Transcript
Good afternoon. And welcome to today’s Optex Systems Holdings, Inc. Second Quarter Earnings Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Danny Schoening.
Thank you, Tom. Hello. My name is Danny Schoening, and I’m the Chairman and CEO of Optex Systems. I’d like to begin by introducing Karen Hawkins, our CFO, who will walk you through the financials, and then I’ll come back to talk a little bit more about the business. Karen?
Thank you, Danny. As Danny said, this is Karen Hawkins. I am going to begin by reading the Safe Harbor Statement. During this call, management will be making forward-looking statements. Any statement that refers to expectations, projections or other characteristics of future events, including future financial results, future business and market conditions, and future plans, strategies, opportunities, and goals is a forward-looking statement. Actual results may differ materially from those expressed in these forward-looking statements. For more information, please refer to the risk factors discussed in documents filed with the SEC, including the company’s latest annual report on Form 10-K filed December 19, 2024, as well as our second-quarter 10-Q filed today. Optex Systems Holdings, Inc. assumes no obligation to update these forward-looking statements. The first item I’d like to go over on our financials is the balance sheet performance. We ended March 30, 2025, with an increase in cash of $2.5 million, basically driven by higher revenue and EBITDA and reductions in inventory. The final cash balance was $3.5 million, as compared to an ending cash balance of $1 million as of the end of September 2024. Our accounts receivable was also up $0.5 million on higher revenue, and our inventory was down $0.9 million on higher revenue and inventory use. We had a net increase of $3.3 million in property and plant equipment on asset purchases net of the depreciation. The next item is regarding the financial statement of operations. Year-over-year, we had a significant increase in revenue of 22.2% for the six months and 25.9% for the three months ending March 30, 2025. Our revenue came in at $10.7 million for the three-month period and $18.9 million for the six-month period. Gross profit was also up for the three-month period, $0.8 million or 31.4%, and for the six-month period, we were up $1.2 million or 29.4%. Our three-month gross profit was $3.4 million, compared to $2.6 million for the three months ended in 2024. Our six-month gross profit was $5.5 million, compared to $4.2 million during the six months of 2024. Our G&A has remained relatively flat, slightly lower in the three-month period and consistent with the prior year spending. Our operating income was also up $0.9 million or 65% for the three months and $1.2 million or 65.2% for the six months. We ended with operating income of $2.2 million for the three-month period and $3.2 million for the six-month period. Our net income was up $0.7 million or 66.5% for the three months and $1.1 million or 74.9% for the six months. Our overall basic and diluted earnings per share were up 62.5% for the three months and 72.7% for the six months ended March 30, 2025. For the cash flow, we had operating cash flow of $3.9 million versus a prior year of $1 million. The increased cash flow was driven primarily by the increases in revenue and net income, as well as decreased inventory, which was slightly offset by other changes in working capital. Our inventory decreased by $0.9 million, again, due to higher shipments. During the period, we spent $0.5 million on capital expenditures, compared to $0.2 million in the prior year. The prior year also included the investment in intangible assets for the purchase of our Speedtracker product line. During the six-month period, we made payments against our line of credits of $1 million, bringing the balance to zero. We ended the six-month period with $3.5 million in cash on hand, compared to $0.3 million for this time last year. In our statement of stockholders’ equity, there were some restricted shares issued during the first quarter, 22,800 shares that had been issued to our Independent Board members, and no other impacts to our outstanding shares during the three months or the six months. Additionally, during the first six months of 2025, we have increased our periscope production levels by 50% over our 2024 production levels, indicating some robust improvement in our periscope revenues. We had some carryover legacy orders that predate COVID during the 2021 period that resulted in a few lost contracts. This accounts for about 7% of our backlog for Optex and roughly 5% of our overall backlog. This is fully reserved on our balance sheet, with $226,000 set aside to cover this. On the recent tariff uncertainties, we do not expect any material impact; our products are primarily military products sourced domestically and come in duty-free. For those commercial optical assemblies, there are some selected components that come from outside, but currently, all of that backlog is covered with our existing inventory, and we anticipate recovering any future orders with updated pricing to include those tariffs. Moving on to our operational segments, during both the three-month and six-month periods, we saw significant improvement in our gross margin percentages for both operating segments for both Optex Richardson and the Applied Optics Center. On a consolidated basis during the three-month period, we recorded a gross margin of 31.3%, compared to 30% in the prior year. Notably, we achieved a 36.1% gross margin on the Applied Optics Center and a 26.1% gross margin for the Optex Richardson segment, up from 21.7% for the same period last year. For the six-month window, our gross margin stood at 29%, compared to 27.4% for the prior year. This improvement was driven by higher margins in both segments at Optex Richardson at 20.3%, compared to 19.3% in the prior year, and for the Applied Optics Center at 35.9%, compared to 33.5% in the prior year. Our backlog orders amounted to roughly $15.7 million, compared to $17.9 million in the same six-month period last year, indicating a decrease of $2.2 million or 12.3%. However, subsequent to the close of the period, we received an additional award for $5.7 million for laser filters for the Applied Optics Center segment. We attribute most of the decrease in orders to timing, noting that we have several outstanding business proposals pending either audit or award. Our backlog ended March 30, 2025, at $41.1 million, down from $44.2 million for the same time last year—a decrease of $3.1 million or 7%. However, including the $5.7 million award received on April 9th, we are slightly above where we were this time last year. We expect that all of our booked awards are affirmed for this current year, and we anticipate higher levels of periscopes through Q3 and Q4, as indicated in our backlog forecast. We have roughly $21.8 million remaining to be delivered in 2025 as booked orders, with the potential for additional orders. To summarize our revenue for the three months, we saw a $2.2 million increase, primarily from the Optex Richardson segment, with a significant increase of 101.6% on our periscope line, going from $2.7 million in 2024 to $5.4 million in 2025. We also saw increases of 21.4% in laser filters, with revenue rising from $2.4 million in 2024 to $3 million in 2025. Though offset by some decreases in other product lines, this reflects an overall increase of 25.9%. For the six-month period, we experienced a $3.4 million increase or 22.2%, with $2 million of that from the Optex Richardson segment—$3.7 million in periscopes offset by a decrease of $1.7 million in other product lines. We also noted a $1.4 million increase in the Applied Optics Center, driven mainly by laser filters and modest offsets from commercial optical assemblies. We have seen a notable increase in military defense revenue, even as we see reductions in our commercial lines. Our EBITDA for the three-month period was $2.4 million, compared to $1.6 million in the prior year, while for six months, it stood at $3.6 million, compared to $2.4 million in the previous six months—primarily driven by increased revenue, improved gross margins, and stable G&A spending. We had set aside $226,000 for lost reserves against the old legacy periscope contracts, and we expect those to flow through by the end of this year or the first quarter of next year at the latest. That sums it up for me, Danny. I turn it back over to you.
Thank you, Karen. Given this is our first earnings call, I’d like to begin by describing at a fairly high level the types of products and services we provide from both divisions, which Karen just highlighted. Let me start with the Applied Optics Division or Applied Optics Center. The core technology here is around thin film coatings. From a layman’s perspective, we place bare glass into a large 2-meter chamber. We pump it down with a vacuum. We then turn on an electron beam gun pointed at a crucible of material to evaporate that material. These molecules then attach themselves to the glass, and we alternate this process between materials to create these molecular mirrors that either absorb or reflect specific wavelengths of light. By choosing the right material, the right thickness of layers, and the correct number of layers, we can meet the customer’s targeted specifications. So, beyond being cool, how do customers use these stacked molecular layers? The most common use is to prevent certain types of laser light from either reaching the soldier’s eyes or critical sensors. The U.S. mandates that all armored vehicles in its inventory use this type of laser protection in addition to protecting the image-intensified tubes inside of night vision goggles and even certain cameras and sensors. This technology can also create EMI barriers and reduce the IR signatures from engine exhausts, both of which are emerging applications of this same technology. Moving over to the Optex Division, we can see how we use these same laser filters as components in our optically improved periscopes, which are utilized on all of the armored vehicles like Abrams, Bradley, Stryker, Ampey, etc. For a more comprehensive list of these vehicles, I’d refer you to the investor presentation on our website. Additionally, Optex produces a wide variety of optical, electrical, and mechanical sub-assemblies, ranging from fairly simple components to high-definition CMOS cameras, analyzing output from I-squared tubes to create digital day/digital night weapon systems for the Canadian Army. Furthermore, Optex has launched a commercial line supporting long-range shooters, including the Speedtracker Chronograph, now made in Texas, and the Reacher, a scope-mounted wedge available in both 50 MOA and 100 MOA versions. That covers what we do. Now let’s touch on sustainability and growth. The bad news is that the enemy continues to develop new threats, but the good news is that once these threats are identified, we can develop a protection plan against them and quickly pivot toward the new specification with the installed equipment base. So, same oven, new recipe. Our capital equipment spending rate is relatively low, between $500,000 and $750,000 a year. Who else is engaged in this? There continues to be occasional new entrants into this space, but about 80% of our revenue is sole source. For the last 10 years or so, Optex has been the clear leader in both cost and performance, as judged by both the government and our clients. Lastly, I’d like to discuss the company itself. We’ve been around for almost 40 years and have been public since 2009; we recently uplisted to NASDAQ a couple of years ago. We have no debt and maintain a line of credit with Texas Capital, an excellent partner. Our experienced Board of Directors provides excellent oversight, and we have a clean cap table. Supply chain issues that held us back post-pandemic have been resolved, and we’re now taking some inventory out of the system, gaining confidence in our incoming shipments, all of which are tariff-free, as Karen mentioned. With that, I’ll turn it back to Tom.
Thank you. I’ll now pass the floor back to Danny as we assemble our queue.
Thank you, Tom. We had several questions sent in early, so I’d like to go over those now as we’re waiting for potentially new questions. The first one comes from Patrick Vogelard. Patrick asks, assuming that sales will increase going forward, how will this affect the cost basis and is there a need for significant CapEx investments going forward? Thank you, Patrick. We’re currently running one shift today with selective overtime and weekends to cover bottleneck operations. So we don’t see any immediate increases in CapEx, and therefore, the factory leverage should trend towards improved margins. So yes to both of those. No on the additional significant CapEx side. Patrick had a follow-up question: Is there any potential to diversify the customer base internationally, especially considering the strong push by the European Union for increased military spending? Yes, we have several avenues into Europe and we’re working through those now. We’re discussing ITAR-controlled items here, which entails some paperwork alongside the normal customer and supplier issues. But yes, we’d like to be selling directly into Europe once we’ve chosen the correct path and worked through these paperwork issues dealing with ITAR. Thanks for the question, Patrick. Another question came from Jordan Crenshaw, who asks, as cash continues to come in and with no long-term debt, please provide a view on how the company thinks about potential cash usage? Jordan, I’d like to say that we’ve shown that we can pull all of the cash usage levers. We’ve reinvested into the business with capital equipment, paid off our working capital line of credit last year, as Karen mentioned, completed a share buyback program a year and a half ago, and even paid dividends four or five years ago. We discussed this in our last Board meeting, but we didn’t reach a firm conclusion. However, all options are still on the table right now. We recognize this issue in front of us and we need to address it. Jordan had a follow-up question asking, can you please speak on why new orders are down year-over-year by 12.3% for the first six months? This is mainly a timing issue, as Karen indicated in her portion. If you noticed, our orders can be somewhat lumpy quarter-to-quarter. We received a $5.7 million order on April 9. If that order had come seven or eight days earlier, orders would have been up 16.2%. So it really is a timing issue. This brings me to how we announce awards and when we choose to issue press releases around IDIQ—Indefinite Delivery Indefinite Quantity type orders. We will announce the IDIQ order in the fully funded amount along with our expected delivery dates for the upcoming releases against the IDIQ. Once we receive the releases against that order, we don’t issue another press release as we feel that this would be kind of like double dipping. Further, we make sure to provide backlog updates at the end of these types of releases, so investors can see where the backlog is at relative to the Qs. But you have to remember that we continue to ship during the Q, and that is a factor to consider. Those were the early questions. Tom, do we have any new ones?
Not at the moment. I’ll now turn the call back over to Danny.
Thanks for taking my question. A couple, if I could. You had some great progress in your gross margins during the past six months, even longer than that. What further progress do you think you can make on gross margins?
Thank you, Frank. Yeah, let’s divide those separately with the two divisions. On the Optex side or the Richardson segment, our gross margins have been rising, but they’re not where we’d like to see them. After the pandemic—or actually right at the beginning of the pandemic in early 2020—we received large five-year IDIQ orders for our highest running periscopes. Unfortunately, we had costed them at a firm fixed price status, and after that, we included material escalators on the materials but certainly didn’t anticipate the extent to which they actually rose. Those contracts have not achieved the gross margins that we desire, and unfortunately, the government has held our feet to the fire on those, and they’ve continued to order against them. It will take us some time to burn off those old orders and include new orders at the gross margins we want. We believe we’ll ship the last of those orders against those old contracts by the end of this year, potentially into Q1 2026, which should improve margins on that side of Optex. For the Applied Optics Center side, we believe those margins are fairly good. We aim to drive them slightly higher, but these are high-tech products sold to the government, so we don’t expect to see 50% or 60% gross margin numbers here. We expect another incremental improvement, but not a dramatic change overall. We intend to see some factory leverage as we continue to add more volume. I hope I answered your question, Frank.
Thanks. I have a second question regarding the Speedtracker acquisition and your approach to acquisitions in general. You mentioned you are looking at capital allocation policies. Where do acquisitions fit into that plan?
We tend to be conservative when it comes to acquisitions. They can be challenging. I’ve been through several acquisitions, including former Honeywell and former Finisar—they are not to be taken lightly. We’ve had several acquisitions, including purchasing assets from a competitor, Miller-Holdsworth Inc., in Salem, Ohio. We acquired the Applied Optics Center from L3 Communications around 2014-2015, and the Speedtracker acquisition was more of a product line effort to support our growing interest in the commercial side. I would characterize our approach as conservative, but we have sent feelers out to our good customers like GDLS, BAE, Lockheed, etc., indicating that if they see anyone in their supply chain reaching maturity or wanting to exit, if it aligns with similar core competencies, we’d be open to that. At the same time, we’ve looked at other technology-related companies, but those companies typically seek high multiples of 13 to 15 times EBITDA, which we believe isn’t a good use of our cash at this time. Thus, I’d say we remain conservative but always open to opportunities. I encourage investors to reach out directly if they see something that might be of interest to us. Thank you, Frank.
Specifically on the Speedtracker and your initial forays into the commercial area: Sales have not been great in the past six months. What are the prospects there and is it worth the time?
That’s a good question, Frank. We went into the Speedtracker acquisition, knowing that Garmin, a competitor, was launching before us. They have a plastic molded part made in Taiwan, and we consciously decided to build it in Texas, using aluminum for a more military-grade product mounted directly on the rifle. We teamed with Applied Ballistics to ensure app compatibility, and we have just launched the product. So we’ll find out—proof will be in the pudding here in the upcoming year on that product line specifically. The acquisition also helped us align our internal processes. We had several issues to clean up on our website to make it commercially viable for direct orders, along with coordinating with distributors to ensure everything aligns. It was a learning curve, but we’ve now launched the Reacher product, another optical wedge that long-range shooters can attach to their rifle for quickly adapting to longer ranges. Both products are manufactured in Texas and have just launched. We’ll track how that performs. Historically, we’ve expressed interest in blending military and commercial sales, as military spending can be cyclical. We’re pursuing this area opportunistically, so we’ll keep monitoring it as it evolves.
Thank you, Danny. I look forward to talking to you in the future.
Thank you, Frank.
Thank you. And we have no further questions in queue at this time. I’d like to turn the floor back to Danny Schoening for closing comments.
Okay. Thank you, Tom. I appreciate it, and I appreciate everybody who dialed in. So Karen, thank you for your time; it was a great quarter. Thanks for putting all that together. Again, investors, if anyone would like to chat with me individually, please email me, and I’ll set up a time to make it happen. Thank you again, and take care.
Thank you. This does conclude today’s conference call. You may disconnect your lines at this time and have a wonderful day. Thank you again for your participation.