The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the accompanying
unaudited condensed consolidated financial statements, the notes thereto and the
other unaudited financial data included in this Quarterly Report on Form 10-Q.
The following discussion should also be read in conjunction with the audited
consolidated financial statements and the notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2021. The terms the "Company", "LGL Group", "LGL", "we", "our" or
"us" refer to The LGL Group, Inc. and unless otherwise defined herein,
capitalized terms used herein shall have the same meanings as set forth in our
condensed consolidated financial statements and the notes thereto.
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q of the
Company and the Company's other communications and statements, other than
historical facts, may be considered forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company intends for all such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in Section 27A of the Securities Act and Section 21E of the
Exchange Act, as applicable by law. Such statements include, in particular,
statements about the Company's beliefs, plans, objectives, goals, expectations,
estimates, projections and intentions. These statements are subject to
significant risks and uncertainties and are subject to change based on various
factors, many of which are beyond the Company's control. The words "may,"
"could," "should," "would," "believe," "anticipate," "estimate," "expect,"
"intend," "plan," "target," "goal" and similar expressions are intended to
identify forward-looking statements. All forward-looking statements, by their
nature, are subject to risks and uncertainties. Therefore, such statements are
not intended to be a guarantee of the Company's performance in future periods.
The Company's actual future results may differ materially from those set forth
in the Company's forward-looking statements. For information concerning these
factors and related matters, see "Risk Factors" in Part I, Item 1A of our Annual
Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the
SEC on March 28, 2022, this Quarterly Report on Form 10-Q and our other filings
with the SEC. However, other factors besides those referenced could adversely
affect the Company's results, and you should not consider any such list of
factors to be a complete set of all potential risks or uncertainties. Any
forward-looking statements made by the Company herein speak as of the date of
this Quarterly Report on Form 10-Q. The Company does not undertake to update any
forward-looking statement, except as required by law. As a result, you should
not place undue reliance on these forward-looking statements.
OVERVIEW
The Company is a diversified holding company with subsidiaries engaged in the
designing, manufacturing and marketing of highly-engineered, high reliability
frequency and spectrum control products used to control the frequency or timing
of signals in electronic circuits, and in the design of high performance
Frequency and Time Reference Standards that form the basis for timing and
synchronization in various applications. The Company's primary markets are
aerospace and defense.
The accompanying unaudited condensed consolidated financial statements include
the accounts of the Company and all of its majority-owned subsidiaries except
its sole variable interest entity ("VIE"), LGL Systems Acquisition Holding
Company, LLC (the "Sponsor"). The VIE served as the sponsor to a special purpose
acquisition company, LGL Systems Acquisition Corp. (the "SPAC" or "DFNS"). The
SPAC completed a merger with its target company, IronNet Cybersecurity, Inc., on
August 26, 2021 and changed its name to IronNet, Inc. ("IronNet" or "IRNT") (the
"IronNet Business Combination"). IronNet is a publicly-traded company on the
NYSE American ("NYSE") under the ticker symbol "IRNT."
In November 2019, the Company made its initial investment of $3,350,000 in the
Sponsor of the SPAC and subscribed to an additional investment of $2,725,000 in
March 2021 which was funded in May 2021. The incremental investment was part of
the Sponsor syndication to participate in a private placement in connection with
the IronNet Business Combination. On September 14, 2021, as a result of its
Sponsor investment, the Company received 1,572,529 shares of IRNT common stock
and 2,065,000 IRNT warrants exchangeable into shares of IRNT common stock,
representing an aggregate fair value of approximately $65,300,000. While LGL
continues to hold an interest in the Sponsor, it is immaterial. Subsequent to
the September 14, 2021 Sponsor distribution, the Company's IRNT securities have
been classified as marketable securities under ASC 321, Investments - Equity
Securities ("ASC 321"), with the change in fair value from the date of
distribution reported as gain or loss.
Impact of MtronPTI's Separation
On August 3, 2022, LGL announced that its Board of Directors approved the
previously announced separation of the M-tron Industries, Inc. ("MtronPTI")
business into an independent, publicly traded company (the "Separation"). Prior
to the Separation, LGL Group operated its electronic instruments business
segment through its wholly-owned subsidiary, Precise Time and Frequency ("PTF")
and its electronic components business segment through MtronPTI.
On October 7, 2022, the Separation of the MtronPTI business was completed and
MtronPTI became an independent, publicly-traded company trading on the NYSE
American under the stock symbol "MPTI."
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The Separation was achieved through LGL's distribution (the "Distribution") of
100% of the shares of the MtronPTI's common stock to holders of LGL's common
stock as of the close of business on the record date of September 30, 2022.
LGL's stockholders of record received one-half share of MtronPTI's common stock
for every share of LGL's common stock. In connection with the Separation,
MtronPTI wrote off $4,439,000 of intercompany receivables due from LGL, which
brought intercompany balances to zero. LGL retained no ownership interest in the
MtronPTI business following the Separation. Beginning in the fourth quarter of
2022, the historical financial results of the MtronPTI business for periods
prior to the distribution date will be reflected in the Company's consolidated
financial statements as discontinued operations.
See Note A - Basis of Presentation and Note O - Subsequent Events in the
accompanying notes to the condensed consolidated financial statements for
further details of the Separation.
Results of Operations
Backlog
As of September 30, 2022, our order backlog was $44,202,000, an increase of
48.3% from $29,797,000 at December 31, 2021 and an increase of 102.3% compared
to the backlog of $21,849,000 as of September 30, 2021. Backlog included
$44,074,000 and $29,439,000 for our electronic components (MtronPTI) segment and
$128,000 and $358,000 for our electronic instruments segment as of September 30,
2022, and December 31, 2021, respectively. The Company attained record backlog
levels as of September 30, 2022. Quarterly bookings were $9,579,000 for the
third quarter of 2022, $13,827,000 for the second quarter of 2022, $15,302,000
for the first quarter of 2022 and $15,169,000 for the fourth quarter of 2021.
This record booking trend during the last three quarters reflects improved
orders from the continued recovery of the avionics market along with strong
defense orders, as we continue to pull in orders from our customers for 2023 and
beyond, much of which is expected to ship subsequent to 2022. Supply chain
constraints within our industry have pushed our customers to order well in
advance to secure product deliveries for their production requirements. The
backlog of unfilled orders includes amounts based on signed contracts as well as
agreed letters of intent which we have determined are firm orders likely to be
fulfilled largely in the next 12 months but can extend past two years. Order
backlog is adjusted quarterly to reflect project cancellations, deferrals,
revised project scope and cost, and sales of subsidiaries, if any.
Three months ended September 30, 2022 compared to three months ended
September 30, 2021
Consolidated Revenues and Gross Margin
Total revenues were $8,761,000 for the three months ended September 30, 2022, or
16.8% above revenues of $7,501,000 for the three months ended September 30,
2021. The revenue increase reflects the recovering avionics market and strong
defense product shipments. Revenues included $8,417,000 for MtronPTI for the
three months ended September 30, 2022 versus $7,173,000 for the three months
ended September 30, 2021. Revenues for PTF were $344,000 for the three months
ended September 30, 2022 versus $328,000 for the three months ended
September 30, 2021.
Consolidated gross margin, which is consolidated revenues less manufacturing
cost of sales as a percentage of revenues, decreased to 32.8% for the three
months ended September 30, 2022, from 36.2% for the three months ended
September 30, 2021 reflecting the effects of product mix changes and
inflationary headwinds due to labor and materials cost increases on long term
contracts, partially offset by increased business volume. We continue to
experience the effects of increased turnover that began during Covid, which
increases our labor costs while also impacting productivity as we work to train
new employees. Gross margin for MtronPTI declined to 32.4% for the three months
ended September 30, 2022 from 35.4% for the three months ended September 30,
2021.
Operating Income (Loss)
The Company reported operating income of $121,000 for the three months ended
September 30, 2022, compared to an operating loss of $746,000 for the three
months ended September 30, 2021. As previously discussed, the increase reflects
higher revenue with lower margins partly offset by inflationary pressures, and
negatively impacted by $61,000 of increased stock compensation expense and the
prior year quarter donation of IRNT shares totaling $1,318,000, which was
included within engineering, selling and administrative costs and $232,000 of
Spin-Off costs.
Gain (Loss) on Equity Investment in Unconsolidated Subsidiary
The decrease is solely attributable to the impact of the IronNet Business
Combination and subsequent Sponsor distribution of IRNT securities recognized
during the three months ended September 30, 2021. During the three months ended
September 30, 2021 the Company recognized a gain on equity investment in
unconsolidated subsidiary of $60,205,000. The fair value of IRNT securities
determined at the date of distribution represents the basis of these securities
in determining realized and unrealized (losses) and gains.
Investment (Loss) Income
The Company reported $2,121,000 of investment loss during the three months ended
September 30, 2022 compared to investment loss of $18,867,000 during the three
months ended September 30, 2021. The loss during the three months ended
September 30, 2022 was related to a $1,947,000 net loss (realized and
unrealized) related to IRNT securities and to unrealized losses on the Company's
non-IRNT investment portfolio of $174,000. The loss during the three months
ended September 30, 2021 was attributable to the change in
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fair value of IRNT security holdings of ($19,779,000) from the date of Sponsor
distribution through the end of the third quarter, offset partially by the
$940,000 gain from derivative transactions related to IRNT. Investment gains and
losses have caused and are expected to continue to cause significant volatility
in our earnings, particularly with respect to our IronNet securities.
Other Expense, Net
Other expense, net was $13,000 for the three months ended September 30, 2022,
compared to other income of $240,000 for the three months ended September 30,
2021 which decreased primarily related to the $258,000 realized gain from IRNT
shares donated during the three months ended September 30, 2021.
Income Tax (Benefit) Expense
We recorded a tax benefit of $503,000 and expense of $9,049,000 for the three
months ended September 30, 2022 and 2021, respectively. The substantially higher
tax expense was driven by the increased income from our Sponsor investment as a
result of the IronNet Business Combination, partially offset by unrealized
losses in IRNT stock held by the Company. The (benefit) expense is based on an
estimated annual effective tax rate across the jurisdictions in which we
operate.
Net Loss (Income)
Net loss was $1,459,000 compared to net income of $31,780,000 for the three
months ended September 30, 2021. The decrease was from the gain from our Sponsor
investment as a result of the IronNet Business Combination during the three
months ended September 30, 2021, partially offset by unrealized losses in IRNT
stock through September 30, 2021. The increase in net loss was primarily from
the previously discussed investment loss offset by business operations described
above. Diluted net (loss) income per share for the three months ended
September 30, 2022 and 2021 was $(0.27) and $5.97, respectively.
Nine months ended September 30, 2022 compared to nine months ended September 30,
2021
Consolidated Revenues and Gross Margin
Total revenues were $24,303,000 for the nine months ended September 30, 2022, or
16.2% above revenues of $20,919,000 for the nine months ended September 30,
2021. The revenue increase reflects the recovering avionics market and strong
defense product shipments. Revenues included $23,172,000 for MtronPTI for the
nine months ended September 30, 2022 versus $19,834,000 for the nine months
ended September 30, 2021. Revenues for PTF were $1,131,000 for the nine months
ended September 30, 2022 versus $1,085,000 for the nine months ended
September 30, 2021.
Consolidated gross margin, which is consolidated revenues less manufacturing
cost of sales as a percentage of revenues, decreased to 35.8% for the nine
months ended September 30, 2022 from 36.3% for the nine months ended
September 30, 2021 reflecting the effects of product mix changes and
inflationary headwinds due to labor and materials cost increases on long term
contracts, partially offset by increased business volume. Gross margin for
MtronPTI increased to 35.6% for the nine months ended September 30, 2022 from
35.3% for the nine months ended September 30, 2021.
Operating Income (Loss)
The Company reported operating income of $466,000 for the nine months ended
September 30, 2022 compared to an operating loss of $190,000 for the nine months
ended September 30, 2021. The increase reflects higher revenue with lower
margins partly offset by inflationary pressures, $575,000 of Spin-Off costs in
the first nine months of 2022 and increased stock compensation expense of
$267,000.
Gain on Equity Investment in Unconsolidated Subsidiary
The Company recognized a gain on equity investment in unconsolidated subsidiary
of $59,453,000 for the nine months ended September 30, 2021. As more fully
described above, the substantial increase reflects the impact of the IronNet
Business Combination. Subsequent to the September 14, 2021 Sponsor distribution,
the Company's investment in the Sponsor is immaterial and the IRNT securities
have been classified as marketable securities with the change in fair value from
the date of distribution reported as investment income or loss on marketable
securities.
Investment (Loss) Income
The Company reported $4,449,000 of investment loss compared to $18,665,000
during the nine months ended September 30, 2021. The investment loss for the
nine months ended September 30, 2022 was primarily related to IRNT related
investment losses of $3,788,000 (realized and unrealized) and unrealized
investment losses of $661,000 from the remainder of the portfolio. Investment
gains and losses have caused and are expected to continue to cause significant
volatility in our earnings, particularly with respect to our IronNet securities.
During the nine months ended September 30, 2021, unrealized loss on marketable
securities was ($18,665,000), including the loss of ($19,779,000) from the
change in fair value of IRNT security holdings from the date of Sponsor
distribution through the end of the third quarter, and the $940,000 gain from
derivative transactions related to IRNT securities and an unrealized gain of
$174,000.
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Other (Expense) Income, Net
Other (expense) income, net was expense of $37,000 compared to income of
$280,000 for the nine months ended September 30, 2021 which decreased primarily
related to the $258,000 realized gain from IRNT shares donated during the nine
months ended September 30, 2021 and the remainder primarily reflects the impact
of unfavorable currency changes.
Income Tax (Benefit) Expense
We recorded a tax benefit of $881,000 and expense of $9,080,000 for the nine
months ended September 30, 2022 and 2021, respectively. The (benefit) expense is
based on an estimated annual effective tax rate across the jurisdictions in
which we operate.
Net (Loss) Income
Net loss was $3,088,000, compared to income of $31,789,000 for the nine months
ended September 30, 2021. The decrease was primarily from the previously
discussed investment gain offset by one-time Spin-Off costs. Diluted net (loss)
income per share for the nine months ended September 30, 2022 and 2021 was
$(0.58) and $5.96, respectively.
Liquidity and Capital Resources
As of September 30, 2022 and December 31, 2021, cash and cash equivalents were
$22,291,000 and $29,016,000, respectively. For the nine months ended September
30, 2022, the Company utilized $5,352,000 for investment activities related to
marketable securities, including $7,013,000 for purchases of securities offset
by security sales of $1,661,000.
Cash (used in) provided by operating activities for the nine months ended
September 30, 2022 and 2021 was $831,000 used in and $227,000, provided by
operating activities, respectively. The $1,058,000 decrease was primarily from
reduced income taxes payable due to timing of payments, higher inventory levels
in support of business growth as well as advanced procurement of certain
inventory components to address supply chain issues, an increase in accounts
receivable, offset by reduced prepaid balances.
Cash used in investing activities for the nine months ended September 30, 2022
and 2021 was $6,015,000 and $2,996,000, respectively. The $3,019,000 increase
reflects the purchase of $7,013,000 of marketable securities offset by the sale
of IRNT shares and related derivatives of $1,661,000 during the nine months
ended September 30, 2022. Capital expenditures of $663,000 during the nine
months ended September 30, 2022 were for investment in production equipment to
improve cost and efficiency, in line with the prior year capital expenditures of
$759,000.
Cash provided by financing activities of $121,000 for the nine months ended
September 30, 2022 attributable to $191,000 for the exercise of stock options,
offset by $50,000 as the result of vested restricted shares being withheld to
pay the related payroll taxes and $20,000 for prepaid financing costs.
As of September 30, 2022, our consolidated working capital was $47,652,000
compared to $51,410,000 as of December 31, 2021. As of September 30, 2022, we
had current assets of $52,784,000, current liabilities of $5,132,000 and a ratio
of current assets to current liabilities of 10.29 to 1.00. As of December 31,
2021, we had current assets of $55,836,000, current liabilities of $4,426,000
and a ratio of current assets to current liabilities of 12.62 to 1.00.
Management continues to focus on efficiently managing working capital
requirements to match operating activity levels and will seek to deploy the
Company's working capital where it will generate the greatest returns.
Total inventory was $7,584,000 at September 30, 2022 versus $5,492,000 at
December 31, 2021. Inventory held by MtronPTI was $7,298,000 at September 30,
2022 and $5,221,000 at December 31, 2021. Inventory held by PTF was $286,000 at
September 30, 2022 and $271,000 at December 31, 2021. Higher inventory levels
are in support of business growth as well as advanced procurement of certain
inventory components to address current supply chain issues.
The Company's MtronPTI subsidiary has a loan agreement for a revolving line of
credit with Fifth Third Bank N.A. for up to $5,000,000 bearing interest at the
Secured Overnight Financing Rate (SOFR) one-month rate plus 2.25%, with a SOFR
floor of 0.00%. The loan agreement has a maturity date of June 15, 2025 and
contains certain financial covenants based on the following criteria: (a)
Minimum Fixed Charge Coverage Ratio; (b) Minimum Current Ratio; and (c) Minimum
Tangible Net Worth (each as defined in the loan agreement). Borrowings under the
loan agreement are secured by all of the property of two of the Company's
subsidiaries, M-tron Industries, Inc. and Piezo Technology, Inc. At
September 30, 2022, the Company had no borrowings outstanding under its
revolving line of credit with Fifth Third Bank.
We believe that existing cash and cash equivalents, marketable securities and
cash generated from operations will provide sufficient liquidity to meet our
ongoing working capital and capital expenditure requirements for the next 12
months from the date of this filing.
Our Board has adhered to a practice of not paying cash dividends. This policy
takes into account our long-term growth objectives, including our anticipated
investments for organic growth, potential acquisitions and stockholders' desire
for capital appreciation of their holdings. No cash dividends have been paid to
the Company's stockholders since January 30, 1989, and none are expected to be
paid for the foreseeable future.
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Critical Accounting Estimates
Our accompanying condensed consolidated financial statements are prepared in
conformity with GAAP, which requires management to make estimates and
assumptions that affect the amounts reported in our financial statements and
accompanying footnotes. These estimates are made and evaluated on an on-going
basis using information that is currently available as well as various other
assumptions believed to be reasonable under the circumstances. Actual results
could differ from those estimates, perhaps in material adverse ways, and those
estimates could be different under different assumptions or conditions. For a
discussion of the Company's critical accounting estimates, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the year ended December 31,
2021.
Factors Which May Influence Results of Operations
We are not aware of any material trends or uncertainties, other than national
economic conditions affecting our industry generally, that may reasonably be
expected to have a material impact, favorable or unfavorable, on our revenues or
income other than those listed below and those listed in Item 1A, Risk Factors,
of our Annual Report on Form 10-K for the year ended December 31, 2021.
COVID-19
The COVID-19 pandemic ("COVID") has had and may continue to have an adverse
impact on our operations and financial performance, as well as on the operations
and financial performance of many of the customers and suppliers in industries
that we serve. The COVID pandemic continues to present business challenges, and
we continue to experience impacts related to COVID, primarily in higher raw
material prices, disruptions in global supply chains, delays in supplier
deliveries, delays in deliveries to customers, travel restrictions, quarantine
restrictions, labor shortages and employee absences.
In accordance with the Department of Defense guidance issued in March 2020
designating the Defense Industrial Base as a critical infrastructure workforce,
our U.S. production facilities have continued to operate in support of essential
products and services required to meet national security commitments to the U.S.
Government and the U.S. military; however, facility closures or work slowdowns
or temporary stoppages have occurred and could occur in the future. In addition,
other countries have different practices and policies that can affect our
international operations and the operations of our suppliers and customers.
The ultimate impact of COVID on our operations and financial performance depends
on many factors that are not within our control, including, but not limited to,
duration of the pandemic, potential subsequent waves of COVID infection or
potential new variants, the effectiveness and adoption of COVID vaccines and
therapeutics, governmental, business and individuals' actions that have been and
continue to be taken in response to the pandemic (including shutdown orders,
border closings, restrictions on travel and transport and workplace
restrictions) and resulting supplier impacts. In addition, to the extent global
vaccination programs do not achieve intended results and a longer period of
economic and global supply chain and related disruption continues, the more
adverse the impact will be on our business operations, financial performance and
results of operations.
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