Earnings Call Transcript - MPTI Q1 2025

Operator, Operator

Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the M-tron Earnings Call for Q1 2025. I would now like to turn the call over to Linda Biles, M-tron's EVP of Finance. Please go ahead.

Linda Biles, EVP of Finance

Good morning, everyone. Thank you for joining our 2025 M-tron Q1 earnings call. Please note that 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 first fiscal quarter of 2025. 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 with 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 statement, 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.

Cameron Pforr, Interim CEO

Yes. Good morning, everyone. And thank you, Linda. First of all, I want to thank all of our shareholders and interested parties for attending our first quarter FY25 earnings call and your interest in the company. We're pleased to discuss our strong start to the fiscal 2025 fiscal year and our outlook going forward. As a reminder, M-tron designs and manufactures highly engineered RF solutions, including electronic components and sub-assemblies used to control the frequency and timing of signals in electronic circuits. We're a global company with three manufacturing sites in the United States and India. The company's primary markets include defense and aerospace, commercial avionics, industrials, and space. We are pleased to report that the company continued to perform well with continued strength in M-tron sales and good financial performance for Q1 fiscal year 2025. Our revenues continue to be driven by defense-related orders, and we also saw some growth in the commercial avionics market, something we believe bodes well for the future recovery of that market. We are pleased to see Boeing resolve its labor dispute early in the year and expect orders from the major airframe manufacturers to pick up throughout the year. With consistent operating performance, we have been able to continue to make strategic investments in research and development and continue to increase the market profile of the company. Part of that effort was the recent rebranding of the company as M-tron, updates to our logo, our website, and sales materials, as well as the initiation of advertising in some of the leading publications for our sector and enhanced lead generation activity. We also continue to make investments in our production facilities, and we've seen good initial results in a program that I mentioned, I think, on the last call to deploy greater automation on the factory floor to improve yields. It looks like we have gotten through some of the choppiness in the defense market caused by some of the conflicting messaging from the administration on the defense budget. We at M-tron have seen no disruption to our business and expect to continue the company's revenue growth throughout the year. The continuing resolution passed and signed in mid-March 2025 extended government funding through the end of the federal fiscal year and largely preserved the defense spending as it was actually increasing the defense budget by, I guess, a relatively small amount, $6 billion. The administration is now proposing increasing the defense budget for this fiscal year by $150 billion through a reconciliation process and also substantially increasing procurement spending in the federal FY 2026 budget. Many of the areas targeted for investment, such as next-gen aircraft, shipbuilding, loitering and precision-guided munitions, border security, and the Golden Dome anti-aircraft anti-missile defense, all require a significant amount of RF subsystems and components, highlighting the continued growing need for M-tron products. The importance of filters and oscillators has only increased as the electromagnetic spectrum has become a more contested part of the battle space. And communications systems and commanders and combatants being subject to electronic countermeasures, such as jamming and interference. We believe that we are well positioned to continue to perform well with the anticipated changes in military procurement focus. Now Linda, would you mind giving our audience the highlights of our fiscal year Q1 performance?

Linda Biles, EVP of Finance

Yes. Total revenues for the first quarter were $12.7 million, a 13.8% increase over the $11.2 million of revenue in the same period last year. The revenue increased in the period primarily due to strong defense program product and solution shipments. Gross margins for the first quarter of 2025 were 42.5%, a 20 basis point decrease over the 42.7% gross margins in Q1 of '24. The decrease is primarily due to additional manufacturing costs associated with the initial production runs of several new products. In addition, we saw the initial impact this quarter of newly initiated federal tariffs on imports of foreign-sourced materials and partially finished goods. Net income was $1.6 million or $0.56 per diluted share in the first quarter of 2025 compared with $1.5 million or $0.53 per diluted share in the first quarter of 2024. The increase in revenues discussed above was partially offset by higher manufacturing costs of sales consistent with the growth in revenues and the introduction of new products, as well as higher engineering, selling, and administrative expenses related to continued research and development investments, higher sales commissions from an increase in revenues, and an increase in administrative expenses consistent with the overall growth of the business. Adjusted EBITDA was $2.5 million in the first quarter of 2025 compared with $2.3 million in the first quarter of 2024. The increase was primarily due to higher revenues resulting in higher income. Backlog was $55.5 million as of March 31, 2025 compared to $47.2 million as of December 31, 2024 and $46.1 million as of March 31, 2024. The increase in backlog reflects several large defense and avionics orders received during the quarter and the continued broad demand for our products. In early February '25, for example, we publicly announced one large order supporting shipboard systems for over $10 million that was expected to have been received in fiscal year 2024. I'd now like to turn the call back over to Cameron.

Cameron Pforr, Interim CEO

Yes. Thank you, Linda. So in March 2025, M-tron saw the initial impact of the recently announced federal tariffs on the import of goods and materials from outside the United States. And while M-tron is a United States-based manufacturer with a great degree of vertical integration, something we pride ourselves on, we do import some materials from Japan, China, South Korea, and a very small amount from Europe. We also perform some finishing work at our facility in India. It's difficult to predict the long-term impact of this trade policy on our financial performance as it changes regularly. We are working with many of our defense customers on acting parts of the federal acquisition regulations, which potentially exempt materials received for defense production from entry tariffs. In addition, we continue, as always, to analyze our supply chain in order to make sure that we have redundancy of suppliers where possible and can source from reliable suppliers at the best price possible. To date, we have seen no impact from tariffs on demand for our products. Also, I wanted to highlight the recent distribution of warrants. On April 25, 2025, the company distributed warrants to stockholders of record as of March 10, 2020. The warrants are listed on the NYSE American Exchange under the ticker, MPTIWS. The warrants may be listed on certain financial websites under the ticker MPTIWT or a similar nomenclature. Pursuant to the warrant agreement, the warrants contain the following terms, which I'll summarize, and we're happy to answer questions about this later. But five warrants are exercisable to purchase one share of common stock, the exercise price is $47.50 per share. The warrants are exercisable at the earlier of 30 days prior to the maturity date of April 25, 2028 or on the date when the average volume weighted average price of M-tron's common stock is greater than or equal to $52 per share for the prior 30 consecutive trading days. This is called the accelerated trigger or early trigger. The warrants expire at the earlier of April 25, 2028, they run to full maturity or 30 calendar days following M-tron's public announcement of the date of the accelerated trigger being triggered. And warrant holders exercising their full allotment awards can apply to subscribe for any and all shares of common stock issuable pursuant to any outstanding but unexercised warrant. This is called the oversubscription feature and it's included in your warrant agreement. Further information on the warrants is available in effect found on our M-tron investor website, which is ir.mtron.com. Just to highlight some of the strategic activity, we do continue to execute on our strategy of moving into more program business, which now makes up the vast majority of our aerospace and defense revenues. We are involved, for example, in over 40 programs of record, it's a very significant amount. Defense and aerospace has been an amazing market in the past several years, and it does remain one with plenty of room for us to grow. We seek to maintain close relationships with our customers and be their first line resource for them as they plan upgrades to current systems or compete for the design of new systems to meet government program needs. And the same can be said in our other sectors like avionics and industrials. We have also ramped up our pursuit of complementary acquisitions and strategic partnership opportunities in both the RF component and subsystem space, as well as some tangential subsystem and solution companies that focus on the same markets. We are focused on finding deals that will be accretive for shareholders and help both companies strengthen their financial performance and customer base. Strengthening the US defense industrial base is one of the goals of the administration's trade policy and current budget focus. They've actually dedicated budget dollars to strengthening the defense industrial base in the anticipated increase in this year's defense budget. Having a US-based advanced manufacturing capability to support our joint forces is more important than ever before, and we thank our employees for their dedication to their jobs and the mission. We also thank our dedicated customers for their continued business and the trust they place in M-tron and our people. M-tron plays its critical role in defense organization providing US-sourced, highly engineered components for many US and allied military programs. Before I open the floor to questions, I wanted to mention that we will be holding our annual meeting on June 10, 2025, at 10:00 a.m. in the morning at the Harvard Club in New York City. The meeting will be open to all shareholders of the company's common stock. In addition, we will hold an investor presentation and question-and-answer session before the annual meeting, and information for both of these events will be posted on our investor website. For those interested in attending in person, you'll need to get a QR code from our IR site to pass through the Harvard Club security. Operator, can you please open the lines to allow and ask the first question?

Operator, Operator

Your first question comes from the line of Anja Soderstrom with Sidoti.

Anja Soderstrom, Analyst

So in terms of the gross margins, I guess that was a bit muted due to the ramping of new programs. How is that going to sort of develop? And with those new large contract wins, are we going to see that being a ramp for a longer period of time or will it pick up pretty quickly?

Cameron Pforr, Interim CEO

The gross margins were affected by three main factors. First, the product mix had fewer shipments from two of our long-term missile programs, which typically have high margins. We expect this to improve soon as this segment of the mix is likely to increase in Q2 and for the remainder of the year due to orders received in Q1. Additionally, we shipped some new products, and the initial production runs of new products tend to be less efficient until we resolve any issues and achieve higher yields. We also introduced a new type of oscillator for electronic warfare and radar, which I believe is beneficial for the company's long-term prospects. I anticipate that yields and margins will improve as we progress through the year. Furthermore, we observed some tariff impacts, with around $100,000 in tariff charges incurred in March. It is challenging to predict future tariff impacts, but we are optimistic that recent efforts to reduce tariffs will yield positive results. Overall, I expect improvements throughout the remainder of the year.

Anja Soderstrom, Analyst

For those new programs that you shipped in the space and the oscillators, are they higher than the average?

Cameron Pforr, Interim CEO

Yes, they'll be a very strong margin product that they're just early developed.

Anja Soderstrom, Analyst

And then in terms of the tariffs, you're not able to pass that on at all or…

Cameron Pforr, Interim CEO

We do have the capability on our contracts to pass that on. The reality is that in the market, there are a lot of mistakes being made regarding how the tariffs are applied, and the whole thought of passing on tariffs to vendors is relatively new. I anticipate a fair amount of pushback, although I think ultimately, many customers will pay per their agreements. So we're really hoping that we can work through the tariff situation in the short term, but we do have in our contracts the ability to pass on taxes and tariffs. I think over time, this will work out, but there will be some disruption in the industry in terms of cost for the short term.

Anja Soderstrom, Analyst

And then also, these large contracts you've been winning, and congrats on those. Are they also higher margin programs then?

Cameron Pforr, Interim CEO

They are, and they were actually some of the programs that I mentioned. We didn't ship a lot over Q1, which did impact our margins some.

Anja Soderstrom, Analyst

And then what does the pipeline look like for other large deals like that?

Cameron Pforr, Interim CEO

We actually have a pretty strong pipeline for the year. We don't really talk about bookings per se and give numbers on that, but we've had two very strong quarters of bookings, and we do have a lot of large programs that we think we'll be announcing over the next quarter or two, so both missile programs as well as some in the avionics space. In the back half of the year, we're working on some really significant drone bookings and programs, which I think will be exciting for the company.

Operator, Operator

At this time, there are no further questions. I would now like to turn the call back over to Cameron Pforr for closing remarks. Please go ahead.

Cameron Pforr, Interim CEO

Okay. Well, thank you, operator. I appreciate you helping us manage the call. And I want to thank everybody for participating today. If there are no further questions, please have a great day. If you want to follow up after the call, after you've had a chance to read the transcripts or go through the earnings release in more detail, feel free to contact us at ir@mtron.com, and we will respond in kind. So thank you again.

Operator, Operator

Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.