The LGL Group, Inc. — Q3 2020 Form 10-Q
Business context and period. LGL is a diversified holding company whose subsidiaries design and manufacture frequency and timing products, primarily for aerospace and defense markets. This filing covers the quarter and nine months ended September 30, 2020; financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $8.071 | $8.588 | $23.748 | $23.058 |
| Gross margin | 35.5% | 41.2% | 34.0% | 39.4% |
| Operating income | $0.709 | $1.122 | $1.553 | $2.412 |
| Net income | $0.629 | $4.530 | $1.067 | $6.051 |
| Diluted earnings per share | $0.12 | $0.91 | $0.21 | $1.22 |
| Operating cash flow | Not stated separately | Not stated separately | $1.830 | $1.089 |
- Q3 revenue declined 6.0% year over year, while nine-month revenue rose 3.0%. The nine-month increase mainly reflected higher filter sales, partly offset by lower crystal and oscillator, purchased-product, and instrument sales.
- Gross margin and operating income declined in both comparisons, attributed to product mix, avionics production slowdown costs, and the India shutdown and ramp-up.
- 2019 net income benefited from a roughly $3.3 million tax benefit following release of substantially all U.S. deferred-tax valuation allowance. This makes reported net income and EPS comparisons unusually favorable to 2019; 2020 recorded tax expense of $0.171 million in Q3 and $0.282 million year to date.
Financial position and liquidity
- At September 30, 2020, cash and cash equivalents were $17.276 million and marketable securities were $5.646 million; total assets were $43.086 million and stockholders’ equity was $39.386 million.
- Working capital was $29.564 million, with a current ratio of 8.99:1, compared with $24.586 million and 6.69:1 at December 31, 2019.
- No borrowings were outstanding under the $3.5 million revolving credit facility at quarter-end. The facility matures May 12, 2022, is secured by borrower-subsidiary assets, and has financial covenants that the company said it was complying with. The filing reports $0.452 million in lease liabilities; it does not report material funded debt on the balance sheet.
- Cash increased $4.823 million during the first nine months. Operating activities provided $1.830 million; investing activities used $0.329 million, primarily capital expenditures; financing activities provided $3.322 million, including ATM sales and option exercises.
Material developments, outlook, and risks
- COVID-19: The India facility closed March 23, resumed limited operations May 7, and returned to full staffing by the end of June. Management said the pandemic had not had a significant overall impact to date and described its updated 2020 projection as showing some, but not significant, decline. It warned that future effects remain uncertain, including possible supply, staffing, delivery, customer-acceptance, payment, and new-business delays, as well as potential added costs and liquidity impacts.
- Backlog: Orders were $21.456 million at September 30, down 7.9% year over year and 1.8% from year-end 2019. Management attributed the decline to slower bookings during COVID-19, particularly in avionics, alongside higher shipments. It expected to fill the entire backlog within 12 months but gave no assurance on timing or fulfillment.
- ATM equity offering: The company sold 263,725 shares in February and March under an at-the-market program, increasing share count and providing financing. The filing describes net proceeds differently in separate disclosures; see verification items below.
- SPAC investment: The company accounts for its $3.35 million investment in the sponsor of LGL Systems Acquisition Corp. under the equity method and recorded a $0.200 million loss for the first nine months. The investment may be lost if the SPAC fails to complete a business combination within 24 months of its IPO closing; no successful transaction is assured.
- Subsequent event: The board declared a warrant dividend: one warrant per common share held on November 9, with five warrants exercisable for one share at $12.50, subject to specified exercise conditions. Issuance and NYSE American listing were expected around November 16, subject to exchange approval.
- The company reported no material pending legal proceedings, no significant changes to previously reported risk factors apart from COVID-19, and effective disclosure controls as of September 30. Management said existing liquidity and credit availability should meet needs for the next 12 months, while emphasizing pandemic uncertainty.
Important facts for investors to verify
- Reconcile the ATM offering disclosures: the cash-flow and equity statements report $3.254 million of proceeds, while the offering note says approximately $3.492 million net after $108,000 of brokerage charges; the note also reports average sale price of $13.65 for 263,725 shares. Confirm gross proceeds, expenses, and net cash raised.
- Track the COVID-19 impact on shipments, margins, supplier availability, customer acceptance and collections, especially after the India shutdown and in avionics.
- Monitor backlog conversion, cancellations or deferrals, and new bookings; management’s 12-month fulfillment expectation is not a guarantee.
- Assess the SPAC sponsor investment’s carrying value and potential impairment or loss if no business combination is completed.
- Consider dilution from the ATM share issuance and the warrant dividend, including the warrant exercise terms and exchange listing status.
- Review related-party exposure: $18.918 million of cash equivalents and marketable securities was held with a fund manager whose executive officer is LGL’s non-executive chairman; assess investment oversight, fees, and potential conflicts.