Optex Systems Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three months ended January 1, 2023, compared with the three months ended January 2, 2022. Optex manufactures optical sighting systems, periscopes, rifle and surveillance sights, night-vision assemblies, optical assemblies and laser filters for the U.S. Department of Defense, foreign military customers, defense contractors and commercial markets. The company operates through the Optex Systems–Richardson and Applied Optics Center–Dallas segments and had 92 full-time equivalent employees.
Revenue concentration was significant: 22% from the U.S. government, 14% from one major U.S. defense contractor, 37% from one major commercial customer and 27% from all other customers. Approximately 95% of revenue was domestic and 5% foreign.
Financial Results and Liquidity
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $4.040 million | $4.340 million | Down 6.9% |
| Gross profit | $717 thousand | $823 thousand | Down 12.9% |
| Gross margin | 17.7% | 19.0% | Down 130 basis points |
| Operating income (loss) | $(282) thousand | $15 thousand | Declined $297 thousand |
| Net income (loss) | $(223) thousand | $29 thousand | Declined $252 thousand |
| Adjusted EBITDA | $(166) thousand | $144 thousand | Declined $310 thousand |
| Basic and diluted EPS | $(0.03) | $0.00 | Unfavorable change |
| Operating cash flow | $451 thousand | $1.549 million | Down $1.098 million |
| Capital expenditures | $90 thousand | $90 thousand | Unchanged |
At January 1, 2023, cash and cash equivalents were $1.280 million, compared with $934 thousand at October 2, 2022. Working capital was approximately $9.7 million, compared with $10.0 million at fiscal year-end. Current assets were $14.268 million, including $10.798 million of net inventory and $1.605 million of accounts receivable. Total liabilities were $7.168 million and stockholders’ equity was $12.205 million.
The company had no outstanding balance on its $2.0 million revolving credit facility. The facility bears interest at PNC Bank’s prime rate less 0.25%, is secured by substantially all operating assets, requires a fixed-charge coverage ratio of at least 1.25:1 and matures April 15, 2023. Management intends to renew or replace it.
Material Changes Versus the Prior Comparable Period
- Revenue decreased $300 thousand, primarily from lower Richardson revenue of $238 thousand and lower Applied Optics Center revenue of $62 thousand.
- Richardson revenue declined 12.8% to $1.619 million, while Applied Optics Center revenue declined 2.5% to $2.421 million.
- Gross margin declined to 17.7% from 19.0%, reflecting lower volume across relatively fixed overhead, product-mix changes and inflation in materials and labor affecting fixed-price contracts.
- General and administrative expense increased 23.6% to $999 thousand, driven by higher labor, office, legal and audit costs.
- Richardson generated a pretax segment loss of $424 thousand, compared with a $216 thousand loss in the prior-year quarter. Applied Optics Center generated pretax income of $177 thousand, compared with $288 thousand.
- Operating cash flow decreased substantially because of increased inventory investment and a new $336 thousand contract asset, partly offset by collections of accounts receivable.
- Backlog increased to $40.1 million from $32.9 million at October 2, 2022 and $26.5 million at January 2, 2022. New orders were $11.2 million, compared with $3.5 million in the prior-year quarter.
Guidance, Outlook, Risks and Unusual Items
- Management expects revenue to increase beginning in the second quarter and through the second half of fiscal 2023 as supplier constraints, labor shortages and customer delivery delays improve. Based on backlog, management anticipates full-year fiscal 2023 revenue above fiscal 2022 levels and expects net income and positive operating cash flow over the following nine months.
- Key execution risks include shortages and extended lead times for periscope covers and housings, paint, resin, epoxies and chemicals; labor shortages; higher aluminum, steel and acrylic costs; and customer-requested shipment delays.
- One Applied Optics Center customer delayed laser-filter deliveries from the first half to the second half of fiscal 2023. Management also expects delayed periscope deliveries to move into the second and third quarters.
- A new $3.4 million contract booked in November 2022 generated a $336 thousand contract asset and accrued selling expense. Deliveries are expected to begin in April 2023 and continue for approximately 10 to 15 months.
- Several long-term fixed-price contracts remain in a loss condition because of inflation and higher labor and manufacturing costs. Contract loss reserves were $282 thousand at January 1, 2023; the company recorded $51 thousand of additional expense and applied $58 thousand against current-period revenue.
- The warranty reserve increased to $229 thousand from $169 thousand, primarily because of returned backlog pending repair or replacement.
- The company had $209 thousand of capital commitments for equipment expected to be purchased within 90 days.
- Liquidity depends on collection of receivables, operating cash flow, inventory management and renewal or replacement of the credit facility before its April 15, 2023 maturity. Management warns that program delays or continued supply and labor problems could create a working-capital shortfall.
- The company submitted an application to list its common stock on Nasdaq, but approval and continued compliance are not assured. No material litigation, defaults or changes to previously disclosed risk factors were reported.
Most Important Facts for Investors to Verify
- Whether the PNC credit facility was renewed or replaced before its April 15, 2023 maturity and on what terms.
- Whether supplier shortages, labor constraints and customer schedule delays abated as expected in the second quarter.
- Conversion of the $40.1 million backlog into revenue, particularly the $7.3 million expected for Q2 FY2023 and the $9.0 million expected for Q3 FY2023.
- Actual gross-margin recovery given inflationary pressure and the $282 thousand reserve for loss-making fixed-price contracts.
- Working-capital requirements as inventory supports backlog growth and whether operating cash flow remains positive.
- Customer concentration and the effect of any further schedule changes by the major commercial and defense customers.
- Status of the Nasdaq listing application and compliance with applicable listing requirements.
- Remaining $560 thousand authorization under the stock repurchase program and whether repurchases resume.