LGL Group, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone quarterly filing; selected Q4 results are noted below. LGL is a holding company whose continuing manufacturing operation is Precise Time and Frequency, LLC (PTF), producing time- and frequency-reference instruments. On October 7, 2022, LGL completed the spin-off of M-tron Industries, Inc. (MtronPTI); its results are reported as discontinued operations.
Financial performance and position
| Metric | FY2022 | FY2021 |
|---|---|---|
| Continuing-operations revenue | $1.655 million | $1.446 million |
| Gross margin | 49.4% | 50.8% |
| Operating loss | $2.047 million | $3.521 million |
| Net income (loss), including discontinued operations | $(2.992) million | $14.638 million |
| Cash provided by (used in) operating activities | $(0.817) million | $1.352 million |
| Cash and cash equivalents at year-end | $21.507 million | $26.381 million |
- Continuing-operations net loss was $4.877 million in 2022, versus net income of $12.550 million in 2021. The 2022 total includes $1.885 million of after-tax income from discontinued operations; FY2021 discontinued-operations income was $2.088 million.
- 2022 basic and diluted loss per share from continuing operations was $0.91; including discontinued operations, total loss per share was $0.56. FY2021 total basic and diluted earnings per share were $2.77 and $2.74, respectively.
- Q4 2022 revenue was $524,000; total net income was $133,000, comprising $1,000 from continuing operations and $132,000 from discontinued operations.
- At year-end, marketable securities were $16.585 million, bringing cash and marketable securities to approximately $38.1 million. Working capital was $38.753 million; current assets were $39.340 million and current liabilities $587,000. The filing reports no material borrowings; total liabilities were $1.295 million, including $708,000 of other liabilities.
- Cash used in investing activities was $5.833 million, mainly reflecting investment activity; cash used in financing was $859,000, including $1.0 million transferred with MtronPTI in the spin-off. Cash-flow statements include continuing and discontinued operations and do not separately identify their cash flows.
Material changes and unusual items
- Continuing revenue increased 14.5% year over year, attributed to stronger defense and communications markets. Gross margin declined 1.4 percentage points, as volume-related improvement was offset by inflationary costs.
- The sharp earnings reversal chiefly reflects volatile IronNet (IRNT) investment results. In 2021, LGL recorded a $59.453 million gain on its equity-method investment in the SPAC sponsor. In 2022, it recorded $22.649 million of realized losses and $18.121 million of unrealized gains on marketable securities. The filing says investment gains and losses have caused substantial earnings volatility.
- LGL had invested $6.1 million in the sponsor and received IRNT securities in 2021. By year-end 2022, it held 198,750 IRNT shares valued at approximately $46,000; cumulative sale proceeds disclosed were approximately $19.3 million.
- MtronPTI generated $23.529 million in revenue and $1.885 million of after-tax income through its discontinued-operations presentation for 2022. The spin-off distributed one-half MtronPTI share for each LGL share; LGL retained no ownership interest. LGL recorded $419,000 of net spin-off costs for 2022 after MtronPTI’s reimbursement contribution.
Outlook, risks and contingencies
- Management said existing cash, marketable securities and operating cash flows should be sufficient for working capital and capital expenditures for the 12 months after filing. It aims to improve profitability through operations and acquisitions, but provided no quantified earnings or revenue guidance.
- Year-end backlog was $360,000, broadly unchanged from $358,000 a year earlier. Management expected to fill a substantial portion in 2023, while warning that orders can be delayed, changed or canceled.
- LGL’s continuing business is concentrated in a single manufacturing line, with cyclical end markets, customer concentration and limited revenue forecasting visibility. Its largest customer represented 18.9% of 2022 revenue; its two largest customers together represented 30.7%.
- Management cited inflation, higher interest rates, supply-chain disruption, component availability, labor constraints and COVID-related effects as risks to costs, deliveries and performance. Investment losses, concentrated or illiquid holdings, leverage exposure and potential investment-company regulation are additional risks.
- The tax-free treatment of the MtronPTI spin-off is not assured: the tax opinion is not binding on the IRS or courts. A taxable determination could create significant tax liabilities for LGL and potentially its shareholders. The auditor identified management’s tax-free spin-off determination as a critical audit matter; its audit opinion was unmodified.
- Related-party investments managed by an entity affiliated with LGL’s chairman/CEO totaled $26.811 million at year-end. Management fees were estimated at approximately 0.52% of assets under management. The filing also describes potential conflicts arising from overlapping LGL and MtronPTI leadership roles.
- LGL reported effective disclosure controls and internal control over financial reporting as of December 31, 2022. No material legal proceedings were reported. No cash dividends are expected for the foreseeable future.
Investor verification points
- Review the composition, liquidity, valuation and subsequent performance of the $16.585 million securities portfolio, particularly the remaining IRNT position and related realized/unrealized losses.
- Assess whether PTF can sustain growth and improve profitability given its small revenue base, operating losses, customer concentration and $360,000 backlog.
- Verify the cash-flow effect of the MtronPTI separation and reconcile continuing versus discontinued operations when comparing periods.
- Monitor the tax status of the spin-off, related indemnification obligations and any developments that could create tax exposure.
- Review related-party fund-management arrangements, potential conflicts, and the company’s compliance with Investment Company Act asset limits.