Optex Systems Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Optex Systems Holdings manufactures optical sighting systems, periscopes, rifle and surveillance sights, night-vision assemblies, laser filters and related products for the U.S. Department of Defense, defense prime contractors, foreign military customers and commercial markets. Reported segments are Optex Systems–Richardson and Applied Optics Center–Dallas.
The filing covers the three and six months ended April 3, 2022, compared with March 28, 2021. The balance sheet is compared with October 3, 2021. The company had 83 full-time-equivalent employees and 8,377,354 common shares outstanding as of May 13, 2022.
Financial Performance and Position
| Metric | Three Months Ended April 3, 2022 | Three Months Ended March 28, 2021 | Six Months Ended April 3, 2022 | Six Months Ended March 28, 2021 |
|---|---|---|---|---|
| Revenue | $5.136 million | $4.246 million | $9.475 million | $8.717 million |
| Gross margin | $0.716 million; 13.9% | $0.378 million; 8.9% | $1.539 million; 16.2% | $1.213 million; 13.9% |
| General and administrative expense | $0.907 million | $0.792 million | $1.715 million | $1.548 million |
| Operating income (loss) | $(0.191) million | $(0.414) million | $(0.176) million | $(0.335) million |
| Net income (loss) | $(0.151) million | $(0.602) million | $(0.122) million | $0.485 million |
| Net income (loss) applicable to common shareholders | $(0.151) million | $(0.602) million | $(0.122) million | $0.323 million |
| Basic EPS | $(0.02) | $(0.07) | $(0.01) | $0.04 |
| Adjusted EBITDA, non-GAAP | $(0.081) million | $(0.292) million | $0.063 million | $(0.093) million |
Revenue increased 21.0% for the quarter and 8.7% for the six-month period. Gross margin improved due primarily to higher Applied Optics Center revenue and a more favorable product and segment mix. Operating losses narrowed despite higher general and administrative expenses, which increased primarily because of office, legal, audit and selling costs.
- Applied Optics Center revenue increased 112.2% in the quarter and 92.1% for the six-month period. Six-month segment operating income was $0.376 million versus a $0.245 million loss in the prior-year period.
- Richardson revenue decreased 25.9% in the quarter and 32.6% for the six-month period. Six-month segment operating loss was $0.460 million versus $0.024 million of operating income in the prior-year period.
- Cash provided by operating activities was $1.340 million for the six months, compared with $0.082 million in the prior-year period.
- Capital expenditures were $0.118 million, and financing activities used $0.241 million, primarily for stock repurchases and taxes withheld on vested restricted stock units.
- Cash increased to $4.881 million at April 3, 2022 from $3.900 million at October 3, 2021. Working capital was $12.6 million versus $12.9 million at October 3, 2021.
- Accounts receivable declined to $1.924 million from $3.183 million, while inventory increased to $8.381 million from $7.583 million.
- Total liabilities were $5.792 million, including $3.532 million of operating lease liabilities. The company had no outstanding balance on its credit facility at April 3, 2022.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected a substantial shift toward Applied Optics Center products, partially offset by lower Richardson demand.
- Six-month gross margin increased to 16.2% from 13.9%, while the six-month operating loss narrowed to $0.176 million from $0.335 million.
- The prior-year six-month results included an $0.858 million noncash gain from the change in fair value of warrants and $0.162 million of deemed dividends attributable to participating warrants. The warrants expired on August 26, 2021, so no warrant fair-value gain or loss was recorded in 2022.
- Customer orders during the six months increased 22.4% to $10.4 million. Backlog was $28.2 million at April 3, 2022, up 3.3% from October 3, 2021 and 76.3% from March 28, 2021.
- The company repurchased 115,971 shares for $0.222 million during the six months; all repurchased shares were canceled, leaving no treasury shares.
Debt, Liquidity, Outlook and Risks
On April 12, 2022, after the reporting date, the company amended and restated its PNC revolving credit facility. The commitment was reduced from $2.25 million to $1.125 million and maturity was extended to April 15, 2023. Borrowings bear interest at PNC’s prime rate minus 0.25%, and the facility is secured by substantially all operating assets. The agreement requires a fixed charge coverage ratio of at least 1.25:1 and contains customary covenants and events of default.
Management expects fiscal 2022 revenue to increase 20% to 25% from the prior fiscal year and expects consolidated revenue for the six months ending October 2, 2022 to increase 30% to 35% from the six months ended April 3, 2022. Management also expects positive operating cash flow and net income for fiscal 2022. The company projects Richardson revenue to increase 50% to 55% and Applied Optics Center revenue to increase 18% to 23% in the next six-month period, based on current orders and backlog.
- COVID-19, supply-chain disruption, labor constraints, program delays and changes in defense spending could affect orders, production and customer deliveries.
- Richardson remains exposed to reduced spending on Army ground-system programs, including Abrams-related programs. Howitzer deliveries were delayed pending resolution of customer-furnished-material issues.
- Some legacy periscope contracts are loss-making or marginally profitable because of inflation and higher component, labor and manufacturing costs. Contract-loss reserves were $43,000 at April 3, 2022.
- Customer concentration is significant: one commercial customer represented 21% of six-month revenue, while the U.S. government and four major defense contractors collectively represented substantial additional revenue.
- The warranty reserve increased to $155,000 from $78,000, reflecting higher warrantied-product revenue and returned backlog pending repair or replacement.
- The company carries a $1.3 million net deferred tax asset, partially offset by a $0.8 million valuation allowance. Recovery depends on future taxable income and may be affected by historical net operating loss limitations.
- Management stated that no material litigation was pending or threatened and that there were no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Whether the projected fiscal 2022 revenue growth and positive net income are achieved, particularly given the Richardson segment’s decline and customer delivery timing.
- Conversion of the $28.2 million backlog into revenue, including the timing and collectability of the $12.4 million expected for 2022 delivery.
- Sustainability of Applied Optics Center growth, customer concentration and the impact of commercial versus military demand.
- Compliance with the new credit facility’s 1.25:1 fixed charge coverage covenant and availability of the reduced $1.125 million borrowing capacity.
- Potential additional losses on legacy contracts, warranty claims, supply-chain disruptions and customer-furnished-material delays.
- Cash generation after inventory investment, capital expenditures, lease obligations and continued stock repurchases.