LGL Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. LGL operates electronic components and electronic instruments businesses, primarily serving aerospace and defense markets.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $7.501 million | $8.071 million | $20.919 million | $23.748 million |
| Gross margin | 36.2% | 35.5% | 36.3% | 34.0% |
| Operating income (loss) | ($746,000) | $709,000 | ($190,000) | $1.553 million |
| Net income | $31.780 million | $629,000 | $31.789 million | $1.067 million |
| Diluted EPS | $5.97 | $0.12 | $5.96 | $0.21 |
| Operating cash flow | Not presented by quarter | $227,000 | $1.830 million |
- Earnings quality: Reported profit was driven chiefly by LGL’s IronNet-related Sponsor investment. For the nine months, LGL recorded a $59.453 million equity-method gain, partly offset by an $18.665 million unrealized loss on marketable securities. The company reported that its IronNet-related mark-to-market changes can cause substantial earnings volatility.
- Operating performance: Revenue fell 7.1% in Q3 and 11.9% for the nine-month period. Management attributed weakness mainly to lower avionics shipments; strong space business partly offset the nine-month decline. Gross margin improved with product mix and cost reductions. Excluding a $1.318 million non-cash charitable donation of IronNet shares, operating income was $572,000 for Q3 and $1.128 million for the nine months.
- Cash flow: Nine-month operating cash flow was $227,000, down from $1.830 million, primarily reflecting unfavorable working-capital changes. Investing activities used $2.996 million, including $2.725 million funded for a PIPE subscription and $759,000 in capital expenditures.
Balance sheet and liquidity
- At September 30, 2021, cash and cash equivalents were $15.593 million and marketable securities were $50.828 million; total assets were $80.931 million.
- Current assets were $77.126 million versus current liabilities of $2.956 million, with reported working capital of $74.170 million and a current ratio of 26.09 to 1. LGL had no borrowings under its $3.5 million revolving credit facility. The filing does not report other borrowings.
- Total liabilities were $9.230 million, including a $6.057 million deferred tax liability. Management said cash, securities, operating cash flow and credit availability should cover needs for the next 12 months.
- Cash decreased from $18.331 million at year-end 2020. Marketable securities increased substantially following the IronNet-related distribution; they include restricted shares and privately valued warrants and should not be treated as equivalent to cash.
Material changes, outlook and risks
- LGL’s investment in the SPAC Sponsor resulted in a September 14 distribution of 1,572,529 IronNet shares and 2,065,000 private warrants, with aggregate fair value of $65.3 million. LGL’s original Sponsor investment was $6.1 million. It recognized a cumulative Sponsor gain of approximately $59.2 million through the distribution date.
- IronNet securities were marked to fair value at quarter-end. After quarter-end, LGL exercised the warrants cashlessly and, by October 31, had sold 1,405,315 shares for approximately $16.9 million, retaining 1,388,620 shares, including 1,250,000 restricted shares. LGL said it may use derivatives to mitigate price exposure but cannot ensure that the investment will be hedged.
- On October 1, the board approved proceeding with a spin-off of MTron/PTI, which comprises the electronic components segment; the transaction remains subject to a shareholder vote. LGL said substantially all cash and investments would remain with LGL. No quantitative earnings or revenue guidance is provided.
- Backlog was $21.849 million at September 30, up 10.3% from December 31, 2020 and 1.8% year over year. Q3 bookings rose 13.8% year over year. Management said orders improved sequentially but remained below pre-COVID quarterly averages and expected substantially all backlog to be filled within 12 months, without assurance on timing.
- Key risks include IronNet share-price volatility, valuation assumptions for Level 3 warrants, restrictions on share sales, and the possibility of continued operating volatility. COVID-19, supply-chain disruptions, staffing constraints, delays in customer acceptance or government approvals, and potential cost increases could affect contract execution. Management reported no COVID-related impairment trigger at quarter-end.
- The company recorded a $9.080 million income tax expense for the nine months and said it released a valuation allowance on some deferred tax assets based on expected gains from later IronNet share sales. It cited approximately $2.5 million of tax-loss and credit carryforwards available to reduce taxes on realized gains.
- Management reported effective disclosure controls as of September 30. The filing reports no material pending legal proceedings beyond ordinary routine matters and describes no material contingencies with a clear quantified exposure.
Important facts for investors to verify
- IronNet holdings, restrictions, subsequent sales, remaining exposure and the valuation of the private warrants and any derivative positions.
- How much of reported earnings is attributable to the non-recurring Sponsor gain and subsequent fair-value movements versus recurring operating results and cash generation.
- Shareholder approval, timing, transaction terms and expected costs or financial effects of the proposed MTron/PTI spin-off.
- Backlog conversion, bookings, avionics demand, and whether supply-chain or COVID-related issues affect deliveries and cash flow.
- Tax consequences of IronNet sales, including use of tax attributes and the deferred tax liability.