The LGL Group, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Financial figures below are in USD thousands, except per-share data.
Business context
LGL is a holding company whose principal operating business, MtronPTI, designs and manufactures highly engineered, high-reliability frequency and spectrum control products. Management said offshore price competition reduced economically viable opportunities in Internet Communications Technology (ICT). The company is moving away from lower-margin commodity business and targeting more complex, higher-margin products, particularly for Aerospace and Defense.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $5,231 | $5,471 | $9,987 | $10,875 |
| Gross margin | 33.9% | 32.7% | 32.8% | 33.0% |
| Operating income (loss) | $26 | $(333) | $(136) | $(494) |
| Net income (loss) | $16 | $(201) | $(110) | $(379) |
| EPS, basic and diluted | $0.01 | $(0.08) | $(0.04) | $(0.14) |
| Operating cash flow | — | — | $43 | $414 |
Q2 revenue declined 4.4% year over year; six-month revenue declined 8.2%. Q2 operating results improved to a small profit, which management attributed to lower engineering, selling and administrative costs and improved gross margin, partly offset by lower revenue. First-half gross margin edged down, which management attributed primarily to lower revenue spreading fixed manufacturing costs over a smaller base. The six-month net loss improved by $269.
Liquidity, balance sheet and cash flow
- At June 30, cash and cash equivalents were $5,563, versus $5,553 at December 31, 2015. Current assets were $12,404 and current liabilities $2,325; working capital was $10,079 and the current ratio was 5.34:1.
- First-half operating cash flow was $43, down from $414 in 2015, reflecting working-capital changes and lower noncash stock-compensation adjustments, partly offset by the smaller net loss. Investing activities used $33, including $76 of capital expenditures.
- The filing reports no revolver borrowings at June 30. The $3.0 million revolving credit facility expires September 30, 2016; it is secured by cash collateral equal to any amount borrowed. The company was discussing renewal with City National Bank.
- No long-term debt is presented on the balance sheet. Management believed cash and operating cash generation would cover working capital and capital expenditure needs for the next 12 months, while noting it might seek additional capital for growth or flexibility.
Backlog, outlook and risks
Order backlog was $9,679 at June 30, up 9.3% from a year earlier, 7.4% from March 31, and 10.0% from December 31, 2015. Management expected to fill the entire backlog within 12 months, but cautioned that cancellations, deferrals and scope changes occur and that it could not assure when orders would be fulfilled.
The company identified offshore price compression and reduced ICT opportunities as business pressures. It maintained a full valuation allowance against deferred tax assets because realization of U.S. tax benefits was uncertain. Management cautioned that interim results are not necessarily indicative of full-year results; the filing provided no specific earnings or revenue guidance.
Other notable items
- Net other expense was $4 in Q2 2016, compared with $147 of other income in Q2 2015; for the first half, other income was $38 versus $135. This comparison affected the change in pretax results.
- About $4,093 of cash equivalents was invested in U.S. Treasury money market funds managed by an entity related through a common director; the filing said there were no management fees and transactions were directed by company management.
- The inventory obsolescence reserve was $3,129 at June 30, up from $3,016 at year-end. The company reported routine litigation only, none expected to have a material adverse effect, and no off-balance-sheet arrangements.
- Disclosure controls were assessed as effective at a reasonable assurance level; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether the credit facility was renewed before its September 30, 2016 expiration, and any resulting terms or borrowing.
- Whether backlog converted to revenue as expected, given the stated cancellation and scope-change risks.
- Whether revenue recovery and the shift toward higher-margin Aerospace and Defense products improved margins and operating cash generation.
- The composition and liquidity of reported cash equivalents, including the related-party-managed Treasury fund investment.
- Developments in inventory obsolescence, deferred-tax-asset valuation allowances, and the company’s ability to sustain operations without additional capital.