Optex Systems Holdings, Inc (PNK:OPXS) Q2 2025 Earnings Call Transcript

Optex Systems Holdings, Inc (PNK:OPXS) Q2 2025 Earnings Call Transcript May 13, 2025

Operator: 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. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Danny Schoening. Danny, the floor is yours.

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?

Karen Hawkins: 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, on March 30, 2025, with an increase in cash of $2.5 million, basically driven by higher revenue and EBITDA and reductions in inventory. 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 also up $0.5 million on higher revenue and our inventory was down $0.9 million on higher revenue and inventory use. Then our property and plant equipment was up a net of $3.3 million 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 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, as compared to $2.6 million for the three months ended in 2024. Our six-month gross profit was $5.5 million, as 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 with 2024. Our operating income also up $0.9 million or 65% for the three months and $1.2 million or 65.2% for the six months.

Q&A Session

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 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 was 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 $0.9 million, again, higher shipments. And during the period, we spent $0.5 million on capital expenditures, as compared to 100 — $0.2 million in the prior year.

Prior 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, as compared to $0.3 million for this time last year. With a 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. And a few items to point out on our material trends, during the first six months of 2025, we have increased our periscope production levels by 50% over our 2024 production levels.

So we’re seeing some pretty good improvement on our periscope revenues. And we also, as noted throughout the Q, we had some carryover legacy orders that dated back prior to COVID during the 2021 period that had a few lost contracts. It reflects about 7% of our backlog for Optex and roughly 5% of our backlog overall. This is fully reserved on our balance sheet. We do have $226,000 in reserves set aside to cover that. And last, speaking to the recent tariff uncertainties, we do not expect to have any material impact as a result of the tariffs. Our products are primarily military products. They’re sourced domestically, and as such, they come in duty-free. For those that are commercial optical assemblies, there are some selected components that do come from outside.

But currently, all of that backlog is covered with our existing inventory and we anticipate that we would be able to recover any future orders with updated pricing that would include those tariffs. So moving on to the segment operations, during both the three-month and the six-month window, we had significant improvement in our gross margin percentages for both operating segments for both Optex Richardson, as well as the AOC, Applied Optics Center. On a consolidated basis during the three-month window, we saw an improvement or we saw gross margin of 31.3%, compared to 30% in the prior year three-month window. Most notably, we had a 36.1% gross margin on the Applied Optics Center and a 26.1% gross margin for the Optex Richardson segment, which compares to a 21.7% for the three months last year.

For the six months, we are running a 29% gross margin for the six-month window, as compared to 27.4% for the prior year six months. And that is driven by higher margins in both the Optex Richardson at 20.3%, as compared to 19.3% in the prior year and for the Applied Optics Center at 35.9%, as compared to 33.5% in the prior year. Our backlog orders that come in roughly at $15.7 million, as compared to $17.9 million in the same six-month period last year. That’s roughly a decrease of $2.2 million or 12.3%. However, subsequent to the close of the period, within 10 days, we did receive an additional award for $5.7 million for laser filters for the AOC, Applied Optics Center segment. We do relate most of the decrease in orders otherwise as just purely a timing difference.

We have several outstanding business proposals that are pending either audit or award. For our backlog, we ended March 30, 2025, with $41.1 million, as compared to an ending backlog this time last year of $44.2 million. That is a decrease of $3.1 million or 7%. This predates the $5.7 million award that we received on April 9th. So with that award included, we are slightly above where we were this time last year as of today. And we do expect our — all of our awards that we have booked are affirmed for the current year, and we are expecting additional higher levels of periscopes through Q3, Q4, as indicated on our backlog forecast. So we have roughly $21.8 million remaining to be delivered in 2025 as booked orders and still some room for some unfirmed, if we should get some additional orders.

Moving on to our revenue for the three months, we were up in revenue $2.2 million and that increase primarily coming in from the Optex Richardson segment. We had an increase of 101.6% on our periscope line. Basically, we went from $2.7 million in 2024 to $5.4 million in 2025. So that — and then we had some significant increases on the laser filters of 21.4% in the current three months, taking the revenue from $2.4 million in 2024 to $3 million in 2025. Those are the most significant increases. Those, however, were slightly offset by some decreases in other product lines, but by and large, overall, a 25.9% increase. And for the six months on the revenue, we had a $3.4 million increase or 22.2%, $2 million of which came from our Optex Richardson segment, $3.7 million in periscopes offset by a decrease in other product lines of $1.7 million.

But then we had a $1.4 million increase in the Applied Optics Center, driven primarily from laser filters, with some offset from commercial optical assemblies. What we have seen is a significant increase in our military defense revenue offset by reductions in our commercial lines. On our EBITDA, we ended the three-month period with $2.4 million in EBITDA, as compared to $1.6 million in the prior year three months. For the six months, we had $3.6 million, as compared to $2.4 million in the prior year three months. Primarily driven by the increased revenue, the improved gross margins and the stable G&A spending. Beyond that, just to point out, we did have, within our critical accounting estimates, we had not any significant changes, but we do have set aside $226,000 for lost reserves against the old legacy periscope contracts.

We do 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.

Danny Schoening: 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 the 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 will either absorb or reflect specific wavelengths of light.

So by choosing the right material, the right thicknesses of layers and the correct number of layers, we can now meet the customer’s targeted specifications. So other than being cool, how do the customers use these stacked molecular layers? And the most common use is preventing certain types of laser light from either reaching the soldier’s eyes or critical sensors. The U.S. has mandated that all armored vehicles in U.S. 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 same technology can be used to create EMI barriers and to reduce the IR signatures from engine exhausts, both of which are emerging applications of this same technology.

Moving over to the Optex division, you can see how we use these same laser filters as piece parts into our optically-improved periscopes, which are then used on all of the armored vehicles like Abrams, Bradley, Stryker, Ampey, et cetera. For a more comprehensive list of these vehicles, I’d refer you to the investor presentation down on our website. And in addition to these periscopes, Optex also produces a wide variety of optical, electrical and mechanical sub-assemblies ranging from fairly simple components all the way up to high-def CMOS cameras, looking at the output of I-squared tubes to create digital day/digital night weapon systems for the Canadian Army. So finally, Optex has also launched a commercial line supporting long-range shooters, which includes Speedtracker Chronograph, now made in Texas, and the Reacher [ph], a scope-mounted wedge available in both 50 MOA and 100 MOA versions.

So that covers the what we do. Now let’s touch a little bit on the sustainability and growth. The bad news is that the enemy continues to develop new threats, and the good news is that once these threats are identified, we’re able to develop a protection plan against them and quickly pivot towards the new specification with the installed equipment base. So same oven, new recipe. Our capital equipment spending rate is relatively low, $500,000 a year to $750,000 a year. So who else is doing this? There continues to be an occasional new entrant into the space, but about 80% of our revenue is sole source. So for the last 10 years or so, Optex has been the clear leader in both the cost and performance, as judged by both the government and the clients.

Finally, I’d like to spend a little time on the company itself. We’ve been around for almost 40 years, public since 2009, but just recently uplitted — uplisted to NASDAQ a couple years ago. We have no debt. We have a line of credit with Texas Capital, who has been an excellent partner and is there to support us. We have an experienced Board of Directors providing excellent oversight, and we have an extremely clean cap table. The supply chain issues, which held us up a little bit after the pandemic, have been resolved, and we’re now taking a little bit of inventory out of the system as we continue to gain confidence in the incoming shipments, all of which are tariff-free, as Karen mentioned. So, with that, I’ll turn it back to Tom. Tom?

Operator: Thank you. [Operator Instructions] I’ll now pass the floor back to Danny as we assemble our queue.

Danny Schoening: Thank you, Tom. We did have 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 [ph]. 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? So thank you, Patrick. We’re currently running one ship 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. So — and Patrick had a follow-up here.

He said, is there any potential to diversify the customer base internationally, especially considering the strong push by the European Union for increased military spending? So, yes, we have several avenues into Europe and we’re working through those now. Again, we’re talking about ITAR-controlled items here. So there’s a paperwork side to this, along with 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 work through these paperwork issues dealing with ITAR. So thanks for the questions, Patrick. We also had a question from Jordan Crenshaw [ph]. He asks, as cash continues to come in and no long-term debt, please provide a view on how the company thinks about potential cash usage?

So 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. We’ve paid off working capital line of credit last year, as Karen mentioned. We completed a share buyback program, I think, a year and a half ago. And four years or five years ago, we even paid dividends. So I think we even did a product line acquisition a year and a half ago with the speed tracker acquisition. So admittedly, we did discuss this in our last Board meeting, but we didn’t come to a firm conclusion. But all the options are still on the table right now. But yes, we recognize that we have this issue in front of us and we need to work it. So Jordan also had a follow-up. He asked, can you please speak on why new orders are down year-over-year, 12.3% for the first six months?

This is mainly a timing issue, as Karen also indicated in her portion. If you noticed, our orders can be somewhat lumpy quarter-to-quarter. We received a $5.7 million order on 4/9. And if that order would have been seven or eight days earlier, the orders would have been up 16.2%. So, yes, it’s just a timing issue, which does take me into the subject of how we announce awards and when we choose to do a press release on them specifically around IDIQ, which is the Indefinite Delivery Indefinite Quantity type order. So in this case, we’ll announce the IDIQ order in the fully funded amount and our expected delivery dates for those upcoming releases against the IDIQ in the press release. Once we receive the releases against that order, we don’t issue another press release because we feel that that’d be kind of like double dipping.

So further, we try to provide an update on backlog at the end of each of these types of press releases so the investors can see where the backlog is at between the Qs. But you have to recognize that we continue to ship during that Q. So you have to take that into account. So those were the questions that were submitted earlier. So Tom, do we have any new ones?

Operator: Not at the moment. [Operator Instructions] And we do have a question coming from Frank Wisniewski [ph]. Frank, your line is live. Please go ahead.

Unidentified Analyst: 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. Well, what kind of further progress do you think you can make on gross margins?

Danny Schoening: Thank you, Frank. Yeah. Let’s divide those separately with the two divisions. So on the Optex side or the Richardson segment, our gross margins have been rising, but they’re not to the point where we’d like to see them. And the reason for that is that 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. And unfortunately, we had costed them at a firm fixed price status. And after that, we put material inflators within that or escalators on the material, but we certainly didn’t anticipate the amount that they actually rose. So those are not at the gross margin that we’d like to have. And unfortunately, the government has held our feet to the fire on those contracts, and they’ve continued to order against them.

And therefore, it’s taken us a while as we burnt off of those old orders and added in with new orders at the gross margins that we’d like to see. And that blend you see is what’s been coming out of the Richardson segment. So I think Karen hit on it too. We believe that we’re going to ship the last of those orders against those old contracts at the end of this year, potentially wrapping into Q1 2026. So we’ll see some improved margins on that side on the Optex side. Over on the Applied Optics Center side, we think those margins are pretty good. We continue to drive them up slightly higher. But again, these are high-tech products that are sold to the government. This is not software. We don’t expect to see 50%, 60% gross margin type of numbers here.

So we will see a little bit of improvement in those numbers, but not dramatic. So we think the AOC side is running pretty good. We’d just like to see incrementally a little bit more. And as we continue to add more volume across that, we’d like to see the factory leverage. So I hope I got you there, Frank.

Unidentified Analyst: Yeah. Yeah. Very good. Thank you. Second question is on the — specifically on the Speedtracker acquisition, but more generally on your approach to acquisitions in general. You mentioned to another question that you’re looking at capital allocation policies at this point in time. Where do acquisitions fall into that scheme?

Danny Schoening: Yeah. We’re fairly conservative when it comes to acquisitions. Acquisitions are tough. And so former Honeywell, former Finisar, I’ve been through several of them and they’re not to be taken lightly. So we’ve had several acquisitions ranging from purchasing the assets from a competitor, Miller-Holdsworth Inc., up in Salem, Ohio. We acquired the Applied Optics Center from L3 Communications in 2014-2015, that time frame, I think. And then this Speedtracker was more of a product line acquisition to support an interest we had in the growing commercial side that we’d like to play in. So I would say we’re conservative, but we’ve also sent out feelers to our good customers like GDLS, BAE, Lockheed, et cetera, that if they see someone that’s in their supply chain that has either reached their maturity or they want to tap out, if it lines with similar core competencies and things that we might be able to do here from an optical electrical perspective, give us a nod.

We’d certainly look at those. At the same time, we have looked at other, I’ll say, technology — corollary technology ones and it seems like those type of guys want the 13 times, 14 times, 15 times EBITDA, and that’s — we just don’t think that’s a good use of our cash right now. So we haven’t gone down that path. So I would say we’re fairly conservative, but we’re always looking. And I also tell investors that if they see something that they think might be of interest to us, may be in alignment, shoot me an email. We’ll certainly look at them. So thank you, Frank.

Unidentified Analyst: Good. Yeah. That’s a wise approach, I think. But specifically on the commercial and Speedtracker, you’ve made some initial forays into the commercial area. I guess those sales were not very good during the last six months. What are the prospects there and is it worth the time?

Danny Schoening: That’s a good question, Frank. We went into the Speedtracker acquisition specifically knowing that Garmin, as a competitor, was launching before us. Again, they have a plastic molded part made in Taiwan, and so we consciously said, hey, we think if we move this to Texas and we build it in Texas, it’s an aluminum, it’s a more military grade product that mounts directly on the rifle. We teamed up with Applied Ballistics from an app compatibility perspective and we’ve just now launched. So we’ll see, the proof will be in the pudding here in the next year on that product line specifically. But it also gave us the opportunity to, I’ll say, properly align internally here. So we had some things we had to clean up on our website to make it commercially viable so you could order directly from our website.

We had a lot of internal processes we needed to correct and to be able to serve customers that expect delivery the next day. We also needed to work with the distributors to make sure all of that was aligned. So yeah, that was a little bit of a learning curve, but we’ve been able to, I’ll say, piggyback on that learning and we’ve now launched the Reacher product, which is a wedge, an optical wedge that long range shooters can attach directly to their rifle so that they can quickly move to longer ranges by adding a fixed elevation to the site. So that product is also built in Texas here and we’ve just launched that too. So again, we’ll see how that plays out. In the past, we’ve always said it’d be nice to have a mix of military and commercial sales.

Military spending sometimes can be cyclic, so we’d see where that goes. But again, it’s — we’re pursuing it because it’s opportunistic. So we’ll see where that goes, Frank.

Unidentified Analyst: Good. Thank you, Danny. Look forward to talking to you in the future.

Danny Schoening: Thank you, Frank.

Operator: Thank you. [Operator Instructions] And we have no further questions in queue at this time. I’d now like to turn the floor back to Danny Schoening for closing comments.

Danny Schoening: Okay. Thank you, Tom. I appreciate it and I appreciate everybody who dialed in. So Karen, thank you for your time. Great quarter. Thank you for putting all that together. And again, investors, if anyone would like to chat with me individually, shoot me an email and I’ll set up time to make it happen. So thank you again and take care.

Operator: 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.