LGL Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unless noted, financial figures below are in millions of dollars. The reported results include M-tron Industries (MtronPTI), which LGL spun off on October 7, 2022; beginning in Q4 2022, MtronPTI’s pre-distribution results are to be presented as discontinued operations.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $8.761 | $7.501 | $24.303 | $20.919 |
| Gross margin | 32.8% | 36.2% | 35.8% | 36.3% |
| Operating income (loss) | $0.121 | $(0.746) | $0.466 | $(0.190) |
| Net income (loss) | $(1.459) | $31.780 | $(3.088) | $31.789 |
| Diluted EPS | $(0.27) | $5.97 | $(0.58) | $5.96 |
| Operating cash flow | Not presented separately | Not presented separately | $(0.831) | $0.227 |
Electronic components accounted for $8.417 million of Q3 revenue and $23.172 million for the nine-month period; electronic instruments contributed $0.344 million and $1.131 million, respectively. Revenue growth reflected recovery in avionics and strong defense shipments. Management attributed lower gross margins mainly to product mix, inflation in labor and materials on long-term contracts, and workforce turnover and training costs; higher volume partly offset these pressures.
Investment results substantially affected reported earnings. LGL recorded investment losses of $2.121 million in Q3 and $4.449 million for the nine months, including IRNT-related losses. The comparable 2021 periods included a $60.205 million Q3 gain and a $59.453 million nine-month gain on the equity investment in the SPAC sponsor following the IronNet transaction. Thus, the large year-over-year net income swing is not a comparable change in operating performance. At September 30, LGL held 1.289 million IRNT shares valued at about $0.888 million against a reported basis of $27.636 million.
Liquidity, debt, and balance sheet
- At September 30, cash and cash equivalents were $22.291 million, marketable securities were $17.070 million, and total current assets were $52.784 million. Cash was down from $29.016 million at December 31, 2021.
- Working capital was $47.652 million, with a 10.29-to-1 current ratio. Total liabilities were $5.725 million; LGL reported no borrowings on its $5 million revolving credit facility. The facility matures June 15, 2025, bears interest at one-month SOFR plus 2.25%, and includes financial covenants.
- Nine-month cash used in investing was $6.015 million, primarily reflecting net purchases of marketable securities; capital expenditures were $0.663 million. Inventory rose to $7.584 million from $5.492 million, which management attributed to growth and advance purchasing amid supply constraints.
- Management stated existing cash, marketable securities, and operating cash generation should be sufficient for working capital and capital expenditures for at least the next 12 months.
Illustrative post-spin view: The filing’s unaudited pro forma balance sheet, assuming the distribution occurred September 30, showed total assets of $40.250 million, cash of $21.291 million, marketable securities of $17.070 million, total liabilities of $0.911 million, and equity of $39.339 million. These pro forma figures are illustrative, not a report of actual post-spin results.
Material changes, outlook, and risks
- Spin-off: On October 7, LGL distributed all MtronPTI shares to shareholders at one-half MtronPTI share per LGL share; LGL retained no ownership. MtronPTI wrote off $4.439 million of intercompany receivables due from LGL, bringing intercompany balances to zero. The filing reports $0.575 million of spin-off costs for the first nine months of 2022.
- Demand and backlog: Backlog reached a reported record $44.202 million at September 30, up 48.3% from year-end 2021 and 102.3% year over year. Management cited recovering avionics demand and defense orders, but noted supply constraints had encouraged customers to order well ahead of need; much of the backlog was expected to ship after 2022. Q3 bookings were $9.579 million, below Q2’s $13.827 million and Q1’s $15.302 million.
- Risks: Management cited raw-material inflation, supply-chain disruption, supplier and customer delivery delays, labor shortages, turnover, and pandemic-related operational uncertainty. The filing also warns that the spin-off could create dis-synergies, affect customer and vendor relationships, dilute earnings, or fail to receive tax-free U.S. federal tax treatment. LGL said it could not assure realization of expected spin-off benefits.
- Other developments: After the spin-off, there were changes to directors and officers. On October 18, the warrant exercise price was adjusted from $12.50 to $4.75 and the potential acceleration trigger from $17.50 to $6.65 following the distribution. No formal financial guidance was provided. LGL stated it does not expect to pay cash dividends for the foreseeable future.
- Management concluded disclosure controls were effective as of September 30, 2022. The filing reports no material pending legal proceedings beyond routine litigation.
Investor verification priorities
- Review LGL’s first post-spin filings to establish its stand-alone revenue base, costs, cash needs, and any corporate cost dis-synergies; the quarter’s reported results still include MtronPTI.
- Assess backlog quality, cancellation or deferral exposure, conversion timing, and whether margins recover as supply, labor, and inflation pressures evolve.
- Track IRNT and other portfolio exposures, valuation changes, and resulting earnings volatility.
- Confirm liquidity and compliance with revolving-credit covenants after the spin-off, and verify the final distribution-related cash and intercompany settlements.
- Monitor the spin-off’s tax treatment and potential share dilution or exercise effects from LGL’s warrants, including the adjusted terms.