Optex Systems Holdings, Inc. 2021 Form 10-K Summary
Reporting period: Fiscal year ended October 3, 2021, comprising 53 weeks. The comparable fiscal year ended September 27, 2020 comprised 52 weeks. The filing is an annual Form 10-K, not a separate quarterly report.
Business Context
Optex manufactures optical sighting systems, periscopes, sighting assemblies, night-vision optical assemblies, laser filters and thin-film coatings, primarily for U.S. Department of Defense applications. Products are sold directly to government agencies, defense prime contractors, foreign military customers and selected commercial customers. Operations are reported through the Richardson, Texas, Optex Systems segment and the Dallas, Texas, Applied Optics Center segment.
- Approximately 86% of fiscal 2021 gross business revenue supported U.S. military products.
- Approximately 90% of revenue came from domestic customers and 10% from foreign customers, primarily Canada.
- Six major customers represented approximately 86% of revenue: U.S. government agencies at 28%, four defense contractors at 27%, 11%, 5% and 5%, and one commercial customer at 10%.
- The company had 84 full-time-equivalent employees and leased approximately 93,967 square feet of facilities at year-end.
Financial Performance and Position
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $18.222 million | $25.890 million | Down 29.7% |
| Cost of sales | $15.702 million | $19.802 million | Down $4.100 million |
| Gross margin | $2.520 million | $6.088 million | Down $3.568 million |
| Gross margin percentage | 13.8% | 23.5% | Down 9.7 points |
| General and administrative expense | $3.014 million | $3.205 million | Down 6.0% |
| Operating income (loss) | $(0.494) million | $2.883 million | Declined $3.377 million |
| Income before taxes | $2.030 million | $2.356 million | Down $0.326 million |
| Net income | $2.131 million | $1.825 million | Up $0.306 million |
| Net income applicable to common shareholders | $1.471 million | $1.227 million | Up $0.244 million |
| Basic and diluted EPS | $0.18 | $0.14 | Up $0.04 |
| Adjusted EBITDA | $(0.003) million | $3.328 million | Down $3.331 million |
Net income benefited from a non-cash $2.535 million gain related to the change in fair value of warrant liabilities after most outstanding warrants expired worthless on August 26, 2021. Excluding this unusual item, operating performance was materially weaker than the reported net income suggests.
Revenue by Segment and Product
| Revenue | FY2021 | FY2020 | Change |
|---|---|---|---|
| Optex Systems, Richardson | $11.827 million | $17.233 million | Down 31.4% |
| Applied Optics Center, Dallas | $6.395 million | $8.657 million | Down 26.4% |
| Periscopes | $7.2 million | $11.3 million | Down 36.3% |
| Sighting systems | $2.3 million | $2.2 million | Up 4.5% |
| Howitzers | $0.2 million | — | New revenue |
| Other products | $2.1 million | $3.7 million | Down 43.2% |
Management attributed the margin deterioration to lower production volume, unfavorable manufacturing overhead absorption and a product mix shift toward less profitable product groups. Applied Optics Center operating income before non-allocated costs was a loss of $0.517 million, compared with income of $1.130 million in the prior year.
Cash Flow, Liquidity and Debt
- Cash and cash equivalents were $3.900 million at October 3, 2021, compared with $4.700 million at September 27, 2020.
- Working capital was $12.9 million, compared with $11.7 million at the prior year-end.
- Operating cash flow was $0.481 million, compared with $3.911 million in fiscal 2020.
- Capital expenditures were $0.274 million, compared with $0.152 million.
- Cash used in financing activities was $1.007 million, including $0.869 million of stock repurchases and $0.377 million of credit-facility repayment, partly offset by $0.283 million of warrant-exercise proceeds.
- Accounts receivable were $3.183 million and inventory was $7.583 million at year-end.
- The company had no outstanding balance on its $2.25 million credit facility at October 3, 2021. The facility matures April 15, 2022 and is secured by substantially all borrower assets.
- Lease liabilities totaled approximately $3.661 million, including $0.528 million current and $3.133 million long-term.
- Management stated that it expected net income and positive operating cash flow over the following twelve months, but warned that uneven deliveries, first-article requirements and pandemic-related delays could create a working-capital shortfall.
Material Changes Versus the Prior Period
- Revenue declined $7.7 million, primarily due to lower periscope demand, reduced other-product shipments and lower Applied Optics Center orders.
- Gross margin fell from 23.5% to 13.8%, and the company moved from $2.9 million of operating income to a $0.5 million operating loss.
- Reported net income increased despite weaker operations because of the $2.5 million non-cash warrant fair-value gain and a $0.1 million income-tax benefit, compared with a $0.5 million warrant loss and $0.5 million tax expense in fiscal 2020.
- Backlog increased 67.5% to $27.3 million from $16.3 million. Applied Optics Center backlog rose to $16.3 million from $3.1 million, while Richardson backlog declined to $11.0 million from $13.2 million.
- New orders increased 65.9% to $29.2 million, including $19.6 million for Applied Optics Center, $7.6 million for periscopes and $1.2 million for sighting systems and support.
- The company repurchased 449,088 shares for $0.869 million during fiscal 2021. A total of 519,266 previously repurchased shares were cancelled in June 2021, and 35,555 shares remained in treasury at year-end.
- On August 26, 2021, 3,936,391 outstanding warrants expired worthless; 188,809 warrants were exercised earlier in the year for $0.283 million of gross proceeds. No warrants remained outstanding at year-end.
- The company renewed and extended its Richardson and Dallas facility leases, increasing recognized right-of-use assets and lease liabilities.
Guidance, Outlook, Risks and Unusual Items
- Management expects Applied Optics Center revenue to increase in fiscal 2022 based on recent orders for optical assemblies and laser filter units, including an $8.4 million laser-filter order and a $3.0 million commercial optical-assembly order.
- Recent announced awards included a potential $14.4 million five-year laser-protected-periscope IDIQ contract, an $8.4 million 24-month laser-filter purchase order, a $3.0 million commercial order and a $1.4 million periscope order beginning in 2022.
- Management expects continued growth from new anti-reflective coating products, although fiscal 2021 orders for those products were only $199 thousand, plus an additional $52 thousand order in October 2021.
- The filing does not provide formal quantitative revenue or earnings guidance. Management stated that it could not determine the effect of further COVID-19-related delays on fiscal 2022 revenue.
- Supply-chain risks include shortages of paint, resin, epoxies and chemicals; higher aluminum, steel and acrylic costs; transportation delays; supplier delivery extensions; inflationary pressures; and labor shortages. These risks are significant because most contracts are fixed price.
- Approximately 83% of contracts contain termination-for-convenience provisions. The company was unaware of any pending terminations, and such provisions generally allow recovery of incurred costs plus a reasonable fee.
- Accrued loss provisions for loss contracts or cost overruns totaled $51 thousand at year-end.
- The company experienced a ransomware attack on July 13, 2021. It restored operations from clean backups and reported no material day-to-day impact, but stated that sensitive data may have been breached and that similar attacks could be material.
- The company reported no material pending legal proceedings, no defective-pricing claims and compliance with applicable government-contract regulations.
- Deferred tax assets had a net carrying value of $1.288 million, supported by a $0.808 million valuation allowance. Recoverability depends on future taxable income and an IRS Section 382 limitation.
- On December 1, 2021, after year-end, the CEO’s employment agreement was amended through November 30, 2022, with a $296,031 base salary and a target bonus equal to 30% of base salary. The amendment also changed vesting terms for 49,500 unvested RSUs.
Important Facts for Investors to Verify
- Whether the $27.3 million backlog converts into revenue on the disclosed delivery schedule, particularly the $16.3 million Applied Optics Center backlog.
- Whether revenue recovery improves fixed-cost absorption and restores gross margins after the 2021 decline to 13.8%.
- Whether the $2.25 million credit facility is renewed or replaced before its April 15, 2022 maturity.
- Whether supply-chain, labor and inflationary pressures affect fixed-price contract profitability or cause delivery delays.
- Whether the reported positive net income is being evaluated separately from the $2.535 million non-cash warrant gain and near-zero Adjusted EBITDA.
- The concentration of revenue among six major customers representing approximately 86% of fiscal 2021 revenue.
- The potential effect of the ransomware incident, including any later-discovered data breach, regulatory exposure or remediation cost.
- The realizability of the $1.288 million deferred tax asset and the impact of the Section 382 limitation.
- The company’s ability to fund working capital internally, given fiscal 2021 operating cash flow of only $0.481 million and management’s warning regarding potential shortfalls.