LGL Group, Inc. — FY2021 Form 10-K
Reporting period: Year ended December 31, 2021; comparisons are to FY2020. The filing was signed March 28, 2022. LGL is a holding company with electronic components operations through MtronPTI and electronic instruments operations through PTF, alongside investment activities.
Financial performance and position
| Metric | FY2021 / Dec. 31, 2021 | FY2020 / Dec. 31, 2020 |
|---|---|---|
| Revenue | $28.140 million | $31.162 million |
| Gross margin | 35.8% | 35.1% |
| Operating income (loss) | ($0.786) million; $0.532 million excluding the $1.318 million noncash IRNT-share donation | $1.415 million |
| Net income | $14.638 million; diluted EPS $2.74 | $0.968 million; diluted EPS $0.19 |
| Cash provided by operating activities | $1.352 million | $3.192 million |
| Cash and cash equivalents | $29.016 million | $18.331 million |
| Marketable securities | $16.167 million | $5.791 million |
| Working capital | $51.410 million; current ratio 12.62 | $30.384 million; current ratio 9.94 |
Electronic components revenue was $26.694 million, down from $29.980 million; electronic instruments revenue was $1.446 million, up from $1.182 million. Total assets were $59.906 million and stockholders’ equity was $54.743 million at year-end. No borrowings were outstanding under the subsidiaries’ $3.5 million revolving credit facility; it matures May 12, 2022. The filing reports no cash dividends and none expected for the foreseeable future.
- FY2021 net income was dominated by the IronNet (IRNT) SPAC-related investment accounting, not manufacturing operating performance. LGL recorded a $59.453 million gain on its equity-method Sponsor investment, alongside $16.962 million in realized marketable-securities losses and $22.949 million in unrealized losses. Management said investment gains and losses will continue to make reported earnings volatile.
- LGL received $18.548 million from sales of IRNT shares and related derivative transactions. At year-end it held IRNT securities with a reported fair value of $6.351 million, including restricted shares and put options. The filing’s non-GAAP pro forma income before taxes, excluding Sponsor transactions, was $0.832 million in 2021 versus $1.566 million in 2020.
Material changes and management commentary
- Revenue declined 9.7%, reflecting reduced avionics shipments during the pandemic, partly offset by strong space business. Gross margin improved modestly on favorable mix and cost reductions, but inflationary pressures constrained improvement.
- Bookings were $38.136 million and year-end backlog rose 50.5% to $29.797 million, from $19.801 million. The backlog includes firm orders management considers likely to proceed but can be cancelled or deferred. A fourth-quarter $6.3 million missile-defense-program order is expected mostly to ship after 2022. Management expects to fill a substantial portion of year-end backlog in 2022 but gives no quantified revenue guidance.
- Operating cash flow fell by $1.840 million, mainly due to lower operating earnings and changes in receivables and inventory. Investing cash flow was positive $9.406 million, reflecting IRNT-related proceeds, partly offset by securities purchases, Sponsor funding and $1.099 million of capital expenditures.
- Management stated that cash, marketable securities and operating cash generation should be sufficient for working capital and capital expenditures for the next 12 months from the filing date. It also expects substantially all cash and marketable securities—approximately $46 million at year-end—to remain with LGL if the proposed spin-off proceeds.
Outlook, risks, contingencies and unusual items
- The Board approved progressing with a spin-off of MtronPTI, subject to conditions including stockholder approval. The proposed pro rata distribution would give shareholders one MtronPTI share for each LGL share held on the distribution record date. LGL would retain PTF and substantially all cash and marketable securities. Completion is not assured; the companies’ combined post-spin-off value may be below LGL’s pre-spin-off value.
- The distribution is intended to be tax-free, but LGL had not obtained and did not expect to obtain a tax opinion or IRS private letter ruling; tax treatment is therefore uncertain. The filing also identifies potential standalone financing needs for MtronPTI and possible conflicts arising from directors and officers serving both companies.
- Key operating risks include customer concentration (the largest customer supplied 28.0% of revenue and the second largest 11.2% in 2021), cyclical aerospace, defense and communications markets, COVID-related supply-chain disruptions, inflation and raw-material availability, and reliance on limited-source components. Four customers represented 53.2% of year-end accounts receivable.
- Other risks include competition, labor availability, government-contract compliance and cybersecurity requirements, international operations, and volatility in IRNT securities. The company had no outstanding revolving-credit borrowings at year-end, but the facility’s stated maturity was May 2022.
- The auditor issued an unqualified opinion on the financial statements. Inventory valuation was identified as a critical audit matter: net inventory was about $5.5 million and included a $1.4 million reserve for excess and obsolete inventory. Management reported effective disclosure controls and internal control over financial reporting. The filing reports no material legal proceedings.
Important facts for investors to verify
- Whether stockholders approved the MtronPTI spin-off, its final terms, timing, tax treatment and allocation of assets, liabilities and funding.
- Subsequent IRNT share sales, derivative positions and realized proceeds. After year-end, the lock-up on 1.25 million shares was released; through February 28, 2022, LGL delivered 50,000 shares against derivatives for $0.4 million and reported holding 1,288,620 unrestricted shares and puts covering 250,000 shares.
- How much of the $29.797 million backlog converts to revenue, particularly the large missile-defense order, and whether customer demand and avionics shipments recover.
- Recurring manufacturing profitability and cash generation excluding the one-time Sponsor investment effects, alongside the status and terms of the revolving credit facility after its stated May 2022 maturity.
- Inventory reserve adequacy, customer credit exposure, and the effects of continuing supply-chain, labor and inflationary pressures.