LGL Group, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2014; financial statements are unaudited. LGL is a holding company whose principal operating business, MtronPTI, manufactures engineered electronic components used to control signal frequency or timing.
Financial results
| Metric | Q3 2014 | Q3 2013 | First nine months 2014 | First nine months 2013 |
|---|---|---|---|---|
| Revenue | $5.581 million | $6.098 million | $17.562 million | $20.461 million |
| Gross margin | 31.0% | 22.4% | 26.7% | 27.2% |
| Operating loss | $(409,000) | $(1.181) million | $(2.501) million | $(2.277) million |
| Net loss | $(492,000) | $(1.199) million | $(2.570) million | $(6.246) million |
| Loss per share, basic and diluted | $(0.19) | $(0.46) | $(0.99) | $(2.40) |
- Cash and liquidity: Cash and cash equivalents were $5.496 million at September 30, down from $7.183 million at December 31, 2013. Working capital was $9.944 million and the current ratio was 3.66:1, versus $12.446 million and 3.76:1 at year-end.
- Cash flow: Operating activities used $1.094 million during the first nine months, compared with $60,000 used in the prior-year period. Investing activities used $912,000, including $700,000 paid for acquired product-line assets; financing activities provided $319,000. Cash declined by $1.687 million.
- Debt and credit: The company had no bank borrowing outstanding at September 30. It repaid and terminated its former $1.5 million Chase line and entered a $3 million revolving facility with City National Bank, bearing 30-day LIBOR plus 2%, available through September 30, 2016. The new facility requires cash collateral equal to amounts borrowed; no balance was drawn at quarter-end.
- Other balance-sheet items: Total assets were $18.139 million and stockholders’ equity was $14.394 million. Accrued warranty expense was $295,000, compared with $22,000 at year-end.
Material changes and operating developments
- Q3 revenue fell 8.5% year over year; nine-month revenue fell 14.2%. Management attributed the declines mainly to price compression and reduced customer share in Internet Communications Technology, and to a lesser extent lower demand in Aerospace and Defense.
- Q3 gross margin improved to 31.0%, primarily from favorable product mix and margin-improvement initiatives. For the nine-month period, margin edged down to 26.7%, reflecting lower revenue and a $366,000 warranty charge related to two isolated product defects.
- Q3 operating loss improved by $772,000 year over year, reflecting higher gross margin and lower selling, engineering and administrative expense. Nine-month operating loss worsened by $224,000, as lower revenue and $444,000 of restructuring charges more than offset $1.084 million of lower engineering, selling and administrative expense.
- Net loss for the nine months narrowed substantially, but the comparison is affected by a $3.922 million income-tax provision recorded in 2013 related to deferred tax assets; no such provision was recorded in 2014. LGL maintains a full valuation allowance against deferred tax assets.
- On January 31, 2014, MtronPTI acquired Trilithic filter product-line assets for $700,000 net cash consideration, excluding acquisition costs, to expand its RF and microwave offering.
Outlook, commentary and risks
- Quarter-end backlog was $8.693 million: down 9.1% from June 30, but up 1.1% from December 31, 2013, and 2.9% from September 30, 2013. Management expects to fill substantially all current backlog within 12 months, but provides no assurance about timing or fulfillment; cancellations, deferrals and scope changes can occur.
- Management said existing cash and cash generated from operations should meet working-capital and capital-expenditure needs for the next 12 months, while noting it may seek additional capital for growth or strategic objectives.
- The restructuring plan’s second phase, realigning sales, general and administrative activities, was substantially completed in Q3. Management continues to evaluate ways to improve operating leverage. No specific earnings or revenue guidance was provided.
- The quarter included approximately $59,000 of legal-settlement expense and a net $28,000 loss on asset disposals, partly offset by foreign-currency gains. The company reported no material legal proceedings and stated routine litigation was not expected to have a material adverse effect.
- Management cited risks to forward-looking statements, including market and customer demand, backlog fulfillment and cash adequacy. The filing states disclosure controls were effective and reports no material change in internal control during the quarter.
Important facts for investors to verify
- Whether revenue and backlog trends stabilize, particularly in ICT, and whether the reported backlog converts to sales within the expected period.
- Whether improved Q3 gross margin is sustainable and whether the warranty charge reflects isolated issues or a broader product-quality exposure.
- Cash burn and liquidity needs, including the practical availability and cash-collateral requirements of the City National revolver.
- Progress and costs from restructuring, and the operating contribution of the acquired Trilithic product line.
- The effect of the full deferred-tax-asset valuation allowance and the tax-related distortion in the prior-year loss comparison.