Optex Systems Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
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 customers. The filing covers the unaudited three and six months ended March 31, 2013, compared with the three and six months ended April 1, 2012. The company had 77 full-time-equivalent employees and 157.3 million common shares outstanding as of May 13, 2013.
Financial Results and Liquidity
| Metric | Three Months Ended Mar. 31, 2013 | Three Months Ended Apr. 1, 2012 | Six Months Ended Mar. 31, 2013 | Six Months Ended Apr. 1, 2012 |
|---|---|---|---|---|
| Revenue | $3.77 million | $3.86 million | $7.62 million | $8.13 million |
| Gross profit | $0.66 million | $0.64 million | $1.35 million | $1.34 million |
| Gross margin | 17.4% | 16.4% | 17.8% | 16.5% |
| Operating income (loss) | $(0.15) million | $(0.01) million | $(0.09) million | $0.02 million |
| Net income (loss) applicable to common shareholders | $(0.11) million | $0.14 million | $(0.07) million | $(0.01) million |
Six-month operating cash flow was $(1.25) million, versus $2.38 million provided in the prior-year period. The cash use primarily reflected a $1.48 million inventory increase and a $0.30 million increase in accounts receivable, partly offset by $0.45 million of customer advance deposits. Investing cash flow was $(0.02) million, while financing cash flow was $0.71 million from borrowings.
Cash declined to $1.10 million at March 31, 2013, from $1.65 million at September 30, 2012. Net inventory rose to $8.58 million from $7.09 million, and total current assets were $11.89 million. The company had $0.71 million outstanding under its Avidbank revolving credit facility, which provides up to $1.0 million against eligible receivables and matures July 14, 2014. Total liabilities were $5.87 million, including $3.17 million of customer advance deposits.
Material Changes Versus the Prior Comparable Period
- Six-month revenue decreased 6.2%, primarily because Howitzer-program revenue fell $1.7 million after completion of the M137 program.
- Periscope revenue increased 6.9% for the six-month period, while sighting-system revenue increased 66.7% and other product revenue increased 200% from low prior-year levels.
- Gross margin improved to 17.8% from 16.5%, reflecting a more favorable product mix and completion of the loss-making Howitzer program.
- General and administrative expense increased 7.7% for six months and 24.6% for the quarter, driven by higher research and development, legal, and marketing costs.
- The company moved from six-month operating income of $0.02 million to an operating loss of $0.09 million and remained loss-making at the net income level.
- Backlog was $16.5 million at March 31, 2013, down from $18.0 million at April 1, 2012. New orders received during the six months totaled $5.1 million.
- Common shares increased to 157.3 million from 152.3 million at September 30, 2012, primarily because 5.0 million shares were issued upon conversion of Series A preferred stock in March 2013.
Guidance, Outlook, Risks, and Unusual Items
- Management expected periscope revenue during the remaining six months of fiscal 2013 to approximate the comparable prior-year period.
- Sighting-system deliveries were expected to increase significantly in the third and fourth quarters as production ramped under the five-year M36 contract. Fiscal 2013 deliveries under that program were expected to be approximately $1.2 million, followed by approximately $1.6 million annually through completion.
- Management expected other product revenue to exceed fiscal 2012 by approximately $2.3 million, supported by gunner head assemblies, vision blocks, thermal cameras, and eyepiece assemblies.
- Approximately $1.0 million of the increased periscope inventory was expected to ship during the next two quarters, with management expecting to use resulting cash flow to reduce the credit facility balance.
- The company had approximately $3.2 million of customer advance deposits, including $3.1 million of unliquidated milestone invoices, under a contract extending through 2017. The company remains obligated to purchase materials needed to fulfill the related deliveries.
- An equitable-adjustment claim related to design and manufacturability problems on the Aiming Circle Howitzer program was rejected by the contracting agency and appealed to the Armed Services Board of Contract Appeals. Management could not predict the outcome or timing. Previously recognized program losses were approximately $0.8 million for the relevant contract.
- Management identified risks related to defense-program timing, customer demand, inventory requirements, contract execution, dependence on government and defense-prime customers, working-capital needs, and the availability of credit. The filing states that there were no material changes to previously disclosed risk factors.
- Stock-option compensation was $86 thousand for the six months, including $26 thousand related to early vesting of options following a director’s resignation. Approximately $186 thousand of future compensation cost remained unrecognized at March 31, 2013.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2013, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether inventory converts to shipments and cash as projected, particularly the approximately $1.0 million of periscope inventory expected to ship in the next two quarters.
- Whether the M36 sighting-system production ramp and other-product orders materialize at management’s projected levels.
- The company’s ability to reduce the $0.71 million credit-facility balance while maintaining sufficient liquidity.
- The timing and outcome of the $0.8 million-related equitable-adjustment appeal.
- The composition, collectability, and expected liquidation of the $3.2 million customer advance-deposit balance.
- Future dilution from approximately 48.3 million outstanding stock options and 4.4 million outstanding warrants, as well as the effect of the Series A preferred stock.
- Whether rising research, development, legal, and marketing expenses can be absorbed without further operating losses.