M-tron Industries, Inc.: Form 10-Q for the period ended Sep 30, 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 risk factors disclosed in our Annual Report on Form 10-K, as filed with the SEC on March 25, 2024.

Results of Operations

Three months ended September 30, 2024 compared to three months ended September 30, 2023

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

(in thousands)

Total Revenues

Total revenues increased $2,326, or 21.4%, from $10,888 for the three months ended September 30, 2023 to $13,214 for the three months ended September 30, 2024 primarily due to continued strong defense program product and solution shipments.

Total Costs and Expenses

Total costs and expenses increased $1,438, or 16.2%, from $8,855 for the three months ended September 30, 2023 to $10,293 for the three months ended September 30, 2024. The following items contributed to the overall increase:

• a $674, or 10.8%, increase in Manufacturing cost of sales from $6,230 for the three months ended September 30, 2023 to $6,904 for the three months ended September 30, 2024 driven by sales of higher margin products; and
• a $764, or 29.1%, increase in Engineering, selling and administrative from $2,625 for the three months ended September 30, 2023 to $3,389 for the three months ended September 30, 2024 driven by increased investment in research and development, which should lead to additional product design wins in the future, resulting in additional revenue; increased sales commissions and bonus accruals consistent with the increase in revenues; and an increase in administrative and 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 500 basis points from 42.8% for the three months ended September 30, 2023 to 47.8% for the three months ended September 30, 2024 reflecting higher revenues, improved production efficiencies, and a higher margin product mix.

Total Other Income (Expense), Net

Total Other income (expense), net increased $74, or 569.2%, from $13 for the three months ended September 30, 2023 to $87 for the three months ended September 30, 2024. The increase was primarily due to a $62, or 6,200.0%, increase in Interest income (expense), net from $1 for the three months ended September 30, 2023 to $63 for the three months ended September 30, 2024 from higher interest income earned on investments in money market mutual funds.

Income Tax Expense

Income tax expense increased $281, or 61.1%, from $460 for the three months ended September 30, 2023 to $741 for the three months ended September 30, 2024 primarily due to the increase in Income before income taxes driven by the increase in revenues discussed above.

Nine Months ended September 30, 2024 compared to nine months ended September 30, 2023

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

(in thousands)

Total Revenues

Total revenues increased $5,812, or 19.1%, from $30,395 for the nine months ended September 30, 2023 to $36,207 for the nine months ended September 30, 2024 primarily due to continued strong defense program product and solution shipments.

Total Costs and Expenses

Total costs and expenses increased $3,354, or 12.9%, from $26,036 for the nine months ended September 30, 2023 to $29,390 for the nine months ended September 30, 2024. The following items contributed to the overall increase:

• a $1,295, or 7.1% , increase in Manufacturing cost of sales from $18,322 for the nine months ended September 30, 2023 to $19,617 for the nine months ended September 30, 2024 driven by sales of higher margin products; and
• a $2,059, or 26.7%, increase in Engineering, selling and administrative from $7,714 for the nine months ended September 30, 2023 to $9,773 for the nine months ended September 30, 2024 primarily due to higher research and development investment and an increase in administrative and corporate expenses to support the growth in revenues.

Gross Margin

Gross margin (Revenues less Manufacturing cost of sales as a percentage of Revenues) increased 610 basis points from 39.7% for the nine months ended September 30, 2023 to 45.8% for the nine months ended September 30, 2024 reflecting higher revenues, improved production efficiencies, and a higher margin product mix.

Total Other Income (Expense), Net

Total Other income (expense), net increased $212, or 1,766.7%, from ($12) for the nine months ended September 30, 2023 to $200 for the nine months ended September 30, 2024. The following items contributed to the overall increase:

• a $145, or 2,416.7%, increase in Interest income (expense), net from ($6) for the nine months ended September 30, 2023 to $139 for the nine months ended September 30, 2024 primarily due to interest income earned on investments in money market mutual funds; and
• a $67, or 1,116.7%, increase in Other income (expense), net from ($6) for the nine months ended September 30, 2023 to $61 for the nine months ended September 30, 2024 primarily due to favorable currency movements.

Income Tax Expense

Income tax expense increased $589, or 63.3%, from $931 for the nine months ended September 30, 2023 to $1,520 for the nine months ended September 30, 2024 primarily due to the increase in Income before income taxes driven by the increase in revenues discussed above.

Backlog

As of September 30, 2024, our order backlog was $39,763, a decrease of $8,068, or 16.9%, from $47,831 as of December 31, 2023 and a decrease of $10,517, or 20.9%, from $50,280 as of September 30, 2023. The decrease in backlog from December 31, 2023 reflects the continued strategy and focus on securing large, long duration program centric business, which can materially affect backlog due to the timing and size of these orders.

Non-GAAP Financial Measures

To supplement our Condensed Consolidated Financial Statements presented on a GAAP basis, the Company presents its financial condition and results of operations in the way it believes will be most meaningful and representative of its business results. Some of the measurements the Company uses are "Non-GAAP financial measures" under SEC rules and regulations. The non-GAAP financial measures the Company presents are listed below and may not be comparable to similarly-named measures reported by other companies. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net earnings or diluted earnings per share prepared in accordance with GAAP.

The Company uses the following operating performance measure because the Company believes it provides both management and investors with a more complete understanding of the underlying operational results and trends and our marketplace performance as well as a more accurate view of the Company's ability to generate cash profits:

Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA") is derived by excluding the items set forth below from Income before income taxes. Excluded items include the following:

• Interest income
• Interest expense
• Depreciation
• Amortization
• Non-cash stock-based compensation
• Other discrete items that might have a significant impact on comparable GAAP measures and could distort the evaluation of our normal operating performance.

Reconciliation of GAAP Income Before Income Taxes to Non-GAAP Adjusted EBITDA

The following table presents a reconciliation of income before income taxes to Adjusted EBITDA, a non-GAAP measure:

(in thousands, except share data)

Three months ended September 30, 2024 compared to three months ended September 30, 2023

Adjusted EBITDA increased $964 from $2,336 for the three months ended September 30, 2023 to $3,300 for the three months ended September 30, 2024 primarily due to improved gross margins and continued containment of operating expenses, resulting in higher income before taxes; higher depreciation; and higher stock-based compensation partially offset by higher interest income.

Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

Adjusted EBITDA increased $2,790 from $5,295 for the nine months ended September 30, 2023 to $8,085 for the nine months ended September 30, 2024 primarily due to higher gross margins and continued containment of operating expenses, resulting in higher income before taxes; higher depreciation; and higher stock-based compensation partially offset by higher interest income.

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 September 30, 2024 and December 31, 2023, Cash and cash equivalents were $8,490 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 $5,707 for the nine months ended September 30, 2024 compared to cash provided by operating activities of $2,273 for the nine months ended September 30, 2023, an increase of $3,434, primarily due to the following:

• Net income increased $2,081 from $3,416 for the nine months ended September 30, 2023 to $5,497 for the nine months ended September 30, 2024;
• Depreciation increased $140 from $577 for the nine months ended September 30, 2023 to $717 for the nine months ended September 30, 2024;
• Stock-based compensation increased $188 from $297 for the nine months ended September 30, 2023 to $485 for the nine months ended September 30, 2024; and
• Net change in operating assets and liabilities increased $1,160 from ($2,098) for the nine months ended September 30, 2023 to ($938) for the nine months ended September 30, 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 $1,473 for the nine months ended September 30, 2024 compared to cash used in investing activities of $565 for the nine months ended September 30, 2023, an increase of $908, primarily due to the purchase of equipment to support growth, next generation product development, and operational efficiencies during the nine months ended September 30, 2024.

Financing Activities

Cash provided by financing activities was $343 for the nine months ended September 30, 2024 compared to cash used in financing activities of $82 for the nine months ended September 30, 2023, an increase of $425, primarily due to the exercise of stock options.

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 September 30, 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 September 30, 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 September 30, 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 September 30, 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 September 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION