LGL GROUP INC quarterly report, Q1 FY2020

Business context and reporting period

The LGL Group, Inc. is a diversified holding company with electronic components and electronic instruments businesses serving aerospace, defense, communications, and timing applications. This unaudited Form 10-Q covers the three months ended March 31, 2020; amounts below are in millions of dollars unless stated otherwise. The company reported two segments: electronic components and electronic instruments.

Financial performance and position

Revenue increased 29.9% year over year. Electronic components revenue was $8.276 million, versus $6.331 million; electronic instruments revenue was $0.342 million, versus $0.301 million. Gross margin declined with product mix, while operating income improved as higher revenue more than offset the margin decline. Operating cash flow rose by $0.800 million year over year. Investing activities used $0.056 million, primarily for capital expenditures; financing activities provided $3.312 million, largely from at-the-market (ATM) stock sales and option exercises.

Total assets were $43.098 million and stockholders’ equity was $38.398 million at March 31, 2020. Current liabilities were $4.700 million. The balance sheet reports no debt at quarter-end. The company said existing cash, marketable securities, and operating cash generation should cover working capital and capital expenditure needs for the next 12 months, subject to pandemic-related uncertainty.

Material changes versus the prior comparable period

• Revenue grew $1.986 million, led by increased filter sales, crystal and oscillator sales, and time and frequency products; purchased-product sales declined.
• Gross margin decreased 2.1 percentage points to 34.3%, attributed to product mix. Operating margin was approximately 7.7%, compared with 6.5% a year earlier.
• Net income fell by $0.399 million despite improved operating income, primarily reflecting a swing in other income: a $0.423 million net expense in Q1 2020 versus $0.154 million net income in Q1 2019. The 2020 amount included investment-portfolio losses, including a $0.325 million loss on marketable securities and a $0.039 million equity-method investment loss.
• Cash increased by $4.178 million from year-end, supported by operating cash flow and ATM proceeds. The company sold 263,725 shares under its ATM program at an average $13.65 per share; reported net proceeds in the statements of equity and cash flows were $3.254 million.
• Backlog was $22.556 million at March 31, up 5.9% year over year and 3.2% from year-end. Management expected to fill the entire backlog within 12 months, while noting timing and fulfillment were not assured.

Outlook, risks, contingencies, and unusual items

• COVID-19: Management said the pandemic had not materially affected Q1 results but was causing supplier-delivery delays and access limitations. The India operation closed March 23 and resumed limited operations May 7 with reduced staffing; U.S. production continued under critical-infrastructure guidance. The company updated its 2020 sales outlook but did not provide a clear numerical forecast. Sales, margins, earnings, and cash flow effects remained uncertain, depending on facility operations, supply chains, customer acceptance and payment, travel, and government activity.
• Subsequent financing: Operating subsidiaries borrowed an aggregate $1.908 million under the Paycheck Protection Program on April 15, 2020, then initiated full repayment on May 14. On May 12, Mtron entered a secured revolving credit line of up to $3.5 million, bearing 30-day LIBOR plus 2.50%, subject to a 0.50% floor, and maturing May 12, 2022.
• SPAC investment: The company’s $3.35 million investment in the sponsor of LGL Systems Acquisition Corp. is accounted for under the equity method. The company could lose its full investment if the SPAC fails to complete a business combination within 24 months of its IPO closing; no outcome is assured.
• Controls: Management concluded disclosure controls were not effective as of March 31 because remediation of a material weakness related to significant transactions and equity-method investment accounting was incomplete. Remediation was expected during 2020; management nevertheless concluded the reported financial statements fairly present the company’s results and position.
• Other items: An interim goodwill and long-lived-asset impairment review found no impairment. The company disclosed ordinary-course litigation contingencies but no material pending legal proceedings. It reported related-party-managed funds of $17.809 million at March 31 and identified an affiliation between the fund manager and its non-executive chairman.

Most important facts for investors to verify

• Whether COVID-19 disruptions materially affected subsequent revenue, backlog conversion, margins, cash flows, or the company’s unstated numerical 2020 outlook.
• The status, usage, and repayment terms of the $3.5 million revolving credit line, and whether the PPP loan repayment was completed.
• ATM issuance costs and proceeds: the filing reports $3.254 million in the equity and cash-flow statements, while the note describes approximately $3.492 million net of brokerage charges before other ATM and registration costs.
• Progress in remediating the material weakness in controls over significant transactions and equity-method investments.
• The valuation and eventual outcome of the SPAC sponsor investment, including the potential for a full loss.