LGL Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited; amounts below are in U.S. dollars unless stated otherwise. LGL is a holding company with an electronic-instruments manufacturing business and a merchant-investment business. MtronPTI was spun off in October 2022, so the 2022 comparative results include its pre-spin results as discontinued operations.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $403,000 | $370,000 | $844,000 | $787,000 |
| Gross margin | 48.4% | 38.6% | 52.6% | 40.4% |
| Operating loss | $(438,000) | $(480,000) | $(747,000) | $(1,327,000) |
| Other income (expense), net | $306,000 | $(2,363,000) | $837,000 | $(2,321,000) |
| Net income (loss) | $(130,000) | $(1,798,000) | $27,000 | $(1,629,000) |
| Net income (loss) per share | $(0.02) | $(0.34) | $0.01 | $(0.31) |
Q2 revenue increased 8.9% year over year; six-month revenue increased 7.2%. Management attributed stronger gross margins to product mix. Interest income rose to $275,000 in Q2 and $473,000 for the half year, mainly due to higher rates on cash invested in short-term Treasury mutual funds. Investment income was $43,000 in Q2 and $388,000 for the half year, versus substantial losses in 2022, principally associated with IronNet.
- Cash and cash equivalents: $40.314 million at June 30, 2023, compared with $21.507 million at December 31, 2022. Marketable securities were $25,000, down from $16.585 million.
- Cash flows, six months: Operating activities used $9,000; investing activities provided $18.816 million; financing activities were nil. Cash increased $18.807 million. Investing inflows included $16.947 million of marketable-security sale proceeds and $1.869 million of cash from consolidating LGL Systems.
- Working capital: $40.701 million, with current assets of $41.204 million and current liabilities of $503,000; current ratio was 81.92 to 1.
- Liabilities and debt: Total liabilities were $1.190 million. The balance sheet does not list borrowings or a debt line; lease-related and other liabilities are included in reported liabilities.
- Backlog: $324,000 at June 30, down 10.0% from December 31, 2022, but up 114.6% from June 30, 2022.
Material changes and unusual items
- Following a June 2023 reassessment, LGL determined it was the primary beneficiary of LGL Systems Acquisition Holdings, LLC and began consolidating it. The consolidation added $1.872 million of non-controlling interests. LGL invested $1 million in LGL Systems, representing approximately 35% of membership interests.
- In Q2, LGL sold substantially all of its investments and placed the proceeds into money-market securities. The large change in cash and marketable securities reflects investment sales and consolidation cash, rather than operating cash generation.
- Operating losses improved versus the prior-year periods. For the first half, management cited higher revenue and margins and lower administrative costs, primarily because certain executive compensation costs shifted to MtronPTI after the spin-off.
- 2022 comparisons are affected by discontinued MtronPTI operations: those operations contributed $457,000 of after-tax income in Q2 2022 and $1.265 million in the first half of 2022.
- Related-party considerations include investment management by an entity whose executive is LGL’s non-executive chairman and LGL Systems membership interests held by the chairman, company executives, and directors. LGL disclosed approximately $31.980 million held with the related fund manager at quarter-end; management fees were estimated at approximately 0.08% annually.
Outlook, risks and contingencies
Management believes existing cash, cash equivalents, marketable securities, and operating cash generation will be sufficient for working-capital and capital-expenditure needs for the next 12 months. The filing provides no specific revenue or earnings guidance. LGL says it is pursuing investment and acquisition opportunities and does not expect to pay cash dividends for the foreseeable future.
Management cited inflation as a potential source of higher manufacturing and administrative costs, while noting that rising interest rates may benefit returns on Treasury investments. It reported no entity-specific impairment trigger at quarter-end, no material pending legal proceedings beyond routine matters, and no material changes in internal control over financial reporting. Disclosure controls and procedures were assessed as effective. The filing describes forward-looking statements as subject to risks and uncertainties and refers investors to the risk factors in the 2022 Form 10-K.
Important facts for investors to verify
- Whether the higher reported earnings and liquidity are sustainable given continuing operating losses and minimal operating cash generation.
- The composition, valuation, liquidity, and subsequent performance of LGL’s cash and investment holdings after the Q2 portfolio repositioning.
- The accounting, governance, related-party terms, and economic exposure arising from LGL Systems consolidation and LGL’s merchant-investment activities.
- How backlog converts to shipments and revenue, and whether recent product-mix-driven margin gains persist.
- The effect of the MtronPTI separation on ongoing corporate costs and comparability with prior periods.