LGL Group, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. The company is a holding company whose principal subsidiary, MtronPTI, designs, manufactures and sells engineered electronic components. This filing covers the quarter and nine months ended September 30, 2012; financial statement amounts below are in thousands of dollars unless noted.
Financial results and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $7,307 | $9,629 | $22,063 | $28,295 |
| Gross margin | 24.5% | 28.0% | 24.5% | 30.8% |
| Operating income (loss) | $(456) | $122 | $(1,547) | $1,069 |
| Net income (loss) | $(314) | $91 | $(1,122) | $678 |
| Diluted earnings (loss) per share | $(0.12) | $0.03 | $(0.43) | $0.26 |
- Cash flow: Nine-month operating cash flow was $1, compared with $1,600 in 2011. Capital expenditures were $805; investing cash outflow was $805. Financing cash outflow was $3,421, and cash and cash equivalents declined by $4,225 to $9,484.
- Liquidity: At September 30, cash and cash equivalents were $9,484, with an additional $1,500 classified as restricted cash. Working capital was $16,396; the current ratio was 4.08:1.
- Debt: Bank revolver borrowings were $1,450 and current maturities of term debt were $145; no long-term debt was reported. Revolver availability was $50. Total liabilities were $5,320.
- Other balance-sheet items: Total assets were $29,977 and stockholders’ equity was $24,657. Inventory was $5,434, including a $2,247 obsolescence reserve.
Material changes versus prior periods
- Revenue fell 24.1% year over year in Q3 and 22.0% for the first nine months. Management attributed the decline to weaker demand in Internet Communications Technology and Military, Aeronautics and Instrumentation markets, including soft telecommunications infrastructure spending and uncertainty in government budgets.
- Gross margin declined 3.5 percentage points in Q3 and 6.3 points year to date, as lower revenue left fixed manufacturing costs spread over a smaller base.
- Engineering, selling and administrative expenses decreased by $328 in Q3 and $691 year to date, primarily from administrative consolidation in Orlando and lower sales commissions. The reductions did not offset the revenue and margin declines.
- Cash and cash equivalents decreased from $13,709 at year-end 2011. The company repaid $1,576 of bank borrowings and placed $1,500 in restricted cash as loan collateral. Nine-month operating cash generation was nearly zero, versus $1,600 in the prior-year period.
Outlook, risks and notable items
- Backlog at September 30 was $8,745, down 8.2% from June 30 and 4.1% from September 30, 2011, but up 1.3% from December 31, 2011. Management expected to fill substantially all current backlog within 12 months, while noting that timing, cancellations and scope changes are uncertain.
- Management said cash, operating cash flow and available revolver borrowings should be sufficient for working capital and capital expenditures over the next 12 months, but noted that additional capital might be needed for growth or strategic objectives. No specific earnings or revenue guidance was provided.
- The Chase facilities are secured by MtronPTI assets, and the loan agreement includes an $8,000 minimum tangible net worth covenant. The company reported compliance at September 30. Amendments in 2012 removed minimum-net-income and debt-service-coverage covenants, renewed the $1,500 revolver and reduced required cash collateral to $1,500. The term loan’s final payment was due January 31, 2013, and the revolver was due June 30, 2013.
- The company began processing transactions on a new ERP system during the quarter and was updating related financial controls; management did not expect an adverse control effect. Disclosure controls were assessed as effective.
- There was no pending litigation reported. The company repurchased 15,000 shares for $90 during Q3. A related party managed the company’s U.S. Treasury money market fund investments; those holdings were $6,738 at quarter-end.
Important facts for investors to verify
- Whether demand in telecommunications and Mil/Aero markets, backlog conversion and gross margins stabilize or continue to weaken.
- Whether operating cash flow improves from the near break-even nine-month result and whether the company retains adequate accessible liquidity, given restricted cash and only $50 of revolver availability.
- Compliance with the $8,000 tangible-net-worth covenant and the repayment or renewal terms for the term loan and revolving facility.
- The pace and cost of ERP implementation, the adequacy of updated controls, and the collectability and realizability assumptions underlying receivables, inventory reserves and deferred tax assets.