LGL Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparison is with the three months ended March 31, 2018. LGL is a holding company with electronic components and electronic instruments businesses, serving timing, frequency-control, aerospace, defense, laboratory, wireless and infrastructure applications. Financial amounts below are in millions, except per-share data.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $6.632 | $5.945; up 11.6% |
| Gross profit / margin | $2.417 / 36.4% | $2.229 / 37.5% |
| Operating income / margin | $0.434 / 6.5% | $0.158 / 2.7% |
| Net income / diluted EPS | $0.582 / $0.12 | $0.193 / $0.04 |
| Operating cash flow | $0.122 | $0.158 |
Other income was $0.154, including a $0.146 investment-portfolio gain and $0.007 of foreign-currency gains. The filing attributes the lower gross margin to product mix. Revenue increased in both segments: electronic components generated $6.331 (up from $5.731), and electronic instruments generated $0.301 (up from $0.214). Foreign revenue was $1.709 versus $1.434.
At March 31, cash and cash equivalents were $10.298 and marketable securities were $8.852; current assets were $29.017 and current liabilities $4.137. Working capital was $24.880 and the current ratio was 7.01, versus 9.95 at December 31, 2018. No borrowings or debt balance are reported in the presented balance sheet. Quarterly investing cash outflow was $5.403, largely the purchase of $5.000 of marketable securities, plus $0.403 of capital expenditures. Cash declined by $5.210, while cash plus marketable securities was approximately $19.150 at quarter-end.
Changes, outlook and notable items
- Revenue rose 11.6%; operating income increased by $0.276 and net income by $0.389 year over year. Gross margin slipped 1.1 percentage points due to shipped product mix.
- Order backlog was $21.301 at March 31, up 60.2% from $13.294 a year earlier. Management said it expects to fill the entire backlog within 12 months, but cannot assure when or what portion will be fulfilled. Backlog includes signed contracts and agreed letters of intent considered likely to be fulfilled.
- Management believes existing cash and cash generated from operations will cover working-capital and capital-expenditure needs for the next 12 months. The filing provides no specific earnings or revenue guidance.
- Management reported a $4.9 million valuation allowance against U.S. deferred tax assets; foreign net operating loss tax assets were assessed as realizable. A future release of some or all of the allowance could affect earnings, but is not assured.
- The company adopted lease accounting standards on January 1, 2019, adding $0.142 to other assets with an equal liability; management reported no material impact on operations or cash flows.
- A related entity connected to a director and greater-than-10% stockholder managed funds totaling $17.615 at March 31; those funds generated $0.146 of investment income. Management stated that investment transactions were directed solely by company management.
- Management reported no material pending legal proceedings beyond routine matters, no off-balance-sheet arrangements, and effective disclosure controls. No cash dividends are expected for the foreseeable future.
Key facts investors should verify
- How much of the reported backlog converts to revenue, especially given its inclusion of letters of intent, and whether cancellations or delays affect fulfillment.
- Whether the stronger operating results persist despite lower gross margin and the quarter’s contribution from investment gains.
- Liquidity and working-capital trends, including the rise in receivables and inventories and the use of cash to purchase marketable securities.
- The valuation and liquidity of investments managed by the related entity, associated fees, and the nature of the relationship and oversight.
- Potential realization of deferred tax assets and any future change in the valuation allowance.