Optex Systems Holdings, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended July 2, 2023, compared with July 3, 2022. Financial statements are unaudited. The company manufactures optical sighting systems, periscopes, surveillance sights, night-vision assemblies and related optical products for U.S. and foreign military, defense contractor and commercial customers. Reportable segments are Optex Systems–Richardson and Applied Optics Center–Dallas.
Financial performance and position
| Metric | Three months ended July 2, 2023 | Three months ended July 3, 2022 | Nine months ended July 2, 2023 | Nine months ended July 3, 2022 |
|---|---|---|---|---|
| Revenue | $7.172 million | $6.170 million | $17.582 million | $15.645 million |
| Gross profit | $1.712 million | $1.268 million | $3.983 million | $2.807 million |
| Gross margin | 23.9% | 20.6% | 22.7% | 17.9% |
| Operating income | $752 thousand | $510 thousand | $1.086 million | $334 thousand |
| Net income | $576 thousand | $428 thousand | $832 thousand | $306 thousand |
| Diluted earnings per share | $0.09 | $0.05 | $0.13 | $0.04 |
| Adjusted EBITDA | $919 thousand | $620 thousand | $1.472 million | $682 thousand |
All dollar amounts in the table are as reported; amounts other than per-share data are in thousands or millions as indicated. Adjusted EBITDA is a non-GAAP measure.
- Cash flow: Operating activities used $1.401 million in the first nine months, compared with $1.890 million provided in the prior-year period. Investing activities used $368 thousand, primarily for property and equipment. Financing activities provided $1.149 million, including $1.507 million of borrowings and $300 thousand of repayments under the credit facility.
- Liquidity: Cash was $314 thousand at July 2, 2023, down from $934 thousand at October 2, 2022. Working capital was $12.2 million versus $10.0 million at fiscal year-end. Accounts receivable were $2.870 million and inventory was $12.282 million, up from $9.212 million, reflecting inventory purchases for new awards and anticipated revenue.
- Debt: The Texas Capital revolving facility had $1.207 million outstanding at July 2, 2023, against a $3.0 million commitment. The facility bears interest at SOFR plus a margin; the reported rate was 7.827%. It matures May 22, 2025, is secured by substantially all operating assets, and requires a fixed-charge coverage ratio of at least 1.25:1 and total leverage ratio of 3.00:1. Management stated that the company was in compliance with all covenants.
- Other obligations: Operating lease liabilities totaled $3.022 million, including $616 thousand current and $2.406 million long term. Remaining base lease payments totaled $3.447 million, excluding estimated variable common-area-maintenance payments of $1.346 million.
Material changes versus the prior comparable periods
- Third-quarter revenue increased 16.2%; nine-month revenue increased 12.4%. Growth came from both segments, including higher periscope, optical assembly and laser-filter deliveries.
- Gross margin expanded by 330 basis points in the quarter and 480 basis points for the nine months, primarily from higher volume, product mix, improved pricing and operating performance at Applied Optics Center, and better fixed-cost absorption.
- Optex Richardson’s nine-month revenue rose 17.5% to $7.742 million, while Applied Optics Center revenue rose 8.6% to $9.840 million. Applied Optics Center generated substantially higher segment profit; Optex Richardson remained loss-making at the segment operating level, with a nine-month operating loss of $527 thousand.
- General and administrative expense increased 26.6% in the quarter and 17.1% for the nine months, driven by higher labor, office, legal, accounting, banking and travel costs, as well as stock compensation.
- Inventory increased $3.070 million and contributed materially to negative operating cash flow. The company also obtained a new $3.0 million Texas Capital credit facility, replacing the prior $2.0 million PNC facility.
- New orders totaled $26.3 million for the nine months, up 43.7%. Backlog was $41.6 million at July 2, 2023, up 38.7% from $30.0 million at July 3, 2022 and 26.4% from $32.9 million at October 2, 2022.
Guidance, outlook, risks and unusual items
- Management expects fiscal 2023 revenue to increase from 2022 levels and expects increased revenue and working capital in the fourth quarter and fiscal 2024 as supplier and labor constraints improve. Management also expects net income and positive operating cash flow over the next twelve months.
- Management cautions that delivery timing remains uncertain. Material shortages, extended supplier lead times and labor shortages delayed certain periscope deliveries into the first half of fiscal 2024. A major Applied Optics Center customer also shifted laser-filter deliveries from the first half to the second half of fiscal 2023.
- Inflation in aluminum, steel, acrylic, paint, resin, epoxies and chemicals, together with higher labor and manufacturing overhead costs, continues to pressure margins on long-term fixed-price contracts. Contract loss reserves were $133 thousand at July 2, 2023, down from $289 thousand at October 2, 2022.
- Warranty reserves increased to $241 thousand from $169 thousand. Management stated that warranty trends had not changed significantly but acknowledged that higher-than-expected returns could materially affect operating profit.
- A $3.4 million Israeli government night-vision repair and refurbishment contract is expected to begin deliveries in the first quarter of fiscal 2024 and includes a potential optional award quantity. A $3.0 million Applied Optics laser-filter delivery order was booked on June 30, 2023.
- The company remains highly concentrated by customer and market: for the nine months, one commercial customer represented 29% of consolidated revenue, and three U.S. defense contractors represented 17%, 6% and 5%. Approximately 95% of revenue was domestic.
- The company disclosed risks related to defense-program funding, government procurement and contract termination, customer concentration, fixed-price contracts, supply-chain constraints, labor availability, inflation, banking-system liquidity and access to financing. No material litigation was reported, and management identified no pending contract terminations.
- No dividends or stock repurchases occurred during the nine months. The remaining authorized stock-repurchase capacity was $560 thousand at July 2, 2023. The company issued restricted and performance awards in May 2023, with potential dilution tied partly to future stock-price targets.
Investor verification priorities
- Verify whether the company converts its $41.6 million backlog into revenue on the stated schedule, particularly the $7.5 million expected in the fourth quarter of fiscal 2023 and $26.0 million expected in fiscal 2024.
- Monitor operating cash flow, inventory normalization and collection of the $2.9 million accounts receivable balance, given the $1.4 million operating cash use year to date.
- Confirm compliance with the Texas Capital facility’s fixed-charge coverage and leverage covenants as borrowings and interest rates change.
- Assess whether supply-chain and labor improvements continue and whether delayed periscope deliveries create further revenue or working-capital pressure.
- Track margins and contract loss reserves on legacy fixed-price contracts exposed to inflation and higher manufacturing costs.
- Evaluate customer concentration, the timing and profitability of the Israeli and laser-filter programs, and potential dilution from equity awards.