Optex Systems Holdings, Inc (OPXS) Earnings Call Transcript & Summary

Good day, and welcome to the Optex Systems Holdings, Inc. 3Q Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Danny Schoening, Chairman and CEO at Optex Systems. Danny, the floor is yours.

Thank you, Paul. 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. Hi. This is Karen Hawkins. And before we begin, I would first like to briefly discuss the use of forward-looking statements during this call. Statements made during today's call and our responses during Q&A may include forward-looking statements, and these forward-looking statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from the statements made. Factors that could cause actual results to differ are described in our annual filings with the SEC, including the Risk Factors section of our annual report on Form 10-K filed with the SEC. Now that the legal lease is out of the way, we'll move on to discuss the financial information. On our balance sheet, we ended June 29, 2025 with a strong cash balance of $4.9 million, up from $1.0 million as of the year ended September 29, 2024. Our accounts receivable increased $0.4 million to $4.1 million from $3.8 million as of September year-end on higher revenue. Accounts payable increased $0.6 million to $1.8 million from $1.2 million as of September year-end on material purchases in support of increased revenue. Our accrued loss reserves for contracts increased $0.4 million in June from $0.3 million as of September year-end, primarily due to additional orders against our legacy IDIQ multiyear contracts, combined with the higher direct labor hours than anticipated in our original estimate. We expect this progress to wind down within the next fiscal year. During the 9 months, we paid $1 million against the line of credit, bringing the balance to 0 from the September year-end $1.0 million balance. The $3 million line of credit was renewed on May 21, 2025, for an additional 24 months through May 2026. Our total working capital was $19.4 million as compared to September year-end balance of $15.1 million with the increased cash. For the cash flow, our operating cash flow for the 9 months was $5.4 million compared to $1.0 million in the prior year 9 months, driven primarily by higher net income and other changes in working capital. During the 9 months, our capital spending was $0.5 million compared to $1.5 million in the prior year period, which included the $1 million for the acquisition of the Speed Tracker product line. For the 9 months, we paid $1 million in taxes comparable with the prior year period. On stockholders' equity, our ending outstanding share balance was 6,912,919 shares as of June 29, 2025, as compared to 6,896,738 as of March 30, 2025, and 6,873,938 as of September 29, 2024. During the 3 months, we issued 16,181 shares to employees, net of the taxes withheld for 23,000 shares of vested restricted stock units against our stock compensation plan. During the 9 months, we issued 38,981 shares, which included an additional 22,800 restricted shares issued to 3 independent Board members vesting on January 1, 2026. Moving to the statement of operations. For the 3 months ended June 29, 2025, our total revenue increased by $2.1 million or 22.6% compared to the prior year period. For the 9 months ended June 29, 2025, our total revenue increased by $5.5 million or 22.3% compared to the prior year period. The increase in revenue was primarily driven by higher Periscope production levels at the Optex Richardson segment, combined with increased customer demand across both the Optex Richardson and the Applied Optics operating segments. Revenue for the Optex Richardson segment increased 46.3% and 34.3% for the 3 and 9 months as compared to the prior year periods. Revenue for the Applied Optics Center decreased 2.6% for the 3 months and increased 10.3% for the 9-month period as compared to the prior year. During the 9 months, our Periscope revenue levels at the Optex Richardson segment had increased 76% or $6 million, and the Applied Optics Center segment has seen a 32% increase or $2.3 million in military laser filter demand over the corresponding period in the fiscal year 2024. These increases are somewhat offset by lower demand for other military products at Optex Richardson and commercial optical assemblies at the Applied Optics Center segment. For gross profit, consolidated gross profit for the 3 months ended June 29, 2025, increased by $0.3 million or 10% to $3.2 million compared to the prior year period of $2.9 million. Consolidated gross profit for the 9 months ended June 29, 2025, increased $1.5 million or 21.6% to $8.7 million compared to the prior year period of $7.1 million. The increase in the most recent 3- and 9-month period gross profit was primarily attributable to increased revenue and changes in product mix. Our 9-month gross margin was 28% as compared to 29% in the prior year period with shifts between segments and product lines. We've held our general and administrative spending consistent with the prior year at $1.3 million for the 3 months and $3.6 million for the 9-month period. Our operating income for the 3 months ended June 29, 2025, increased by $0.3 million or 18.3% to $1.9 million compared to the prior year period of $1.6 million. Our operating income for the 9 months ended June 29, 2025, increased by $1.5 million or 43.8% to $5.1 million compared to the prior year period of $3.5 million. The increase in operating income was primarily driven by higher revenue and gross profit with no increase in general and administrative costs. Net income and EBITDA. Our net income increased by $0.2 million to $1.5 million for the 3 months ended June 29, 2025, as compared to the net income of $1.3 million for the prior year period. Our adjusted EBITDA increased by $0.3 million to $2.1 million for the 3 months ended June 29, 2025, as compared to adjusted EBITDA of $1.8 million for the prior year period. Our net income increased by $1.3 million to $4.1 million for the 9 months ended June 29, 2025, compared to a net income of $2.8 million for the prior year period. Our adjusted EBITDA increased by $1.5 million to $5.7 million for the 9 months ended June 29, 2025, as compared to adjusted EBITDA of $4.2 million for the prior year period. The increase in net income and adjusted EBITDA for the most recent 3- and 9-month periods compared to the prior year periods is primarily driven by the increased revenue and gross profit. We currently do not anticipate any material adverse effects on our business from the recent tariff uncertainties or China's export restrictions on rare earth metals. Our defense products are primarily sourced domestically, but those which are imported are generally not subject to tariffs or duties. We produce some commercial optical assemblies with selective components sourced from Taiwan; however, our current customer backlog is covered with existing material and inventory. We anticipate any future orders for these commercial products will be subject to revised pricing, inclusive of any potential tariff impact. On the backlog. The backlog as of June 29, 2025, was $38.3 million compared to a backlog of $45.6 million as of June 30, 2024, representing a decrease of $7.3 million or 16% from the prior year June period. We believe this decrease in backlog is primarily due to the timing of awards rather than any new trend. Subsequent to the period ended June 29, 2025, the company announced several new awards, including a $2.8 million order for the XM30 program, a $10.2 million 5-year requirement type contract award for optical siding systems and a $1.6 million order for laser filters, bringing our total backlog to $45 million as of August 5, 2025. I would also like to highlight the subsequent events occurring after the June 29, 2025 period, which include changes to the company's bylaws to create a new Chief Executive Officer and President, allowing for the positions to be held by different individuals. In addition, effective on August 11, Chad George has assumed the position of President reporting to Danny Schoening, where he will continue to serve as Chief Executive Officer. In connection with his appointment to President, the company entered into an employment agreement with Mr. George through July 1, 2028. Mr. George was granted 10,000 shares of restricted stock as a part of his employment package, which will vest on January 1, 2026. Lastly, the Board of Directors approved amendments to the charters of Nominating and Corporate Governance Committees, Audit Committees and Compensation Committees. These events and corresponding documents have been filed on 8-Ks and the updated committee charters have been published to our company website located at www.optexif.com. That concludes the financial portion of this call. I will now turn the perch over to Danny Schoening for his comments on the period performance.

Thank you for all those numbers, Karen. This is our second earnings call. I'd like to do a quick review of the products and services we provide for both divisions, which Karen just highlighted. So the Applied Optics division or AOC's core technology is thin film coatings. We apply these coatings to either absorb or reflect certain wavelengths of light. Common use of this technology would be to protect soldiers eyes, image intensifier tubes used in night visual goggles and also used to protect sensors from these same laser sources. AOC supplies these both externally to customers like Elbit and L3Harris or they supply them internally to our Richardson division. Recapping the products from our Optex division, Optex uses these same filters and builds them into laser-protected Periscopes and other siding systems. And if you'd like to learn more about the products with the customers, I suggest you go back and listen to our Q2 earnings call where I go into more depth on both divisions. I'd like to spend a little bit more time adding color to several of our recent press releases. In July, we announced a contract win in support of the XM30 vehicle. The significance of this win is that it supports the fundamentals of our growth strategy. Our revenues and earnings grow as we continue to get designed in on new vehicles while continuing to support the ongoing maintenance and upgrades of previous platforms. For a more comprehensive list of these vehicles that we support, I again would refer you to our website and specifically, we lay out the number of vehicles fielded in the investor presentation. So this is a great win for Optex and highlights our core competencies around complex optical and mechanical systems used in these mission-critical applications. Also in July, we announced a $10.2 million contract. This was for the Muzzle Reference Sensor that sits out on the end of the barrel on the Abrams tank, which allows the gunner to stay on target after multiple shots. When announced, it was similar to an IDIQ, but identified as a requirement type contract, but it was unfunded at the time of the award. We sometimes struggle as to when to announce these type of contracts, debating on whether to announce them at award or announce them after the first period orders have been funded and awarded. But given the unfunded award is visible through the government's website, we choose to announce awards as this information is technically already available out in the public domain. So we apologize if there's any confusion from this, but mainly because of the award, the backlog doesn't immediately increase by this amount, but that's the nature of the business. This leads me into another announcement that we posted in early August of a $1.6 million award from General Dynamics Land Systems Canada in support of their armored vehicles. You'll notice that after backlog increased from $39.2 million up to $45 million after this award. And this was due to the fact that in between those 2 awards, the U.S. government funded the first year order of the MRS units from the $10.2 million press release for $4.2 million. So to summarize, we announced these awards one time, and we report the up to amount called out on the award and the expected delivery period for the award. We do not announce the individual period awards for these contracts because we think this would cause further confusion around multiple announcements on the same contract. Finally, as you saw from yesterday's announcement, I'd like to welcome Chad George as our new President to the organization. This is only Chad's second day with this, but he's here listening in with Karen and me, and he will play a stronger role in our 10-K earnings call in December. So welcome, Chad.

Thank you, Danny.

So with that, I would like to answer one question that was sent in early, and then hopefully, we'll have additional questions that are called in.

So the first question comes from Chris Cheng. Congratulations, Chad, on your recent appointment. Can you share your response -- your perspective on the growth opportunities under the proposed defense budget and specifically how Optex Systems will address specific needs on the ambitious Golden Dome initiative. Optex's specialized precision optical systems seem uniquely suited to this development of advanced missile defense capabilities. Does your outlook factor in significant investments for R&D in these areas? And if so, can you provide a dollar range or timings of the investment? We look forward to hearing more from you.

I am very familiar with the Golden Dome and the advanced missile defense capabilities. However, at this point in time, I'm not sure if our capabilities align well with this initiative. However, we recognize it as a growth vector for our business, and we will continue to investigate our capabilities and how we support this initiative going forward.

Very good. Thank you. Paul, I guess I would turn it back to you. Is there any questions that came in?

[Operator Instructions] We did have a question coming from Richard Westcott, who is a private investor.

I just wanted -- just curious if anything was going on with the tracker system you guys had started about a year ago.

Yes, the speed tracker?

Yes, the speed tracker.

Yes, very good. Yes. So this was a little bit of an investment from a standpoint of not only a product line, but technology so that we sometimes think about having both support from the military perspective and also commercial applications. And we saw that this aligned fairly well with our support for NightForce Optics in the rifle space. So that's why we made the investment. We have been in the process of transferring that product line from the Czech Republic to Texas, where we're now building the products. There was some confusion along the lines of -- in between when we start transferring along the tariffs and import and export side of that. But we're just getting to the point where we're launching that release now. So sometime in the next 30 days, you'll see them advertised on Amazon. So we set up the same distribution channel that was created before. So we wanted things to move a little bit quicker along that path than what they were, but we still think it's a nice investment. We still think from the standpoint of commercial applications that could easily be used in military units. So if you think about what the unit provides to a shooter and how that could be used to increase the accuracy of military weapons, they all play well together. So that's really the secondary play. So there you go.