Optex Systems Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Optex manufactures optical sighting systems, periscopes, rifle and surveillance sights, night-vision assemblies, optical assemblies and laser filters for U.S. and foreign military, defense-prime and commercial customers. Reported segments are Optex Systems–Richardson and Applied Optics Center–Dallas. The filing covers the unaudited three and six months ended April 2, 2023, compared with April 3, 2022. The company had 97 full-time equivalent employees and 6,763,070 shares outstanding as of May 16, 2023.
Financial Performance and Position
| Metric | Three months ended April 2, 2023 | Three months ended April 3, 2022 | Six months ended April 2, 2023 | Six months ended April 3, 2022 |
|---|---|---|---|---|
| Revenue | $6.370 million | $5.136 million | $10.410 million | $9.475 million |
| Gross profit | $1.553 million | $0.716 million | $2.270 million | $1.539 million |
| Gross margin | 24.4% | 13.9% | 21.8% | 16.2% |
| Operating income (loss) | $0.615 million | $(0.191) million | $0.333 million | $(0.176) million |
| Net income (loss) | $0.479 million | $(0.151) million | $0.256 million | $(0.122) million |
| Adjusted EBITDA | $0.717 million | $(0.081) million | $0.552 million | $0.063 million |
| Basic earnings (loss) per share | $0.07 | $(0.02) | $0.04 | $(0.01) |
Six-month revenue increased 9.9%, led by Richardson revenue growth of 18.8% and Applied Optics Center growth of 3.6%. Gross profit increased 47.5%, primarily from higher volume, product mix, improved pricing and better absorption of fixed manufacturing costs. Six-month general and administrative expense increased 13% to $1.937 million.
- Cash and cash equivalents were $0.676 million at April 2, 2023, compared with $0.934 million at October 2, 2022.
- Working capital was $11.4 million, compared with $10.0 million at October 2, 2022.
- Inventory increased to $11.292 million from $9.212 million, mainly to support new awards and anticipated revenue.
- Accounts receivable was $2.276 million; management expected collection during the third quarter of fiscal 2023.
- Operating cash flow was negative $1.061 million for the six months, compared with positive $1.340 million in the prior-year period. Investing cash flow was negative $0.146 million, primarily for property and equipment.
- The company borrowed $1.007 million under its revolving credit facility. Capital commitments for property and equipment totaled $0.213 million over the following 60 days.
- Total liabilities were $7.191 million, including $1.007 million of credit-facility debt and $3.140 million of operating lease liabilities.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue rose $1.234 million, or 24.0%, with Richardson revenue up 46.9% and Applied Optics Center revenue up 8.5%.
- Six-month revenue rose $0.935 million, or 9.9%; periscope revenue increased 31.7% and optical-assembly revenue increased 51.2%, while laser-filter and day-window revenue declined.
- Gross margin improved by 10.5 percentage points in the second quarter and 5.6 percentage points for the six-month period.
- The company moved from operating and net losses to operating and net income in both comparable periods.
- New orders totaled $19.1 million for the six months, up 84% year over year. Backlog reached $41.6 million at April 2, 2023, up 48% from $28.2 million at April 3, 2022 and 26% from $32.9 million at October 2, 2022.
- Richardson backlog increased 91% to $25.2 million; Applied Optics Center backlog increased 9% to $16.4 million.
- The prior $2.0 million PNC line was replaced in March 2023 with a $3.0 million Texas Capital Bank revolving facility. The new facility matures May 22, 2025 and carried a stated interest rate of 7.501% at April 2, 2023.
- The company completed no share repurchases during the six months. $0.560 million remained available under the existing repurchase authorization.
Guidance, Outlook, Risks and Unusual Items
Management expects fiscal 2023 revenue to increase from 2022 levels and anticipates higher Richardson revenue in the third and fourth quarters as supplier performance improves. Management expects to generate net income and positive operating cash flow over the next six months, while using cash, operating cash flow and available borrowing capacity to fund inventory and backlog requirements. This outlook is dependent on execution and is not a firm financial forecast.
- Supply-chain disruptions, shortages of paint, resin, epoxies and chemicals, higher aluminum, steel and acrylic costs, labor shortages and customer schedule changes have delayed deliveries and increased costs.
- Several older fixed-price contracts remain loss-making because of inflation and higher labor and manufacturing costs. Contract-loss reserves were $0.113 million at April 2, 2023, versus $0.289 million at October 2, 2022. Some option periods run through February 2025, with deliveries potentially extending into February 2026.
- A new $3.4 million contract booked in November 2022 generated a $0.336 million contract asset and accrued selling expense; deliveries are expected to begin in the fourth quarter of fiscal 2023 and continue through fiscal 2024.
- Warranty reserves increased to $0.266 million from $0.169 million, primarily due to higher optical-assembly revenue and returned backlog awaiting repair or replacement.
- The Texas Capital facility is secured by substantially all operating assets and includes fixed-charge coverage and total-leverage requirements, customary defaults and a $0.125 million letter-of-credit sublimit.
- Future cash needs could exceed available resources if customer deliveries remain uneven or supply-chain, labor, inspection or program delays continue. The company currently has no existing contracts allowing progress payments.
- The filing identifies financial-institution liquidity and counterparty risks following 2023 bank failures. Management reported no material litigation and concluded that disclosure controls were effective.
- Subsequent to quarter-end, the company granted 39,000 employee restricted stock units, 135,000 performance shares to the CEO and CFO, and 40,000 restricted shares to an independent director.
Important Facts for Investors to Verify
- Whether the $41.6 million backlog converts into revenue on the projected schedule, particularly the $15.9 million expected for the remainder of fiscal 2023.
- Whether supplier delays, labor shortages and customer schedule changes abate as management expects.
- Compliance with the Texas Capital facility’s fixed-charge coverage and leverage covenants, and the company’s ability to manage the $1.0 million balance and variable interest rate.
- Whether inventory growth and negative operating cash flow reverse as backlog is delivered and receivables are collected.
- The ultimate profitability of legacy fixed-price contracts and adequacy of the $0.113 million contract-loss reserve.
- Customer concentration: one commercial customer represented 33% of six-month consolidated revenue, and five major defense contractors and one commercial customer represented significant portions of receivables.
- The dilution and future compensation effects of the new equity incentive awards and the 600,000-share 2023 Equity Incentive Plan.