Earnings Call Transcript - MPTI Q2 2025

Operator, Operator

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. Thank you. I would now like to turn the call over to Linda Biles, EVP of Finance. Please go ahead.

Linda M. Biles, EVP of Finance

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 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.

Cameron Pforr, Interim CEO

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 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 three manufacturing sites, two of those in the United States and one in India. Company's primary markets include aerospace and defense, commercial avionics, industries, 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 have now had three 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 poised to drive 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. The revenue increased in the period primarily due to strong defense program product and solution shipments. Gross margins 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 imports of foreign-sourced and partially finished goods. Net income was $1.6 million, or $0.53 per diluted share for the three months ending June 30, 2025, compared to $1.7 million or $0.63 per share for the three 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 revenue increase, and increased administrative and corporate expenses consistent with the overall growth in the business. Adjusted EBITDA was $2.4 million for the three months ended June 30, 2025, compared to $2.5 million for the three months ended June 30, 2024. 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 at the end of June 2024 and $47.2 million at the end of 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 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 from which we receive materials and partially finished goods 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 demand 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, five warrants are exercisable to purchase one 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. We 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 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 the 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 capability supporting 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 two 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, Operator

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

Anja Marie Theresa Soderstrom, Analyst

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?

Cameron Pforr, Interim CEO

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 about 1% in the period roughly. So it was around 1.20%.

Anja Marie Theresa Soderstrom, Analyst

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?

Cameron Pforr, Interim CEO

Right. Yes. Good question. So there were three 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. A lot of it is product mix. And to a certain degree, we have a backlog of $61 million. There's a period performance for each PO we have. And so in the first two quarters of the year, we had a higher percentage than normal of lower-margin products. We produce many products, some 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. We're estimating an impact from tariffs probably around 1% to 1.5%, although that's difficult to predict just given that things are moving around still with some of our suppliers, like in India, for example, where we do receive some unfinished goods.

Anja Marie Theresa Soderstrom, Analyst

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

Cameron Pforr, Interim CEO

A little bit, but I would caution people it's the biggest variable we have in our business right now. 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.

Anja Marie Theresa Soderstrom, Analyst

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 like for other large contract wins or just wins in general?

Cameron Pforr, Interim CEO

Yes. We had a great start of the year in terms of bookings. A lot of the wins in this past quarter in terms of increases in the backlog were in the space and avionics area. 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. Those are from various areas, including munitions, communications, and the drone area. Some of them are quite large, with the largest expected in Q4, around the $10 million area.

Anja Marie Theresa Soderstrom, Analyst

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?

Cameron Pforr, Interim CEO

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, up around 4% at this point in time. That's primarily to implement some automation programs that are helping us to drive consistency in our manufacturing process and also help us scale as we grow our revenues. We are also continuing to look at M&A. I think we'll look at a small buyback as well as M&A as two logical ways to spend some of our capital if needed.

Operator, Operator

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

Gregory McKinley, Analyst

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 backdrop influences your opportunities and timelines?

Cameron Pforr, Interim CEO

Yes, that's a great question. The depletion of missile stockpiles, not only for the U.S. but for other countries, is more interesting in the short term for us. I think Raytheon and also Lockheed have had some recent announcements about substantial increases in their manufacturing of certain systems. I do think we'll see a benefit from that, as we're a sole source for some of the parts for these systems. We have had conversations about increasing our capability; although we haven't received orders yet.

Gregory McKinley, Analyst

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?

Cameron Pforr, Interim CEO

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 a quarter of all the stockpiles they had manufactured to date in a matter of days, in response to Iranian attacks on Israel. That's just an indicator. There have been some other published reports about trying to triple the annual production rate of some missile systems. 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.

Operator, Operator

Your next question comes from Howard Root.

Unidentified Analyst, Analyst

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?

Cameron Pforr, Interim CEO

Yes. So this particular quarter was a bit higher than normal due to some of the bonus allocations. We are tracking how we plan and our bonus structure in place for our employees. However, I believe the level of expense is probably a reasonable assumption. You can adjust for the bonus allocation. We have made an increase, for example, year-over-year, of about $100,000 per quarter on engineering. We are trying to hire more engineers; that's a constant investment area for us. Commissions went up a little bit because of the increase in sales, which was significant. Another area that increased in this period was on the sales and marketing front. We have done significant efforts to start marketing the company and some of the trade magazines. We're doing more on the Internet and have revised our website. While it might decrease a bit going forward, that was another investment area. We do expect to see benefits from both the engineering side and the sales and marketing side in future bookings.

Unidentified Analyst, Analyst

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

Cameron Pforr, Interim CEO

Yes. I think the operating margin will improve as we continue to scale. The big variable is, however, on the tariff front. We see fluctuations quarter-to-quarter, which could be a couple of percentage points based on product mix. If you look at us over the past several years, you'll see the gross margin bouncing around 2% to 3% per quarter, largely based on mix or the percentage of new products.

Unidentified Analyst, Analyst

So do you see Q2 as being more on the lower part of that bounce, mid, or upper?

Cameron Pforr, Interim CEO

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 a reasonable range for this year.

Unidentified Analyst, Analyst

Great. So looking 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 Q3 and the rest of the year regarding our outlook for 2024?

Cameron Pforr, Interim CEO

We do not see a seasonal aspect; it's based on product mix. We expect our revenues to increase quarter-over-quarter as we go through the second half of the year. Operating expense as a percentage of sales will probably decrease a bit, but it won't significantly impact our margins. Our margins are more based on the product mix. I think it will go up slightly, but I can't provide a firm estimate yet.

Unidentified Analyst, Analyst

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 the company you would acquire, valuation metrics? And generally, your preference and use of cash, debt, or equity to do that?

Cameron Pforr, Interim CEO

Sure. We're looking at companies that would be complementary to what we do. We're not really looking at industry consolidation per se. We're primarily focusing on 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 significantly improve the revenues of the companies we're considering due to our depth there. We’re looking at companies typically in the $5 million to $15 million revenue range. Some companies may be larger, but they're rare in the RF sector. We're also trying to find companies that are positive EBITDA, at least $1 million of EBITDA or more. Most of these companies trade in the range of 8 to 12 times EBITDA.

Unidentified Analyst, Analyst

Your use of cash, debt, or equity, are you open to all three?

Cameron Pforr, Interim CEO

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, it could be a little bit more depending on how many options are exercised. There's about $3 million of options that could come from the exercise of all our open options. So that would provide some capital for us. We also have the ability to borrow from our commercial bank, and if we needed more capital, we might issue a little bit of equity, but likely we’d consider convertible options.

Unidentified Analyst, Analyst

The interim CEO title bothers me. Is there any news, announcement, or progress to remove the interim from the CEO title?

Cameron Pforr, Interim CEO

Yes, thank you. We are trying to finalize paperwork there. I did receive a letter of interest from the Board with the proposed cost structure, which we're just finalizing now.

Operator, Operator

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.

Cameron Pforr, Interim CEO

Okay. Well, I'd like to thank you for participating in today's call and your interest in M-tron. Have a great day. If you have more questions, contact us, and we'll get back to you as quickly as we can. Thank you again for your interest. Bye-bye.

Operator, Operator

Ladies and gentlemen, that concludes today's conference call. We would like to thank everyone for their participation. You may now disconnect your lines.