EMCORE Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 6 speakers on the call.

Operator

Good morning, and thank you for standing by. Welcome to the EMCOR Corporation Fiscal 2023 Third Quarter Results. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tom Minichiello, EMCORE's Chief Financial Officer.

Operator

Please go ahead.

Speaker 1

Thank you, and good morning, everyone, and welcome to our conference call to discuss EMCOR's fiscal 2023 3rd quarter results. The news release we issued yesterday afternoon is posted on our website, emcore.com. On this call, Jeff Rittercher, EMCOR's President and Chief Executive Officer, will begin with a discussion of our business highlights. I'll then update you on our financial results and we'll conclude by taking questions. Before we begin, we would like to remind you that the information provided herein may include forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934.

Speaker 1

Before. These forward looking statements are largely based on our current expectations and projections about future events and trends affecting the business. Such forward looking statements include projections about future results, statements about plans, strategies, business prospects and changes and trends in the business and the markets in which we operate. Management cautions that these forward looking statements relate to future events or future financial performance and are subject to business, economic and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance or achievements of the business or in our industry to be materially different from those expressed or implied by any forward looking statements. We caution you not to rely on these statements and to also consider the risks and uncertainties associated With these statements and the business, which are included in the company's filings available on the SEC's website located at sec.gov, including the sections entitled Risk Factors in the company's annual report on Form 10 ks and subsequent periodic reports.

Speaker 1

The company assumes no obligation to update any forward looking statements to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation. In addition, references will be made during this call to non GAAP financial measures, which we believe provide meaningful supplemental information to both management and investors. The non GAAP measures reflect the company's core ongoing operating performance and facilitates comparisons across reporting periods. Investors are encouraged to review these non GAAP measures as well as The explanation and reconciliation of these measures to the most comparable GAAP measures included in our news release. I will now turn the call over to Jeff.

Speaker 2

Thank you, Tom, and good afternoon, everyone. Well, I guess it is morning. In Q3, EMCOR's inertial navigation business came into its own, Growing 10% over the March quarter, representing the 5th sequential quarter of growth. Book to bill kept pace with this growth of 1.0 And the business has $68,000,000 in backlog. Non GAAP gross margin for inertial navigation was 30% And the A and D segment overall was 29%.

Speaker 2

Operating expenses for inertial navigation were approximately $9,900,000 Consolidated revenue in fiscal Q3 was 26,700,000 Inertial NAV came in at 26.7%, defenseoptoelectronics was 300 ks And broadband posted a negative $300,000 in revenue due to a terminated $1,300,000 broadband development contract. Tom will provide additional details on this in his remarks. Simply put, inertial navigation performed Significantly better than expectations, setting the stage for the company's evolution into a pure play aerospace and defense business. Turning now to the broadband business, I'd like to focus on our announcement of the letter of intent to sell the linear part of the business to photonic foundries. Completion of this sale would accelerate EMCOR's ability to narrow its focus on to inertial navigation.

Speaker 2

It should also meet our objectives to create a seamless transition of supply to our customers and opportunities for our employees. We expect to complete the sale during the September quarter. The last remaining component of broadband is the wafer fab And we expect to conclude production for the last time by pardon me, within the September quarter as originally planned. Since the completed sale of the linear product line would transfer the order backlog for the affected products to photonic foundries, We expect that the remaining wafer fab backlog to be approximately $3,200,000 Once the wafer fab production processes are complete in Alhambra, EMS takes over from there, assembling chips onto carriers and completing test and burn in. Since there are production limits in EMS, it will take at least a year to complete all of the orders with just a handful of EMCOR employees remaining to manage the process.

Speaker 2

That said, We have several interested parties conducting due diligence on the chip business and expect to have a decision on the future direction of the fab within the current quarter, Bringing the tale of 2 companies to an end. Moving on to Inertial Navigation. I'll begin my comments by stating that we had a strong performance from our Space and Navigation, Tinley Park and Concord operations. Revenue was up about 10% Quarter over quarter with a book to bill of 1.0. This is a little misleading by itself considering the fact that inertial navigation has grown 30 from the December quarter, which was the first full quarter in which the former KDH team was merged into EMCOR.

Speaker 2

Backlog came in at a solid $68,000,000 Please keep in mind that this only includes hard purchase orders against are long term contracts, not the value of the contracts themselves. In the current quarter, We expect that the book to bill will remain above 1.0. Operating expenses came in below budget for research and development and sales and marketing. We are mindful of our high internally funded research and development spending, otherwise known as IRAD, and are working to drive this down substantially in the coming quarters through non recurring engineering contracts from our customers. Consequently, we should see IRAD approach 10% of revenue within the next few quarters.

Speaker 2

We received full rate production orders for BAE's armored multi purpose vehicle program and expect this to transition into a solid yearly order pattern from this point forward. For AMPD, foreign military sales and spare orders should book periodically from here onward, providing additional upside. International bookings improved significantly this quarter, most notably in Taiwan and Poland. These included a group of unmanned and turreted platforms. We also saw substantial interest from customers in the EN300 platform, especially in the space sector with several key test runs starting this quarter.

Speaker 2

We've seen some positive results early in the game and eagerly await the Full results of these tests to drive additional momentum. On the precision guided munitions side of the business, We have been pursuing a tiered product placement strategy to ease licensing requirements for our international customers. This approach takes a bit more time, but we should begin to see orders this quarter based on this strategic direction. Beyond program capture, we are seeing important signs of acceleration of key programs into the low rate of initial production phase. This is a leading indicator of long term growth.

Speaker 2

Infrared search and track has become a key area of focus and our multiple design wins should benefit in terms of production timing. The IRF program has secured an additional bank of orders that reflect the strength and duration of the program. We are also working with major primes on securing long term manufacturing partnerships and orders are expected to produce improved production costs and predictability. The Space and Navigation team has continued to integrate Multiple TAMU inertial measurement units in support of tests and validation as it continues to meet shipment targets for or which is the booster rate gyro. These two systems are critical to the launch schedule for United Launch Alliance.

Speaker 2

The next important milestone should be reached by the end of September. Beyond that, when ULA reaches its targeted launch rates, Hamu and Borg are expected to produce $20,000,000,000 to $25,000,000,000 in revenue per year and help significantly improve gross margins. Quartz MEMS had a very nice uptick in shipments this quarter and scaled up margin well. We saw a favorable mix in the Concord shipments, But the operations team executed a very clean quarter with no surprises in the way of unplanned variances. We expect to continue to reduce the lumpiness in Concord as we upgrade Concord to a new ERP system in the coming months.

Speaker 2

Before I move on to guidance, I'd like to provide some comments on integration, which is a key area of focus this year. We did successfully transition our Chicago operations to Siteline 10, which will and the need for transition services from KDH as well as eliminate the expense. Since it's the last quarter of the year, we will not Upgrade Alhambra or Concord to Sideline-ten until the new fiscal year and should complete this work in a quarter or so after getting started. Beyond ERP, we should complete the PLM PDM unification in early October And we'll integrate Camstar MES into the Concord and Chicago facilities after we complete the ERP upgrades. Ultimately, this will make EMCORE more efficient and will help us to improve our processes, costs and reduce inventory.

Speaker 2

Beyond the systems integration programs I mentioned, EMCOR has a solid roadmap for stripping out redundancy within engineering programs to streamline our operations and reduce development expense. Over the next few years, you should expect to see a reduction in the amount of Manufacturing floor space we require, a reduction inventory and improvements in profitability. Turning now to guidance. We are expecting a few supply chain issues and order delivery dates will tamp down on growth a bit for the September quarter. Assuming that the sale of the linear product line to photonic foundries is completed, We expect consolidated revenue in the $26,000,000 to $28,000,000 range.

Speaker 2

This includes inertial navigation at $25,000,000 to 27,000,000 along with approximately $1,000,000 in last time buys from the chip business. Looking beyond that into the December quarter, We expect Inertial Navigation to have a revenue range of $28,000,000 to $30,000,000 With that, I'll turn the call back over to Tom.

Speaker 1

Thank you, Jeff. Let me first start off with the restructuring plan we announced during the June quarter. This plan consisted of a shutdown of the broadband segment and a discontinuance of the Defense Optoelectronics product line within the A and D segment. Because we have been keeping these operations running to fulfill customer last time buy orders, both broadband and defense optoelectronics were included in consolidated results as continuing operations for fiscal 3Q. So I'll first start with consolidated and segment results.

Speaker 1

After that, I'll provide a financial review for Inertial Navigation. Consolidated revenue in fiscal 3Q was $26,700,000 net of $27,000,000 for A and D, Last 300,000 reported for broadband. In an unusual set of circumstances subsequent to our announced shutdown of broadband, Development contracts for chips and sensing products were prematurely terminated. And Steve's contracts are under the cost incurred percent of Completion accounting method, of which the timing of revenue recognition is independent of the milestone billing and cash collection cycle, A $1,300,000 adjustment was recorded in 3Q to properly account for the closeout of these contracts, I. E.

Speaker 1

True up final contract revenue to final cash received. Excluding this adjustment, broadband was 1,000,000 Within A and D, Defense Optoelectronics revenue was $300,000 This brings total last time buy shipments in 3Q to 1,300,000 slightly above our guidance of $1,000,000 Turning to the rest of the consolidated results on a non GAAP basis. Consolidated gross margin was 16%, flat with 2Q and for the same reason, the highly dilutive Broadband segment gross margin. On the A and D side, 3Q segment gross margin strengthened to 29%, driven by significant improvements for the inertial NAV business, which came in at 30%. For the A and D segment overall, The inertial NAV 30% gross margin was partly offset by a lower gross margin for the discontinued defense optoelectronics component.

Speaker 1

Consolidated operating expenses were $11,100,000 in fiscal 3Q compared to $12,400,000 in the prior quarter. The $1,300,000 decrease was largely due to lower material expenses for R and D work on FOG programs as well as lower G and A. Consolidated operating loss in the June quarter improved to $6,500,000 compared to $8,100,000 in the March quarter. Adjusted EBITDA was also better at negative 4.3% versus 6.5% in fiscal 2Q. Consolidated net loss was $7,000,000 or $0.13 per share compared to $8,300,000 or $0.18 per share the quarter before.

Speaker 1

Shifting to the GAAP results for a moment, fiscal 3Q loss was $9,900,000 or $0.18 per share compared to $12,200,000 or $0.27 per share in 2Q. GAAP results included a $1,800,000 charge or severance costs related to the April 21 restructuring announcement and a $1,200,000 credit as a result of insurance proceeds received in 3Q. Let me now turn our attention to the non GAAP Inertial Navigation results. Inertial navigation revenue grew to $26,700,000 in fiscal 3Q, a 10% increase compared to 2Q, driven by double digit growth for both our space and navigation site in Bud Lake and for Qmem's shipments in Concord. Operations in Tinley Park continued on a steady growth path with revenue up 5% sequentially.

Speaker 1

As noted, Inertial Navigation gross margin expanded to 30% in 3Q, not only on the higher Also driven by better mix and significantly improved Fort Smith production yields. Inertial NAV R and D expense $4,200,000 in fiscal 3Q compared to $4,700,000 in the prior quarter. The $500,000 decrease was due to The lower project material spend noted earlier. Turning to the balance sheet, we had cash of $20,200,000 at June 30, compared to $24,800,000 at March 31. The $4,600,000 change during the quarter included the aforementioned Insurance proceeds of $1,200,000 and positive operating working capital of 1,500,000 offset by the following uses of cash during the quarter.

Speaker 1

Dollars 4,300,000 adjusted EBITDA, dollars 600,000 for litigation related expenses, $500,000 paid for severance, dollars 500,000 for acquisition related costs, dollars 900,000 used for financing activities and $500,000 for CapEx. With that, we are now opening up the call for your questions.

Operator

Thank you. First question comes from Maxwell Mike Ellis with Lake Street Capital. Your line is open.

Speaker 3

Hey, good morning, guys. First question, I got 2. The first one is related to the supply chain weakness you guys mentioned. I was wondering if you're seeing any material changes in the Supply chain and lead times or not supply chain, just lead times, I guess.

Speaker 2

So the question is, I'm just trying to Breaking up a little bit. Is whether or not there are material changes in supply chain?

Speaker 3

Yes, sorry, the lead times, Yes, was that breaking up there?

Speaker 2

Yes, it's really not. I wouldn't read a lot into it. One of the things that's become bit of a flashpoint is that military grade systems on a chip, FTGAs, Still remain quite difficult to get and we see last minute push outs of deliveries. And unfortunately, you can have 99% of the parts available to build and be missing 1 and then you're stuck. So it's really that sort of an issue as opposed to an overall supply chain deficiency.

Speaker 2

Just a few parts that are military grade that we just don't believe we're going to get on schedule.

Speaker 3

Thanks. And then my next one is related to book to bill. You mentioned it was 1.0 this quarter and you expect to be above 1 on Q4. Just wondering if you could share a few points of confidence that kind of give me that outlook.

Speaker 2

Could you repeat that?

Speaker 3

So you mentioned that book to bill is going to be above 1.0 in Q4. I was wondering if you could share any points of confidence that's given you that outlook.

Speaker 2

Well, there's Really a solid demand out there in the market. We see All the product lines doing quite well. On the I wouldn't necessarily call it a headwind. One of the things that's occurred because of the Ukraine war, And I don't think this is widely understood is that when products are shipped to support Ukraine, It gets registered as foreign military sales, but the reality is it comes out of the storehouses of the various Ranches of service. And so what happens then is the budget priorities Get shifted and the service branches that have had product shift are demanding the cash in the budget To immediately replenish their stores and sometimes that's at odds with what the Say the Navy or the Air Force program managers have budgeted, if they have to give up money to the Army Where a lot of the material has come from.

Speaker 2

So it's really called a phase lag between Shipping something from stores and then the push and pull between the branches of service Against existing budget priorities, if that makes sense. Yes.

Speaker 3

No, that makes sense. Thanks guys.

Operator

Thank you. And our next question will come from Richard Shannon with Craig Hallum Capital Group, your line is open.

Speaker 4

Thanks, Jeff and Tom for taking my questions here. I guess I got a few of them in no particular order. Maybe I'll Follow-up on the guidance here. Jeff, thanks for the little bit greater detail here in your prepared script versus the press release here and understanding the last time buys. But Also want to get a sense of what you're thinking about for gross margins here.

Speaker 4

I think at the midpoint of the inertial NAV only Revenues, I think it's slightly down from your performance in the quarter, but not much. Would we expect to see an inertial NAV gross margin near that 30% number you just reported?

Speaker 2

Yes, I think we should. The only thing that really is going to move around here from this point forward, Rich is Richard is the Just the product mix can shift a little bit quarter to quarter. One of the things, for example, that will affect gross margins And the next couple of quarters is, the AMPV order, I bet you it's from BAE. There are some other CAFDAP product order, we're expecting those NAV margins significantly above, let's call it a 30% number. There are also a few products which are not quite as good, but volume drives the margin at EMCOR.

Speaker 2

And so as volumes pick up, we'll expect to see continued improvement in gross margins in general.

Speaker 4

Okay, fair enough then. Let's talk about your comments about December quarter inertial NAV getting up $28,000,000 to $30,000,000 here. The midpoint is a nice growth of it looks like double digits from the midpoint you're telling For September. So can you talk to us a little bit about some of the drivers there?

Speaker 2

Sure. There are Some planned delivery dates that have moved around a little bit. Customers do Take advantage of the fact that government fiscal year is the end of September. And so when You look at that, some guys that have additional money will want to pull things in and some guys who don't have money until Q1, I'd like to push things out. So there's a little bit of that in there.

Speaker 2

But overall, the trend is that you've got new programs that are picking up Heading into low rate of initial production, and we're expecting to see those require support in terms of shipments In the December quarter. So we're looking at some AMPD orders that will come in. We're looking for Final shipments of one of our development programs. It's one of these things that's a little lumpy, But sometimes you get non recurring engineering billings and then you'll have a bit of a chunk at the end of The particular program phase as the prototypes are delivered. But overall, What I'm really trying to get across is that there is a strengthening and strengthening of demand.

Speaker 2

There is a consistency within the order patterns that give us confidence To go out a little farther to provide guidance where we wouldn't ever have done that as a broadband company. Again, Yes, with $68,000,000 in backlog, we can see out several quarters now consistently And we'll expect that to continue to improve.

Speaker 4

Okay. And then given that visibility, I guess, I would assume that your gross margins Ian's segment here would be at least as high in December as September just because of the growth and it drives gross margin. Is that fair, Jeff?

Speaker 2

Yes, that's completely fair.

Speaker 4

Okay, good to hear. Maybe jumping over to the I'm not even sure what to call the activities you announced yesterday, disposal of Defense Opto, etcetera here. Do I understand correctly that there's no effective purchase price and it's really just a Liability transfer and OpEx savings dynamic here for you or do you expect some sort of proceeds on the completion of This disposal, I guess, we'll call it.

Speaker 2

Yes. So I would say that it was it's the former scenario Within what you mentioned, there are significant liabilities Pardon me, associated with broadband, with one particular supplier In the supply chain, I would also say that I think we've done a reasonable job at getting the factory Or factories more correctly moving again. But every time you do this sort of thing, you run into problems as far as, Gosh, we need a special silver filled epoxy. We needed to get it into China. China has got export restrictions And it's going to take 8 weeks to get something that you could get here in the States overnight.

Speaker 2

So What it does is it puts all of that sort of activity that really it's amazing how much management Cycle bandwidth it takes up to crack these problems. It also enables us to Thin out our organization even further. For example, we still have to have quality people and Engineers available inside the business deal with RMAs and service requirements and This the sale of the linear portion of broadband essentially solved that problem for us as well. It just speeds up our ability to focus And works out, I think, well for all parties.

Speaker 4

Okay. And I guess, can you just kind of give us some sense of what OpEx or cost structure savings that you'll achieve upon close here?

Speaker 2

Gosh. Well, what we gave you, I think it was $9,900,000,000 in OpEx.

Speaker 1

Yes, I think you go back to the restructuring announcement on the 21st April, Richard, And those numbers pretty much hold up because most of it was all broadband and defense opto Related. So as the business gets transferred and eventually the we figure out the wafer fab, You save all that money. There's also a slice of it, maybe upwards of around $2,000,000 of it was in the G and A. So that will help the business going forward. So what you're likely to see in operating expenses on a go forward basis, inertial navigation, pure P and L is around $10,000,000 $9,800,000 somewhere in that range From probably 12.5 before we started all this.

Speaker 1

So there's your And then there's some cost of goods sold savings. So there's your at least $12,000,000 right there.

Speaker 2

The other point that I'd make Richard is that As we get into this, we have identified a few areas where we might be able to take down OpEx little further. We're not quite ready to talk about those in detail, but we certainly will in our next call. So You haven't seen the end of OpEx reduction. The other point to make, especially as we hit December quarter Will be this we've talked about research and development just as a monolithic number, But you're going to see us talk more about what the IRAD portion, the internally funded research and development number is And we're going to make some additional refinements, which Should help to make it obvious how much we're really spending and how much our customers are supporting.

Speaker 4

Okay. You kind of hit on my last question around this IRAD. So relative to the numbers that Tom just mentioned, as you get more of this So NRE that with this IRED shine out then that will be a further improvement in the OpEx cost structure then, is that right? Yes. Okay.

Speaker 4

All right, great. I think that's all the questions for me guys. I will jump out of line. Thank you. Thank you, Richard.

Speaker 4

Thanks.

Operator

Thank you. Our next question will come from Brian Kinstlinger from Alliance Global Partners, your line is open.

Speaker 5

Great. Thanks so much for taking my questions. You mentioned the $68,000,000 backlog. I'm curious if you could provide the total value of contracts that's not included in backlog An unfunded backlog, if you will?

Speaker 2

Oh, wow. Not off the top of my head, but I'll give you 2 big ones, right? Just to give you an example. If you look into the we announced Last winter, I think it was a $32,000,000 contract for CROWS V, which will go on for 3 years. We're expecting the first purchase order for PROS-five coming up here soon, but that would not Appear in backlog at all.

Speaker 2

Another example, Taymoo, if you take the time to look into the original documents we signed When we purchased L3 based on navigation, it specifies that A minimum of 2 22 units will make their way into Purchase orders at a minimum. We don't have a final production price for that yet because it doesn't have to be set Until after we are done with production readiness review, which is something that happens After the final configuration is done and that would be at least $50,000,000 if Not more. And that's just part of it all, right? So double, triple, Yes, it's possible, but those are just 2 and those 2 alone would double more than double the backlog.

Speaker 5

Great. Understood. As it relates to TAMU, you mentioned September is the next milestone. When do you expect payment deliveries to become mature? Are we a year away?

Speaker 5

Are we 18 months away to get to that run rate you've discussed.

Speaker 2

I think you're probably looking at about a year from now. It's the thing that you need to understand about this is you're already seeing Bits of TAMU within the Bud Lake number. So we're able to recognize the revenue for An item in backlog, which is over $9,000,000 which is an advanced buy of long lead materials, Okay. It's not all of the material, it's just the longest lead parts. And as our customer And we complete critical design review as the configuration gets locked down, You'll see that progress into more production.

Speaker 2

Interesting part is, of course, that Just recognizing revenue for the material, there's not that much margin in it. But even with that, We're doing just the sheer amount of work flowing through Bud Lake has improved the operating results significantly. So what and I've said this, I think in every conference and in Very large number of conversations. You don't think of Timu as a hockey stick. What you're going to see is continued sequential Improvement in the revenue number for Bud Lake as we progress through the program.

Speaker 5

Okay. My last question, I'm not sure if I understood correctly, but as it relates to the shortages, You've talked about them for a couple of quarters. Are they related to a different component or the same components, the circuit board you talked about? And are you hearing or seeing or expecting any changes in the near future on these shortages? How much revenue are you unable to generate as a result of these shortages?

Speaker 5

And does the customer wait for you to get these products? Or Are they urgent needs where they have to go find them elsewhere? Thank you.

Speaker 2

Well, in the Aerospace and Defense business, Nothing happens quickly and it's rare that you have a situation where Any supplier would have a large number of these components Or even the final end product on a shelf, the lead times tend to be very long in this business. The particular components are again primarily Driven by temperature range and reliability requirements. And so this Set of things we're chasing is different from, let's call it, general supply chain issues, which I think have got better Over the past few quarters, but when you get to these high rel microprocessors, FPGAs, Systems on a chip that go down to minus 55 degrees centigrade, there are very few people that can make them And everybody has what are called D PAS ratings, which set priorities for acquisition. And so what we may be able to buy for Taymoo and get our hands on because it has a DFAST rating of DXA2, we can't get them for some of the other products because they don't have a D PAS rating. So it's sort of complicated, but it's really confined to only several components.

Speaker 2

Hopefully, we'll see this start to ease as we get into 2024, but I don't think this is varies much Across the entire spectrum of aerospace and defense companies in terms of getting their hands on these parts. That makes sense?

Speaker 5

Okay. Yes. Appreciate all your time. Thanks.

Operator

Thank you. I'm showing no further questions in the queue. I'd like to turn the call back to Jeff Ritter for closing remarks.

Speaker 2

Thank you. And again, I apologize for bringing back a bug from Far reaches of the customer base. But I'd like to thank everyone for their interest in EMCOR And recognize, especially our Aerospace and Defense team for turning in such strong effort in the past quarter. And we look forward to the next chapter of EMCOR's Aerospace and Defense Business.

Powered by Quartr
Earnings Conference Call
EMCORE Q3 2023
00:00 / 00:00