LGL Group, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The company designs and manufactures electronic frequency-control components and precision timing instruments. Unless stated otherwise, financial amounts are in millions of dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $7.838 | $6.157 | $14.470 | $12.102 |
| Gross margin | 40.0% | 41.6% | 38.3% | 39.6% |
| Operating income | $0.856 | $0.489 | $1.290 | $0.647 |
| Net income | $0.939 | $0.472 | $1.521 | $0.665 |
| Diluted EPS | $0.19 | $0.10 | $0.31 | $0.14 |
- Revenue grew 27.3% in Q2 and 19.6% for the first half. The electronic components segment generated $7.462 million in Q2 revenue; electronic instruments generated $0.376 million.
- Operating margin was approximately 10.9% in Q2 versus 7.9% a year earlier, and 8.9% for the first half versus 5.3%. Net margin was approximately 12.0% and 7.7% in Q2, respectively, and 10.5% and 5.5% for the first half.
- Management attributed the gross-margin declines to product mix, while higher revenue drove improved operating income. Revenue gains included increased filter, crystal and oscillator, purchased-product, and time-and-frequency product sales.
- Other income was $0.117 million in Q2 and $0.270 million for the first half, primarily from investment portfolio gains. The first-half portfolio gain was $0.265 million.
Cash, liquidity and capital
- At June 30, cash and cash equivalents were $9.820 million, marketable securities $8.920 million, current assets $29.813 million, and current liabilities $4.215 million. Working capital was $25.598 million; the current ratio was 7.07.
- Cash declined $5.688 million during the first half. Operating activities used $0.264 million, investing activities used $5.692 million, and financing activities provided $0.268 million. Investing outflows included $5.000 million invested in marketable securities and $0.692 million of capital expenditures.
- Operating cash flow was negative despite net income, with higher receivables and inventory contributing to the use of cash.
- The balance sheet lists no debt. The filing reports no off-balance-sheet arrangements. Operating lease liabilities totaled $0.408 million at June 30.
Changes, outlook and risks
- Backlog was $24.482 million at June 30, up 69.1% from $14.478 million a year earlier. Management said backlog growth reflected design wins, favorable market conditions, and orders received earlier than planned. It expected to fill the entire backlog within 12 months, but gave no assurance about timing or the portion fulfilled in a given year. Backlog includes signed contracts and agreed letters of intent and may be affected by cancellations, deferrals, or scope changes.
- Management stated that cash, marketable securities, and expected operating cash generation should be sufficient for working capital and capital expenditures for the next 12 months. No specific earnings or revenue guidance was provided.
- The company adopted lease accounting effective January 1, 2019, recording lease assets and liabilities; management said adoption did not materially affect operating results or cash flows.
- U.S. deferred tax assets remain subject to a full valuation allowance; certain foreign deferred tax assets were considered realizable. A release of the allowance, if warranted by future evidence, would affect reported results.
- The company disclosed ordinary-course litigation exposure, including potential product liability, patent, and worker claims, but no material pending legal proceedings beyond routine matters. Risk factors were not applicable in this quarterly filing; the company directs readers to its 2018 Form 10-K and other filings for risk discussion.
- Investment assets managed by a related entity totaled approximately $17.735 million at June 30, including cash equivalents and marketable securities. The fund manager is related through a director who is also a greater-than-10% stockholder and an executive officer of that manager.
- No cash dividends are expected for the foreseeable future. No shares were repurchased during the first half of 2019.
Important facts for investors to verify
- Whether the elevated backlog converts to revenue on the expected timetable, and how much is firm versus based on letters of intent.
- Whether margins recover as product mix changes, given lower gross margins year over year despite higher sales.
- Whether working-capital needs—especially receivables and inventory—continue to pressure operating cash flow.
- The composition, liquidity, performance, and related-party oversight of the investment portfolio, including the reported investment gains.
- Potential realizability of deferred tax assets and any future valuation-allowance changes.