LGL Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. LGL is a holding company with electronic components and electronic instruments businesses; its products serve, among other markets, aerospace, defense, communications, and timing applications. Unless noted otherwise, amounts are in millions.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $8.588 | $6.338 | $23.058 | $18.440 |
| Gross margin | 41.2% | 39.5% | 39.4% | 39.6% |
| Operating income | $1.122 | $0.477 | $2.412 | $1.124 |
| Net income | $4.530 | $0.478 | $6.051 | $1.143 |
| Diluted EPS | $0.91 | $0.10 | $1.22 | $0.24 |
- Q3 revenue rose 35.5%; nine-month revenue rose 25.0%. Electronic components generated $8.218 million of Q3 and $22.011 million of nine-month revenue; electronic instruments generated $0.370 million and $1.047 million, respectively.
- For the nine months, operating cash flow was $1.089 million versus $0.689 million. Investing cash outflow was $5.826 million, including $5.000 million invested in marketable securities and $0.826 million of capital expenditures. Financing cash inflow was $0.390 million, principally from stock-option exercises.
- Cash and cash equivalents were $11.161 million and marketable securities were $8.954 million at September 30, versus $15.508 million and $3.775 million, respectively, at December 31, 2018. Working capital was $26.960 million; the current ratio was 6.52, down from 9.95. The balance sheet does not separately report borrowings.
- Backlog was $23.285 million, up 45.0% from $16.062 million a year earlier. Management said it expected to fill the backlog within 12 months, but gave no assurance on timing or fulfillment.
Changes, outlook, and notable items
- Management attributed improved Q3 operating results primarily to higher sales and a more favorable product mix. Nine-month gross margin edged down from 39.6% to 39.4% due to product mix. Management described its strategy as shifting toward higher-margin products.
- Net income included a substantial non-cash tax benefit: the company recorded a $3.326 million Q3 and $3.286 million nine-month income tax benefit, primarily from releasing substantially all of its U.S. deferred-tax-asset valuation allowance. Deferred tax assets were $3.433 million at September 30, and the remaining valuation allowance was approximately $0.388 million. The tax benefit materially boosts reported net income and is not equivalent to operating cash generation.
- Management said cash, marketable securities, and operating cash generation should meet working-capital and capital-expenditure needs for the 12 months following the filing. No numerical revenue or earnings guidance was provided. The company reported no cash dividends expected for the foreseeable future.
- After quarter-end, LGL contributed $3.35 million to the sponsor of its SPAC to fund private-warrant purchases. The SPAC raised $172.5 million in its IPO, which closed November 12, 2019. LGL expected to own approximately 43.57% of the sponsor. If the SPAC does not complete a business combination within 24 months, LGL may lose its entire investment; the filing also describes potential incentive compensation for certain LGL-affiliated individuals.
- At September 30, $17.816 million was held with an investment manager whose executive officer is LGL’s non-executive chairman and a greater-than-10% stockholder. The filing reports investment income from these holdings and anticipated annual management fees below 0.35% of managed assets.
- The company adopted lease accounting in 2019; reported right-of-use assets were $0.364 million. Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material pending legal proceedings were identified, and the filing reported no off-balance-sheet arrangements.
Key facts for investors to verify
- How much of the earnings increase reflects sustainable operating improvement versus the one-time valuation-allowance release?
- Whether backlog converts to revenue as expected, particularly given management’s report that Q3 orders declined from two record quarters.
- The SPAC investment’s ultimate value, LGL’s total exposure, potential dilution or incentive compensation, and conflicts involving shared officers, directors, and sponsor investors.
- The liquidity, valuation, and related-party terms of investments managed by the fund manager connected to LGL’s chairman.
- Whether working-capital growth, including higher receivables and inventories, and planned capital spending affect future operating cash flow.