LGL Group, Inc. — Q2 2013 Form 10-Q
Business context and reporting period. The company is a holding company whose principal operating business, MtronPTI, manufactures custom-designed, engineered electronic components. This unaudited report covers the three and six months ended June 30, 2013; balance-sheet comparisons are to December 31, 2012. Dollar amounts below are in millions unless noted.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $6.965 | $7.582 | $14.363 | $14.756 |
| Gross margin | 25.7% | 26.5% | 29.2% | 24.4% |
| Operating loss | $(0.818) | $(0.290) | $(1.096) | $(1.091) |
| Net loss | $(4.964) | $(0.215) | $(5.047) | $(0.808) |
| Loss per share, basic and diluted | $(1.91) | $(0.08) | $(1.94) | $(0.31) |
The substantially larger 2013 net loss primarily reflects a $4.135 million income-tax provision related to a full valuation allowance against U.S. deferred tax assets, alongside weaker Q2 revenue. The company cited a three-year cumulative loss as negative evidence for the allowance. Six-month operating loss was essentially unchanged year over year: lower revenue and higher engineering, selling and administrative expense were offset by improved gross margin, attributed to product mix and margin initiatives.
Cash flow and liquidity. For the first half, operating cash use was $0.299 million, investing cash use $0.228 million (capital expenditures), and financing cash use $0.485 million. Cash and cash equivalents were $7.613 million at June 30, down from $8.625 million at year-end; an additional $1.500 million was restricted as collateral and unavailable for general use. The filing reports cash and cash equivalents plus marketable securities of $7.669 million. The company stated that available cash, operating cash generation and revolving credit availability should cover working capital and capital spending for the next 12 months.
Debt and balance sheet. Total assets were $23.700 million and total liabilities $3.927 million at June 30, compared with $29.593 million and $4.979 million, respectively, at December 31. The company had $0.881 million outstanding on its $1.500 million revolving facility, with about $0.619 million available; long-term debt had been repaid. The revolver is secured by MtronPTI assets, excluding real property, and matures June 30, 2014, subject to lender-approved extensions.
Changes, outlook and notable matters
- Demand and backlog: Q2 revenue declined 8.1%, primarily from weaker Internet Communications Technology demand, partly offset by Aero/Defense growth. First-half revenue declined 2.7%. Backlog was $9.070 million at June 30, up 8.5% from March 31 but down 4.8% from June 30, 2012. Management expected to fill substantially all current backlog within 12 months, while cautioning that cancellations, deferrals and scope changes occur and timing is uncertain.
- Market conditions and strategy: Management reported no notable structural recovery in served markets, citing lingering effects of the Japan disaster, U.S. spending uncertainty and Eurozone instability. The company was investing in research and development and sales efforts across communications, aerospace, energy exploration, security and related markets. A board special committee was reviewing strategic alternatives, including streamlining, discontinuing or separating some or all MtronPTI operations; outcomes and effects on shareholder value were uncertain.
- Credit covenant: MtronPTI’s tangible net worth was $7.778 million against an $8.000 million minimum covenant at June 30. Chase waived the non-compliance in an August 6, 2013 letter. The company had requested covenant amendments, but stated there was no assurance an amendment would be completed.
- Warrants: After quarter-end, the company distributed five warrants per common share held on July 29. Each 25 warrants, when exercisable, entitle the holder to buy one share for $7.50. They become exercisable only when the 30-day volume-weighted average share price reaches $15.00 or on August 6, 2018, subject to the warrant terms. The filing warns they may expire worthless and an active trading market may not develop.
- Other: The company repurchased 10,806 shares for $0.059 million during the quarter. It reported no pending litigation, no off-balance-sheet arrangements, and effective disclosure controls as of June 30. No cash dividends were expected for the foreseeable future.
Investor verification priorities
- Review the assumptions and future evidence supporting the full deferred-tax-asset valuation allowance and its potential effect on reported earnings.
- Track compliance with the Chase tangible-net-worth covenant, progress on a covenant amendment, and the revolver’s 2014 maturity and extension terms.
- Assess backlog conversion, cancellations and customer demand, particularly in ICT versus Aero/Defense, against management’s 12-month fulfillment expectation.
- Monitor the special committee’s strategic review and any resulting restructuring, sale or separation proposals and their financial implications.
- Verify the share-count, dilution and market-liquidity implications of the warrants, including their exercise triggers and prospectus requirements.
- Note that the MD&A states six-month 2012 revenue of $14.746 million in one passage, while the financial statements report $14.756 million; verify the comparable-period figure.