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spk00: Thank you for standing by and welcome to the MCOR Corporation fiscal 2024 third quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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. If you would like to withdraw your question, press the star one again. For operator assistance throughout the call, please press star zero. And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome MCOR's Chief Financial Officer, Tom Minichiello. Please go ahead.
spk03: Thank you. Good morning, everyone, and welcome to our conference call to discuss MCOR's fiscal 2024 third quarter results. The news release we issued yesterday afternoon is posted on our website, MCOR.com. On this call, Matt Vargas, MCOR's interim chief executive officer, will begin with a discussion of our business highlights. I will then update you on our financial results, and we'll conclude by taking questions. Before we begin, we'd 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 the 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-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. I'll now turn the call over to Matt.
spk04: Thank you, Tom, and good morning, everyone. The Board of Directors and the Office of the CEO have been working lockstep executing the restructuring plan. While there is much more work to be done, the team is confident that the undertakings so far demonstrate progress towards our goal stated in last quarter's earnings call of adjusted operating cash flow break-even exclusive of restructuring costs by September 30th. I wanted to call out a couple of key actions that demonstrate tangible progress by the Restructuring Committee and the Office of the CEO and associated cost savings. As previously announced, headcount reductions enacted beginning in May are estimated to result in approximately $17 million of annualized payroll savings, and we are on track to complete the full Alhambra site closure by the end of August. Also, the team has identified additional expense savings in several categories that are currently in process. Additionally, the Board's Restructuring Committee retained FTI Consultants to serve as the company's Chief Restructuring Officer, CRO, to augment cash management and modeling in support of the restructuring effort. The FTI team has provided immediate impact and will continue to support our efforts in the upcoming quarter. From a top line revenue perspective, the revenue figure and billings were securely within the projected range. The book to bill was also well over one at 1.24 with two armored vehicle orders above $2 million and continued growth in our European portfolio. Current backlog has increased over $60 million and the sales funnel continues to be strong with diverse domestic and international opportunities and an improved product mix in the manufacturing build plan. For guidance, we're expecting revenue in the September quarter to be in the range of 20 to $22 million. The team is committed to pursuing operational efficiencies and the office of the CEO is working to overlay common operating systems across the three remaining production sites. Sustained improvement in gross margin in Concord is a key pillar of the company's strategy and will be a continued area of focus in the current quarter. While some progress was made in the June quarter, more work remains to be done. The entire MCOR team will continue to work in a coordinated fashion in the current quarter to meet our stated goals. Before turning the call back over to Tom, I'd like to mention a recent and positive development that has a significant go-forward impact for MCOR. Earlier this week, we paid off all outstanding obligations under our credit agreement with Hale Capital. This was made possible by successfully renegotiating customer payment terms on one of our existing programs of record, along with reaching a settlement on a former program with the same customer. This change eliminates the senior security interest on our assets and frees us up to explore an expanded range of alternatives to shore up the company's liquidity, including the possibility of a new, more favorable credit facility. With that, I'll turn the call back over to Tom.
spk03: Thank you, Matt. Starting with the restructuring plan announced during the June quarter, this plan included personnel reductions of approximately 120 employees, or about 40% of the workforce across all locations, resulting in annualized savings of approximately $17 million or $4.25 million per quarter. I can now report that all actions related to these reductions were completed by the end of July. From a timeline perspective, about two-thirds of the personnel reductions were completed in late May, with the remaining one-third done in late July. Headcount, which stood at 315 at March 31st, was lowered to 235 at the end of June and is now at 190. Associated expense savings, which are split just about evenly between cost of goods sold and OPEX, were approximately 1.1 million in the June quarter. Going forward, all but about 600,000 of the rest of the quarterly savings should benefit the September quarter, and then be fully realized in the P&L by the December quarter. The restructuring plan also included the full closure of the Alhambra, California site. And as Matt noted, we are working on additional expense management actions aimed at lowering overall operating costs further. In Alhambra, you may recall, we exited three of the five buildings last year when we shut down MCOR's legacy operations. We are now in the process of exiting the remaining buildings, which we expect to be completed by the end of August. Restructuring and restructuring-related charges in our fiscal 3Q gap results included a $1.86 million charge for employee severance, as well as a total of $4.3 million related to the Alhambra shutdown, which included asset impairment charges of $2.9 million, primarily for leasehold improvements. Also in the GAAP results was a $5.1 million non-cash item in other expense for the loss on extinguishment of debt, which represents the fair value of the warrants granted to Hale Capital in connection with their assumption of our debt during the June quarter. Revenue for fiscal 3Q was $20.4 million, a 4% increase when compared to the $19.6 million in fiscal 2Q. The improved top line was led by record quarterly revenue for our Concord-based QMEMS product line. Additionally, the strong bookings quarter, particularly for our Tinley Park and Concord sites, resulted in a book to bill of 1.24. I'll now go over the rest of the operating results, which will be on a non-GAAP basis. Gross margin was 24% for the June quarter, significantly better when compared to 15% the quarter before. The gross margin improvement was primarily attributable to better production yields in Concord, cost reductions, and a more favorable mix. OPEX was $9.1 million in fiscal 3Q compared to $9.8 million in fiscal 2Q, as both R&D and SG&A expenses benefited by the partial quarter impact of the restructuring. The higher revenue and gross profit in reduced OPEX lowered the operating loss in the June quarter by $2.6 million when compared to the March quarter. Negative adjusted EBITDA was reduced to $3.6 million compared to $5.8 the quarter before. Net loss was $4.4 million or 49 cents per share. Turning to the balance sheet, the cash balance was $9 million at June 30th compared to $12 million at March 31st. The $3 million cash decrease was net of $1.9 million in cash proceeds associated with the April 30th sale of the CHIPS business line and Alhambra Indian Phosphide wafer fab. Taking that into account, the resulting $4.9 million cash use during the quarter was down significantly compared to $8 million in the prior quarter and included the following, $3.2 million related to normal operating activities, $600,000 for severance, $300,000 for financing activities, and a combined total of $800,000 for non-routine legal expenses, discontinued operations, and CapEx. We are intently focused on continued working capital management, right-sizing the cost structure of the business, and operational execution with the goal of achieving adjusted operating cash flow breakeven in fiscal 4Q.
spk00: With that, we're now ready to open up the call for your questions. Thank you, Tom. And as mentioned, we are now open for questions. To ask a question, please press star one to raise your hand and join the queue. A reminder to please unmute your device when you are called upon to ask your question. And again, that's star one to join the queue. Your first question is from the line of Richard Shannon from Craig Hallam. Please go ahead.
spk02: Well, hi, Matt and Tom. Thanks for taking my questions. Let's see here. I guess maybe just want to parse your language here on the goal that you said last quarter and what you're repeating as a goal. It doesn't sound like it's something you're strongly committed to making happen here, meaning getting to that cash flow break even for this quarter. Is that something you're going to be able to do or not certain yet?
spk03: Yeah. Hey, good morning, Richard. Tom here. It's going to come down to executing on our P&L and our working capital management, which if we continue with the progress we've already made up until this point, it puts us in a good position to achieve the goal.
spk02: Okay. And how much benefit do we need from working capital to make that a reality? In other words, what's the efficiency look like here without it?
spk03: Yeah, it'll go hand in hand with the P&L. It You know, our adjusted EBITDA will likely be a lot lower, negatively lower, you know, getting closer to that break-even point. And then working capital management, which was actually on a normalized basis, was a source of cash in the June quarter. Just, you know, pretty tight cash management. And that is not something that we're stopping. It'll continue on. So between the combination of the two, you know, again, it puts us in position to hit the target.
spk02: Okay. Fair enough. And obviously this cash break-even target is obviously excluding other restructuring expenses here. So I think the last question you were to think of just kind of tactically is what do we think about the cash burn or, you know, the cash position ending the quarter then?
spk03: Yeah, good question, Richard. And it's an important point. Because, you know, restructuring is not free, right? So we've got probably the bulk of our restructuring costs in terms of, you know, we took the charges in the quarter, but in terms of cash, you know, we'll be paying for a lot of that in the September quarter. It'll peak in terms of employee severance, some payments we have to make in relation to the shutdown and the exit out of the Alhambra facility. And then some other items, you know, financing and CapEx, of course, are not part of the operating activities. So there, you know, we'll be using cash in the quarter. And the bulk of it, as we see it right now, will be towards those types of items with, again, if we hit the break even on normalized adjusted cash flow from an operating standpoint, then almost all of the cash use would be towards these items that we would adjust out to get to that target.
spk04: And Richard, I can add a little more color. I think it's really important to think about this in a phased approach. It's by no means, you know, the cash flow, adjusted cash flow break-even goal is part of a phased approach with much larger strategic objectives to get to profitability, right? So it's certainly a great short-term target that, to Tom's point, if we execute to plan, we can certainly achieve. But we are monitoring the cash burn very closely as part of sort of the cultural change within the organization now. So it's something that's top of mind for us, and it's definitely part of our battle rhythm, so to speak, now more than it ever has been. So very top of mind in terms of the go forward and bringing on the FTI team And that CRO role has helped us immensely with getting, you know, a little bit more intimately familiar with the cash management on a day-to-day basis. So your point is noted, Richard. Okay, great.
spk03: And maybe two last questions. Richard, Tom, again, just one more thing to add. You know, after the September quarter, those expenses, you know, related to restructuring and shutting down Alhambra, moderate and trail off in a significant way. It's going to be mostly severance that will continue on for a few more quarters after the September quarter.
spk02: Okay. Two last questions for me. One for Tom, which is kind of baking all this stuff in here. Obviously, we'll try to go into this a little bit afterwards here, but just kind of high level here. How do we think about a break-even model here? Obviously, you've engaged FTI Consulting to help do things here and probably have some sort of model in mind here? And we've asked this in the past, and obviously things have changed, but Tom, maybe you can update us on what that breakeven model might look like.
spk03: Yeah, sure. So let's just start with OPEX. You know, the OPEX came down, you know, in large part because we got some benefit basically in the month of June, in the June quarter, because, you know, the actions were taken near the end of May. As you get into the September quarter, we'll get a pretty significant boost from the restructuring actions. And so we expect the operating expense number, the non-GAAP operating expense number to be likely under eight, could even be closer to mid-sevens. And so if you think about it that way, Richard, you're going to need, with depreciation running at around $700,000 a quarter, you're going to need about you know, 6.7, 6.8 in gross profit dollars to get to that break even on an adjusted EBITDA basis. So I hope that helps, you know, kind of guide you to where we think we need to get to in order to break even.
spk02: Okay. That's fair enough. I'll do the math and follow up with any more questions on that. Maybe one last one for Matt here and probably kind of a two-parter. Obviously, some nice bookings in the quarter 1.24 is a great book to build number. I think you mentioned a couple of programs. I think some armored vehicle, which I didn't recognize before, maybe in detail where those are coming from, and then obviously going back to the last quarter, Matt, with the delays in two different torpedo programs. Want to get any update on where we sit in terms of seeing that come back to a normal run rate?
spk04: No, great points. The strong bookings quarter was really, really holistic, and those are great call-outs and armored vehicle programs. Those are programs of record that we are on. We have a large US Army contract that I'll leave non-attributional for now, but that contract has viability through three more fiscal years. So to get into full rate production and actively getting those orders has been a fantastic outcome. In addition, we had an armored vehicle opportunity emerge in and around the effort in Ukraine, which was also a really positive windfall, something that we had been working on since sort of the advent of the conflict. So those were two programs that we've been working within the pipeline that came to fruition that were certainly notable. That being said, we did discuss the torpedo mix falling a bit short of projections in the last earnings call. Certainly, that has been the case. What we did have in this quarter is we got a much clearer picture of the delivery schedule on one of the programs, which was hugely edifying, both for our build plan and for our go-forward projections. We continue to have an elusive schedule in and around the second program, but we continue to work with Navy leadership directly as a crucial supplier and an attempt to even out that demand to get some clearer projections as we go. Positively, Richard, we've filled out the quarterly projections with a lot more non-torpedo orders to help with the product mix. Just knowing the fact pattern that we have, right, we have to deal with the hand that we're dealt. So we're modeling the bill plan in and around that, at least the demand signal of that one program that has become much more clear.
spk02: Okay, fair enough. Thanks for that update. That's all from me, guys. Thank you.
spk03: Thank you, Richard.
spk00: And before we continue on to the next question, a reminder to join the queue to press star one now. And your next question is from the line of Brian Kinslinger from AGP. Your line is open. Great. Thanks so much.
spk01: Can you talk about the pipeline or thoughts on sustainability of bookings on a go-forward basis?
spk04: Absolutely. So the... The early indications this quarter are outpacing actually the quarter that we just reported on. So the pipeline continues to be really strong. The sales team has put an inordinate amount of effort into the international and domestic mix of the pipeline. And we have seen, as I stated previously, a lot of demand outside of the conflict in Ukraine, in Turkey, Israel, and a couple other European countries. So The European portfolio continues to be strong, and then the domestic portfolio continues to deliver well within our pipeline models. So no signs of letting up. From where I sit, the team is working hard to sustain that. Obviously, that book-to-bill ratio is the lifeblood of the growth. So we're working with the FTI team to model that a little bit more closely. That's a clear next step to look a little bit further on the horizon. in some of those projections. But the outlook has been very positive.
spk01: It seems the market, sorry, it seems your bookings trends in this most recent quarter as well as the one coming up seems to have shifted for the positive. Is that the function of the market improving because of war-related regions? Is that what's changing the markets?
spk04: I think it's a combination of factors. I think the geopolitical situation globally certainly plays a role in a positive direction. I also think the current sales team has been in place now, not for a full two years, but at least for 18 months. And obviously, given the cyclical nature of this business, that team and their associated contacts and and funnels have really started to come to fruition given how long it takes, especially on the armored vehicle side and in some of these larger turreted platforms and some of these gimbal programs. The qualification effort can be lengthy, so we're starting to see a material benefit of some good seed work that was laid down early on in the sales team kind of getting their footing as a combined entity.
spk01: Got it. Lastly, can you talk about the mix of backlog? You said the June quarter had a favorable mix. Is the mix of the backlog similar, better, worse? And how should we think about the long-term potential gross margin as a result of that plus the cuts?
spk04: The mix is improved greatly, especially the mix is a much more sensitive analysis in and around the Concord facility. And that makes, I would say, Contest has improved the most among the group. That said, on a go forward basis, managing that mix is something we have to pay attention to every day and getting the right mix of products in the build plan so that we can operate within a much more narrow band of gross margin. That's why it's a key pillar of our company strategy, right? So as we manage the Concord facility, we have to manage to an improved margin profile to get the financial outcomes that we've stated. So the team is working very closely, not only on the mix, but improving the yield dynamics in and around the facility so that we have a little bit more latitude, but at the same time, getting the right product mix in the quarter, working with the associated customers, getting longer term demand signals from a few customers, that order quarterly or operate under a renewal framework, re-engaging those customers and some different frameworks that can help all parties has been effective as well in the short term.
spk01: Great. Thanks. Nice progress in a short period.
spk03: Thank you. Thank you. Thanks. Thanks, Brian.
spk00: And this concludes today's Q&A session. I would like to hand back over to Interim Chief Executive Officer Matthew Vargas for closing remarks.
spk04: Thank you all for making the time today. I really appreciate it. Thank you for your interest in MPOR. I wanted to emphatically recognize our team for their perseverance as we build on the solid progress we've achieved thus far and continue to work to achieve our stated goals. Thank you very much.
spk00: This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.
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