Optex Systems Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Optex Systems Holdings manufactures optical sighting systems, periscopes, surveillance sights, night-vision assemblies and precision optical components for U.S. and foreign military, defense-prime and commercial customers. Operations comprise the Optex Systems Richardson segment and Applied Optics Center Dallas segment. The filing covers the unaudited quarter and six months ended April 2, 2017, compared with March 27, 2016.
The company had 97 full-time-equivalent employees and 8,190,101 common shares outstanding at April 2, 2017. Sileas owned approximately 49.3% of the equity as of May 1, 2017.
Financial Performance and Position
| Metric | Three Months Ended April 2, 2017 | Three Months Ended March 27, 2016 | Six Months Ended April 2, 2017 | Six Months Ended March 27, 2016 |
|---|---|---|---|---|
| Revenue | $4.040 million | $3.216 million | $7.552 million | $6.429 million |
| Gross margin | $0.769 million; 19.0% | $0.515 million; 16.0% | $1.541 million; 20.4% | $0.981 million; 15.3% |
| General and administrative expense | $0.840 million | $0.828 million | $1.684 million | $1.522 million |
| Operating income (loss) | $(0.071) million | $(0.313) million | $(0.143) million | $(0.541) million |
| Net income (loss) | $(0.149) million | $(0.310) million | $0.205 million | $(0.556) million |
| Basic income (loss) per share | $(0.02) | $(0.90) | $0.03 | $(1.66) |
Six-month revenue increased 17.5%, while gross margin improved by 510 basis points. Richardson six-month revenue increased 7.5% and Applied Optics Center revenue increased 35.5%. Richardson’s gross margin increased to 23.7% from 18.0%; AOC’s increased to 12.2% from 10.2%.
The six-month net profit included a $0.358 million noncash gain from the change in fair value of warrant liabilities. The second-quarter result included a $0.072 million noncash loss from the same item. No income tax expense or benefit was recorded.
At April 2, 2017, cash was $1.627 million, accounts receivable were $1.780 million, inventory was $7.174 million and working capital was approximately $8.5 million. Total assets were $12.354 million and total liabilities were $4.950 million. Inventory increased $0.960 million to support expected deliveries.
Net cash used in operating activities was $0.811 million for the six months, including a $0.960 million inventory investment. Capital expenditures were $0.130 million, and financing activities provided no net cash. Cash declined from $2.568 million at October 2, 2016 to $1.627 million at April 2, 2017.
The Avidbank revolving credit facility had $0.300 million outstanding at April 2, 2017, against an amended facility of up to $2.2 million, subject to borrowing-base limitations. The facility matures January 22, 2018. The Sileas-related note payable to Longview had a balance of approximately $15.1 million at quarter-end; this debt is not presented as a liability of Optex Systems Holdings in the condensed balance sheet.
Material Changes and Operating Developments
- Revenue growth was driven by periscopes, other Richardson products and AOC commercial optical assemblies.
- Sighting-systems revenue declined sharply because DDAN deliveries were rescheduled pending qualification testing, long-lead materials and export licensing.
- Management attributed margin improvement to higher production volumes, lower manufacturing overhead rates, labor efficiencies, improved yields and product mix.
- Six-month G&A expense increased $0.162 million, primarily from executive bonus compensation, stock compensation and investor-relations costs.
- Backlog increased 40.8% to $16.9 million from $12.0 million at October 2, 2016. The company booked $12.4 million of orders during the six months, compared with $9.9 million in the prior-year period.
- Expected backlog deliveries were $5.5 million in the third quarter of fiscal 2017, $5.8 million in the fourth quarter and $5.6 million in 2018.
Guidance, Outlook, Risks and Unusual Items
Management expects second-half fiscal 2017 periscope revenue to increase approximately 15% over the first half and expects continued improvement in gross margins and operating results as backlog converts to deliveries. Management anticipated net income in the second half of fiscal 2017, but noted that profitability depends on achieving sufficient revenue to support the cost structure.
Recent awards included a $5.99 million five-year DLA IDIQ contract, a $1.5 million periscope order for Middle East applications, a $1.7 million laser-interference-filter order with deliveries beginning in June 2017, and commercial optical-assembly awards. The filing also describes potential opportunities from increased military spending, international programs and commercial optics.
Key risks include customer delivery changes, first-article inspection requirements, qualification testing, export licensing, long-lead materials, contract delays and uneven revenue timing, any of which could create a working-capital shortfall. The company is exposed to U.S. government and defense-prime procurement decisions, customer concentration, inventory recoverability and the need to achieve sustained profitable operations.
The company had $7.174 million of net inventory, including $1.651 million of reserves, and stated that inventory purchases support contracts deliverable over the following six months. It also has approximately $2.999 million of remaining minimum lease and estimated CAM payments under non-cancellable facility leases.
After quarter-end, Longview converted $0.8 million of Sileas note principal into 700,000 common shares. On May 1, 2017, the company repurchased those 700,000 shares for $0.518 million using cash and placed them in treasury, reducing shares outstanding to 7,490,101. Management reported no material litigation, no material changes in risk factors, and effective disclosure controls.
Important Facts for Investors to Verify
- Whether backlog converts into the forecast second-half deliveries, particularly the $5.5 million and $5.8 million near-term delivery amounts.
- Whether the company generates positive operating cash flow after the inventory build and funds the $0.518 million post-quarter-end share repurchase without straining liquidity.
- The effect of DDAN qualification, export licensing and long-lead-material issues on timing of sighting-system revenue.
- The sustainability of reported profitability excluding the $0.358 million noncash warrant revaluation gain.
- The terms, maturity, borrowing base and renewal availability of the Avidbank credit facility, as well as the company’s access to related-party financing.
- The potential dilution and valuation effects of 4,125,200 outstanding warrants, 132,000 unvested restricted stock units and 60,030 outstanding stock options.
- Customer concentration and dependence on U.S. government, defense-prime and key commercial customers.