LGL Group, Inc. — 2012 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2012; it is not a quarterly report. LGL is a holding company whose principal operating business, MtronPTI, designs and manufactures custom and standard frequency-control electronic components, including quartz crystals, oscillators, filters, and timing modules. The company reports one operating segment. The 10-K was filed April 1, 2013.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $29.706 million | $35.682 million |
| Gross margin | 26.1% | 30.2% |
| Operating income (loss) | ($1.782 million) | $0.674 million |
| Net income (loss) | ($1.320 million) | $0.382 million |
| Basic and diluted EPS | ($0.51) | $0.15 |
| Cash from (used in) operations | ($0.469 million) | $2.321 million |
| Capital expenditures | $0.906 million | $1.694 million |
| Cash and cash equivalents at year-end | $8.625 million | $13.709 million |
| Working capital at year-end | $16.624 million | $18.118 million |
| Total assets at year-end | $29.593 million | $32.421 million |
Revenue fell 16.7%, primarily from lower demand in Internet Communications Technology and Military, Aerospace and Instrumentation markets, alongside macroeconomic weakness. Lower volume reduced fixed-cost absorption and drove the 4.1-percentage-point gross-margin decline. Engineering, selling and administrative expense fell $0.568 million, partly offsetting the revenue and margin deterioration. Research and development expense was $2.005 million, up from $1.878 million.
International revenue was $14.619 million (49.2% of total), down from $20.037 million (56.2%); domestic revenue was $15.087 million, versus $15.645 million. Operating, investing, and financing cash flows were respectively ($0.469 million), ($0.906 million), and ($3.709 million). The financing outflow reflected bank-debt repayments, a $1.5 million increase in restricted cash pledged to Chase, and treasury-stock purchases; the prior-year inflow included proceeds from a public share offering.
At year-end, current assets were $21.603 million and current liabilities were $4.979 million, a 4.34:1 current ratio. Of the reported cash, $1.5 million was restricted as loan collateral. The revolving facility had $1.249 million drawn and $0.251 million of stated available capacity. The balance sheet also showed $58,000 of current term debt; the term loan was repaid on February 7, 2013. Total long-term debt including its current portion was $58,000, separate from the revolving balance.
Changes, outlook, risks, and unusual items
- Net results shifted from $0.382 million income in 2011 to a $1.320 million loss in 2012; operating results likewise moved from $0.674 million income to a $1.782 million loss.
- Year-end backlog rose 0.8% to $8.703 million. Management expected to fill substantially all of it within the following 12 months, but warned that orders can be cancelled, deferred, or changed.
- Management said existing cash, operating cash generation, and available revolver borrowings should cover working-capital and capital-expenditure needs for the next 12 months, while noting possible future capital needs. No specific revenue or earnings guidance was provided.
- The Chase revolver was reduced to $1.5 million and was due June 30, 2013. It is secured by MtronPTI assets and subject to borrowing-base limits and a minimum $8 million tangible-net-worth covenant. The company reported covenant compliance at year-end; the filing also notes that lower business activity could reduce borrowing availability.
- Customer and supplier concentration merit attention: the largest customer generated 9.8% of 2012 revenue, the three largest customers represented 42.4% of receivables, and one Asian contract manufacturer accounted for 15.4% of revenue. The manufacturer relationship had no written long-term supply contract.
- Other identified risks include cyclical end markets, international operations, raw-material availability and pricing, competition, single-source components, government-contract compliance, environmental regulation, and the company’s reliance on one product line. Management said the permanence of weakened market spending was unclear.
- The company recorded a $0.524 million income-tax benefit in 2012, including a deferred tax benefit; it had a $0.307 million valuation allowance and $0.589 million of Indian subsidiary earnings treated as permanently reinvested. The 2012 inventory-obsolescence reserve was $2.318 million, up from $1.942 million.
- No litigation was pending, and the company reported no off-balance-sheet arrangements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether revenue, gross margin, and operating performance recovered after the 2012 demand decline, and whether backlog converted to sales.
- Current revolver renewal, borrowing-base availability, covenant compliance, and the status of collateral and restricted cash.
- Collection of receivables, particularly from the three largest customers, and any changes in customer or contract-manufacturer concentration.
- Whether management’s 12-month liquidity assessment remains supportable given negative operating cash flow in 2012 and limited stated revolver availability.
- Realization of deferred tax assets and carryforwards, and any changes to valuation allowances or the treatment of foreign earnings.