LGL Group, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. LGL designs and manufactures frequency/spectrum-control components and time/frequency instruments through MtronPTI and PTF.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $22.402 million | $20.891 million |
| Gross margin | 34.6% | 33.7% |
| Operating income (loss) | $276,000 | ($161,000) |
| Net income | $117,000 | $148,000 |
| Basic and diluted EPS | $0.04 | $0.06 |
| Cash from operating activities | $681,000 | $278,000 |
- Electronic components generated $21.516 million of revenue and $1.260 million of operating income; electronic instruments generated $886,000 of revenue and $56,000 of operating income. Corporate expense was $1.040 million.
- At year-end, cash and cash equivalents were $13.250 million, marketable securities were $3.803 million, working capital was $21.923 million, and current assets/current liabilities were 9.35x. Total assets were $27.555 million and stockholders’ equity was $24.928 million.
- No borrowings were outstanding on the $3.0 million cash-secured revolving credit facility. The facility was scheduled to expire September 30, 2018. Management said existing cash and operating cash flow should meet working-capital and capital-expenditure needs for the next 12 months.
- Investing cash outflow was $1.003 million; financing cash inflow was $10.794 million, principally net proceeds from the 2017 rights offering. Capital expenditures were $131,000.
Changes versus 2016
- Revenue increased 7.2%, primarily from higher PTF revenue and increased filter sales. Gross margin rose 0.9 percentage points; management attributed the improvement to shifting away from lower-margin commodity business toward more complex products.
- Operating results improved by $436,000, turning from a loss to income, as higher gross margin more than offset increased operating expenses. Net income nevertheless declined $31,000, reflecting lower other income and a higher tax provision.
- Backlog increased 11.0% to $11.713 million. Cash increased from $2.778 million to $13.250 million, largely reflecting the rights offering. The offering issued 2,006,598 shares and raised approximately $10.794 million net.
- Electronic instruments revenue rose to $886,000 from $200,000; electronic components revenue increased to $21.516 million from $20.691 million.
Outlook, commentary and key risks
- The company expected to fulfill its December 2017 backlog during 2018, but cautioned that orders may be canceled, deferred, or changed and that fulfillment timing is not assured. No quantified revenue or earnings guidance was provided.
- 2017 net income included a $102,000 impairment of a note receivable associated with a prior asset sale. The prior-year comparison included approximately $118,000 of net insurance proceeds. The company also wrote off approximately $1.254 million of previously reserved obsolete inventory.
- The Tax Cuts and Jobs Act prompted a $1.662 million deferred-tax remeasurement charge and a provisional $565,000 transition-tax expense; both were offset by the valuation allowance for purposes of the reported tax provision. The reported 2017 income tax provision was $102,000. The transition-tax estimate remained subject to further analysis.
- Customer concentration is material: the largest customer represented 16.7% of 2017 revenue, and four customers represented 32.0% of year-end receivables. The business remains heavily dependent on electronic components and cyclical end markets.
- Other risks include competition, supply constraints and raw-material price volatility, limited revenue-forecast visibility, international and regulatory exposure, and dependence on key technical personnel. The company reported no material legal proceedings and no off-balance-sheet arrangements.
- The company does not expect to pay cash dividends in the foreseeable future. Warrants were due to expire August 6, 2018; they were exercisable only upon specified conditions, including a $15.00 30-day VWAP trigger or expiration-date exercise, and could expire worthless.
Important facts for investors to verify
- Whether the higher backlog converted to revenue and cash in 2018, given cancellation and deferral risk.
- Whether margins and operating profitability improved sustainably, and whether growth is diversifying beyond electronic components.
- Customer concentration, receivable collection, and the effects of any change in the largest customer’s demand.
- Final tax treatment and any adjustment to the provisional transition-tax estimate or deferred-tax valuation allowance.
- Use of rights-offering proceeds, including acquisitions or other investments; also review the related-party-managed market-neutral fund investment, which was $3.792 million at year-end.
- The filing reported effective disclosure controls and internal control over financial reporting. The auditor gave an unqualified opinion on the financial statements; it was not engaged to audit internal controls.