Optex Systems Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the unaudited quarter and six months ended April 1, 2012, compared with April 3, 2011. 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 company had 73 full-time equivalent employees and 144.4 million common shares outstanding as of May 14, 2012.
Financial Performance and Position
| Metric | Three Months Ended April 1, 2012 | Three Months Ended April 3, 2011 | Six Months Ended April 1, 2012 | Six Months Ended April 3, 2011 |
|---|---|---|---|---|
| Revenue | $3.863 million | $3.756 million | $8.133 million | $8.740 million |
| Gross margin | $636 thousand; 16.4% | $592 thousand; 15.5% | $1.338 million; 16.5% | $1.255 million; 14.4% |
| Operating income (loss) | $(9) thousand | $3 thousand | $17 thousand | $106 thousand |
| Net income (loss) | $(69) thousand | $(17) thousand | $(118) thousand | $33 thousand |
| Net income (loss) applicable to common shareholders | $144 thousand | $(119) thousand | $(12) thousand | $(170) thousand |
| Basic and diluted EPS | $0.00 | $(0.00) | $(0.00) | $(0.00) |
Cash increased to $3.351 million at April 1, 2012 from $1.514 million at October 2, 2011. Net cash provided by operating activities was $2.329 million for the six months, primarily from $1.647 million of customer advance deposits, a $406 thousand decrease in accounts receivable, and a $221 thousand increase in accounts payable and accrued expenses. Capital expenditures were $35 thousand. Financing activities used $457 thousand, including a $507 thousand repayment under the credit facility, partially offset by $50 thousand from common stock issuance.
Total assets were $10.859 million and total liabilities were $3.156 million at April 1, 2012. Net inventory was $4.146 million. The company had no outstanding balance under its Avidbank credit facility at quarter-end. Customer advance deposits totaled $1.647 million, consisting of $400 thousand current and $1.247 million long term.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 2.6%, while six-month revenue declined 6.9%.
- Periscope revenue increased 15.4% in the quarter and 3.6% for the six-month period, primarily from higher glass-periscope production.
- Howitzer revenue declined as programs were completed; the remaining Howitzer program ended in March 2012, with no follow-on contracts reported.
- Six-month sighting-systems revenue increased $0.3 million, including milestone revenue and M36-related work.
- Gross-margin percentage improved because of product mix and completion of loss-making Howitzer programs.
- General and administrative expense increased 10.2% in the quarter and 18.2% for the six months, driven by business-development personnel, advertising and public relations, incentive costs, travel, expositions, and research and development.
- The company recognized $123 thousand of milestone revenue in both the quarter and six-month period. No comparable milestone revenue existed in the prior-year periods.
- Preferred shareholders waived previously accrued and future dividends in February 2012. The waiver reduced the preferred dividend burden by $213 thousand in the quarter and $106 thousand for the six months, contributing to positive quarterly income applicable to common shareholders despite a GAAP net loss.
- Alpha Capital purchased 5.0 million restricted common shares for $50 thousand in February 2012.
- Stock-option expense increased to $69 thousand for the six months from $50 thousand in the prior-year period. Outstanding options increased substantially to 48.6 million, creating potential dilution.
Backlog, Outlook, Risks and Unusual Items
Backlog was $18.0 million at April 1, 2012, compared with $13.8 million at April 3, 2011. The company reported $14.7 million of new orders during the first two fiscal quarters, including an $8.0 million, five-year M36 contract with General Dynamics Land Systems–Canada, a $1.2 million Defense Logistics Agency award, and $5.5 million of other orders.
The M36 contract provides for up to $3.9 million of milestone billings, including approximately $3.3 million of customer advances for future-year deliveries. Management expected approximately $0.7 million of M36 deliveries in fiscal 2012, with full production beginning in the first quarter of fiscal 2013 at approximately $1.5 million annually thereafter. Management also expected no additional Howitzer revenue during the remainder of fiscal 2012 and anticipated increased sighting-system deliveries.
Management expected general and administrative expense to remain approximately 20% above the prior-year level during fiscal 2012. The company acknowledged uncertainty regarding whether increased periscope orders would offset reduced federal-government demand.
Optex has submitted an equitable-adjustment claim related to the Aiming Circle Howitzer program because of design and manufacturability issues. Discussions with the contracting agency were ongoing, and no resolution had been received as of April 1, 2012. The company had previously recognized approximately $0.8 million of losses related to one affected contract; management stated that an unsuccessful claim would not create additional future margin impact because the losses had already been recognized.
On April 16, 2012, after the quarter-end, the company amended its Avidbank revolving facility to provide up to $1.0 million through April 2014. Advances bear interest at the greater of 7.0% or prime plus 3.5%, are secured by substantially all subsidiary assets, and require the company to maintain a zero balance for at least 30 consecutive days during each loan period.
Additional risks include dependence on government and defense-prime contracts, potential contract termination for convenience or default, fixed-price contract cost overruns, milestone and customer-advance obligations, inventory valuation, liquidity requirements, and the company’s ability to convert backlog into profitable revenue. No material litigation was reported, and management stated that there were no material changes to previously disclosed risk factors. Disclosure controls were determined to be effective.
Important Facts for Investors to Verify
- Whether the $18.0 million backlog and M36 contract convert into deliveries and margins as projected.
- The timing and profitability of M36 production beginning in fiscal 2013.
- The resolution and potential recovery from the Aiming Circle Howitzer equitable-adjustment claim.
- Whether increased general and administrative spending produces sustainable new orders and revenue growth.
- The company’s ability to fulfill contracts associated with $1.647 million of customer advance deposits through 2017.
- The terms, collateral requirements, and zero-balance covenant of the amended Avidbank facility.
- The dilution implications of 48.6 million outstanding stock options, 9.9 million warrants, and convertible Series A preferred stock.
- Whether reported margin improvement persists after the completed Howitzer programs and related favorable product-mix effects.