The LGL Group, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2018, LGL operated two segments: electronic components, primarily frequency and spectrum-control products, and electronic instruments, including frequency and time reference standards. The statements are unaudited and results for the quarter are not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $5.945 million | $5.624 million; up 5.7% |
| Gross margin | 37.5% | 36.7% |
| Operating income | $158,000 | $108,000 |
| Income before taxes | $194,000 | $114,000 |
| Net income | $193,000 | $111,000 |
| Basic and diluted EPS | $0.04 | $0.04 |
| Operating cash flow | $158,000 | $219,000 |
Revenue growth was attributed chiefly to higher filter sales and time-and-frequency product sales, partly offset by lower purchased-product sales. Electronic-components revenue rose to $5.731 million from $5.392 million; electronic-instruments revenue was $214,000 versus $232,000. Electronic-components operating income increased to $550,000 from $326,000; electronic-instruments operating income declined to $2,000 from $36,000. Unallocated corporate expense rose to $394,000 from $254,000.
Cash and cash equivalents were $1.483 million at quarter-end, down from $13.250 million at December 31, 2017, while marketable securities increased to $15.590 million from $3.803 million. The cash decline largely reflected an $11.775 million purchase of marketable securities; combined cash and marketable securities were approximately $17.073 million versus $17.053 million at year-end. Investing cash use was $11.947 million, including $172,000 of capital expenditures. Financing provided $22,000 from option exercises.
Working capital was $22.189 million, and the current ratio was 8.91:1, compared with 9.35:1 at year-end. Current liabilities were $2.806 million. No amount was outstanding on the $3.0 million revolving credit facility; it was scheduled to expire September 30, 2018. Management said cash and operating cash generation should cover working-capital and capital-expenditure needs for the next 12 months. No cash dividends are expected for the foreseeable future.
Material changes, outlook, and other considerations
- Order backlog was $13.294 million, up 22.2% from $10.877 million a year earlier. Management attributed the increase mainly to orders arriving sooner than planned, expects to fill the backlog within 12 months, and cautioned that timing and fulfillment are not assured.
- Management said the improved gross margin reflected a strategy to move away from lower-margin commodity business and focus on more complex, higher-margin products, particularly in aerospace and defense.
- Q1 2018 net income included $36,000 of total other income, including a $16,000 gain on marketable securities, a $4,000 recovery on a previously written-down note, and $4,000 of foreign-currency transaction gains. Net interest income was $12,000, versus $6,000 of net interest expense in Q1 2017.
- The income-tax provision was $1,000. The company maintained a valuation allowance against U.S. net deferred tax assets, while determining certain foreign net operating loss deferred tax assets were more likely than not realizable. It expected to finalize provisional Tax Act accounting by Q4 2018.
- The company adopted the new revenue standard on January 1, 2018, with no cumulative financial-statement adjustment. Revenue is generally recognized at shipment when control transfers to the customer.
- A related entity managed by a common director held $15.581 million of company investments at March 31, 2018; those investments generated $32,000 of investment income during the quarter. The filing reports no material pending legal proceedings, no off-balance-sheet arrangements, and no changes in internal controls that materially affected or were reasonably likely to materially affect them. Disclosure controls were assessed as effective.
- Warrants covering 519,241 shares were excluded from diluted EPS as anti-dilutive. The warrants were scheduled to expire August 6, 2018, subject to their terms and earlier exercisability conditions.
Important facts for investors to verify
- Whether backlog converts to revenue as expected, given management’s caveat that fulfillment timing and amounts are uncertain.
- The investment portfolio’s composition, liquidity, valuation, and related-party oversight, including the $15.581 million managed by the related entity.
- The status and terms of the $3.0 million revolving facility before its September 30, 2018 expiration, and the company’s cash-generation assumptions supporting its 12-month liquidity outlook.
- Potential dilution and any consequences associated with the warrants scheduled to expire August 6, 2018.
- Developments in realization of deferred tax assets and completion of the company’s provisional Tax Act accounting.