Business Context and Reporting Period
Optex Systems Holdings, Inc. manufactures optical sighting systems, periscopes, rifle and surveillance sights, and night-vision optical assemblies primarily for U.S. Department of Defense, foreign military customers, and defense prime contractors. The unaudited Form 10-Q covers the three months ended December 30, 2012, the company’s fiscal first quarter of 2013, compared with the three months ended January 1, 2012.
The company reported 72 full-time equivalent employees and 152,346,607 common shares outstanding as of February 13, 2013.
Key Financial Metrics
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Revenue | $3.850 million | $4.270 million | Down 9.3% |
| Gross profit | $0.698 million | $0.702 million | Down $0.004 million |
| Gross margin | 17.9% | 16.3% | Up 1.6 percentage points |
| General and administrative expense | $0.635 million | $0.676 million | Down 5.9% |
| Operating income | $0.063 million | $0.026 million | Up $0.037 million |
| Net income applicable to common shareholders | $0.041 million | $(0.156) million | Improved $0.197 million |
| Basic and diluted earnings per share | $0.00 | $(0.00) | Improved |
| Net cash used in operating activities | $(0.218) million | $0.104 million provided | Outflow increased $0.322 million |
At December 30, 2012, cash was $1.413 million, compared with $1.653 million at September 30, 2012. Net inventory increased to $7.773 million from $7.094 million, while total current assets increased to $11.201 million from $10.618 million.
Total liabilities were $5.104 million and stockholders’ equity was $7.658 million at December 30, 2012. The company had no outstanding balance on its Avidbank revolving credit facility, which provides up to $1.0 million against eligible receivables and matures in July 2014. The facility is secured by substantially all subsidiary assets and requires a zero balance for at least 30 consecutive days during each loan period.
Customer advance deposits totaled approximately $3.1 million, consisting of $1.1 million classified as short term and $2.0 million classified as long term. The company also reported $17.6 million of backlog at December 30, 2012.
Material Changes Versus the Prior Comparable Period
- Revenue declined $0.4 million, primarily because the M137 Howitzer program was completed in March 2012 and generated no comparable current-quarter revenue.
- Periscope revenue increased $0.5 million, or 17.9%, supported by foreign orders and new customers following the July 2012 closure of competitor Miller-Holzwarth.
- Gross margin improved despite lower revenue, reflecting product mix changes and the completion of the lower-margin Howitzer program.
- General and administrative expense declined $0.04 million, contributing to higher operating income.
- Net income applicable to common shareholders improved from a $0.156 million loss to $0.041 million of income. The improvement also reflected the absence of preferred-stock dividends following prior waivers and lower interest expense.
- Operating cash flow shifted from $0.104 million provided in the prior period to $0.218 million used, mainly because inventory purchases increased by $0.679 million to support new periscope orders and the M36 production schedule.
- Backlog decreased $1.9 million, or 9.7%, from $19.5 million at January 1, 2012, although the company received $2.4 million of new orders during the quarter.
Outlook, Risks, Contingencies, and Unusual Items
Management expected sighting-system deliveries to increase in the second through fourth quarters of fiscal 2013 as production began under the five-year M36 contract. Fiscal 2013 deliveries under that program were expected to be approximately $1.7 million, followed by approximately $1.5 million annually through contract completion. The filing does not provide formal earnings or revenue guidance.
The reported backlog was scheduled for delivery of approximately $11.7 million during fiscal 2013, $2.1 million in 2014, $1.4 million in 2015, $1.4 million in 2016, and $1.0 million in 2017.
The company has appealed the rejection of an equitable-adjustment claim related to significant design and manufacturability issues on the Aiming Circle Howitzer program. The appeal is pending before the Armed Services Board of Contract Appeals, and the filing states that its outcome cannot be predicted. Management said losses on the program had already been recognized, so an unsuccessful appeal was not expected to create future margin impact on those programs.
The General Dynamics Land Systems–Canada contract extends through 2017 and requires the company to purchase materials needed for delivery. Customer deposits associated with non-substantive milestone billings are recorded as liabilities until revenue recognition criteria are met.
Subsequent to quarter-end, Chairman Ronald F. Richards resigned effective December 31, 2012. The board appointed Merrick Okamoto as chairman and elected Chief Operating Officer Danny Schoening as chief executive officer. The board also accelerated vesting of Mr. Richards’ remaining options covering 5,000,000 shares.
Other risks include dependence on defense and military contracts, customer and program concentration, contract execution and fixed-price risk, inventory requirements, government funding and procurement decisions, and the uncertainty of forward-looking statements. Management reported no material litigation and no material changes to previously disclosed risk factors. Disclosure controls and procedures were concluded to be effective.
Important Facts for Investors to Verify
- Verify the sustainability and margin profile of the new periscope orders obtained after Miller-Holzwarth’s closure.
- Assess whether the $17.6 million backlog converts to revenue as scheduled and whether customer funding, delivery timing, or contract changes could affect realization.
- Monitor inventory growth, operating cash usage, and the company’s ability to fund material purchases despite having no current revolver borrowings.
- Review the status and potential value of the Aiming Circle Howitzer equitable-adjustment appeal.
- Evaluate the effect of the M36 program ramp-up and the expected timing of sighting-system deliveries.
- Consider dilution from approximately 48.5 million outstanding stock options, 4.5 million warrants, and convertible Series A preferred stock.
- Confirm the accounting and future cash implications of approximately $3.1 million in customer advance deposits and the contract obligations extending through 2017.