The LGL Group, Inc. — Q2 2020 Form 10-Q
Business context and period: The company designs and manufactures electronic frequency and spectrum-control components and precision timing instruments through its electronic components and electronic instruments segments. This unaudited report covers the quarter and six months ended June 30, 2020; comparisons are to the corresponding 2019 periods unless noted. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $7.059 | $7.838 | $15.677 | $14.470 |
| Gross margin | 31.8% | 40.0% | 33.2% | 38.3% |
| Operating income | $0.184 | $0.856 | $0.844 | $1.290 |
| Net income | $0.255 | $0.939 | $0.438 | $1.521 |
| Diluted EPS | $0.05 | $0.19 | $0.08 | $0.31 |
| Operating cash flow | Not separately stated | Not separately stated | $0.871 | $(0.264) |
- Q2 revenue fell 9.9%, with declines in filters, crystal and oscillator products, and timing instruments, partly offset by purchased-product sales. The six-month increase of 8.3% was principally driven by higher filter sales.
- Q2 gross margin declined to 31.8%; management attributed the deterioration to lower sales volume during the India shutdown while fixed costs continued. The six-month margin decline also reflected product mix.
- For the six months, investing cash outflow was $0.105 million, primarily capital expenditures; financing cash inflow was $3.420 million, including ATM share sales, credit-line proceeds, and option exercises. Cash increased by $4.186 million.
Financial position and liquidity
- At June 30, 2020, cash and cash equivalents were $16.639 million, marketable securities $5.524 million, and total assets $42.702 million. Current assets were $32.917 million and current liabilities $4.007 million; the reported current ratio was 8.21:1.
- Working capital was $28.910 million, compared with $24.586 million at December 31, 2019. The company reported $0.103 million outstanding on a new revolving facility of up to $3.5 million, maturing May 12, 2022. Borrowings are secured by borrower property and subject to financial covenants; the company reported compliance.
- Management believed cash, securities, operating cash generation, and credit availability would cover working capital and capital expenditures for the next 12 months. No cash dividends are expected for the foreseeable future.
Developments, outlook, and risks
- COVID-19 disrupted operations and supplier deliveries. The India facility closed March 23, resumed limited operations May 7, and returned to full staffing and normal capacity by the end of June. U.S. production continued as an essential defense-industry activity, but future disruptions remain possible.
- Management said it updated its 2020 sales outlook to reflect pandemic effects, but the filing provides no clear numerical sales or earnings forecast. Outcomes depend on facility continuity, supply-chain mitigation, customer acceptance and payment timing, travel restrictions, and other uncertain developments.
- Backlog was $22.495 million at June 30, down 8.1% year over year and up 2.9% from year-end 2019. Management expected to fill the entire backlog within 12 months but gave no assurance about timing or fulfillment.
- The company recorded a $0.139 million six-month equity-method loss on its 62.2% investment in the sponsor of SPAC LGL Systems Acquisition Corp. The investment may be lost if the SPAC fails to complete a business combination within 24 months of its November 2019 IPO; any eventual ownership and proceeds are uncertain.
- The operating subsidiaries returned the full $1.908 million of Paycheck Protection Program loans on May 14, 2020; the loans were terminated.
- A previously disclosed material weakness in controls over reporting significant transactions was reported remediated as of June 30, 2020. Management concluded disclosure controls were effective at quarter-end. The company reported no material pending legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile the ATM share-sale proceeds: the filing reports $3.254 million in cash-flow and equity disclosures, while the ATM note describes approximately $3.492 million of net proceeds after brokerage charges, alongside separate registration costs.
- Track whether COVID-19 or supply-chain issues affect production, backlog conversion, customer acceptance, cash collection, and the unstated numerical 2020 outlook.
- Monitor the sponsor investment’s carrying value, further losses, and the SPAC’s ability to complete a business combination before its deadline.
- Review compliance with the Synovus facility’s financial covenants and the company’s cash and marketable-securities balances.