M-tron Industries Q3 2023 Earnings Call Transcript

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November 16, 2023

There are 5 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Amtron PTI Third Quarter Earnings 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. Thank you. On today's call, we will have Mike Ferrantino, CEO and James Tyve, CFO.

Operator

I would now like to turn the call over to James. Please go ahead.

Speaker 1

Thank you. Good morning, everyone, and thanks for joining our Q3 2023 earnings call. Please note that this call will be recorded, and we anticipate making the recording available on our website at www.emtronpti.com shortly after the call. We issued our 10 Q last week Thursday reporting the results for 3rd fiscal quarter of 2023. Before getting underway, we're required to advise you and all participants should note that the following discussion should be taken in conjunction with the most recent financial statements and notes thereto contained within our 2022 10 ks, which has been filed with the SEC.

Speaker 1

This discussion may contain forward looking statements within the meaning of Section 27A of Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward looking statements involve known and unknown risks and uncertainties, which are detailed in our filings with the SEC. Although the company believes that its forward looking statements are based upon reasonable assumptions regarding its business and future market conditions, there can be 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.

Speaker 1

With that, I'll now turn the call over to Mike Fiorentino, our CEO.

Speaker 2

Thank you, James. Good morning, and thank you to our shareholders for your interest in Amtron PTI and attending our Q3 2023 earnings call. The completion of the Q3 also marks the completion of our 1st year as a public company. As a brief reminder, Emtron PTI has been providing RF solutions to the marketplace since 1965. We are a global company with 3 manufacturing locations in the U.

Speaker 2

S. And India. With consistent investment in research and development, we have a robust product pipeline averaging over 2 60 new product introductions a year. Our customer base is growing with over 300 active customers today. We continue to focus on our core markets of defense and aerospace, avionics and space, each of which continues to demonstrate significant tailwinds.

Speaker 2

Design wins in these markets tend to be very sticky and program life cycles are long. Let me now summarize for you where Emtron PTI stands for the Q3 2023. Compared to prior year, revenue for the 3 months ended September 30 increased 29.4 percent to $10,900,000 and revenue for the 9 months increased 31.2 percent to 30,400,000 dollars The revenue increase for the quarter year to date periods over the prior year numbers reflect strong defense product shipments. Gross margins were 42.8 percent for the 3 months compared to 32.4% for the prior year and 39.7% for the 9 months compared to 35.6% for the prior year, benefiting from the favorable product mix along with increased product volumes. Backlog was $50,300,000 at September 30, compared to $46,200,000 at the beginning of the year and $44,100,000 at the end of the Q3 of 2022.

Speaker 2

Backlog increased during 2023, primarily due to an increase in defense product orders. The company reported operating income of $4,400,000 for the 9 months ended September 30, compared to operating income of $2,000,000 for the prior year period. The increase reflects both higher revenue and higher margins impacted by favorable product mix as described earlier. For the 9 months ended September 30, engineering, selling and administrative costs increased $1,500,000 over the prior year, primarily as a result of 1.2 $1,000,000 of administrative cost increases, including public company costs of $735,000 which represents the incremental direct cost of being public company with no comparable amount being recorded within the prior year when results were presented on a standalone basis. Our investment in research and development increased $125,000 to $1,600,000 for the 9 months ended September 30 as compared to the prior year.

Speaker 2

Net income was $3,400,000 for the 9 months ended September 30, 2023. Diluted net income per share for the 9 months ended September 30 was $1.25 compared to $0.60 for the prior year period. Our adjusted EBITDA was $5,300,000 for the 9 months ended September 30 versus $2,900,000 for the prior year period. Note that adjusted EBITDA was calculated on a standalone basis for the 9 months ended September 30, 2022 and does not include any adjustments for the potential impact from additional costs of being a publicly traded company. Finally, as we conclude, I would like to thank all of the 300 plus members of our team who have diligently worked to execute our plans, contributing greatly to these results.

Speaker 2

With a strong backlog and a robust pipeline, we believe we are well positioned for the continued organic growth. We are working hard to drive efficiencies throughout the organization by leveraging our India operation, making key investments in talent and equipment to improve yields and reduce cycle times. We are also working hard to extend our legacy of acquisitions with a focus on companies or cargos that provide synergistic products, increased technical capabilities and access to new and growing markets. I will now open the floor to questions. Operator, please open the call to any questions.

Operator

Thank you. Your first question comes from the line of Anja Soderstrom with Sidoti and Co.

Speaker 3

So I just wanted to get a sense, you're talking about strong defense product shipments helping the Q3 results, but what are you seeing in the other end markets you serve, the avionics industry, for example?

Speaker 2

So the other end markets are we're seeing strength in those markets as well. To give you some background, so our Air and Space Aerospace and Defense market over the last 4 years has been growing at a CAGR of about 8.3%, avionics in that same timeframe has been 7%, and our space business is growing at 17%. We see the biggest change in the defense because that's our largest base market today.

Speaker 3

Okay. Thank you. And in terms of the gross margin improvement, you said that's due to favorable product mix and increased product volumes. Can you sort of bucket that and how should we think about gross margin going forward?

Speaker 2

Sure, sure. So about 50% of that is volume related and 50% product mix. In terms of going forward, we are implementing significant improvements in efficiencies, which should impact margins moving forward as well. So, although product mix will continue to play a factor, I think it will be a little bit less than it has been in earlier quarters this year.

Speaker 3

Okay. But that might be then made up for increased product volumes or?

Speaker 2

Correct. If you recall, in the Q2, we did have an end of life product that had some high revenue shipments at a lower margin that impacts in the Q2. So that's behind us. So within the mix that we're offering today, there's less variability than what we've seen in the past. And we do expect to see some additional improvements through efficiencies.

Speaker 3

Okay. Thank you. And your cash position improved quite a lot. Are you at all looking actively at M and A? And what are you seeing if so, what are you seeing in that area?

Speaker 2

Yes, we're actively looking in that space. Just don't have anything to discuss at this point.

Operator

Thank you. Your next question comes from the line of Achilles Kumar with ITI Investment. Please go ahead.

Speaker 4

Hi, sir. I have a question. First question is regarding customer concentration. I see that our concentration has been increasing, while one would expect a decrease in concentration like over the years. So I see that 34% is generated in this 9 months from the largest customer.

Speaker 4

So how do you perceive it to be the concentration towards single customer and like how stable is the franchise, I mean, auto coupling with EBITDAR like top 2 or top 3 customers that you would talk about, sir?

Speaker 2

Sure. So, we definitely have seen some increase in customer concentration, but that's largely been driven by mergers within our customer base. As an example, when Raytheon merged with United Technologies, we had positions with both of those companies that combined them. And within any one of those customers, they are very large and we are generally doing business with multiple locations within those customer bases. So while it may be with the same end customer, there is quite a bit of diversity within that customer.

Speaker 4

Got it. What would be an aspirational concentration that you would say, I mean, say which we can target for top 5 customers and like the next

Speaker 2

I think over time as we grow our customer base and take some of our smaller companies up to the food chain, if you will, we'd love to have nobody greater than 15% to 20%.

Speaker 4

Okay. Okay. Nice. Yes, the second question is, if I were to classify your products as to being catered to aftermarket versus new builds, so what would be the share that you would say between like say, if there is any aftermarket for your products and versus like those going into new builds, what percent you will attribute to?

Speaker 2

The vast majority of what we're doing is going into new builds as opposed to an aftermarket business. Where there is aftermarket business, it would be maybe upgrades on a plane, but it would be a new system going into that plane, a new radar system, for example.

Speaker 4

So it's sort of a maintenance demand itself, you would say, replenishing or evergreen demand, you would say?

Speaker 2

That is not a huge portion of our business. We do have a fair amount of product in what I would describe as consumables where we have missile programs, for example, that are used once and then done. But in terms of this program, it's not a big piece of our business.

Speaker 4

Might I know how much percentage would be consumables that you would call us?

Speaker 2

Probably less than 10%. But I can see if I can get a better number on that.

Speaker 4

Okay, okay. Fine, sir. And the last question is with regard to our increase in defense orders, so does it have anything to do at all with the macro scenario that's playing the part with respect to Russia, Ukraine or Israel, Hamas? And I mean is this sustainable or is it if at all this has any role to play and the increase in defense, would you say that it is sustainable or market share or whatever you call us?

Speaker 2

So in addition to growing with the overall market, which is clearly growing based on what's going on in the global environment right now, we believe we are gaining market share within that space. So, and when I look out over the horizon, certainly within what's visible, I believe it's sustainable. As even if things begin to calm down a bit, I think there'll be a fair amount of continued purchasing as not only the U. S. But other firming nations rebuild their supplies.

Speaker 4

Okay, okay, okay. Fine, sir. Fine. Yes, that's it, my questions. Thank you for answering.

Operator

Thank you. Your next question comes from the line of Anja Soderstrom with Sidoti and Co. Please go ahead.

Speaker 3

Hi. Sorry, I just had a follow-up on that last question on the geopolitical environment and most recently, the Hamas Israel war. Have you noticed that in your backlog already or is it too soon and that could create some sort of tailwind maybe in the coming quarters?

Speaker 2

So certainly we have noticed it from the Ukraine side, but not from the Israel Hamas side, no.

Speaker 3

Okay. Okay, thank you. That was all.

Speaker 2

Thank you.

Operator

Thank you. Ladies and gentlemen, there are no further questions at this time. I will now turn the call back over to Michael Ferentino for closing remarks. Please go ahead.

Speaker 2

Well, thank you. And once again, I would to thank everybody for joining and for your interest in Amtron PTI. And please have a great day and a great holiday season.

Operator

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

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