Optex Systems Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the quarter and nine months ended July 3, 2022, compared with the periods ended June 27, 2021. Optex manufactures optical sighting systems, periscopes, rifle and surveillance sights, night-vision assemblies, optical assemblies, laser filters and related products primarily for U.S. and foreign defense customers, defense contractors and commercial customers. Operations are conducted through the Optex Systems–Richardson and Applied Optics Center–Dallas segments.
The company had 83 full-time-equivalent employees, operated approximately 93,967 square feet of leased facilities, and had 8,320,865 common shares outstanding as of August 12, 2022.
Key Financial Metrics
| Metric | Three Months Ended July 3, 2022 | Three Months Ended June 27, 2021 | Nine Months Ended July 3, 2022 | Nine Months Ended June 27, 2021 |
|---|---|---|---|---|
| Revenue | $6.2 million | $4.4 million | $15.6 million | $13.1 million |
| Gross margin | $1.3 million; 20.6% | $0.7 million; 16.8% | $2.8 million; 17.9% | $2.0 million; 14.9% |
| Operating income (loss) | $0.5 million | $0.1 million | $0.3 million | $(0.3) million |
| Net income | $0.4 million | $1.4 million | $0.3 million | $1.9 million |
| Net income applicable to common shareholders | $0.4 million; $0.05 per share | $0.9 million; $0.11 per share | $0.3 million; $0.04 per share | $1.2 million; $0.15 per share |
| Adjusted EBITDA | $0.6 million | $0.2 million | $0.7 million | $0.1 million |
Nine-month operating cash flow was $1.9 million, compared with $1.1 million in the prior-year period. Capital expenditures were $0.2 million, and financing cash outflows were $0.4 million, primarily for share repurchases. Cash increased to $5.2 million from $3.9 million at October 3, 2021.
At July 3, 2022, current assets were $16.0 million, current liabilities were $2.7 million and working capital was $13.3 million. Accounts receivable was $1.9 million and inventory was $8.6 million, including $5.2 million of raw materials and $3.5 million of work in process.
The company had no outstanding balance under its revolving credit facility. On April 12, 2022, the facility was reduced from $2.25 million to $1.125 million and extended to April 15, 2023. Borrowings bear interest at the lender’s prime rate minus 0.25%, and the facility requires a fixed-charge coverage ratio of at least 1.25:1. Operating lease liabilities totaled $3.5 million, including $0.6 million current and $2.9 million noncurrent.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 39.2% to $6.2 million, primarily due to a $2.2 million increase at Applied Optics Center, partly offset by a $0.5 million decline at Richardson.
- Nine-month revenue increased 19.0% to $15.6 million. Applied Optics Center revenue increased 116.1% to $9.1 million, while Richardson revenue declined 26.5% to $6.6 million.
- Consolidated gross margin improved to 20.6% from 16.8% for the quarter and to 17.9% from 14.9% for the nine-month period, primarily because of higher Applied Optics Center volume and product mix.
- Nine-month operating results improved from a $0.3 million operating loss to $0.3 million of operating income. General and administrative expense increased 10.5% for the nine-month period to $2.5 million.
- Net income declined despite improved operating performance because the prior-year periods included noncash gains on warrant fair-value changes of $1.2 million for the quarter and $2.0 million for nine months. The warrants expired on August 26, 2021, and no warrant liability remained at July 3, 2022.
- New orders totaled $18.3 million for the first nine months, up 86.7% from the prior-year period. Backlog was $30.0 million at July 3, 2022, up 9.9% from October 3, 2021 and 132.6% from June 27, 2021.
- The company repurchased 188,414 shares for $0.4 million during the nine months and 72,443 shares for $0.1 million during the quarter. All repurchased shares were canceled; no treasury shares remained.
Guidance, Outlook, Risks and Unusual Items
Management expects consolidated revenue for the fiscal year ending October 2, 2022 to increase 21%–23% from the prior fiscal year, with increased operating profit and net income. The company expects Richardson revenue to decline approximately 15% for the fiscal year, while Applied Optics Center revenue is expected to increase approximately 92%.
Management expects to generate net income and positive operating cash flow for fiscal 2022. The company is also evaluating strategic alternatives, including a possible strategic investment, merger or sale, through a Strategic Alternatives Committee.
- Inflation in materials, labor and manufacturing overhead has pressured Richardson margins, particularly on older fixed-price periscope contracts.
- The company had $33 thousand of contract-loss reserves at July 3, 2022 related to legacy periscope IDIQ contracts. Additional inflation or substantial customer releases under these contracts could create material losses.
- The accrued warranty reserve increased to $196 thousand from $78 thousand at October 3, 2021, primarily because of higher warrantied-product revenue and increased returned backlog awaiting repair or replacement.
- COVID-19, supply-chain disruption, employee availability, program delays, defense-budget shifts and the Russia-Ukraine conflict may affect orders, production, costs and customer delivery schedules.
- Revenue and cash flow may be uneven because of customer delivery demands, first-article inspections and program delays. Management states that a working-capital shortfall could occur if the business plan is not successfully implemented.
- Customer and industry concentration is significant: for the nine months, the U.S. government represented 13% of revenue, three major defense contractors represented 25%, 15% and 8%, and one commercial customer represented 21%. Approximately 94% of revenue was domestic.
- The company reported no material litigation, no defaults on senior securities and no material changes to previously disclosed risk factors. Management concluded that disclosure controls were effective as of July 3, 2022.
Important Facts for Investors to Verify
- Whether the projected 21%–23% consolidated fiscal-year revenue growth and segment forecasts are achieved.
- Conversion of the $30.0 million backlog into revenue, including the timing of the $19.3 million expected for 2023 delivery and $15.8 million expected for 2024 and later.
- Whether Applied Optics Center growth offsets continued Richardson declines and whether Richardson fixed-price contracts remain profitable.
- Inventory growth, working-capital requirements and the company’s ability to maintain positive operating cash flow.
- Compliance with the revolving-credit facility’s fixed-charge coverage covenant and availability of the reduced $1.125 million borrowing capacity.
- Changes in warranty reserves, contract-loss reserves, customer concentration and supply-chain or inflation-related costs.
- The status and potential consequences of the Strategic Alternatives Committee’s review, including any change-of-control effects on executive compensation and restricted stock units.