Optex Systems Holdings, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended January 2, 2022, compared with the three months ended December 27, 2020. The unaudited consolidated statements cover the manufacture of optical sighting systems, periscopes, rifle and surveillance sights, night-vision assemblies, optical assemblies and laser filters for U.S. and foreign military and commercial customers.
Business Context
- Operations consist of the Optex Systems–Richardson segment and the Applied Optics Center–Dallas segment.
- Q1 revenue was derived from the U.S. government (15%), three major U.S. defense contractors (25%, 8% and 6%), one major commercial customer (26%) and other customers (20%). Approximately 92% of revenue was domestic and 8% foreign.
- The Company had 87 full-time equivalent employees and operated approximately 93,967 square feet of leased facilities.
Financial Performance and Liquidity
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $4.340 million | $4.471 million | Down 2.9% |
| Gross margin | $823 thousand; 19.0% | $835 thousand; 18.7% | Down $12 thousand; margin up 30 basis points |
| Operating income | $15 thousand; 0.3% | $79 thousand; 1.8% | Down $64 thousand |
| Net income | $29 thousand | $1.087 million | Down $1.058 million |
| Net income applicable to common shareholders | $29 thousand | $726 thousand | Down $697 thousand |
| Adjusted EBITDA | $144 thousand | $199 thousand | Down $55 thousand |
| Cash flow from operations | $1.549 million | $423 thousand | Up $1.126 million |
| Capital expenditures | $90 thousand | $81 thousand | Up $9 thousand |
- Cash increased to $5.285 million from $3.900 million at October 3, 2021. Working capital was approximately $12.9 million at both dates.
- Accounts receivable declined to $2.010 million from $3.183 million, while net inventory increased to $7.919 million from $7.583 million.
- The PNC Bank credit facility has a $2.25 million principal limit, matures April 15, 2022, and had no outstanding balance at January 2, 2022. The Company was in compliance with its covenants.
- Total liabilities were $5.629 million, primarily operating lease liabilities. Operating lease liabilities totaled $3.649 million, with a $3.531 million right-of-use asset.
- Financing cash outflows of $74 thousand reflected repurchases of 37,238 common shares at an average price of $1.98 per share. The remaining authorization was $857 thousand.
Material Changes Versus the Prior Comparable Period
- Richardson external revenue fell 38.7% to $1.857 million, driven by lower periscope, sighting-system and howitzer revenue. Applied Optics Center revenue increased 72.2% to $2.483 million, primarily from commercial optical assemblies.
- Revenue mix shifted materially toward Applied Optics Center: 57% of consolidated revenue versus 43% for Richardson.
- General and administrative expense increased 6.9% to $808 thousand due primarily to higher labor, office, legal and audit costs.
- The prior-year quarter included a $1.027 million noncash gain from the change in fair value of warrant liabilities and $361 thousand of deemed dividends allocated to participating warrants. The warrants expired on August 26, 2021, so no related gain, liability or deemed dividend was recorded in Q1 FY2022.
- New orders increased 9.4% to $3.5 million from $3.2 million. Backlog was $26.5 million at January 2, 2022, up 76.7% from $15.0 million at December 27, 2020 but down 2.9% from $27.3 million at October 3, 2021.
- Backlog composition changed: Richardson backlog was $11.7 million, down 7.1% year over year, while Applied Optics Center backlog was $14.8 million, up 516.7% year over year.
- Accrued warranty costs increased to $122 thousand from $78 thousand. Contract-loss reserves were approximately $50 thousand, related to legacy periscope contracts affected by inflation and higher manufacturing costs.
Guidance, Outlook, Risks and Unusual Items
- Management expects Richardson revenue to decline or remain below prior-year levels for several product lines, although periscope revenue is expected to improve over the next three quarters. Howitzer deliveries have been delayed because of issues involving customer-furnished materials.
- Management expects Applied Optics Center revenue to increase during fiscal 2022 based on backlog and demand for optical assemblies, laser filters and other products.
- Management expects net income and positive operating cash flow throughout fiscal 2022, but cautions that uneven deliveries, first-article inspection requirements and pandemic-related delays could create working-capital shortfalls.
- The Company intends to renew or replace its $2.25 million credit facility before its April 15, 2022 maturity. The filing warns that financing may not be available on acceptable terms.
- COVID-19 remains a risk to demand, contract awards, supply chains, employee availability and defense-program schedules. Management cited a 40% Richardson backlog decline between September 29, 2019 and October 3, 2021, partly due to shifts in defense spending away from Army ground vehicles.
- Customer concentration is significant, particularly in defense contractors and one commercial customer. Loss of a major customer, program reductions or delayed awards could materially affect results.
- The Company has no material pending or threatened litigation reported, no defaults upon senior securities, and no material changes to previously disclosed risk factors.
- Danny Schoening’s amended employment agreement, effective December 1, 2021, provides a $296,031 annual base salary, a target bonus equal to 30% of salary and modified vesting terms for certain restricted stock units upon a change of control.
Key Facts for Investors to Verify
- Whether the PNC credit facility was renewed or replaced before the April 15, 2022 maturity and on what terms.
- Conversion of the $26.5 million backlog into revenue, including delivery timing and customer-furnished-material dependencies.
- Sustainability of Applied Optics Center growth and whether Richardson revenue continues to decline.
- Exposure to concentrated customers, U.S. defense-budget reallocations, COVID-19 effects and supply-chain constraints.
- Adequacy of the $122 thousand warranty reserve and $50 thousand contract-loss reserve as costs and order volumes change.
- Future cash use from the $1 million stock-repurchase authorization and the Company’s ability to maintain liquidity while funding operations and lease obligations.