The LGL Group, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 29, 2021. This is an annual report, not a standalone fourth-quarter report. LGL designs and manufactures frequency, spectrum, and time-reference products through its electronic components and electronic instruments segments.
Financial results and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $31.162 million | $31.897 million |
| Gross margin | 35.1% | 39.2% |
| Operating income | $1.415 million | $3.439 million |
| Net income | $968,000 | $7.016 million |
| Diluted EPS | $0.19 | $1.41 |
| Operating cash flow | $3.192 million | $2.666 million |
- Revenue declined 2.3%. Avionics weakness and COVID-related disruption were partly offset by increased defense/military and aerospace sales. The India facility closed in March, resumed limited operations in May, and returned to normal capacity by late June.
- Gross margin fell as product mix shifted and the India shutdown required production to be moved to U.S. facilities, increasing costs. Operating income also reflected higher stock-based compensation.
- 2019 net income included a $3.344 million reversal of a deferred-tax valuation allowance; this makes the year-over-year earnings decline larger than the change in underlying operations alone. LGL recorded a $336,000 tax provision in 2020.
- Cash and cash equivalents were $18.331 million, marketable securities $5.791 million, working capital $30.384 million, and total assets $43.455 million at year-end. Current assets were $33.781 million versus current liabilities of $3.397 million; the current ratio was 9.94.
- Total liabilities were $3.690 million, including lease liabilities. LGL had no borrowings outstanding on its $3.5 million revolving credit line at year-end; the facility matures May 12, 2022 and is secured by borrower assets.
- Cash rose $5.878 million during the year. Financing cash flow included $3.254 million of ATM stock-sale proceeds; investing cash outflow was $428,000. Capital expenditures were $407,000.
Changes, outlook, and notable items
- Order backlog was $19.801 million at year-end, down 9.4% from $21.857 million. Management expected to fill substantially all of the year-end backlog in 2021, but cautioned that timing and fulfillment are not assured.
- Management said existing cash, marketable securities, operating cash generation, and revolving-credit availability should fund working capital and capital needs for the next 12 months from the filing date. No quantified revenue or earnings guidance was provided.
- The two largest customers represented 17.1% and 14.0% of 2020 revenue. Four customers accounted for 43.1% of year-end receivables. Customer loss, delayed payment, or lower demand could affect results and liquidity.
- COVID-19, supply-chain constraints, raw-material availability and prices, cyclical end markets, international operations, and government-contract compliance are key risks. The company also flagged cybersecurity and future CMMC requirements.
- LGL invested $3.35 million in the SPAC sponsor in 2019 and recorded a $262,000 equity-method loss in 2020. After year-end, on March 19, 2021, it announced an additional $2.725 million sponsor investment related to a proposed SPAC business combination with IronNet. Completion remained subject to approvals and other conditions.
- LGL distributed warrants to shareholders in November 2020: five warrants permit purchase of one common share at $12.50, exercisable when the 30-day VWAP reaches $17.50 or on expiration in November 2025. The distribution generated no proceeds; full exercise could produce approximately $13.0 million.
- The auditor issued an unqualified opinion on the financial statements and identified inventory valuation reserves as a critical audit matter. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not express an opinion on internal control.
- No material legal proceedings or off-balance-sheet arrangements were reported. The company paid no cash dividends and did not repurchase shares in 2020.
Important facts for investors to verify
- Whether backlog converts to 2021 shipments and whether avionics demand and gross margins recover.
- Customer concentration, receivable collections, and the adequacy of the $1.219 million inventory-obsolescence reserve against $5.280 million of net inventory.
- The terms, covenant compliance, collateral, and actual availability of the revolving credit facility; also verify that no borrowings were outstanding at year-end.
- The status, funding, and potential downside of the additional SPAC/IronNet investment and related-party relationships.
- Potential dilution and exercise conditions for the 5.26 million warrants distributed to shareholders, as well as remaining capacity under the ATM offering.