The LGL Group, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. LGL is a diversified holding company with electronic components and electronic instruments businesses, serving markets including aerospace and defense.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $6.882 million | $7.059 million | $13.418 million | $15.677 million |
| Gross margin | 39.7% | 31.8% | 36.3% | 33.2% |
| Operating income | $616,000 | $184,000 | $556,000 | $844,000 |
| Net income (loss) | ($18,000) | $255,000 | $9,000 | $438,000 |
| Operating cash flow | Not separately stated | Not separately stated | $48,000 | $871,000 |
Q2 diluted EPS was reported as $0.00, versus $0.05 a year earlier; six-month diluted EPS was $0.00 versus $0.08. The filing attributes the quarter’s operating-margin improvement primarily to favorable product mix and cost reductions. For the first half, reduced revenue more than offset those operating improvements.
Balance sheet, liquidity and cash flow
- At June 30, cash and cash equivalents were $15.254 million and marketable securities were $5.993 million, versus $18.331 million and $5.791 million, respectively, at year-end 2020.
- Current assets were $31.719 million and current liabilities $3.282 million, giving working capital of $28.437 million and a current ratio of 9.66:1.
- There were no borrowings outstanding on the $3.5 million revolving credit facility. It matures May 12, 2022 and is subject to financial covenants. Long-term lease liabilities were $246,000.
- First-half operating cash flow was $48,000; investing cash outflow was $3.125 million, including the $2.725 million Sponsor investment and $400,000 of capital expenditures. Cash declined by $3.077 million during the period.
Management said cash, marketable securities, operating cash generation and available revolver capacity should be sufficient for working capital and capital spending over the next 12 months.
Material changes and notable items
- First-half revenue decreased 14.4%; management cited weaker avionics shipments and the comparison with pre-COVID conditions in early 2020. In Q2, revenue declined 2.5%, as weaker avionics shipments were largely offset by space business.
- Q2 operating income increased to $616,000 from $184,000, but the company recorded a net loss, primarily reflecting a $676,000 equity-method loss on its unconsolidated Sponsor investment and lower investment portfolio gains.
- The first-half equity-investment loss rose to $752,000 from $139,000, reflecting legal and other costs tied to the planned DFNS–IronNet transaction. LGL funded a $2.725 million Sponsor subscription in May for participation in a $125 million PIPE. The business combination and PIPE were expected to close in Q3 2021, subject to shareholder approval and other conditions; completion was not assured.
- Cash and securities totaling $16.540 million were held with a related-party fund manager, including $10.557 million classified as cash equivalents and $5.983 million as marketable securities. The filing notes that the manager is an entity in which the company’s non-executive chairman serves as an executive officer.
Outlook, risks and contingencies
No specific financial guidance was provided. Backlog was $21.347 million at June 30, up 7.8% from December 31, 2020 but down 5.1% from June 30, 2020. Q2 bookings of $7.841 million were 12.0% above the prior-year quarter and had improved sequentially, but remained substantially below pre-COVID levels. Management expected to fill substantially all backlog within 12 months, while noting timing and fulfillment are not assured.
Management described COVID-19-related risks to staffing, suppliers, contract execution, customer acceptance and payment, travel, and international operations, including a potential risk from the COVID-19 surge in India. It reported no COVID-related impairment trigger during the period, but future changes in projections could affect asset values. The company reported no material pending legal proceedings beyond routine matters. Disclosure controls were concluded to be effective as of June 30, 2021.
Important facts for investors to verify
- Whether avionics demand and bookings recover, and whether backlog converts to revenue on the expected schedule.
- The eventual outcome, accounting impact and value of LGL’s Sponsor investment and the planned DFNS–IronNet PIPE/business combination.
- Liquidity and operating cash generation after the Sponsor funding, capital expenditures and any further business disruption.
- The nature and extent of the related-party investment-management relationship and the company’s concentration of cash and securities with that manager.
- Potential effects of COVID-19, supply-chain constraints and market volatility on deliveries, margins and asset values.