Business Context and Reporting Period
Optex Systems Holdings, Inc. manufactures optical sighting systems, periscopes, rifle and surveillance sights, night-vision assemblies, and related optical products for the U.S. Department of Defense, foreign military customers, defense contractors, and commercial customers. The company operates through Optex Systems-Richardson and Applied Optics Center-Dallas.
This unaudited Form 10-Q covers the three and six months ended March 28, 2021, compared with March 29, 2020. The company had 85 full-time equivalent employees and 8,334,995 common shares outstanding as of May 7, 2021. Dollar amounts below are in thousands unless otherwise stated.
Key Financial Metrics
| Metric | Three Months Ended March 28, 2021 | Three Months Ended March 29, 2020 | Six Months Ended March 28, 2021 | Six Months Ended March 29, 2020 |
|---|---|---|---|---|
| Revenue | $4,246 | $6,947 | $8,717 | $12,833 |
| Gross profit | $378 | $1,619 | $1,213 | $3,086 |
| Gross margin | 8.9% | 23.3% | 13.9% | 24.0% |
| Operating income (loss) | $(414) | $781 | $(335) | $1,499 |
| Net income (loss) | $(602) | $1,944 | $485 | $1,265 |
| Net income (loss) applicable to common shareholders | $(602) | $1,311 | $323 | $852 |
| Basic income (loss) per share | $(0.07) | $0.15 | $0.04 | $0.10 |
| Adjusted EBITDA, non-GAAP | $(292) | $871 | $(93) | $1,681 |
Six-month operating cash flow was $82, compared with $752 in the prior-year period. Capital expenditures were $128, and financing cash outflows were $774, principally reflecting $730 of stock repurchases and $44 of taxes withheld on net-settled restricted stock units. Cash decreased to $3,880 at March 28, 2021 from $4,700 at September 27, 2020.
At March 28, 2021, current assets were $15,062, current liabilities were $3,575, and working capital was approximately $11.5 million. Inventory was $8,993, accounts receivable were $2,031, and total assets were $21,127.
Debt consisted primarily of $377 outstanding under a $2.25 million BBVA revolving credit facility maturing April 15, 2022. The facility is secured by all company assets, and management stated that the company was in compliance with its covenants at March 28, 2021. Operating lease liabilities totaled $3,851, including $477 current and $3,374 long term.
Material Changes Versus the Prior Comparable Period
- Six-month revenue declined 32.1% to $8.7 million; second-quarter revenue declined 38.9% to $4.2 million.
- Revenue reductions affected both segments. Six-month Richardson revenue fell 27.7% to $5.8 million, while Applied Optics Center revenue fell 39.5% to $2.9 million.
- Periscope revenue decreased 33.0% for the six months, and other product revenue decreased 62.6%. Sighting-system revenue increased 215.5%, partly offsetting these declines.
- Six-month gross margin fell to 13.9% from 24.0%, reflecting lower production volume, unfavorable manufacturing overhead absorption, and product mix changes.
- The company reported a six-month operating loss of $335 versus operating income of $1,499 in the prior-year period. General and administrative expense declined modestly to $1,548 from $1,587.
- Second-quarter net results were affected by a $169 loss from the change in fair value of warrant liabilities, compared with a $1,332 gain in the prior-year quarter. The six-month period included an $858 noncash warrant valuation gain, compared with an $81 gain previously.
- Backlog was $16.0 million at March 28, 2021, down 1.8% from $16.3 million at September 27, 2020. Richardson backlog declined 19.7% to $10.6 million, while Applied Optics Center backlog increased 74.2% to $5.4 million.
- The company repurchased 374,934 shares for $730 during the six months. Cumulative repurchases totaled 480,667 shares for $930, leaving $70 available under the $1 million authorization.
Guidance, Outlook, Risks, and Unusual Items
Management attributed reduced orders and revenue to COVID-19-related delays in government and foreign military contract awards, defense-spending shifts away from Army ground vehicles, and disruption across the defense supply chain. The company remained open as an essential defense contractor and reported limited workforce disruption, although it experienced some supply and delivery delays.
Management anticipates a 26% to 32% reduction in fiscal 2021 performance compared with fiscal 2020 and expects a fiscal-year operating loss. It expects positive operating cash flow in the second half of fiscal 2021 and some margin improvement as revenue increases and cost reductions take effect, but stated that the timing and nature of new orders remain uncertain.
Recent proposal activity has increased. The company booked $8.5 million of orders during the first six months, including $5.2 million for Applied Optics Center products. A January 2021 laser-protected-periscope IDIQ contract has a potential value of up to $14.4 million over a three-year base period and two one-year options; the filing does not indicate the amount or timing of orders that will ultimately be received.
Cost-saving actions included workforce reductions, reduced employee compensation, and lower discretionary spending. Additional reductions were under review. Management warned that uneven customer deliveries, first-article inspection requirements, pandemic-related delays, and increased inventory or production costs could create a working-capital shortfall. The company believes its current liquidity and backlog are sufficient for near-term needs but stated that successful execution of its business plan is necessary to maintain profitable operations.
Unusual or non-operating items include recurring Level 3 warrant-liability remeasurement gains and losses, stock-based compensation of $114 for the six months, and a $3.7 million increase in recognized right-of-use assets and operating lease liabilities from facility lease amendments. No material litigation or subsequent events were reported, and management identified no material changes to previously disclosed risk factors.
Facts Investors Should Verify
- Whether contract awards and customer orders recover as projected and support the stated 26% to 32% fiscal 2021 revenue outlook.
- The conversion, timing, and profitability of the $16.0 million backlog, including the potential $14.4 million laser-protected-periscope IDIQ award.
- Whether cost reductions and higher second-half volume restore positive operating margins and operating cash flow.
- The company’s compliance with BBVA facility covenants and ability to fund operations if revenue delays continue.
- The sensitivity of reported earnings and warrant liabilities to changes in the company’s share price, volatility, interest rates, and warrant expiration.
- Customer concentration, as the U.S. government and several major defense contractors represent substantial portions of revenue and receivables.
- Execution of the extended facility leases and the resulting fixed lease commitments through 2028 and 2029.