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May 14, 2020, 4:42 p.m. EDT

10-Q: LGL GROUP INC

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the accompanying 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, 2019. The terms "we," "us," "our," and the "Company" 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, 2019, filed with the SEC on March 30, 2020, 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.

Results of Operations

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 set forth below and those listed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2019 and this Quarterly Report on Form 10-Q. However, due to the recent outbreak of COVID-19 in the U.S. and globally, our business and operations may be impacted. The impact of the COVID-19 outbreak on our future results could be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19, the success of actions taken to contain or treat COVID-19, and reactions by consumers, companies, governmental entities and capital markets.

The Company has taken measures to protect the health and safety of our employees, work with our customers to minimize potential disruptions and support our community in addressing the challenges posed by this global pandemic. The extent of the impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our contracts in the expected timeframe, will depend on future developments, including the duration and spread of the pandemic and related actions taken by the U.S. government, state and local government officials, and international governments to prevent disease spread, all of which are uncertain and cannot be predicted. The outbreak did not have a material impact on our operating results or business in the first quarter of 2020. However, we are beginning to experience some issues related to COVID-19, primarily in access to some locations and delays of supplier deliveries. We have updated our 2020 sales outlook, as described below, but the ultimate impact of COVID-19 remains uncertain.

In accordance with the Department of Defense ("DoD") 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 could occur. In addition, other countries have different practices and policies that can affect our international operations and the operations of our suppliers and customers. In many cases our facilities are not operating under full staffing as a result of COVID-19, which could have a longer-term impact. Customer visits and representative training are being impacted by travel restrictions as a result of COVID-19, which could delay new design wins and future business with our customers.

An extended period of global supply chain disruption caused by the response to COVID-19 could impact our ability to perform on our contracts. To date, we have identified a number of suppliers that have potential delivery impacts due to COVID-19 and, if we are not able to implement alternatives or other mitigations, contract deliveries could be adversely impacted.

We are seeing some impact from COVID-19 on our expected 2020 sales growth. However, depending on future developments, the ultimate impact of COVID-19 on our 2020 outlook for sales, operating profit margin, earnings and cash flows from operations remains uncertain. Our 2020 outlook assumes, among other things, that our production facilities continue to operate and we do not experience significant work stoppages or closures, we are able to mitigate any supply chain disruptions and these do not worsen, and we are able to recover our costs under contracts.

Delays in inspection, acceptance and payment by our customers, many of whom are teleworking, could also affect our sales and cash flows. This is particularly an issue with respect to classified work that is unable to be done remotely. Limitations on government operations can also impact regulatory approvals such as export licenses that are needed for international sales and deliveries. In addition, we could experience delays in new contract starts or awards of future work as well as the uncertain impact of contract modifications to respond to the national emergency. Current limitations on travel to customers could impact both domestic and international orders. Government funding priorities may change as a result of the costs of COVID-19. If significant portions of our workforce are unable to work effectively, including because of illness, quarantines, absenteeism, government actions, facility closures, travel restrictions or other restrictions in connection with the COVID-19 pandemic, our operations will be impacted. We may be unable to perform fully on our contracts and our costs may increase as a result of the COVID-19 outbreak. These cost increases, including costs for employees whose jobs cannot be performed remotely, may not be fully recoverable under our contracts, or adequately covered by insurance. The impact of COVID-19 could worsen if there is an extended duration of any COVID-19 outbreak or a resurgence of COVID-19 infection in affected regions after they have begun to experience improvement.

The continued spread of COVID-19 has also led to disruption and volatility in the global capital markets, which depending on future developments could impact our capital resources and liquidity in the future. COVID-19 has also negatively affected the equity capital markets. We are monitoring the impacts of COVID-19 on the fair value of our assets. While we do not currently anticipate any material impairments on our assets as a result of COVID-19, future changes in expectations for sales, earnings and cash flows related to intangible assets and goodwill below our current projections could cause these assets to be impaired. While these are our current assumptions, this is an emerging situation and these could change, which could affect our outlook. Risks related to these items are described below and under Item 1A, Risk Factors.

Backlog

As of March 31, 2020, our order backlog was $22,556,000, which is an increase of 5.9% compared to the backlog of $21,301,000 as of March 31, 2019, and an increase of 3.2% over the backlog of $21,857,000 at December 31, 2019. The increase reflects the Company's continued execution in delivering design wins coupled with favorable market conditions. During the first two quarters of 2019, we had been building backlog faster than our growth in revenues due primarily to orders being received sooner than planned. Our production increases over the 2019 year resulted in increased revenues that more closely matched the run rate for our new orders, which had declined as expected the last two quarters of 2019. 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 in the next 12 months.

Order backlog is adjusted quarterly to reflect project cancellations, deferrals, revised project scope and cost, and sales of subsidiaries, if any. We expect to fill our entire order backlog within the next twelve months, but cannot provide assurances as to what portion of the order backlog will be fulfilled in a given year.

Equity Investment in Unconsoldiated Subsidiary

In November 2019, we invested $3.35 million into a subsidiary that is obligated as the sponsor of LGL Systems Acquisition Corp /zigman2/quotes/217024998/composite DFNS +0.10% , a blank check company. Prior to a business combination, the Sponsor holds 100% of the B shares outstanding of DFNS. The B shares equal 20% of the outstanding common stock of DFNS. Upon the successful completion of an acquisition the proforma ownership of the new company will vary depending on the business combination terms.

The Company is expected to own approximately a 43.57% interest in the sponsor through its direct investment. Assuming the terms of the business combination are identical in capital structure as that of DFNS, the Company anticipates its economic interest will include approximately 8.7% of the SPAC's pro-forma equity immediately following a successful business combination. There can be no assurances that this scenario and the resulting ownership will manifest, as changes may be made depending upon business combination terms.

There is no assurance that the SPAC will be successful in completing a business combination or that any business combination will be successful. The Company can lose its entire investment in the SPAC if a business combination is not completed within 24 months

Three months ended March 31, 2020 compared to three months ended March 31, 2019

Consolidated Revenues and Gross Margin

Total revenues for the three months ended March 31, 2020 were $8,618,000, an increase of $1,986,000, or 29.9%, from revenues of $6,632,000 for the three months ended March 31, 2019. Revenues increased across our main product categories, including increased filter sales of $1,949,000, increased crystal and oscillator sales of $382,000, and from our time and frequency products, which increased $41,000. These gains were offset by a decrease of ($266,000) from sales of purchased products.

Consolidated gross margin, which is consolidated revenues less manufacturing cost of sales, as a percentage of revenues decreased slightly to 34.3% for the three months ended March 31, 2020, from 36.4% for the three months ended March 31, 2019. The decrease reflects a shift in our product mix shipped during the quarter. The Company continues to execute its long-term strategic shift toward higher margin products, but there will be fluctuations of product mix in the short-term.

Stock-Based Compensation

For the three months ended March 31, 2020 and 2019, stock-based compensation expense was $10,000 and $6,000, respectively. Compensation expense related to stock-based compensation is recognized over the applicable vesting periods. As of March 31, 2020, there was approximately $500,000 of total unrecognized compensation expense related to unvested stock-based compensation arrangements, with a weighted-average life of 2.5 years.

Operating Income

Operating income of $660,000 for the three months ended March 31, 2020 was an improvement of $226,000 from operating income of $434,000 for the three months ended March 31, 2019. This was primarily due to the increase in revenues, net of the reduction in gross margin from the changes in product mix noted above.

Other Income, Net

For the three months ended March 31, 2020, other (expense) income, net was $(384,000), compared to $153,000 for the three months ended March 31, 2019. These balances are comprised of gains and losses from our investment portfolio. Financial markets were impacted significantly as a result of COVID-19 during February and March of 2020.

Income Tax Provision

We recorded a tax provision of $54,000 and $6,000 for the three months ended March 31, 2020 and 2019, respectively. The tax provision is based on an estimated annual rate across the jurisdictions in which we operate.

Net Income

Net income for the three months ended March 31, 2020 was $183,000, compared to $582,000 for the three months ended March 31, 2019 due to the factors noted above. Diluted net income per share for the three months ended March 31, 2020 and 2019 was $0.04 and $0.12, respectively.

Liquidity and Capital Resources

As of March 31, 2020 and December 31, 2019, cash and cash equivalents were $16,631,000 and $12,453,000, respectively. In the first quarter of 2020, we raised approximately $3,254,000 as a result of sales of securities under our ATM program.

Cash provided by operating activities was $922,000 and $122,000 for the three months ended March 31, 2020 and 2019, respectively. The $800,000 increase was due to a year-over-year decrease in net income of $(399,000), offset by a year-over-year change in deferred tax benefit of $46,000, an increase of $402,000 due to losses in our investment portfolio and an increase in our working capital accounts of $692,000.

Cash used in investing activities for the three months ended March 31, 2020 and 2019 was $56,000 and $5,403,000, respectively. The use of cash for the three months ended March 31, 2020 was due to $56,000 in capital expenditures. The use of cash for the three months ended March 31, 2019 included $5 million invested in marketable securities. Capital expenditures decreased ($347,000) from the prior year due primarily to the replacement of the roof on our primary production facilities in Florida during 2019.

For the three months ended March 31, 2020, cash provided by financing activities represented $3,254,000 received by the Company from sales of securities under our ATM program, and $58,000 for the exercise of stock options. For the three months ended March 31, 2019, financing activities represented $71,000 received by the Company for the exercise of stock options.

As of March 31, 2020, our consolidated working capital was $28,383,000, compared to $24,586,000 as of December 31, 2019. As of March 31, 2020, we had current assets of $33,083,000, current liabilities of $4,700,000 and a ratio of current assets to current liabilities of 7.04 to 1.00. As of December 31, 2019, we had current assets of $28,910,000, current liabilities of $4,324,000 and a ratio of current assets to current liabilities of 6.69 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.

We believe that existing cash and cash equivalents, marketable securities, and cash generated from operations will be sufficient to meet our ongoing working capital and capital expenditure requirements for the next 12 months from the date of this filing. However, we are continuing to monitor the outbreak of COVID-19 and its impact on our customers and suppliers, as well as our industry as a whole. The magnitude and duration of the pandemic and its impact on our operations and liquidity is uncertain as of the filing date of our report as this continues to evolve globally. However, if the outbreak continues on its current trajectory, such impacts could grow and become material. To the extent that our customers and suppliers continue to be impacted by the COVID-19 outbreak, or by the other risks disclosed in our report, this could materially disrupt our business operations.

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 technology acquisitions or other strategic ventures, 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.

Critical Accounting Policies

Our accounting policies and unaudited condensed consolidated financial statements have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. We believe we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. We believe that the accounting policies related to the following accounts or activities are those that are most critical to the portrayal of our financial condition and results of operations and require the more significant judgments and estimates:

Revenue recognition;

VIE analysis and equity-method investments;

Accounts receivable allowance;

Inventory valuation;

Intangible assets;

Income taxes; and

Segment information.

There have been no significant changes to our critical accounting policies from those described in Note A - Accounting and Reporting Policies to the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

May 14, 2020

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(c) 1995-2020 Cybernet Data Systems, Inc. All Rights Reserved

/zigman2/quotes/217024998/composite
US : U.S.: NYSE
$ 9.99
+0.01 +0.10%
Volume: 3,609
Sept. 25, 2020 3:59p
P/E Ratio
576.21
Dividend Yield
N/A
Market Cap
N/A
Rev. per Employee
N/A
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