LGL Group Inc: Form 10-Q for the period ended Mar 31, 2024

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, 2023, as filed with the SEC on April 1, 2024. The terms "LGL," "LGL Group," "we," "our," "us," or the "Company" refer to The LGL Group, Inc. and its consolidated subsidiaries 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.

Unless otherwise stated, all dollar amounts are in thousands.

In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Actual results may differ materially from those discussed in the forward-looking statements as a result of various factors. See the Cautionary Statement Concerning Forward-Looking Statements included in this Quarterly Report on Form 10-Q.

Overview

The Company is a holding company engaged in services, merchant investment, and manufacturing business activities. The Company, through its manufacturing business subsidiary, is engaged in the designing, manufacturing, and marketing 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 communications, networking, aerospace, defense, instrumentation, and industrial markets.

The accompanying unaudited condensed consolidated financial statements include the accounts of The LGL Group, Inc., its majority-owned subsidiaries, and variable interest entities (“VIE”) of which we are the primary beneficiary.

We provide our products and services through our Electronic Instruments and Merchant Investment businesses. Activities not related to our business segments, such as our corporate operations and corporate-level assets and financial obligations, are included in Corporate.

Electronic Instruments Business

We operate our manufacturing business currently through our subsidiary, Precise Time and Frequency, LLC ("PTF"), a globally positioned producer of industrial Electronic Instruments and commercial products and services. Founded in 2002, PTF operates from our design and manufacturing facility in Wakefield, Massachusetts.

Merchant Investment Business

The LGL investment business is comprised of various investment vehicles in which LGL is either shareholder, partner, or has general partner interests, and through which LGL invests its capital. The Company seeks to invest available cash and cash equivalents in liquid investments with a view to enhancing returns as we continue to assess further acquisitions of, or investments in, operating businesses broadly. LGL core strengths include identifying and acquiring undervalued assets and businesses, often through the purchase of securities, increasing value through management, financial or other operational changes, and managing complex legal, regulatory or financial issues, which may include technical, engineering, environmental, zoning, permitting and licensing issues among others.

As of March 31, 2024, LGL had investments (classified within Cash and cash equivalents and Marketable securities) with a fair value of approximately $23.8 million. The Company accounts for its Marketable securities under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 321, Investments - Equity Securities ("ASC 321") and as such, its Marketable securities are reported at fair value on its consolidated balance sheets.

Trends and Uncertainties

We are not aware of any material trends or uncertainties, other than global macroeconomic 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, 2023, as filed with the SEC on April 1, 2024.

Inflation and Changing Interest Rates

Inflation in the United States decreased from 6.5% as of December 31, 2022 to 3.4% as of December 31, 2023, which is still above the U.S. Federal Reserve's long-term target of 2.0%. The continued higher inflationary conditions may have an adverse impact on our Manufacturing cost of sales and Engineering, selling and administrative expenses, as these costs could increase at a rate higher than our revenue. The U.S. Federal Reserve raised the federal funds rate a total of four times throughout 2023, resulting in a range from 5.25% to 5.50% as of December 31, 2023. Through the date of filing of this Quarterly Report on Form 10-Q, the Federal Reserve has maintained the federal funds rate in the same range as of December 31, 2023. It is expected that the U.S. Federal Reserve will continue to hold the federal funds rate steady or start to decrease it during 2024 to, among other things, control inflation; however, the timing of any such decrease remains unclear. As a result, we have increased the prices we charge our customers.

Results of Operations - Consolidated

The following table presents our Condensed Statements of Operations for the periods indicated:

(in thousands)

Three months ended March 31, 2024 compared to three months ended March 31, 2023

Total Revenues

Total revenues decreased $96, or 9.8%, from $984 for the three months ended March 31, 2023 to $888 for the three months ended March 31, 2024. The following items contributed to the overall decrease:

• a $49, or 11.1%, decrease in Net sales from $441 for the three months ended March 31, 2023 to $392 for the three months ended March 31, 2024 primarily due to lower backlog in Q4 2023.
• a $348, or 100.9%, decrease in Net (losses) gains from $345 for the three months ended March 31, 2023 to ($3) for the three months ended March 31, 2024 primarily due to lower mark-to-market movements of Marketable securities.

The decrease is partially offset by:

• a $301, or 152.0%, increase in Net investment income from $198 for the three months ended March 31, 2023 to $499 for the three months ended March 31, 2024 primarily due to higher investments in U.S. Treasury money market funds.

Total Expenses

Total expenses increased $75, or 10.2%, from $734 for the three months ended March 31, 2023 to $809 for the three months ended March 31, 2024. The increase was primarily due to a $63, or 11.6%, increase in Engineering, selling and administrative from $542 for the three months ended March 31, 2023 to $605 for the three months ended March 31, 2024 driven by higher wages and benefits.

Gross Margin

Gross margin (Net sales less Manufacturing cost of sales as a percentage of Net sales) decreased 850 basis points from 56.5% for the three months ended March 31, 2023 to 48.0% for the three months ended March 31, 2024 reflecting a lower margin product mix and higher labor costs.

Income Tax Expense

Income tax expense decreased $29, or 44.6%, from $65 for the three months ended March 31, 2023 to $36 for the three months ended March 31, 2024 primarily due to the decrease in Income from continuing operations.

Net Income Attributable to Non-Controlling Interests

Net income attributable to non-controlling interests increased $22 from $0 for the three months ended March 31, 2023 to $22 for the three months ended March 31, 2024 primarily due to the consolidation of LGL Systems in June 2023, which has minority shareholders.

Backlog

As of March 31, 2024, our order backlog was $341, an increase of $198, or 138.5%, from $143 as of December 31, 2023 and a decrease of $58, or 14.5%, from $399 as of March 31, 2023. The backlog of unfilled orders includes amounts based on signed contracts likely to be fulfilled largely in the next 12 months but usually will ship within the next 90 days. Order backlog is adjusted quarterly to reflect project cancellations, deferrals, and revised project scope and cost, if any.

Results of Operations - Operating Segments

Electronic Instruments

The following table presents income from continuing operations of our Electronic Instruments segment for the periods indicated:

(in thousands)

Three months ended March 31, 2024 compared to three months ended March 31, 2023

Income from Continuing Operations Before Income Taxes

Income from continuing operations before income taxes decreased $70, or 97.2%, from $72 for the three months ended March 31, 2023 to $2 for the three months ended March 31, 2024. The decrease was primarily due to a $49, or 11.1%, decrease in Net sales reflecting lower backlog in Q4 2023.

Merchant Investment

The following table presents income from continuing operations of our Merchant Investment segment for the periods indicated:

(in thousands)

Three months ended March 31, 2024 compared to three months ended March 31, 2023

Income from Continuing Operations Before Income Taxes

Income from continuing operations before income taxes increased $240 from $0 for the three months ended March 31, 2023 to $240 for the three months ended March 31, 2024 due to the commencement of operations of Lynch Capital International, LLC in June 2023.

Corporate

The following table presents income from continuing operations of our Corporate segment for the periods indicated:

(in thousands)

Three months ended March 31, 2024 compared to three months ended March 31, 2023

(Loss) income from Continuing Operations Before Income Taxes

(Loss) income from continuing operations before income taxes decreased $341, or 191.6%, from $178 for the three months ended March 31, 2023 to ($163) for the three months ended March 31, 2024. The decrease was primarily due to a $348, or 100.9%, decrease in Net (losses) gains as there were lower mark-to-market movements of Marketable securities during the three months ended March 31, 2024.

Liquidity and Capital Resources

Overview

Liquidity refers to our ability to access sufficient sources of cash to meet the requirements of our operating, investing and financing activities.

Capital refers to our long-term financial resources available to support business operations and future growth.

Our ability to generate and maintain sufficient liquidity and capital depends on the profitability of the businesses, timing of cash flows, general economic conditions and access to the capital markets and the other sources of liquidity and capital described herein.

As of March 31, 2024 and December 31, 2023, Cash and cash equivalents were $40,871 and $40,711, respectively.

Cash Flow Activity

The following table presents the cash flow activity for the periods indicated:

(in thousands)

Operating Activities

Cash provided by operating activities was $160 for the three months ended March 31, 2024 compared to cash used in operating activities of $50 for the three months ended March 31, 2023, an increase of $210, primarily due to the following:

• Net gains (losses) decreased $348 from $345 for three months ended March 31, 2023 to ($3) for three months ended as there were no sales of IronNet, Inc. and lower mark-to-market movements on Marketable securities during the three months ended March 31, 2024.

The increase was partially offset by:

• Net change in operating assets and liabilities decreased $28 from $105 for the three months ended March 31, 2023 to $77 for the three months ended March 31, 2024.

Our working capital metrics and ratios were as follows:

(in thousands)

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.

Investing Activities

Cash provided by investing activities was $0 for the three months ended March 31, 2024 compared to cash provided by investing activities of $43 for the three months ended March 31, 2023, a decrease of $43, primarily due to sales of IronNet, Inc. during the three months ended March 31, 2023.

Capital Resources

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 and for the foreseeable future.

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.

Contractual Obligations

As of March 31, 2024, there have been no material changes in our contractual obligations from December 31, 2023, a description of which may be found in Part II, Item 7. Management Discussion and Analysis - Liquidity and Capital Resources - Contractual Obligations in the 2023 Annual Report.

Critical Accounting Estimates

Our accompanying Condensed Consolidated Financial Statements are prepared in conformity with U.S. 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, 2023.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of March 31, 2024 was conducted under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures, as of March 31, 2024, were effective.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

For a discussion of the Company's potential risks and uncertainties, refer to Part I, Item 1A. Risk Factors in the 2023 Annual Report and Trends and Uncertainties in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2. of this Quarterly Report on Form 10-Q.

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 in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2023.