LGL Group, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. LGL is a holding company whose principal operating business, MtronPTI, designs and manufactures highly engineered frequency and spectrum control products. Unless otherwise noted, amounts are in thousands of dollars.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $5,471 | $5,850 | $10,875 | $11,981 |
| Gross margin | 32.7% | 23.3% | 33.0% | 24.7% |
| Operating loss | $(333) | $(1,278) | $(494) | $(2,092) |
| Net loss | $(201) | $(1,269) | $(379) | $(2,078) |
| Basic and diluted loss per share | $(0.08) | $(0.49) | $(0.14) | $(0.80) |
- Cash flow: Six-month operating cash flow was $414, versus cash use of $576 in 2014. Investing used $175, including $269 of capital expenditures; financing cash flow was zero. Cash increased $239 to $5,431.
- Liquidity: Current assets were $12,380 and current liabilities $2,563, yielding working capital of $9,817 and a current ratio of 4.83:1. Cash and cash equivalents included $4,089 invested in U.S. Treasury money market funds.
- Debt: No balance was outstanding under the $3,000 revolving credit facility at June 30; no associated restricted cash was reported. Interest expense was $9 for the six-month period.
- Balance sheet: Total assets were $16,547 and stockholders’ equity was $13,984 at June 30, compared with $17,262 and $14,237, respectively, at year-end 2014.
Changes versus the prior comparable period
- Revenue declined 6.5% in Q2 and 9.2% for the first half. Management attributed the declines mainly to price compression and reduced demand from existing customers in the Internet Communications Technology market.
- Gross margin improved by 9.4 percentage points in Q2 and 8.3 points for the first half. Management cited favorable product mix and continuing margin initiatives; the 2014 comparison included a $344 increase in warranty accruals for two isolated product defects.
- Operating losses narrowed, with lower engineering, selling and administrative expenses following the 2014 restructuring. Those expenses fell $125 in Q2 and $575 for the first half year over year.
- Foreign revenue fell to $3,076 for the first half from $5,242; reported declines included Malaysia and China.
Outlook, commentary and risks
- Backlog was $8,857 at June 30: up 2.0% from March 31 and 0.7% from December 31, 2014, but down 7.4% year over year. The company expected to fill the entire backlog within 12 months, while cautioning that it could not assure the timing or amount fulfilled in any given year.
- Management believed existing cash and operating cash generation would be sufficient for working capital and capital expenditures over the next 12 months. The company said it may seek capital for growth or strategic objectives. No cash dividends were expected for the foreseeable future.
- Q2 other income included approximately $159 of net insurance proceeds for damaged equipment and inventory, partly offset by foreign-currency transaction gains. This is a material non-operating item relative to the quarterly loss.
- The company maintained a full valuation allowance against U.S. deferred tax assets. It reported a $11 income tax provision for the first half.
- Management described routine litigation and said it did not expect the matters to have a material adverse effect; Part II reported no legal proceedings or new risk factors. Disclosure controls were assessed as effective, with no material internal-control changes reported.
Important facts for investors to verify
- Whether revenue and backlog stabilize, particularly given weaker ICT demand, price pressure and lower foreign sales.
- Whether improved gross margins persist and how much reflects operational improvement versus the prior-year warranty comparison.
- The timing and collectability of backlog, and whether the company achieves its stated 12-month fulfillment expectation.
- Whether operating cash flow remains positive as working-capital movements change; verify capital-spending needs and availability and terms of the unused, cash-collateralized credit line.
- The recurrence and accounting treatment of insurance proceeds, and the assumptions supporting the full deferred-tax valuation allowance.
- Related-party exposure: approximately $4,089 was invested in Treasury money market funds managed by an entity connected through a common director.