LGL Group, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018; comparisons are with fiscal 2017. The company designs and manufactures frequency, spectrum, and time-reference products through its electronic components and electronic instruments segments. Electronic components, principally MtronPTI, generated most revenue.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $24.870 million | $22.402 million |
| Gross margin | 38.8% | 34.6% |
| Operating income | $1.430 million | $276,000 |
| Net income | $1.405 million | $117,000 |
| Diluted earnings per share | $0.29 | $0.04 |
| Cash from operating activities | $1.656 million | $681,000 |
| Cash and cash equivalents | $15.508 million | $13.250 million |
| Working capital | $24.633 million | $21.923 million |
- Revenue grew 11.0%, primarily from a $2.580 million increase in filter sales. Management attributed margin improvement to shifting away from lower-margin commodity products toward more complex products, particularly for aerospace and defense.
- Operating expenses rose $764,000; engineering, selling and administrative expenses were 33.1% of revenue versus 33.3% in 2017. Operating margin was approximately 5.7%, compared with 1.2%.
- Operating cash flow increased by $975,000. Investing activities used $324,000, mainly for production machinery; financing provided $926,000, primarily from warrant exercises.
- Current assets were $27.385 million and current liabilities $2.752 million, for a 9.95:1 current ratio. The filing shows no borrowings on the balance sheet. A $3.0 million cash-collateralized revolving credit facility expired September 30, 2018; it had no outstanding balance at year-end 2017.
- Total assets were $30.075 million and stockholders’ equity was $27.323 million at year-end 2018.
Material changes and operating details
- Electronic components revenue was $23.793 million, up from $21.516 million; segment operating income rose to $2.525 million from $1.260 million. Electronic instruments revenue increased to $1.077 million from $886,000, while segment operating income was $49,000 versus $56,000.
- Year-end order backlog rose 49.5% to $17.506 million from $11.713 million. Management expected to fill the entire 2018 year-end backlog during 2019, but gave no assurance about the portion ultimately fulfilled.
- Domestic revenue was $18.673 million, or 75.1% of total, versus $16.090 million, or 71.8%. International revenue was $6.197 million, or 24.9%, versus $6.313 million, or 28.2%.
- The largest customer accounted for 17.8% of 2018 revenue ($4.436 million), up from 16.7% in 2017. Four customers represented 30% of year-end accounts receivable, versus 32% a year earlier.
- Research and development expense was $1.947 million, compared with $1.827 million.
Outlook, risks, and unusual items
- Management said existing cash and operating cash generation should cover working-capital and capital-expenditure needs for the 12 months following filing. No specific revenue or earnings guidance was provided. The company does not expect to pay dividends in the foreseeable future.
- Key risks include customer concentration, cyclical end markets, limited revenue visibility and backlog cancellation or deferral, competition, dependence on new product development and key personnel, and exposure to limited-source materials. Government-contract compliance, international operations, environmental requirements, and cybersecurity are also identified risks.
- The company reported $138,000 of other income in 2018, versus $46,000 of other expense in 2017, primarily reflecting investment portfolio income. Related-party-managed investments totaled $16.270 million at year-end 2018, including $12.506 million classified as cash equivalents and $3.764 million as marketable securities. The related fund manager is affiliated with a director and significant shareholder; fees were expected to average less than 0.25% of assets managed.
- Income tax expense was $165,000. The filing reports $9.429 million of federal net operating loss carryforwards, $15.906 million of state carryforwards, and tax credit carryforwards, but records a full valuation allowance against remaining net deferred tax assets except for $127,000 deemed realizable.
- The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting. The company reported no material legal proceedings or off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the elevated backlog converted into 2019 shipments and revenue, and whether cancellations, delays, or scope changes affected orders.
- Whether higher gross margins persisted without weakening demand or increasing customer concentration.
- The credit quality and continuing demand of the largest customer, and the collectability of receivables concentrated among four customers.
- The liquidity, valuation, governance, and related-party terms of the investment portfolio managed by an affiliated entity; note that a significant portion of reported cash is held in mutual funds.
- How effectively the company can sustain profitability, fund product development, and manage raw-material, compliance, and international-operating risks.