M-tron Industries - Earnings Call - Q2 2025

Executive Summary

• Q2 revenue grew 12.5% year over year to $13.28M on continued defense program shipments, while diluted EPS declined to $0.53 on lower gross margin and higher operating expenses.
• Backlog reached a record $61.2M, up 35% Y/Y and up from $47.2M at year-end, underscoring visibility into 2H25 and beyond.
• Versus S&P Global consensus, revenue modestly beat ($13.28M vs $13.20M*) while EPS missed ($0.53 vs $0.60*) amid mix and tariff headwinds; only one estimate was available for each metric (limited sample size)*.
• Management highlighted robust demand and pipeline strength; June awards of $3.0M and $5.5M to major U.S. defense programs support the medium-term outlook.
• Gross margin contracted 300 bps Y/Y to 43.6% on mix and tariffs; management is working with defense customers on potential FAR tariff exemptions and continuing supply chain optimization.

What Went Well and What Went Wrong

• What Went Well
  • Strong top-line growth: Revenue +12.5% Y/Y to $13.28M on “continued strong defense program product and solution shipments”.
  • Record backlog: Backlog rose to $61.2M (vs $45.3M a year ago; $47.2M at 12/31/24), reflecting broad demand across aerospace & defense, avionics, and space.
  • Positive demand signals and wins: $3.0M follow-on air defense order (program of record in production past 2029) and $5.5M production contract for a major weapons system (program through at least 2035) reinforce revenue pipeline.
  • Management tone: “We’re pleased to report strong revenue growth… [and] significant increase in our backlog… This momentum positions us well for sustained performance in the second half of 2025 and beyond.” — Interim CEO Cameron Pforr.
• What Went Wrong
  • Margin pressure: Gross margin fell to 43.6% from 46.6% Y/Y on product mix and tariff impacts.
  • EPS decline: Diluted EPS fell to $0.53 from $0.63 Y/Y as lower gross margin and higher engineering/selling/admin (R&D, commissions, corporate) outpaced revenue gains.
  • Adjusted EBITDA slipped Y/Y: $2.42M vs $2.52M driven by margin compression and higher operating expenses.

Transcript

Speaker 1

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 Industries second quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. To withdraw your question, simply press star one again. Thank you. I would now like to turn the call over to Linda Biles, EVP of Finance. Please go ahead.

Speaker 0

Good morning, everyone. Thank you for joining our 2025 M-tron Industries 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 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 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 result 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.

Speaker 3

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 2025 and our outlook going forward. As a reminder, M-tron Industries 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 U.S. and one in India. The company's primary markets include aerospace and defense, commercial avionics, industrials, and space. We are pleased to report that the company continues to perform well with continued strength in M-tron Industries 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 three quarters in a row of very strong book-to-build 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 the pump for 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 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, as compared to $1.7 million, or $0.63 per diluted 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 an increased investment in research and development, higher sales commissions due to our increase in revenue, and an increase in 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 the fiscal year 2024. The increase in backlog reflects continued broad demand for our products, including several large defense and avionics orders received during the quarter and an increase in space industry orders. Q2 fiscal year 2025 was the first full quarter M-tron Industries was impacted by the recently announced federal tariffs on the import of goods and materials from outside the U.S.

While M-tron Industries 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 regularly in some of the countries with which we receive materials or partially finished goods from do not have new trade agreements in place with the U.S. government. Unfortunately, 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 for March 10, 2025. The warrants are listed on the NYSE American Exchange under the ticker NPTIWS 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 feature. Further information on the warrants is available in a FAQ found on our M-tron Industries 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 continues to grow. M-tron Industries 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 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've placed in M-tron Industries and our people. Before I open the floor to questions, I wanted to mention that we will be presenting at two conferences in September of this year. We'll be presenting at the HC Wainwright Conference in early September and at 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?

Speaker 1

Absolutely. Thank you. Once again, ladies and gentlemen, in order to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. Our first question comes from the line of Anja Soderstrom with Sidoti & Company. Please go ahead.

Speaker 2

Hi, and thank you for taking the question. First, I'm curious about the gross margin. How much of an impact did the federal tariffs have on the gross margin for the quarter?

Speaker 3

Yep. Hi, Anja. 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. If you look carefully at the month, about 1.25% of revenue was expensed in the period, or 1% in the period, roughly. It was about $120,000.

Speaker 2

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

Speaker 3

Right. Yeah. Good questions. There were three components that lowered our gross margin in the first half of this year. They're the same that we experienced in the first quarter. A lot of it is product mix. To a certain degree, that's, we have a backlog at $61 million. There's a period performance for each PO we have. In the first two quarters of the year, we had, I think, a higher percentage than normal of lower margin products. When we produce many products, some of them are 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. We should see some improvement, hopefully, in Q3 and Q4 on that front. We are 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.

Speaker 2

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

Speaker 3

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%. Hopefully, we'll probably be in the 43%, 44% range, and then hoping to improve on that.

Speaker 2

Okay. Thank you. In terms of the backlog, there was a 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?

Speaker 3

Yeah, 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 were in the space and the 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, and those are a number of different areas from munitions to communications, as well as in the drone area, and some of them are quite large. The largest one is expected in Q4, and that would be a repeat order of some large ones we've had in the past, and that's in the $10 million area. Yeah.

Speaker 2

Thank you. In terms of capital allocation priorities, how do you think about that, especially given the pullback in your shares? Are you at all considering buybacks, or?

Speaker 3

Yeah, 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. It's up around 4% at this point in time. 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. The other thing we are continuing to look at is M&A. I think we will look at a small buyback as well as M&A as being two logical ways to spend some of our capital if needed.

Speaker 2

Okay, thank you. That was all from me for now.

Speaker 3

Thank you.

Speaker 1

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

Speaker 4

Good morning. Thanks for taking my question. 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 you see that backdrop influencing your opportunities and the timeline of them.

Speaker 3

Yeah, that's a great question. That in the 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. I do think we'll see benefit from that. Part of the reason is that we're a kind of a sole source or a value source for some of the parts for some of these systems. We have had conversations about increasing our capability, although we haven't received orders yet.

Speaker 4

Got it. Is there a way you can help us understand how significant of a rebuild the military is considering with its inventories, or any context you can put around that?

Speaker 3

Yeah, 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 FAD system, for example, where they had used about a quarter of all the stockpiles they had manufactured to date in a matter of days, defending against the Iranian attacks on Israel. That's just an indicator. There have been some other published articles about trying to triple the annual production rate of some missile systems. I think we'll probably see more of that going forward. It does take several years for the larger programs to increase their production capacity in these areas.

Speaker 4

Thank you.

Speaker 3

Thank you.

Speaker 1

Your next question comes from the line of Howard Root. Please go ahead.

Speaker 5

Good morning, and thanks for taking my call. 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 % of revenue as you grow?

Speaker 3

This particular quarter was maybe a little bit higher than normal just because of some of the bonus allocations. Just as we're trying to track how we're doing to plan and our bonus structure in place for our employees. I do believe that the level of expense is probably a reasonable assumption. You can make an adjustment for the bonus allocation. 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. 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 in some of the trade magazines. We're doing more on the internet.

We've kind of revised our website. While it might decrease a little bit going forward, that was another investment area. We do think we'll see benefit from both of those efforts, like the engineering side and also the sales and marketing, and our future bookings.

Speaker 5

Great. 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 or % of sales?

Speaker 3

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

Speaker 5

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

Speaker 3

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.

Speaker 5

Great. You 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 goals for 2024?

Speaker 3

Yeah, 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. Operating expenses as a percentage of sales will probably go down a little bit, but it won't really impact our margins. Our margins are based more on the product mix. I think it'll go up a tiny bit, but I can't really give you a firm estimate yet on how much.

Speaker 5

Okay. 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, you know, a size of company that you'd acquire and valuation, how you would put it, whether you're buying projects or products and valuation metrics? Just generally on your preference on use of cash, debt, or equity in order to do that, or if you rule any of those out.

Speaker 3

Yeah. Sure. We're looking at companies that would be complementary to what we do. We're not really looking at, you know, industry consolidation per se. It's really for products that sell into our markets that our customers are interested in acquiring. 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 our depth there. Those companies are typically in the $5 million to $15 million in revenue. There are some companies that are larger, but they're kind of few and far between in the DIB for RF companies. 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.

Most of these guys trade in the range of 8 to 12 times EBITDA.

Speaker 5

Is your use of cash, debt, or equity open to all three?

Speaker 3

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 funding that could come from the exercise of all of our open options. That would provide certainly some capital for it, but we do have the ability to borrow from our commercial bank. If we needed more capital, we might issue a little bit of equity, but probably more likely to do like an overnight converter slightly.

Speaker 5

Okay. Great. That's very helpful. Last question. Cameron, you know 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 timeframe to remove the interim from the CEO title?

Speaker 3

Thank you. We are trying to finalize the paperwork there. I did receive a letter or an interest from the board with a proposed comp structure, which I'm just kind of finalizing now.

Speaker 5

All right. Early congratulations, hopefully not jinxing anything.

Speaker 3

Yeah, thanks for taking my call. Congrats.

Speaker 5

No problem. Thank you.

Speaker 1

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.

Speaker 3

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

Speaker 1

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