LGL Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. LGL is a diversified holding company with electronic components and electronic instruments businesses serving primarily aerospace and defense markets. Unless indicated otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $8.108 | $6.536 |
| Gross margin | 37.6% | 32.7% |
| Operating income (loss) | $0.221 | $(0.060) |
| Net income | $0.169 | $0.027 |
| Diluted EPS | $0.03 | $0.01 |
| Operating cash flow | $(0.554) | $0.402 |
| Capital expenditures | $0.207 | $0.055 |
- Revenue rose 24.1%, reflecting recovery in avionics and stronger defense shipments. Electronic components revenue was $7.691 million, versus $6.254 million; electronic instruments revenue was $0.417 million, versus $0.282 million.
- Gross margin improved with higher business volume. Operating results also improved, partly offset by inflationary pressures, higher stock-based compensation and $0.111 million in Spin-Off costs. Corporate expense increased to $0.841 million from $0.425 million.
- Net income benefited from improved operations; investment income declined to $0.045 million from $0.127 million. Investment gains and losses, particularly on IronNet securities, can cause substantial earnings volatility.
Financial position and liquidity
- At March 31, cash and cash equivalents were $21.652 million and marketable securities were $22.815 million, totaling $44.467 million. Total assets were $60.229 million.
- Current assets of $56.108 million exceeded current liabilities of $4.497 million; working capital was $51.611 million and the current ratio was 12.48 to 1.
- Total liabilities were $5.084 million, including $0.587 million of long-term lease liabilities. There were no borrowings outstanding on the $3.5 million revolving credit facility at quarter-end. The facility was due to mature May 12, 2022; the filing does not provide a clear value for any subsequent renewal or replacement.
- Operating cash flow was negative, primarily reflecting higher receivables and inventory to support growth and advance procurement amid supply-chain issues. Investing cash outflow was $6.810 million, including $7.000 million of marketable-security purchases and $0.397 million of proceeds from securities sales. Cash declined by $7.364 million during the quarter.
- Management stated that cash, marketable securities and expected operating cash generation should provide sufficient liquidity for the next 12 months. The company reported no cash dividends paid since 1989 and said none are expected for the foreseeable future.
Backlog, outlook and material developments
- Order backlog reached a record $36.991 million at March 31, up 24.1% from year-end 2021 and 81.4% from March 31, 2021. Quarterly bookings were $15.302 million. Management cited strong defense demand, including $9.8 million of orders from two missile-defense programs, much of which it expects to ship after 2022, and improving avionics demand.
- The Board was pursuing a proposed spin-off of MtronPTI, subject to stockholder approval. A special meeting was scheduled for June 21, 2022. If completed, LGL would retain Precise Time and Frequency and substantially all cash and marketable securities; MtronPTI would become a separate public company. Completion was not assured.
- LGL held 1,288,620 IronNet shares at quarter-end, with a reported fair value of $4.897 million versus a $27.636 million basis; the cumulative unrealized loss was $22.739 million. The filing also reported $1.088 million of put-option value. In May, IronNet notified LGL that it could not sell its registered shares until an amended registration statement became effective. LGL sold its quarter-end put options on May 5 for $1.263 million.
Risks, contingencies and other items
- Management cited COVID-related and broader supply-chain challenges, including higher raw-material costs, supplier and customer delivery delays, labor shortages and employee absences. Inflationary pressures and currency movements also affected results.
- The company reported no material pending legal proceedings beyond ordinary routine matters. It records litigation liabilities when loss is probable and reasonably estimable.
- Investment assets include related-party-managed funds. The filing identifies the Fund Manager’s relationship to LGL’s non-executive Chairman and states that management directed the brokerage and fund transactions; anticipated management fees average approximately 0.50% annually.
- Disclosure controls and procedures were concluded to be effective as of March 31, 2022. The filing gave no numerical full-year revenue or earnings guidance.
Important facts for investors to verify
- Whether the MtronPTI spin-off received approval and was completed, and the final terms and allocation of assets and liabilities.
- Whether IronNet’s resale restrictions were lifted, the status and value of LGL’s remaining IronNet holdings, and any subsequent gains or losses.
- Whether the revolving credit facility was renewed, replaced or allowed to mature, and whether any borrowing or covenant changes occurred.
- Whether record backlog converts to shipments and revenue as expected, particularly the missile-defense orders, given supply-chain and delivery risks.
- How operating cash flow, inventory and receivables evolve as production and sales grow, and how marketable-security volatility affects reported earnings.