MPTI - AMEX

Thank you for standing by. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the M-tron Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Linda Biles, EVP of Finance. Please go ahead.

Good morning, everyone. Thank you for joining our 2025 M-tron Q2 earnings call. Please note this call will be recorded, and we will make the recording available on our website, www.mtron.com, shortly after the call. Yesterday afternoon, we released our earnings for the second fiscal quarter of '25. Before getting underway, we are required to advise you that the following discussion should be taken in conjunction with our most recent financial statements and notes as contained within our 2024 10-K, which was filed on March 27, 2025, with the SEC. This discussion may contain forward-looking statements within the meaning of 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements contain known and unknown risks and uncertainties, which are detailed in our SEC filings. Although the company believes that the forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there are no assurances that the company's actual results will not differ materially from any results expressed or implied by the company's forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise. Readers are cautioned that any forward-looking statements are not guarantees of future performance. With that, I will now turn the call over to our Interim CEO, Cameron Pforr.

Thank you, Linda, and good morning, everyone, and thank you for attending our second quarter FY 2025 earnings call and your interest in the company. We are pleased to discuss our strong first half results for the fiscal year '25 and our outlook going forward. As a reminder, M-tron designs and manufactures highly engineered RF solutions, including electronic components and subsystems used to control the frequency and timing of signals and electronic circuits. We're a global company with 3 manufacturing sites, 2 of those in the United States and 1 in India. Company's primary markets include aerospace and defense, commercial avionics, industrials and space. So we're pleased to report that the company continues to perform well with continued strength in M-tron Q2's sales and also growth in our backlog. Our revenues continue to be driven by defense-related orders and we saw growth in the backlog over the quarter, driven by avionics and space orders. We also have had now 3 quarters in a row of very strong book-to-bill ratio. With consistent operating performance, we've been able to continue to make strategic investments in research and development and continue to increase the profile of the company and prime to pump future growth. Yesterday, we reported the following Q2 fiscal year 2025 results. Total revenues for the quarter were $13.28 million, a 12.5% increase over the prior year period's $11.2 million of revenue. The revenue increased in the period primarily due to strong defense program product and solution shipments. Gross margins for the first -- for the second quarter of 2025 were 43.6%, a decrease from the 47% gross margin we experienced in Q2 of 2024. The decrease is primarily due to product mix and the first full quarter of federal tariffs on ports of foreign sourced and partially finished goods. Net income was $1.6 million, or $0.53 per diluted share for the 3 months ending June 30, 2025, as compared to $1.7 million or $0.63 per share -- per diluted share for the 3 months ended June 30, 2024. The decrease was primarily due to lower gross margins discussed above as well as higher engineering, selling and administrative expenses from increased investment in research and development, higher sales commissions due to our increase in revenue and increased administrative and corporate expenses consistent with the overall growth in the business. Adjusted EBITDA was $2.4 million for the 3 months ended June 30, 2025 compared to $2.5 million for the 3 months ended June 30, '24. The decrease was primarily due to reduced gross margins as well as an increase in engineering, selling and administrative expenses consistent with our growth. Backlog increased 35% or $15.9 million to $61.2 million as of the end of June 30, 2025, compared to where it was at $45.3 million in the end of June 2024 and $47.2 million at the end of the fiscal year 2024. The increase in backlog reflects continued broad demand for our products, including several large defense and avionics orders received in the quarter and an increase in space industry orders. Q2 fiscal year '25 was the first full quarter M-tron was impacted by the recently announced federal tariffs on the imported goods and materials from outside of the United States. While M-tron is a U.S.-based manufacturer, we do import some materials from Japan, China, Korea and Europe and perform some finishing work in our India facility. It's difficult to predict the long-term impact of this trade policy on our financial performance as it changes regulated in some of the countries with which we receive materials and partially finished goods from do not have new trade agreements in place with the U.S. government. Encouragingly, though, to date, we have seen no impact from tariffs on demands for our products. Also of note, on April 25, 2025, the company distributed dividend warrants to stockholders of record from March 10, 2025. The warrants are listed on the NYSE American Exchange under the ticker MPTI.WS and are tradable. Just as a reminder, 5 warrants are exercisable to purchase 1 common share. The strike price is $47.50 per share, and there is an early conversion provision as well as an oversubscription future. Further information on the warrants is available in fact found on our M-tron Investor Relations website at ir.mtron.com. We continue to execute on our strategy of continuing moving into more program business, which now makes up the vast majority of our aerospace and defense revenues. We are involved in over 40 programs of record. And on many of these programs, we are a sole source provider, and we stand to reap many benefits if defense spending in the areas we support continue to grow. M-tron plays a critical role in defense of our nation by providing U.S. sourced and highly engineered components for many U.S. and allied military programs. Having a U.S.-based advanced manufacturing capabilities support our joint forces is more important than ever, and we thank our employees for their dedication to their jobs and our mission. We also thank our dedicated customers for their continued business and the trust they place in M-tron and our people. So before I open the floor to questions, I want to mention that we will be presenting at the 2 conferences in September of this year. We're presenting at the H.C. Wainwright Conference in early September and the Sidoti Small Cap Conference later in the same month. Information for both of these events will be posted on our investor website. Operator, can you please open the lines and allow the first question?

[Operator Instructions] Our first question comes from the line of Anja Soderstrom with Sidoti.

So first, I'm curious about the gross margin. How much of an impact did the tariffs have on the gross margin for the quarter?

Yes. So one thing we've put in place this quarter is we're now capitalizing some of our tariff costs. and then making sure we expense the portion that was related to sales in that period. So if you look carefully at the month, about 1.25% of revenue was expensed in the period or 1% in the period roughly. So it was about [ 1.20% ].

Okay. And then in terms of the gross margin there, they have come down a bit from historical highs last year. How should we think about that expanding again as you ramp new programs?

Right. Yes. Good question. So there were 3 components that lowered our gross margin in the first half of this year. And they're the same that we experienced in the first quarter. So a lot of it is product mix. And to a certain degree, that's -- we have a backlog of $61 million. There's a period performance for each PO we have. And so in the first 2 quarters of the year, we had, I think, a higher percentage than normal of a lower-margin products we produce many products and higher margin than others. We did experience some lower margins on some initial production runs of newer products. We are starting to see some improvement there over the quarter. So we should see some improvement, hopefully, in Q3 and Q4 on that front. And then we're now kind of estimating an impact from tariffs, probably around 1% to 1.5%, although that's difficult to predict just given things are moving around still with some of our -- like India, for example, where we do receive some unfinished goods.

Okay. So we can expect the gross margin to improve sequentially throughout the year?

A little bit, but I would caution people it's the biggest variable we have in our business right now. So I think we'll be a little bit below 45%. We'll probably be in the 43%, 44% range and hoping to improve on that.

Okay. And then in terms of the backlog, there was some nice growth there. I know you had some large contract wins. What does the pipeline look for other sort of large contract wins or just wins in general?

Yes. So we had a great start of the year in terms of bookings. And a lot of the wins in this past quarter in terms of increase on the backlog, we're in the space, in the avionics area. So we mentioned that there was a large avionics contract signed at the beginning of April, and we received some POs against that, which increased our backlog. In the back half of the year, we do have a lot of other defense POs that are expected. And those are a number of different areas from munitions to communicate as well as in the drone area. And some of them are quite large. So the largest one is expected in Q4, and that would be a reorder of some large ones we had in the past, that's the $10 million area.

Okay. And then just in terms of capital allocation priorities, how do you think about that, especially given the pullback in your share? Are you at all considering buybacks or?

Yes. It's something we're definitely considering but a higher priority in terms of how we are allocating our capital is we have increased our CapEx slightly this year, so it's up around 4% at this point in time. And that's really to implement some automation programs primarily that are helping us to kind of drive consistency in our manufacturing process and also help us scale as we grow our revenues. And then the other thing we are continuing to look at is M&A. So I think we will look at a small buyback as well as M&A as being 2 logical ways to spend some of our capital if needed.

Your next question comes from the line of Gregory McKinley with Asymmetric.

I wonder if you can talk a little bit about what you've learned regarding the news that a lot of us read around depleted stockpiles for U.S. missile systems and how that -- how you see that backdrop influencing your opportunities and the time line of them?

Yes, that's a great question, that and golden dome comes up quite a bit. I think the more interesting thing in the short term for us is the depletion of missile stockpiles, not only for the U.S. but for other countries. I think Raytheon and also Lockheed have had some recent announcements about substantial increases in their manufacturing of certain systems. And I do think we'll see a benefit from that. Part of the reason is that we're kind of a sole source or a value source for some of the parts for some of these systems. And so we have had conversations about increasing our capability, although we haven't received orders yet.

Got it. And just in terms of -- is there a way you can help us understand how significant of a rebuild effort the military is considering with its inventories? Or any context you can put around that?

Yes. I think I can only cite what's been published, but I think you saw maybe the article in the Wall Street Journal about the FA system, for example, where they had used about 1/4 of all the stockpiles they had manufactured to date in a matter of days, depending against the Iranian attacks on Israel. That's just an indicator. There have been some other published verticals about trying to triple the annual production rate of some missile systems. And I think we'll probably see more of that going forward. But it does take several years for the larger primes to increase their production capacity in these areas.

Your next question comes from [ Howard Root ].

A couple of little accounting questions. On the SG&A, a pretty sizable jump as you're growing at 30% of revenue. Do you see that as being kind of your target going forward? Or should that come down as a percent of revenue as you go?

Yes. So this particular quarter was it maybe a little bit higher than normal just because of some of the bonus allocations. And just as we're trying to track how we're going to plan and our bonus structure in place for our employees. But I do believe that the level of expense is probably a reasonable assumption. You can make an adjustment for the bonus allocation. I mean we have made an increase, for example, year-over-year, about $100,000 per quarter on engineering. We are trying to hire more engineers. That's kind of a constant investment area for us. Commissions went up a little bit just related to the increase in sales, which was significant. And the other area that increased in this period was really just on the sales and marketing front. We have done a fair amount to start marketing the company and some of the trade magazines. We're doing more on the Internet. We've kind of revised our website. So those -- while it might decrease a little bit going forward. That was another investment area. And we do think we'll see a benefit from both of those efforts like the engineering side and also the sales and marketing in future bookings.

Great. So then on the operating margin, you're around 14% with the gross margin coming down a little bit, SG&A going up a little bit. Do you see that as being a baseline and it should go up from that? Or what do you see over the next year for operating margin as percent of sales?

Yes. I think the operating margin will improve as we continue to scale. Just the big variable is though is on the tariff front. And then we do see fluctuations quarter-to-quarter. It could be up to a couple of percentage points just based on product mix. And that will go back and forth. And if you look at us over the past several years, you'll see the gross margin bounce around 2% to 3% per quarter, and that's based largely on mix or percent of new products.

So do you see Q2 as being more of a lower part of that bounce around or mid or upper or?

I'm hoping it's kind of the lower end of the range, but it's definitely within a reasonable range. I think 42% to 45% is kind of like the reasonable range probably for this year.

Great. So then look into Q3, you've got a pretty tough comparable from 2024. Do you see that as a seasonally stronger period for you? Or what do you see in the Q3 and the rest of the year in terms of our [ outlook ] for 2024?

We do -- I would say it's not a seasonality thing. It's really based on product mix. We do expect our revenues to increase quarter-over- quarter as we go through the second half of the year. So operating expense as a percentage of sales will probably go down a little bit, but it won't really impact on our margins. Our margins are based more on the product mix. So I think it will go up a tiny bit, but I can't really give you a firm estimate yet how much.

Okay. Then a bigger question on the acquisitions you mentioned as a use of capital. How do you see the environment out there? What do you see as an appetite for an acquisition in terms of size of company that you'd acquire in valuation? How you would put it, whether you're buying projects or products and valuation metrics? And then just generally on your preference and use of cash debt or equity in order to do that or if you roll any of those out?

Sure. So we're looking at companies that would be complementary to what we do. We're not really looking at industry consolidation per se. So it's -- really it's for products that sell into our markets that our customers are interested in acquiring because we have a really strong manufacturer rep sales force that can push those products to market and for the most part, improve the revenues of the companies that we're looking at because of just our depth there. So those companies are typically in the kind of $5 million to $15 million of revenue. There are some companies that are larger, but they're kind of few and far between in the dip for RF companies. So that's the range we're looking at. We're also trying to find companies that are positive EBITDA, at least $1 million of EBITDA, if not more, hopefully more. And so most of these guys trade in the range of kind of 8 to 12x EBITDA.

And then your use of cash debt or equity, are you open to all 3 or?

I think right now, we have about $15 million of cash on the balance sheet. We'll probably end the year closer to $20 million, could be a little bit more depending on how many options are exercised. There's about $3 million of option or funding that could come from the exercise of all of our open options. So that would provide certainly some capital for it, but we do have the ability to borrow from our commercial bank. And if we needed more capital, then we might issue a little bit of equity, but probably more likely do look like an overnight converters like that.

Okay. Great. That's very helpful. So last question, and Cameron, I've asked this before in our call. The interim CEO, the interim part of the CEO title bothers me. Is there any news or announcement or progress or time frame to remove the interim from the CEO title?

Yes. Yes. Thank you. Well, we are trying to finalize paper work there. So yes, I did receive a letter of interest from the Board with the proposed cost structure, which we're just finalizing now.

Early congratulations. Hopefully [indiscernible] anything.

And it seems that we have no further questions for today. I would like to turn the call back over to Cameron Pforr for closing remarks.

Okay. Well, I'd like to thank you for participating in today's call and your interest in M-tron. Have a great day. And please if you have more questions, contact us at [email protected], and we'll get back to you as quickly as we can. So thank you again for your interest. Bye-bye.