MPTI 10-Q
M-tron Industries, Inc. (MPTI)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from ____________ to ____________
Commission File No.
M-TRON INDUSTRIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
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| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
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| (Address of principal executive offices) | (Zip Code) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ |
| Accelerated filer | ☐ |
| | ☒ | Smaller reporting company | | |
| Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
As of November 6, 2023, the registrant had
Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 2023
INDEX
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| PART I. |
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| Item 1. |
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| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. |
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| Item 4. |
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| PART II. |
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| Item 1. |
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| Item 6. |
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FINANCIAL INFORMATION
Consolidated and Combined Statements of Operations (Unaudited)
(In thousands, except share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| REVENUES | $ | $ | $ | $ | ||||||||||||
| Costs and expenses: | ||||||||||||||||
| Manufacturing cost of sales | ||||||||||||||||
| Engineering, selling and administrative | ||||||||||||||||
| OPERATING INCOME | ||||||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income (expense), net | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income (expense), net | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other income (expense), net | ( | ) | ( | ) | ( | ) | ||||||||||
| INCOME BEFORE INCOME TAXES | ||||||||||||||||
| Income tax provision | ||||||||||||||||
| NET INCOME | $ | $ | $ | $ | ||||||||||||
| Net Income per Basic Share | $ | $ | $ | $ | ||||||||||||
| Net income per Dilutive Share | $ | $ | $ | $ | ||||||||||||
See Accompanying Notes to Consolidated and Combined Financial Statements.
Consolidated and Combined Balance Sheets
(In thousands, except par value and share amounts)
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of reserves of $, and $, respectively | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Property, Plant and Equipment | ||||||||
| Land | ||||||||
| Buildings and improvements | ||||||||
| Machinery and equipment | ||||||||
| Gross property, plant and equipment | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Net property, plant and equipment | ||||||||
| Right-of-use lease asset | ||||||||
| Intangible assets, net | ||||||||
| Deferred income tax asset | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued compensation and commissions | ||||||||
| Other accrued expenses | ||||||||
| Income taxes payable | ||||||||
| Total Current Liabilities | ||||||||
| Long-term lease liability | ||||||||
| Total Liabilities | ||||||||
| Contingencies (Note G) | ||||||||
| Stockholders' Equity | ||||||||
| Preferred stock - $ par value; shares authorized, issued. | ||||||||
| Common stock - $ par value; shares authorized; and shares issued and outstanding, respectively. | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Total Equity | ||||||||
| Total Liabilities and Stockholders' Equity | $ | $ | ||||||
See Accompanying Notes to Consolidated and Combined Financial Statements.
Consolidated and Combined Statements of Equity (Unaudited)
(In thousands)
| Common Stock | Paid-In Capital | Net Investment by LGL Group | Retained Earnings | Total Equity | ||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
| Net income | ||||||||||||||||||||
| Adjustment to The LGL Group, Inc. transfer | ( | ) | ( | ) | ||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
| Net income | ||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Forfeiture of shares to pay taxes | ( | ) | ( | ) | ||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
| Net income | ||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | |||||||||||||||
| Net income | ||||||||||||||||||||
| Net transfers to LGL Group, Inc. | ||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
| Net income | ||||||||||||||||||||
| Net transfers to LGL Group, Inc. | ||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
| Net income | ||||||||||||||||||||
| Net transfers to LGL Group, Inc. | ||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
See Accompanying Notes to Consolidated and Combined Financial Statements.
Consolidated and Combined Statements of Cash Flows (Unaudited)
(In thousands)
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of finite-lived intangible assets | ||||||||
| Stock-based compensation expense | ||||||||
| Deferred income tax provision | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Decrease (increase) in accounts receivable, net | ( | ) | ||||||
| Increase in inventories, net | ( | ) | ( | ) | ||||
| Decrease in prepaid expenses and other assets | ||||||||
| (Decrease) increase in accounts payable, accrued compensation and commissions expense and other | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| INVESTING ACTIVITIES | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Forfeiture of shares to pay taxes | ( | ) | ||||||
| Net transfers from LGL Group, Inc. | ||||||||
| Prepaid financing costs | ( | ) | ||||||
| Payments to related party | ( | ) | ||||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental Disclosure: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
See Accompanying Notes to Consolidated and Combined Financial Statements.
Notes to Consolidated and Combined Financial Statements (Unaudited)
A. Background and Description of Business
Originally founded in 1965, M-tron Industries, Inc. (the "Company," "MtronPTI," "we," "us," or "our") 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.
Our component-level devices and modules are used extensively in electronic systems for applications in commercial and military defense, aerospace, satellites, down-hole drilling, medical devices, instrumentation, industrial devices and in infrastructure equipment for the telecommunications and network equipment industries. As an engineering-centric company, MtronPTI provides close support to the customer throughout its products' entire life cycle, including product design, prototyping, production and subsequent product upgrades and maintenance. This collaborative approach has resulted in the development and growth of long-standing business relationships with its blue-chip customer base.
The Company offers a wide range of precision frequency control and spectrum control solutions including: radio frequency, microwave and millimeter wave filters; cavity, crystal, ceramic, lumped element and switched filters; high performance and high frequency oven-controlled crystal oscillators (“OCXO”), integrated phase-locked loops OCXOs, temperature-compensated crystal oscillators, voltage-controlled crystal oscillators, low jitter and harsh environment oscillators; crystal resonators, Integrated Microwave Assemblies (IMA); and state-of-the-art solid state power amplifier products.
All of MtronPTI’s production facilities are ISO 9001:2015 (the international standard for creating a quality management system published by the International Organization for Standardization) certified and Restriction of Hazardous Substances (“RoHS”) compliant. In addition, its U.S. production facilities in Orlando and Yankton are International Traffic in Arms Regulations registered and AS9100 Rev D (the aerospace standard released by the International Aerospace Quality Group) certified and our Yankton production facility is Military Standard (MIL-STD)-790 certified.
We maintain our executive offices at 2525 Shader Road, Orlando, Florida 32804. Our telephone number is (407) 298-2000. Our Internet address is www.mtronpti.com. Our common stock is traded on the NYSE American under the symbol "MPTI".
The 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 business of MtronPTI into an independent, publicly traded company (the "Separation"). Prior to the Separation, LGL Group operated its electronic instruments business segment through its wholly-owned subsidiary, Precise Time and Frequency (“PTF”) and its electronic components business segment through MtronPTI.
On October 7, 2022 (the “Distribution Date”), the Separation of the MtronPTI business was completed, and we became an independent, publicly traded company trading on the NYSE American under the stock symbol "MPTI."
The Separation was achieved through LGL Group’s distribution (the “Distribution”) of
B. Summary of Significant Accounting Policies
Basis of Presentation – Consolidated and Combined Financial Statements
The Company’s financial statements for periods through the Separation are combined financial statements prepared on a “carve-out” basis as discussed below. The Company’s financial statements for the period from October 7, 2022 through September 30, 2023 are consolidated financial statements based on the reported results of M-tron Industries, Inc. as a standalone company.
The Consolidated and Combined Financial Statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These Consolidated and Combined Financial Statements may not be indicative of the Company’s future performance and do not necessarily reflect what the financial position, results of operations, and cash flows would have been had it operated as an independent company during the periods presented.
Basis of Presentation – Prior to Separation
Through the Separation date, the Company's combined financial statements are prepared on a "carve-out" basis. The Consolidated and Combined Financial Statements have been derived from the consolidated financial statements and accounting records of LGL Group in conformity with GAAP.
The Consolidated and Combined Financial Statements include the accounts of the Company and all of its majority-owned subsidiaries. Intercompany transactions and accounts have been eliminated. Transactions between the Company and LGL Group have been included in these Consolidated and Combined Financial Statements. The aggregate net effect of transactions between the Company and related parties that have been historically settled other than in cash are reflected in the Consolidated and Combined Statements of Cash Flows as Net transfers from LGL Group, Inc. For additional information, see Note C – Related Party Transactions.
The debt and associated interest expense in these Consolidated and Combined Financial Statements relate to third-party borrowings under a revolving credit agreement specifically attributable to legal obligations of the Company.
The Consolidated and Combined Statements of Operations include an allocation for certain corporate and shared service functions historically provided by LGL Group, including, but not limited to, executive oversight, accounting, tax, and other shared services. These expenses have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on a pro rata basis of consolidated sales or other measures considered to be a reasonable reflection of the historical utilization levels of these services. Management believes the assumptions underlying our Consolidated and Combined Financial Statements, including the assumptions regarding the allocation of general corporate expenses from LGL Group, are reasonable. Nevertheless, our Consolidated and Combined Financial Statements may not include all of the actual expenses that would have been incurred and may not reflect our results of operations, financial position and cash flows, had we operated as a standalone company during the periods presented. Actual costs that would have been incurred if we had operated as a standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure.
During the periods presented in these Consolidated and Combined Financial statements, the Company’s income tax expense has been included in LGL Group’s income tax returns. Income tax expense contained in the Consolidated and Combined Financial Statements is presented on a separate return basis, as if the Company had filed its own income tax returns.
Earnings per Share
Earnings per basic share is computed based on the weighted-average number of shares of common stock outstanding. Earnings per diluted share include the weighted-average effect of dilutive restricted stock and options on the weighted-average shares outstanding.
Earnings per share through the Distribution Date was calculated based on the
The following table provides the weighted-average shares utilized for the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2023 and 2022:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Weighted average shares outstanding - basic | ||||||||||||||||
| Effect of diluted securities | ||||||||||||||||
| Weighted average shares outstanding - diluted | ||||||||||||||||
Interim Financial Statements
The Consolidated and Combined Financial Statements as of and for the three and nine months ended September 30, 2023 and 2022 are unaudited. These Consolidated and Combined Financial Statements should be read in conjunction with the audited Consolidated and Combined Financial Statements and notes thereto for the fiscal years ended December 31, 2022 and 2021, contained within the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2023.
In the opinion of management, the accompanying Consolidated and Combined Financial Statements reflect all adjustments, which are of a normal recurring nature and necessary for a fair presentation of the results for the interim periods.
Use of Estimates
The preparation of the Consolidated and Combined Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Research and Development Costs
Research and development costs are charged to operations as incurred. Such costs were approximately $
Revenue Recognition
The Company recognizes revenue from the sale of its products in accordance with the criteria in Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, which are:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
The Company meets these conditions upon the Company’s satisfaction of the performance obligation, usually at the time of shipment to the customer, because control passes to the customer at that time. Our standard terms for customers are net due within 30 days, with a few exceptions, none regularly exceeding 60 days.
The Company provides disaggregated revenue details by geographic markets in Note H – Domestic and Foreign Revenues.
The Company offers a limited right of return and/or authorized price protection provisions in its agreements with certain electronic component distributors who resell the Company's products to original equipment manufacturers or electronic manufacturing services companies. As a result, the Company estimates and records a reserve for future returns and other charges against revenue at the time of shipment consistent with the terms of sale. The reserve is estimated based on historical experience with each respective distributor. These reserves and charges are immaterial as the Company does not have a history of significant price protection adjustments or returns. The Company provides a standard assurance warranty that does not create a performance obligation.
Practical Expedients:
| - | The Company applies the practical expedient for shipping and handling as fulfillment costs. |
| - | The Company expenses sales commissions as sales and marketing expenses in the period they are incurred. |
Concentration Risks
For the three and nine months ended September 30, 2023, the Company's largest customer accounted for $
A significant portion of the Company's accounts receivable is concentrated with a relatively small number of customers. As of September 30, 2023,
Segment Information
The Company reports segment information in accordance with ASC 280, Segment Information ("ASC 280"). ASC 280 requires companies to report financial and descriptive information for each identified operating segment based on management's internal organizational decision-making structure. Management has identified the Company’s only segment as electronic components.
Impairments of Long-Lived Assets
Long-lived assets, including intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Long-lived assets are grouped with other assets to the lowest level to which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Management assesses the recoverability of the carrying cost of the assets based on a review of projected undiscounted cash flows. If an asset is held for sale, management reviews its estimated fair value less cost to sell. Fair value is determined using pertinent market information, including appraisals or broker's estimates, and/or projected discounted cash flows. In the event an impairment loss is identified, it is recognized based on the amount by which the carrying value exceeds the estimated fair value of the long-lived asset.
We performed an assessment to determine if there were any indicators of impairment at the end of the fiscal quarter ended September 30, 2023. We concluded that, while there were events and circumstances in the macro-environment that did impact us, we did not experience any entity-specific indicators of asset impairment and no triggering events occurred.
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-13, “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments,” which changes the impairment model for most financial assets. The standard replaces the incurred loss model with the current expected credit loss (“CECL”) model to estimate credit losses for financial assets. The Company adopted the provisions of this standard on January 1, 2023, with minimal effect on its financial statements.
C. Related Party Transactions
Allocation of General Corporate Expenses
For purposes of preparing these Consolidated and Combined Financial Statements on a “carve-out” basis for periods prior to the Separation, we have allocated a portion of LGL Group’s corporate expenses, totaling $
Transactions with LGL Group, Inc.
MtronPTI and LGL Group have entered into an Amended and Restated Transitional Administrative and Management Services Agreement, which sets out the terms for services to be provided between the
MtronPTI and LGL Group have agreed to share any excess Separation costs. Included in other income (expense), net on the Consolidated and Combined Statements of Operations is an amount of $
At September 30, 2023 and December 31, 2022, there was a balance due from MtronPTI to LGL Group of $
D. Inventories
Inventories are valued at the lower of cost or net realizable value using the FIFO (first-in, first-out) method. The Company reduces the value of its inventories to net realizable value when the net realizable value is believed to be less than the cost of the item. The inventory reserve for excess and obsolete inventory as of September 30, 2023 and December 31, 2022 was $
Inventories are comprised of the following (in thousands):
| September 30, 2023 | December 31, 2022 | |||||||
| (unaudited) | ||||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Total Inventories, net | $ | $ | ||||||
E. Income Taxes
The Company’s quarterly provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items within the period presented. To determine the annual effective tax rate, the Company estimates both the total income (loss) before income taxes for the full year and the jurisdictions in which that income (loss) is subject to tax. The actual effective tax rate for the full year may differ from these estimates if income (loss) before income taxes is greater than or less than what was estimated or if the allocation of income (loss) to jurisdictions in which it is taxed is different from the estimated allocations.
The effective tax rate for the nine months ended September 30, 2023 and 2022 was
F. Revolving Credit Agreement
On June 15, 2022, MtronPTI 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 $
G. Commitments and Contingencies
In the ordinary course of business, the Company and its subsidiaries may become defendants in certain product liability, patent infringement, worker claims and other litigation. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. The Company has
H. Domestic and Foreign Revenues
Significant foreign revenues from operations (
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Malaysia | $ | $ | $ | $ | ||||||||||||
| Hungary | ||||||||||||||||
| Australia | ||||||||||||||||
| All other foreign countries | ||||||||||||||||
| Total foreign revenues | $ | $ | $ | $ | ||||||||||||
| Total domestic revenues | $ | $ | $ | $ | ||||||||||||
The Company allocates its foreign revenue based on the customer's ship-to location.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
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.
OTHER INFORMATION
In the ordinary course of business, we may become subject to litigation or claims. We are not aware of any material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we or any of our subsidiaries are a party or to which our or their properties are subject.
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2023 (and are numbered in accordance with Item 601 of Regulation S-K):
| Exhibit No. |
Description |
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| 2.1 |
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| 3.1 |
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| 3.2 |
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| 4.1 |
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| 31.1* |
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| 31.2* |
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| 32.1** |
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| 32.2** |
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| 101.INS* |
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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| 101.SCH* |
Inline XBRL Taxonomy Extension Schema Document |
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| 101.CAL* |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF* |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB* |
Inline XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE* |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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| 104* |
The cover page for the Company’s Quarterly Report on Form 10-Q has been formatted in Inline XBRL and contained in Exhibit 101 |
* Filed herewith
** In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| M-TRON INDUSTRIES, INC. |
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| Date: November 9, 2023 |
By: |
/s/ Michael J. Ferrantino |
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| Michael J. Ferrantino |
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| Chief Executive Officer (Principal Executive Officer) |
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| Date: November 9, 2023 |
By: |
/s/ James W. Tivy |
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| James W. Tivy |
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| Chief Financial Officer (Principal Financial Officer) |
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