Earnings Call Transcript - MPTI Q4 2025

Operator, Operator

Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to M-tron Earnings Call for Q4 2025. Operator instructions were provided. I would now like to turn the conference over to Linda Biles, Executive Vice President of Finance. You may begin.

Linda Biles, Executive Vice President, Finance

Good morning, everyone. Thank you for joining our M-tron Q4 2025 and Fiscal Year 2025 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. Tuesday afternoon, we released our earnings for the fourth fiscal quarter of 2025 and annual fiscal year 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 contained within our 2025 Form 10-K, which was filed today on March 26 with the SEC. This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements contain known and unknown risks and uncertainties, which are detailed in our filings with the SEC. 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 a 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 CEO, Cameron Pforr.

Cameron Pforr, Chief Executive Officer

Thank you, Linda. Good morning, everyone. Thank you for joining our fourth quarter and annual FY '25 earnings call and your interest in the company. We are pleased to discuss our strong finish to the 2025 fiscal year and our outlook going forward. M-tron designs and manufactures highly engineered RF solutions, including electronic components and subassemblies 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 aerospace and defense, commercial avionics, space and industrial markets. We're pleased to report that the company continued to perform well with continued strength in defense-related sales and good financial performance for Q4 FY 2025. Our revenues continue to be driven by defense-related orders and strong improvement in the commercial aircraft, or what we call the avionics, sector. Bookings growth was particularly strong with a 62% increase in backlog over the 2024 year-end figure. With improved operating leverage, we have been able to continue to make strategic investments in research and development and continue our efforts to increase the market profile of the company and requests for quotes that that visibility is generating. We also continue to make investments in our production facilities and made several equipment upgrades in addition to our production lines as we prepare for increased demand. The past quarter has been an extremely active one for the defense sector. With the recent military action in Venezuela and Iran, it's easy to get distracted from some of the important fundamental industry news. The FY 2026 defense budget was approved for FY '26 through H.R. 7148 signed by President Trump in early 2026. The White House and Department of Defense have also voiced a desire to increase military procurement to the $1.5 trillion level from the current annual $968 billion budget for 2026. In February, both Lockheed Martin and Raytheon announced that they had signed seven-year production agreements with the Department of Defense to dramatically increase production over time for several important missile systems that each produces. M-tron is a significant vendor to both of these companies' precision-guided munition programs. Over the past several years, this has been one of the most significant growth areas for M-tron. In fact, we believe that M-tron has one of the highest levels of missile content as a percentage of revenue among publicly listed U.S.-based companies. After many months of discussion and planning around how we could significantly increase production levels, if required, we are now being asked to bid on components for several of these contracts. Provided that we do win significant design slots, we would not anticipate seeing an additional increase to our production volumes over what we received recently in December and January until late 2027 or 2028. Overall, we believe that we are well positioned to continue to perform well with significant upside potential given the Department of Defense's actions and the recent conflicts in Iran, which does not appear to have been fully factored into the current demand cycle. We reported the following Q4 2025 results. Total revenues for the fourth quarter were $14.2 million, an 11.2% increase over the same period last year. The revenue increase in the period was primarily due to strong defense program product as well as avionics shipments. Gross margins for the fourth quarter of 2025 were 46.9% as compared to 47.2% in Q4 2024. The gross margins were impacted by a level of tariffs not experienced in 2024 and by product mix. Net income per diluted share was $0.99 for the three months ended December 31, 2025, as compared to $0.73 per share in the prior year's period. Adjusted EBITDA was $4.5 million for the three months ending December 31, 2025, an increase of 46.8% over the $3.1 million of adjusted EBITDA for Q4 of FY 2024. The increase was primarily driven by higher revenues and lower engineering, sales and administrative expense as a percent of revenue, which was partially offset by the lower gross margins. Backlog at the end of the quarter was $76.4 million as compared to $47.2 million as of December 31, 2024. The 62% increase reflects the continued strategy and focus on securing large, long-duration, program-centric business. During 2025, we secured several multiyear purchase orders for defense programs. In addition, the timing of these purchase orders can materially affect backlog. For the fiscal 2025 year, we reported the following results. Total revenues for the 2025 fiscal year were $54.4 million, an 11.2% increase over the same period last year. The revenue increase in the period was primarily due to defense program product and solutions shipments as well as an increase in avionics shipments. Gross margins in 2025 were 44.4% as compared to 46.2% gross margin in 2024. Gross margin was impacted by higher tariff-related costs and a less favorable product mix compared to 2024, primarily around new product introductions. Net income was $8.4 million, or $2.62 per diluted share, in 2025, as compared to $7.6 million, or $2.65 per diluted share, in 2024. The increase in net income was driven by the increase in revenue, partially offset by the higher cost of sales. Adjusted EBITDA was $12.6 million in 2025 as compared to $11.1 million in 2024. The increase was primarily due to higher revenues, continued operating leverage and lower incentive compensation, partially offset by lower gross margins. Speaking of incentive compensation, in 2024 the company paid a cash bonus to employees and management for overachieving its annual plan. In 2025, management anticipated the company being able to achieve similar results against plan, but while the results reflected solid operational execution in a challenging environment marked by tariffs and increased new product introductions, the company did not achieve the same result. As a result, the company reversed $860,000 in earlier accrued incentive compensation expense, which had a favorable 6% impact on the fourth quarter results. For comparison purposes, in fiscal year 2024, the cash bonus plan expense totaled $1.4 million, representing approximately 3% of revenue. For 2025, the Board decided to grant stock compensation in lieu of cash to further align the long-term interests of employees and management with shareholders. The Board of Directors now intends to develop a more balanced incentive plan expected to incorporate several performance metrics designed to encourage, measure and reward the long-term sustainable growth of the company's revenue and earnings. We had a lot of activity in Q4 2025 to strengthen the balance sheet. M-tron operations are at a performance level where the company is starting to accumulate cash on the balance sheet. In fiscal year 2025, we added $10.7 million of cash through operations. In addition, in December 2025, we signed a new loan agreement with Fifth Third Bank, which provides the company the ability to borrow up to $20 million at a very competitive rate based on company leverage. Currently, we have no debt outstanding and haven't drawn upon this line. Lastly, at the end of the year, we closed the warrant offering that we launched in the spring of 2025. The offering was fully subscribed with 580,233 shares being issued at the end of December and early January, and net proceeds of $27.5 million were raised for the company, increasing our flexibility to pursue acquisitions that align with our long-term strategy. At the end of the period, M-tron had $20.9 million of cash on the balance sheet, with an additional $27.5 million being transferred in early January 2026 to the company from our transfer agent as warrant proceeds. As we look forward into 2026, we continue to expand our defense program business, which makes up the vast majority of our aerospace and defense revenue. Two of the areas where we expect strong growth in 2026 and 2027 are radar and electronic warfare. These are areas that we emphasized from a sales and engineering perspective several years ago. There's a broad redesign of many military fire control radars due to the change in warfare, incorporating a breadth of weapons ranging from hypersonic missiles to small and slow-moving, or even loitering, drones. There's also a newer class of mid-range radar being developed and widely deployed for counter-drone missions. We are active in this market as well and have seen demand increase over recent periods. Control of the electromagnetic spectrum is more important than ever as autonomous software-driven systems play a greater role on the battlefield. We also continue to expect strong growth throughout the year from commercial avionic shipments as we serve key suppliers to both Boeing and Airbus. Our position in this market is quite strong and our products are used in 15 to 17 different applications on every commercial airframe that Airbus and Boeing produce. With inventories largely depleted at the airframe manufacturers, orders for components and subsystems picked up as the airframe manufacturers executed on their backlog, which we project to be strong through 2035. While our management team is focused on executing our organic growth strategy, we are placing a greater emphasis on combining that with inorganic growth through partnerships and acquisitions. In 2025, we formed three strategic partnerships with complementary product companies. We recently announced a rights offering to provide the team greater flexibility to execute against our acquisition strategy. The record date for these rights will be tomorrow, March 27, 2026. Shareholders of record who exercise their full basic subscription rights are eligible to participate in the oversubscription feature should there be unallocated shares from the offering. The offering is expected to launch early next week, and the rights are expected to expire on April 15, 2026. Five rights will be required to purchase one share of common stock and the subscription price per share will be determined next week when we file our prospectus supplement on Monday or Tuesday, March 30 or 31. It's anticipated that the subscription price will be at a 10% to 12% discount to the trailing five-day volume-weighted average price per share. This offering is designed to support accretive acquisitions, the ability to perform carve-outs or participate in carve-outs, transactions of scale, the pursuit of strategic investments and also to expand our internal capabilities to meet demand. I'd like to thank our loyal employees for supporting the company and its mission of serving the nation and its capability to defend freedom. M-tron plays a critical role in the defense of our nation by providing U.S.-sourced, highly engineered components for many U.S. and allied military programs. Strengthening the U.S. defense industrial base is more important than ever, and we thank our employees for their dedication to their jobs, their fellow employees and our mission. We also want to thank our customers for their continued business and partnership. I want to mention that we will be holding an Investor Day in New York on May 12, beginning at 12:00 p.m. at the New York Stock Exchange at 11 Wall Street. I hope you can attend that. Please check our Investor Relations calendar on our IR website, ir.mtron.com, for announcements about this and other investor events. With that, operator, can you please open the lines and allow the first question?

Operator, Operator

Operator instructions were provided. Your first question comes from the line of Anja Soderstrom with Sidoti.

Anja Soderstrom, Analyst, Sidoti

You've done a lot to strengthen the balance sheet lately. What's the motivation for this rights offering?

Cameron Pforr, Chief Executive Officer

The rights offering really reflects a lot of the changes in the industry that are taking place right now. There is a tremendous amount of demand in the market, for example, for some of these larger seven-year engagements. We're being asked now to assemble quotes to handle that demand curve as well as, obviously, make the financings necessary to increase our own capacity. We'll use some of the proceeds for that, but it's really more being driven by some of the pressure from the industry and from the Department of Defense on primes to become more nimble. So we do expect divestitures from primes as well as a number of private equity firms trying to find exits for their portfolio companies in the space. We think this is creating more opportunity than we've seen in the past to do potentially larger transactions. It could be a carve-out or it could be a merger of equals — that kind of thing — but it definitely helps to have cash on the balance sheet to be able to execute and be included in processes and to improve bankers' and other intermediaries' belief in the certainty of close. So we believe that having a stronger balance sheet is going to allow M-tron to take advantage of the opportunities and also strengthen our posture with primes as they look to us as a key supplier as demand increases.

Anja Soderstrom, Analyst, Sidoti

Okay. And then in terms of the gross margin, nice work there on a sequential basis. Even though the revenue didn't increase that much on a sequential basis, is that all mostly driven by the product mix and ramping new programs since the tariff seems to have had a negative effect? I'm just trying to figure out as we lap this tariff impact, how should we think about gross margin for next year?

Cameron Pforr, Chief Executive Officer

Yes, good question. Some of the impact in December of 2025 was a little bit lower than the prior year, and that was the impact of tariffs as well as still some residual product mix issues, which is really from newer products. In December 2024 and also September 2024 quarters, we also had some last-time buys at very, very high margins, and those are more periodic. If we look forward, I do believe that we'll have a more favorable product mix going forward, but we do have an increase in orders for some of these newer products we've been producing, so we're still working through that impact. We do expect a slightly more favorable tariff environment next year. In 2025, tariffs impacted our gross margins by about one percentage point. We expect them to be a little bit less in 2026 and forward, but tariffs are a moving target and we'll see what comes out.

Anja Soderstrom, Analyst, Sidoti

Okay. And then one last one in terms of the backlog, nice growth there as well. What was most of the growth coming from?

Cameron Pforr, Chief Executive Officer

The backlog was driven by defense and aerospace and then avionics. Both of those were strong growth areas in the backlog. Earlier in the year, we did see some increase in space as well. We're hoping that as we look into 2027 and 2028 there'll be more opportunities in space, especially resulting from the Golden Dome initiatives.

Operator, Operator

Your next question comes from the line of Jan Ader with Freedom Broker.

Jan Ader, Analyst, Freedom Broker

First, how meaningful is the drone exposure today in your business? And can it become a more material part of the mix over time?

Cameron Pforr, Chief Executive Officer

You were asking about exposure to drone warfare? Drones are definitely an active part of our business. We participate in two ways. One, we sell solutions and components to several of the manufacturers of drones. We've been doing that since 2014. We tend to service some of the primes that are making the larger drones — ISR or kinetically focused — the larger class of drones, think of Global Hawk and Reapers and that class. We do not participate in FPV drones. Those are very attritable designs with less expensive parts that don't rely on the level of reliability our products provide. That's a relatively small part of our business, but it is growing. In the prior year, we typically did about $1.5 million to $2 million of revenue in that space, but I think that's going to grow. The other area very much impacted by drone warfare is what's happening in the radar space. Most of the radar systems we support are being redesigned because of drones. We're also getting significant orders and a lot of growth in mid-range radar, which is almost entirely focused on counter-drone warfare. We believe that will become a substantial part of our revenue going forward.

Jan Ader, Analyst, Freedom Broker

Okay, that's helpful. But can you quantify the radar systems revenue for 2026?

Cameron Pforr, Chief Executive Officer

Could you just repeat that? It was a little bit hard to understand.

Jan Ader, Analyst, Freedom Broker

Can you quantify the revenue exposure from radar systems for 2026 or provide some color on that?

Cameron Pforr, Chief Executive Officer

I think it will probably total roughly $4 million.

Operator, Operator

That concludes our Q&A session. I will now turn the call back over to Cameron Pforr for closing remarks.

Cameron Pforr, Chief Executive Officer

Okay. Well, thank you, everyone. I appreciate the questions. I'd like to thank everybody for participating today and your interest in M-tron. Have a great day, and please contact us at [email protected] should you have any additional questions; we'd be happy to handle those.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect. Everyone, have a great day.