EMCORE Corporation

Good day and thank you for standing by. Welcome to the MCOR Corporation fiscal 2023 second quarter earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. 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, Chief Financial Officer. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to our conference call to discuss MCOR's fiscal 2023 second quarter results. The news release we issued this afternoon is posted on our website, MCOR.com. On this call, Jeff Bridger, MCOR's President and Chief Executive Officer, will begin with a discussion of our business highlights. I will then update you on our financial results and will 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. 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 FCC's website located at SEC.gov, including the sections entitled Risk Factors in the company's annual report on Form 10-K. 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. With that, I'll now turn the call over to Jeff.

Thank you, Tom, and good afternoon, everyone. In Q2, MCOR made significant progress in its transformation into an aerospace and defense business. Inertial navigation grew 21% over the previous quarter to 24.3 million, driven by strong performances from our Tinley Park, Bud Lake, and Alhambra fog operations. Consolidated revenue totaled 26.8 million, which was up 7% from Q1 23. Aerospace and defense generated 94% of revenue. Inertial navigation was 90%. Broadband overall was 6%. Defense opto was 4%. And CATV represented less than 1.5% of our top line. There were encouraging improvements in the business as it continued to work through the operating challenges of a significant transformation. generating a gap operating loss of $12.2 million. Our non-gap operating loss and adjusted EBITDA both remained roughly flat at a negative $8 million and negative $6.5 billion, respectively. Essentially, the improvements in gross margin and revenue in aerospace and defense were erased by the continued erosion of broadband. The restructuring that we announced two weeks ago represents the logical conclusion to the end of the broadband era at MCOR. As we pointed out in our announcement, we made a determined effort to sell the broadband and defense opto businesses, which started last September. Although we had significant interest, which manifested itself in a signed letter of intent and term sheet, we could not reach a definitive agreement or close the transaction. Historically, MCOR's board had made numerous attempts to sell the broadband business beginning all the way in 2014, employing different banks at multiple points in time over the past nine years. The inertial navigation business continued to grow both organically and through M&A during the period, finally reaching the point where MCOR became two distinctly different companies. In this tale of two companies, The inertial navigation and broadband businesses developed with independent personnel and assets. The lone intersection of these two businesses was the indium phosphide wafer fab, which is being shut down as part of the actions we announced. However, we prepared for this decision by building a significant stockpile of indium phosphide chips for our fog products and consolidating our chip-making operations for quartz MEMS and lithium niobate in concrete. In summary, the actions we've taken effectively carve out the assets and other costs in the broadband business from MCOR without affecting inertial navigation. MCOR is now a pure play in inertial navigation. This transformation is really just the beginning of the next set of changes in our manufacturing operations. Many of the improvements that we made in automated assembly for cable television that resulted in a reduction in fixed assets, improved productivity, and profitability will now be applied to inertial navigation. Over the next few years, you should expect to see a reduction in the manufacturing floor space we require, a reduction in inventory, and improvements in profitability. Our final objective for broadband is to serve our customers last time by requirements and ensure an orderly exit from the business for customers and employees alike. We are still processing last time by orders, but believe that the total amount should be approximately $10 million, which will ship over the next two quarters or so. Turning now to aerospace and defense, I'll begin my comments by stating that we had strong performance in our space and navigation, Tinley Park, and Alhambra operation. Q2's book-to-bill was a little low at 0.85, but several significant orders were pushed out due to contracting priorities inside of the DoD. We expect the book-to-bill will be approximately 1.2 for the June quarter. Demand was solid across the board, with civil aviation seeing a surprising upswing. We also received orders for new UAV platforms, which are expected to total $5.6 million over the next few months as full funding is released in parts. We also booked significant follow-on business for the fiber optic gyros that control targeting turrets from two important customers. BAE's armored multipurpose vehicle program is continuing to pick up momentum as it heads into full-rate production. International bookings were strong for turret-based platforms stemming from our strong position in AMPV, CROWS, and Escribano's Guardian II programs. On the naval side of our business, we received new orders for the next generation Mark 54 lightweight torpedo IMUs and continue to ship against our strong Mark 48 torpedo backlog. New torpedo programs are emerging, and we are being called in to leverage our expertise in the demanding vibration environments of undersea weapons. On the precision-guided munitions side of things, we were slowed down a little bit getting export licenses, but are working with our customers to qualify products with less restrictive licensing requirements. Beyond program capture, we are seeing important signs of acceleration in key programs into the low rate of initial production phase, which is a key indicator of long-term growth. In particular, infrared search and track has become a key area of focus, and our multiple design wins in this application stand to benefit. Our IRST product has now achieved an important production readiness milestone with Boeing, Lockheed, and NAVAIR, and we are ramping up production for these important deployments on the F-A-18 Hornet. The Space and Navigation Team has built multiple TAMU inertial measurement units in support of the design, integration, and qualification as it continues to meet shipment targets for board. These two systems are critical to the launch schedule for United Launch Alliance. Our expectation is to complete qualification late in the calendar year to enable significant volume builds and launches going forward. When these products hit full production, they are expected to produce $20 to $25 million of revenue per year and help significantly improve gross margins. QMEMS had a nice uptick in shipments this quarter, but margin didn't scale quite as well as we expected, largely because of the timing of certain charges, which can be lumpy. As the entire company moves to its new ERP system in the coming months, we expect that these fluctuations will be less pronounced. Before I move on to guidance, I'd like to provide some comments on the recent acquisitions in our integration programs, which are a key area of focus this year. Both the L3 para space and navigation business, as well as the former KVH inertial businesses, are performing well and are clearly accreted. On the integration side of these acquisitions, Space and Navigation is running a common ERP system with the rest of MCOR and has made the cutover from L3Harris IT systems with resulting reduction in TSA costs. We are expecting the transition for Chicago to complete in the June quarter, but we've already moved the Rhode Island engineering team out of KBH's building and have now switched both the Chicago and Middletown offices over to the MCOR IT domain. We expect to integrate CamStar into Concord and Chicago after we complete the ERP upgrades and exit transition services. Ultimately, this will make MCOR more efficient and will help us improve our processes, costs, and inventory. Turning now to guidance in the current quarter, we expect that semiconductor shortages will slow down production for some products, tamping down growth a bit for inertial NAV in the June quarter. Additionally, We are moving forward on our last-time bills from a standing start and have not yet scheduled production dates. Excluding these last-time buy bills, we expect revenue in the $25 to $27 million range for the June quarter, of which $24 to $26 million is the inertial navigation business. With that, I will turn the call back over to Tom.