Optex Systems Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the unaudited fiscal quarter ended December 29, 2013, compared with the quarter ended December 30, 2012. Optex manufactures optical sighting systems, periscopes, rifle and surveillance sights, and night-vision assemblies primarily for U.S. Department of Defense, foreign military, and defense-prime-contractor applications. The company operated with 63 full-time equivalent employees in a 49,100-square-foot Richardson, Texas facility.
Key Financial Metrics
| Metric | Quarter Ended Dec. 29, 2013 | Quarter Ended Dec. 30, 2012 |
|---|---|---|
| Revenue | $3.354 million | $3.850 million |
| Gross profit | $0.618 million | $0.698 million |
| Gross margin | 17.7% | 17.9% |
| General and administrative expense | $0.629 million | $0.635 million |
| Operating income (loss) | $(0.011) million | $0.063 million |
| Net income (loss) applicable to common shareholders | $(0.013) million | $0.041 million |
| Basic and diluted income (loss) per share | $(0.0001) | $0.0003 |
| Net cash provided by operating activities | $1.120 million | $(0.218) million |
| Capital expenditures | $0 | $0.029 million |
At December 29, 2013, cash was $1.455 million, accounts receivable were $1.720 million, net inventory was $7.062 million, and total current assets were $10.301 million. Total assets were $11.802 million and stockholders’ equity was $7.860 million.
The Avidbank revolving credit facility had an outstanding balance of $0.304 million, down from $0.858 million at September 29, 2013. The facility provides up to $1.0 million against eligible receivables, bears interest at the greater of 7.0% or prime plus 3.5%, and matures July 15, 2014. Management stated that liquidity was sufficient for the next twelve months.
Material Changes Versus the Prior Comparable Period
- Revenue declined $0.496 million, or 12.8%, primarily because periscope revenue fell $0.9 million, or 27.3%, due to lower U.S. government spending.
- Sighting-systems revenue increased $0.3 million, or 100.0%, primarily from increased deliveries and scope changes under the five-year M36 contract.
- Other product-line revenue increased $0.1 million, or 33.3%, due to DCM sight-assembly shipments.
- Gross margin decreased modestly from 17.9% to 17.7%, primarily because of product mix.
- The company moved from operating income of $0.063 million to an operating loss of $0.011 million and from net income of $0.041 million to a net loss of $0.013 million.
- Operating cash flow improved to $1.120 million, primarily from collecting $1.399 million of accounts receivable and reducing inventory by $0.517 million.
- Cash increased $0.573 million during the quarter despite a $0.554 million repayment under the credit facility.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Backlog was $10.4 million at December 29, 2013, down 40.9% from $17.6 million at December 30, 2012. The company received $1.6 million of new orders during the quarter.
- Management expected M36 sighting-system deliveries to increase to approximately 150% of prior-year levels beginning in June 2014 because of an accelerated delivery schedule.
- Management expected other-product revenue to decline as DCM sight-assembly orders wind down, with revenue in those groups projected to be 25% to 40% below fiscal 2013 levels over the following three quarters based on current backlog and government demand.
- The company did not expect alternative business to fully offset reduced government spending during the next nine months. Sequestration and uncertainty in long-term U.S. military spending remain significant risks.
- Management planned significant reductions in general and administrative expenses, including legal, research and development, business development, salary, commission, and travel costs.
- The company is pursuing an appeal before the Armed Services Board of Contract Appeals relating to a rejected equitable-adjustment claim on the Howitzer Aiming Circle program. The outcome is uncertain; management stated that any related program losses had already been recognized.
- Customer advance deposits totaled approximately $2.5 million, including approximately $2.4 million related to non-substantive milestones. The related contract extends through 2017 and requires the company to purchase materials needed for delivery.
- The company amended its facility lease, extending the term through March 31, 2021. The amendment includes a $0.35 million HVAC improvement allowance and rent abatement through March 31, 2014. Remaining minimum operating-lease payments totaled $1.921 million.
- The company granted 25 million stock options during the quarter at an exercise price of $0.01 per share. Total options outstanding were 73.248 million, creating substantial potential dilution. Stock-based compensation expense was $18 thousand for the quarter.
- The company stated that its disclosure controls were effective and that there were no material changes in internal control over financial reporting. No material litigation was reported other than the contract appeal described above.
Important Facts for Investors to Verify
- Whether the reduced backlog and continued U.S. defense-spending uncertainty result in further revenue declines.
- The timing and profitability of accelerated M36 deliveries and replacement orders for declining product lines.
- The renewal or repayment status of the Avidbank facility, which had a July 2014 maturity and customary default provisions.
- Whether operating cash flow remains positive after the benefit from collecting prior-period receivables and reducing inventory is removed.
- The company’s ability to fund required materials and deliveries associated with approximately $2.5 million of customer advance deposits through 2017.
- The outcome of the Howitzer Aiming Circle equitable-adjustment appeal and any effect on future cash flows.
- The potential dilution from 73.248 million outstanding options and 4.447 million outstanding warrants compared with 157.347 million common shares outstanding.