The LGL Group, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. LGL is a diversified holding company operating electronic components and electronic instruments businesses, with primary markets in aerospace and defense.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Revenue | $6.536 million | $8.618 million; down 24.2% |
| Gross margin | 32.7% | 34.3% |
| Operating income (loss) | $(60,000) | $660,000 |
| Net income | $27,000 | $183,000 |
| Diluted earnings per share | $0.01 | $0.04 |
| Operating cash flow | $402,000 | $922,000 |
| Cash and cash equivalents | $18.678 million | $18.331 million at Dec. 31, 2020 |
| Marketable securities | $5.918 million | $5.791 million at Dec. 31, 2020 |
| Current assets / current liabilities | $34.213 million / $6.308 million | $33.781 million / $3.397 million at Dec. 31, 2020 |
| Working capital / current ratio | $27.905 million / 5.42 | $30.384 million / 9.94 at Dec. 31, 2020 |
Capital expenditures were $55,000; investing cash flow was $(55,000), and financing cash flow was zero. LGL had no borrowings on its $3.5 million revolving credit facility at quarter-end. The facility matures May 12, 2022; lease liabilities totaled $272,000 long term. The current liabilities include a $2.725 million subscription payable related to the Sponsor investment, funded in May 2021 after quarter-end.
Electronic components revenue was $6.254 million, versus $8.276 million; electronic instruments revenue was $282,000, versus $342,000. Segment operating income was $349,000 and $16,000, respectively, before $425,000 of unallocated corporate expense.
Changes and management commentary
- Revenue fell $2.082 million year over year, reflecting weakness in avionics and customer order delays amid semiconductor shortages, as well as comparison with pre-pandemic Q1 2020. Lower revenue and reduced gross margin drove the $720,000 deterioration in operating results.
- Gross margin pressure reflected temporary production onshoring to U.S. factories following India’s COVID-related shutdown and lower avionics volume at the Yankton plant. LGL said it continued cost-saving measures while retaining costs to preserve manufacturing capacity.
- Other income was $172,000 versus expense of $384,000, primarily reflecting investment portfolio results and currency translation. The equity-method loss on the SPAC Sponsor investment was $76,000, versus $39,000.
- Backlog was $20.388 million at March 31, up 3.0% from year-end but down 9.6% from March 2020. Q1 bookings of $7.123 million were 23.5% below Q1 2020; bookings had improved sequentially but remained below pre-COVID levels. Management expects substantially all backlog to be filled within 12 months but gives no assurance about timing.
Outlook, risks and unusual items
No specific financial guidance was provided. Management believed cash, marketable securities, operating cash generation and available credit would be sufficient for working capital and capital expenditures over the next 12 months, while continuing to monitor COVID-19 impacts.
- COVID-19 could disrupt facilities, suppliers, customer acceptance and payments, staffing, contract execution, new awards, export approvals and supply chains. Management noted a renewed COVID-19 surge in India and said future effects remain uncertain.
- In March, LGL subscribed to an additional $2.725 million investment in its equity-method Sponsor, funded in May. The Sponsor investment supports a PIPE tied to the proposed DFNS–IronNet business combination, then expected to close in Q3 2021 subject to shareholder and other approvals.
- The filing reports related-party connections involving company directors and executives and the Sponsor, and that a related entity managed investments holding $19.189 million at quarter-end. The filing says brokerage and fund transactions were directed by company management.
- The SPAC restated its warrant accounting after SEC staff guidance. LGL stated the change did not affect its Sponsor investment carrying value under its HLBV accounting.
- Management reported no COVID-19-related impairment trigger in Q1. Ordinary-course litigation contingencies are disclosed; LGL reported no material pending legal proceedings. Disclosure controls were considered effective, with no material change in internal control reported.
LGL stated that it has not paid cash dividends since 1989 and does not expect to do so for the foreseeable future.
Important facts for investors to verify
- Whether avionics demand, bookings and backlog convert into scheduled deliveries and revenue, particularly given customer semiconductor shortages.
- The degree and duration of margin pressure from production location, plant utilization and costs retained to preserve capacity.
- The terms, funding and potential returns or downside of the additional Sponsor/PIPE commitment, and whether the proposed IronNet transaction closes.
- Liquidity after the $2.725 million subscription payment, including use of the revolving credit facility and compliance with its financial covenants.
- The valuation and performance of marketable securities and the related-party investment-management arrangements.