LGL Group, Inc. — Q1 2015 Form 10-Q
Business and period: The LGL Group is a holding company whose principal operating business, MtronPTI, designs and manufactures high-reliability frequency and spectrum-control products. The unaudited results cover the three months ended March 31, 2015, compared with Q1 2014; balance-sheet comparisons are with December 31, 2014. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Revenue | $5.404 million | $6.131 million |
| Gross margin | 33.3% | 26.0% |
| Operating loss | $161,000 | $814,000 |
| Net loss | $178,000 | $809,000 |
| Basic and diluted loss per share | $0.07 | $0.31 |
| Cash from (used in) operating activities | $112,000 | ($540,000) |
| Cash used in investing activities | $256,000 | $760,000 |
| Cash from financing activities | $0 | $214,000 |
| Cash and cash equivalents | $5.048 million | $5.192 million at Dec. 31, 2014 |
| Working capital | $9.719 million | $9.909 million at Dec. 31, 2014 |
| Current ratio | 4.44 to 1 | 4.28 to 1 at Dec. 31, 2014 |
Revenue fell 11.9% year over year. Gross margin improved, while operating expenses declined: engineering, selling and administrative expense was $1.960 million, versus $2.410 million in Q1 2014. The company recorded no income tax provision or benefit. Interest expense was $5,000; other expense was $12,000.
Material changes and management commentary
- Management attributed lower revenue mainly to price compression and weaker demand from existing customers in Internet Communications Technology, with a lesser decline in Aerospace and Defense.
- Gross margin increased by 7.3 percentage points, which management attributed to favorable product mix and ongoing margin-improvement initiatives.
- The operating loss improved by $653,000. Management cited higher gross margin and $450,000 lower engineering, selling and administrative expense following a restructuring completed in 2014.
- Operating cash flow improved by $652,000 year over year. The company attributed the change primarily to reduced net losses and working-capital changes. Investing outflow was lower than in Q1 2014, which included the 2014 acquisition of Trilithic filter-product-line assets; Q1 2015 investing included increased capital expenditures.
- Order backlog was $8.681 million at March 31, down 1.3% from $8.792 million at year-end. The company expected to fill the entire backlog within 12 months, but cautioned that cancellations, deferrals, and scope changes occur and that it could not assure how much would be fulfilled in any given year.
Liquidity, debt, outlook, and risks
- Management said existing cash and cash generated from operations should be sufficient for working-capital and capital-expenditure needs over the next 12 months. This is management’s assessment, not a guarantee; it may seek additional capital for growth or strategic objectives.
- A $3.0 million revolving credit facility is available through September 30, 2016, subject to its terms. It bears interest at 30-day LIBOR plus 200 basis points and requires cash collateral equal to amounts borrowed. No amount was outstanding and no associated restricted cash was reported at March 31, 2015.
- The company maintains a full valuation allowance against its U.S. deferred tax assets because realization is uncertain. It reported federal and state net operating loss carryforwards, as well as tax-credit carryforwards, in the notes.
- The company disclosed routine litigation in the normal course of business and said it did not expect the matters to have a material adverse effect; Part II reports no legal proceedings. No new risk factors were listed in this 10-Q.
- No off-balance-sheet arrangements were reported. The company stated that it does not expect to pay cash dividends for the foreseeable future.
- A related entity managed $4.089 million of the company’s U.S. Treasury money-market funds; the relationship is through a common director, who is also a 10% stockholder and an officer and director of the fund manager.
- Management reported disclosure controls were effective as of March 31, 2015, and no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether the backlog converts to revenue as expected, given the disclosed cancellation, deferral, and scope-adjustment risks.
- Whether improved margins and lower operating expenses persist despite continued revenue pressure in ICT and Aerospace and Defense.
- Cash generation, capital spending, and the company’s ability to fund operations and growth without additional capital.
- The terms and cash-collateral requirement of the unused $3.0 million revolver, and the related-party Treasury-fund arrangement.
- The assumptions supporting the inventory obsolescence reserve and full deferred-tax valuation allowance.