M-tron Industries, Inc.: Form 10-Q for the period ended Mar 31, 2024

The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the accompanying unaudited Condensed Consolidated 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 25, 2024. 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 Condensed Consolidated Financial Statements and the notes thereto.

Unless otherwise stated, all dollar amounts are in thousands.

In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Actual results may differ materially from those discussed in the forward-looking statements as a result of various factors. See the Cautionary Note Concerning Forward-Looking Statements included in this Quarterly Report on Form 10-Q.

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.

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and all of its majority-owned subsidiaries.

Trends and Uncertainties

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 25, 2024.

Inflation and Changing Interest Rates

Inflation in the United States decreased from 6.5% as of December 31, 2022 to 3.4% as of December 31, 2023, which is still above the U.S. Federal Reserve's long-term target of 2.0%. Although inflation is expected to continue to decrease in 2024, the continued higher inflationary conditions 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 four times throughout 2023, resulting in a range from 5.25% to 5.50% as of December 31, 2023. Through the date of this Quarterly Report on Form 10-Q, the Federal Reserve has maintained the federal funds rate in the same range as of December 31, 2023. It is expected that the U.S. Federal Reserve will continue to hold the federal funds rate steady or start to decrease it during 2024 to, among other things, control inflation; however, the timing of any such decrease remains unclear. As a result, we have increased the prices we charge our customers.

Results of Operations

The following table presents our Condensed Consolidated Statements of Operations for the periods indicated:

(in thousands)

Three months ended March 31, 2024 compared to three months ended March 31, 2023

Total Revenues

Total revenues increased $1,818, or 19.4%, from $9,367 for the three months ended March 31, 2023 to $11,185 for the three months ended March 31, 2024 primarily due to strong defense product shipments.

Total Costs and Expenses

Total expenses increased $790, or 9.2%, from $8,606 for the three months ended March 31, 2023 to $9,396 for the three months ended March 31, 2024. The increase is primarily due to a $555, or 22.8%, increase in Engineering, selling and administrative from $2,435 for the three months ended March 31, 2023 to $2,990 for the three months ended March 31, 2024 from higher research and development costs, higher sales commissions related to an increase in revenues, and an increase in corporate expenses consistent with the overall growth in the business.

Gross Margin

Gross margin (Revenues less Manufacturing cost of sales as a percentage of Revenues), increased 861 basis points from 34.1% for the three months ended March 31, 2023 to 42.7% for the three months ended March 31, 2024 reflecting higher revenues and change in product mix to higher margin products.

Total Other Income (Expense), Net

Total Other income (expense), net increased $116, or 276.2%, from ($42) for the three months ended March 31, 2023 to $74 for the three months ended March 31, 2024. The following items contributed to the overall increase:

• a $34, or 1700.0%, increase in Interest income (expense), net from ($2) for the three months ended March 31, 2023 to $32 for the three months ended March 31, 2024 primarily due to interest income earned on investments in money market mutual funds.
• a $82, or 205.0%, increase in Other income (expense), net from ($40) for the three months ended March 31, 2023 to $42 for the three months ended March 31, 2024 primarily due to favorable currency movements.

Income Tax Expense

Income tax expense increased $211, or 127.1%, from $166 for the three months ended March 31, 2023 to $377 for the three months ended March 31, 2024 primarily due to the increase in Income before income taxes driven by the increase in revenues discussed above.

Backlog

As of March 31, 2024, our order backlog was $46,130, a decrease of $1,701, or 3.6%, from $47,831 as of December 31, 2023 and an increase of $592, or 1.3%, from $45,538 as of March 31, 2023. The decrease in backlog from December 31, 2023 reflects an increase in revenue and timing of certain orders.

Liquidity and Capital Resources

Overview

Liquidity refers to our ability to access sufficient sources of cash to meet the requirements of our operating, investing and financing activities.

Capital refers to our long-term financial resources available to support business operations and future growth.

Our ability to generate and maintain sufficient liquidity and capital depends on the profitability of the business, timing of cash flows, general economic conditions and access to the capital markets and the other sources of liquidity and capital described herein.

As of March 31, 2024 and December 31, 2023, Cash and cash equivalents were $5,414 and $3,913, respectively.

Cash Flow Activity

The following table presents the cash flow activity for the periods indicated:

(in thousands)

Operating Activities

Cash provided by operating activities was $1,496 for the three months ended March 31, 2024 compared to cash provided by operating activities of $279 for the three months ended March 31, 2023, an increase of $1,217, primarily due to the following:

• Net income increased $933 from $553 for the three months ended March 31, 2023 to $1,486 for the three months ended March 31, 2024.
• Stock-based compensation increased $136 from $71 for the three months ended March 31, 2023 to $207 for the three months ended March 31, 2024.

The increase was partially offset by:

• Net change in operating assets and liabilities increased $174 from ($534) for the three months ended March 31, 2023 to ($360) for the three months ended March 31, 2024.

Our working capital metrics and ratios were as follows:

(in thousands)

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.

Investing Activities

Cash used in investing activities was $122 for the three months ended March 31, 2024 compared to cash used in investing activities of $78 for the three months ended March 31, 2023, an increase of $44, primarily due to the purchase of equipment during the three months ended March 31, 2024.

Financing Activities

Cash provided by financing activities was $127 for the three months ended March 31, 2024 compared to cash provided by financing activities of $0 for the three months ended March 31, 2023, an increase of $127, primarily due to the exercise of stock options by an executive officer.

Capital Resources

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 as of March 31, 2024 and December 31, 2023, 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.

Revolving Line of Credit

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 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.

As of March 31, 2024 and December 31, 2023, there were no outstanding borrowings under the revolving line of credit with Fifth Third Bank.

Critical Accounting Estimates

The preparation of financial statements in conformity with U.S. 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 25, 2024.

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 Securities Exchange Act of 1934, as amended (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 Principal Executive Officer and Principal 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 March 31, 2024 was conducted under the supervision and with the participation of our management, including our Principal Executive Officer and Principal 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 Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures, as of March 31, 2024, 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 March 31, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION