M-tron Industries, Inc.: Form 10-Q for the period ended Sep 30, 2023

The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the accompanying unaudited Consolidated and Combined Financial Statements, the notes thereto and the other unaudited financial data included in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with the audited Consolidated and Combined Financial Statements and the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2023. The terms the “Company”, “MtronPTI”, “MPTI”, “we”, “our” or “us” refer to M-tron Industries, Inc. and unless otherwise defined herein, capitalized terms used herein shall have the same meanings as set forth in our Consolidated and Combined Financial Statements and the notes thereto.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q of the Company and the Company's other communications and statements, other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company intends for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable by law. Such statements include, in particular, statements about the Company's beliefs, plans, objectives, goals, expectations, estimates, projections and intentions. These statements are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond the Company's control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," "target," "goal," and similar expressions are intended to identify forward-looking statements. All forward-looking statements, by their nature, are subject to risks and uncertainties. Therefore, such statements are not intended to be a guarantee of the Company's performance in future periods. The Company's actual future results may differ materially from those set forth in the Company's forward-looking statements. For information concerning these factors and related matters, see "Risk Factors" in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 30, 2023. However, other factors besides those referenced could adversely affect the Company's results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by the Company herein speak as of the date of this Quarterly Report on Form 10-Q. The Company does not undertake to update any forward-looking statement, except as required by law. As a result, you should not place undue reliance on these forward-looking statements.

OVERVIEW

MtronPTI is engaged in the designing, manufacturing and marketing of highly-engineered, high reliability frequency and spectrum control products used to control the frequency or timing of signals in electronic circuits in various applications. MtronPTI’s primary markets are defense, aerospace, space, and avionics.

Impact of MtronPTI’s Separation

On August 3, 2022, The LGL Group, Inc. (“LGL Group” or “LGL”) announced that its Board of Directors approved the previously announced separation of the MtronPTI business into an independent, publicly traded company (the "Separation").

On October 7, 2022, the Separation was completed through LGL Group’s distribution (the "Distribution") of 100% of the shares of the Company’s common stock to holders of LGL Group's common stock as of the close of business on September 30, 2022, the record date for the Distribution. As a result of the Distribution, LGL Group's stockholders of record received one-half share of the Company's common stock for every share of LGL Group's common stock held by them. On October 7, 2022, the Company became an independent, publicly traded company trading on the NYSE American under the stock symbol "MPTI." LGL Group retained no ownership interest in the Company following the Separation.

We believe the Separation of MtronPTI allows the Company to tailor its strategic plans and growth opportunities, more efficiently raise and allocate resources, including capital raised through debt or equity offerings, provide flexibility to use its own stock as currency for incentive compensation and potential acquisitions and provide investors a more targeted investment opportunity.

See Note A – Background and Description of Business in the accompanying notes to the Consolidated and Combined Financial Statements for further details of the Separation.

Basis of Presentation

Our financial statements for periods prior to the Separation are Combined Financial Statements prepared on a “carve-out” basis, which reflects the business as historically managed within LGL Group. The cash flows include only those assets and liabilities directly related to MtronPTI, and the statements of operations include the historically reported results of the MtronPTI business along with allocations of a portion of LGL Group’s corporate expenses. For additional information on the “carve-out” basis of accounting, see Note A – Background and Description of Business and Note B – Summary of Significant Accounting Policies in the accompanying notes to the Consolidated and Combined Financial Statements.

Results of Operations

Backlog

As of September 30, 2023, our order backlog was $50,280,000, an increase of 8.9% from $46,180,000 at December 31, 2022 and an increase of 14.1% compared to the backlog of $44,074,000 as of September 30, 2022. The Company attained record backlog levels as of the second quarter of 2023. Strong orders during 2023 from the defense market have helped to drive the increase to near-record levels, with a slight decline experienced in the first and third quarters of 2023 related primarily to the timing of order receipts. The backlog of unfilled orders includes amounts based on signed contracts. Order backlog is adjusted quarterly to reflect project cancellations, deferrals, revised project scope and cost, and sales of subsidiaries, if any.

Three months ended September 30, 2023 compared to three months ended September 30, 2022

Consolidated Revenues and Gross Margin

Total revenues were $10,888,000 for the three months ended September 30, 2023, or 29.4% above revenues of $8,417,000 for the three months ended September 30, 2022. The revenue increase reflects strong defense product shipments.

Gross margin, which is consolidated revenues less manufacturing cost of sales as a percentage of revenues, increased to 42.8% for the three months ended September 30, 2023 from 32.4% for the three months ended September 30, 2022 reflecting primarily a favorable product mix, due to increased manufactured product in the three months ended September 30, 2023.

Operating Income

The Company reported operating income of $2,033,000 for the third quarter of 2023 compared to operating income of $630,000 for the third quarter of 2022. The increase reflects higher revenue and higher margins and was impacted by favorable product mix as described above. Engineering, selling and administrative costs increased $526,000 in the third quarter of 2023 as compared to the third quarter of 2022, primarily as a result of $382,000 of administrative cost increases in the second quarter of 2023, which included public company costs of $200,000, increased salaries and employee benefits of $172,000 along with other miscellaneous cost increases of $24,000, offset by a favorable reduction in audit and tax costs of $12,000. The public company costs of $200,000 represent the incremental direct costs of being a public company, with no comparable amounts within the prior year when results were presented on a standalone basis.

Other Income (Expense), Net

Other income (expense), net was income of $13,000 for the three months ended September 30, 2023 compared to expense of $16,000 for the three months ended September 30, 2022 primarily reflecting the impact of favorable and unfavorable currency changes. Included in Other income (expense), net for the three months ended September 30, 2023 was $27,000 of income from the transitional services agreement with LGL Group.

Income Tax Provision

We recorded a tax provision of $460,000 and $111,000 for the three months ended September 30, 2023 and 2022, respectively. The provision is based on an estimated annual effective tax rate across the jurisdictions in which we operate.

Net Income

Net income was $1,586,000 for the three months ended September 30, 2023 compared to $503,000 for the three months ended September 30, 2022. The increase was primarily from the previously discussed increased business volume and margins offset by increased operating costs. Basic and diluted net income per share for the three months ended September 30, 2023 and 2022 was $0.59 and $0.57 per share for 2023, respectively and $0.19 per share for 2022.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022

Consolidated Revenues and Gross Margin

Total revenues were $30,395,000 for the nine months ended September 30, 2023, or 31.2% above revenues of $23,172,000 for the nine months ended September 30, 2022. The revenue increase reflects the recovering avionics market and strong defense product shipments.

Gross margin, which is consolidated revenues less manufacturing cost of sales as a percentage of revenues, increased to 39.7% for the nine months ended September 30, 2023 from 35.6% for the nine months ended September 30, 2022 reflecting primarily a favorable product mix and the beneficial effect from increased revenues.

Operating Income

The Company reported operating income of $4,359,000 for the nine months ended September 30, 2023 compared to operating income of $2,047,000 for the nine months ended September 30, 2022. The increase reflects higher revenue and higher margins impacted by favorable product mix, as described above. Engineering, selling and administrative costs increased $1,508,000 in the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily as a result of $1,234,000 of administrative cost increases in the nine months ended September 30, 2023, which included public company costs of $735,000, increased salaries and employee benefits of $328,000, increased audit and tax costs of $97,000, and other miscellaneous cost increases of $74,000. The public company costs of $735,000 represent the incremental direct costs of being a public company, with no comparable amounts within the prior year when results were presented on a standalone basis.

Other Income (Expense), Net

Other income (expense), net was an expense of $12,000 for the nine months ended September 30, 2023 compared to an expense of $47,000 for the nine months ended September 30, 2022 primarily reflecting the impact of favorable and unfavorable currency changes. Included in other (income) expense, net for the nine months ended September 30, 2023 was $28,000 of excess spin-off costs related to the Separation, which were offset by $81,000 of income from the transitional services agreement with LGL Group.

Income Tax Provision

We recorded a tax provision of $931,000 and $392,000 for the nine months ended September 30, 2023 and 2022, respectively. The provision is based on an estimated annual effective tax rate across the jurisdictions in which we operate.

Net Income

Net income was $3,416,000 for the nine months ended September 30, 2023 compared to $1,608,000 for the nine months ended September 30, 2022. The increase was primarily from the previously discussed increased business volume and margins from a favorable product mix, partially offset by increased operating costs. Basic and diluted net income per share for the nine months ended September 30, 2023 and 2022 was $1.27 and $1.25 per share, respectively for 2023 and $0.60 per share for 2022.

Liquidity and Capital Resources

As of September 30, 2023 and December 31, 2022, cash and cash equivalents were $2,552,000 and $926,000, respectively.

Cash provided by (used in) operating activities for the nine months ended September 30, 2023 and 2022 was cash provided of $2,273,000 and $1,205,000, respectively. The $1,068,000 increase was primarily from an increase in net income and a decrease in accounts receivable and prepaid expenses and other current assets offset by decreases in accounts payable and accrued expenses and increases in inventories in support of business growth as well as procurement of certain inventory components in advance to address lingering supply chain issues.

Cash used in investing activities for the nine months ended September 30, 2023 and 2022 consisted of capital expenditures of $565,000 and $663,000, respectively, for investment in production equipment to reduce costs and improve efficiency.

Cash used in financing activities for the nine months ended September 30, 2023 was $82,000 related to the forfeiture of shares to pay taxes and for the nine months ended September 30, 2022 was $2,371,000 and consisted of payments to related party of $2,496,000 offset by net transfers from LGL Group of $145,000 along with the payment of prepaid financing costs of $20,000.

As of September 30, 2023, our consolidated working capital was $12,972,000 compared to $9,458,000 as of December 31, 2022. As of September 30, 2023, we had current assets of $16,964,000, current liabilities of $3,992,000 and a ratio of current assets to current liabilities of 4.25 to 1.00. As of December 31, 2022, we had current assets of $14,314,000, current liabilities of $4,856,000 and a ratio of current assets to current liabilities of 2.95 to 1.00. Management continues to focus on efficiently managing working capital requirements to match operating activity levels and will seek to deploy the Company’s working capital where it will generate the greatest returns.

On June 15, 2022, the Company entered into a loan agreement (the “Loan Agreement”) for a revolving line of credit with Fifth Third Bank, National Association (“Fifth Third Bank”), for up to $5,000,000 bearing interest at the Secured Overnight Financing Rate (“SOFR”) plus a margin of 2.25%, with a SOFR floor of 0.00%. The Loan Agreement has a maturity date of June 15, 2025 and contains various affirmative and negative covenants that are customary for lines of credit and transactions of this type, including limitations on the incurrence of debt and liabilities, as well as financial reporting requirements. The Loan Agreement also imposes certain financial covenants based on Debt Service Coverage Ratio, Current Ratio, and the Ratio of Total Liabilities to Total Net Worth (as such terms are defined in the Loan Agreement). All loans pursuant to the Loan Agreement are secured by a continuing and unconditional first priority security interest in and to any and all property of the Company. At September 30, 2023 and December 31, 2022, there were no outstanding borrowings under the revolving line of credit with Fifth Third Bank.

We believe that existing cash and cash equivalents, marketable securities and cash generated from operations will provide sufficient liquidity to meet our ongoing working capital and capital expenditure requirements for the next 12 months from the date of this filing. At various times throughout the year and at September 30, 2023 and December 31, 2022, some deposits held at financial institutions were in excess of federally insured limits. The Company has not experienced any losses related to these balances.

Our Board of Directors has adhered to a practice of not paying cash dividends. This policy takes into account our long-term growth objectives, including our anticipated investments for organic growth, potential acquisitions and stockholders' desire for capital appreciation of their holdings.

Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies related to estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, management evaluates its accounting policies, estimates and judgments, including those related to income taxes and inventories. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

There have been no material changes to the critical accounting estimates disclosed in our Annual Report on Form 10-K, as filed with the SEC on March 30, 2023.

Factors Which May Influence Results of Operations

We are not aware of any material trends or uncertainties, other than national economic conditions affecting our industry generally, that may reasonably be expected to have a material impact, favorable or unfavorable, on our revenues or income other than the one listed below and the risk factors disclosed in our Annual Report on Form 10-K, as filed with the SEC on March 30, 2023.

Inflation and Rising Interest Rates

During 2022, inflation in the United States accelerated and, as of the date of this Report, is currently expected to continue at an elevated level in the near-term. Rising inflation may have an adverse impact on our manufacturing cost of sales along with engineering, selling and administrative expenses, as these costs could increase at a rate higher than our revenue. The U.S. Federal Reserve raised the federal funds rate a total of seven times throughout 2022, and four times in 2023, resulting in a current range from 5.25% to 5.50% as of the filing date of this Quarterly Report on Form 10-Q. It is expected that the Federal Reserve may continue to increase the federal funds rate to, among other things, control inflation.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of September 30, 2023 was conducted under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of September 30, 2023, were effective.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION