LGL GROUP INC annual report, FY2015

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LGL Group, Inc. — FY2015 Form 10-K

Reporting period: Fiscal year ended December 31, 2015; filed March 29, 2016. This is an annual report, not a standalone fourth-quarter filing. LGL operates primarily through MtronPTI, designing and manufacturing engineered frequency- and spectrum-control electronic components.

Financial performance and position

  • Revenue: $20.713 million, down 10.0% from $23.013 million in 2014. Domestic revenue rose to $15.260 million from $13.556 million; international revenue fell to $5.453 million from $9.457 million.
  • Gross margin: 33.1%, up from 27.5%, attributed to improved product mix and margin initiatives. Engineering, selling and administrative expense declined to $7.638 million from $8.692 million.
  • Operating and net results: Operating loss was $788,000 versus $2.829 million; net loss was $711,000 versus $2.825 million. Basic and diluted loss per share was $0.27 versus $1.09.
  • Cash flow: Operating activities provided $689,000, compared with $1.299 million used in 2014. Investing activities used $328,000; financing activities were zero. Cash increased $361,000 to $5.553 million.
  • Liquidity and debt: Working capital was $9.876 million. Current assets of $11.952 million and current liabilities of $2.076 million produced a 5.76 current ratio. No debt was outstanding at year-end. The $3.0 million revolving facility was available through September 30, 2016, subject to extension, and requires cash collateral equal to borrowings.
  • Other balance-sheet measures: Total assets were $15.803 million and stockholders’ equity was $13.727 million. A $7.631 million valuation allowance was recorded against deferred tax assets.
  • Backlog and concentration: Backlog was $8.799 million at year-end versus $8.792 million a year earlier. The largest customer represented 12.7% of revenue; three customers represented 31.4% of accounts receivable.

Material changes and management commentary

  • Management attributed the lower revenue mainly to offshore price competition in the Internet communications technology market and a deliberate retreat from low-margin commodity business. It is emphasizing more complex, higher-margin products, particularly for aerospace and defense.
  • The operating-loss improvement reflected the higher gross margin and a $1.054 million reduction in engineering, selling and administrative costs. The 2014 comparison included $465,000 of restructuring charges.
  • The electronic-components segment reported operating income of $309,000, compared with an operating loss of $1.392 million in 2014; unallocated corporate expense remained $1.097 million.
  • Research and development expense was $1.964 million, down from $2.166 million. The company reported no material seasonality.

Outlook, risks and unusual items

  • Management expected to fulfill the year-end backlog during 2016 and believed cash plus operating cash generation would cover working-capital and capital-spending needs for the next 12 months. These are expectations, not earnings or revenue guidance; backlog cancellations and deferrals are possible.
  • Key risks include dependence on one product line and cyclical end markets, intense global competition and price pressure, customer and receivables concentration, limited forecasting visibility, and dependence on innovation and technical staff. Raw-material availability, government-contract compliance, international operations and environmental requirements also present risks.
  • Other income, net was $117,000, including approximately $132,000 of net insurance proceeds and $35,000 of foreign-currency transaction gains, offset by a $38,000 impairment loss and a $15,000 legal settlement. The company reported a $43,000 impairment of a note receivable in operating cash-flow adjustments.
  • On February 24, 2016, NYSE MKT suspended trading in the company’s warrants amid delisting proceedings over their low trading price. The company did not intend to appeal; the warrants moved to OTC quotation as LGLPW. Common-stock listing and operations were not affected.
  • No cash dividends were expected for the foreseeable future. The company reported no material legal proceedings and no off-balance-sheet arrangements. Management considered disclosure controls and internal control over financial reporting effective; the external auditor did not express an opinion on internal controls.

Important facts for investors to verify

  • Whether revenue and margins improved in 2016, especially as international sales declined sharply in 2015.
  • How much of the $8.799 million backlog converted to sales, given customer cancellation and deferral rights.
  • Cash generation, working-capital needs and the status or extension of the revolving facility after September 30, 2016.
  • Customer concentration, receivable collection, and progress in diversifying products and markets while sustaining higher margins.
  • The status and liquidity of the warrants following the NYSE MKT suspension and OTC quotation.