The LGL Group, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. LGL is a holding company whose principal operating business, MtronPTI, designs and manufactures custom and standard frequency-control electronic components, including quartz crystals, oscillators and filters. The filing reports one business segment.
Financial performance
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $35.682 million | $46.656 million |
| Gross margin | 30.2% | 35.0% |
| Operating income | $674,000 | $6.759 million |
| Income before tax | $567,000 | $6.478 million |
| Net income | $382,000 | $9.423 million |
| Basic and diluted EPS | $0.15 | $4.19 |
| Cash from operations | $2.321 million | $5.503 million |
- Revenue declined 23.5%, primarily from weaker demand in telecommunications and military, instrumentation, space and avionics markets. Gross margin fell 4.8 percentage points as lower sales spread fixed costs across a smaller revenue base.
- Operating income declined by $6.085 million. Engineering, selling and administrative expense rose $519,000, including increased product-development and sales costs.
- 2011 net income included a $185,000 income-tax provision; 2010 included a $2.945 million tax benefit, substantially reflecting release of a valuation allowance. The large year-over-year earnings decline therefore reflects both weaker operations and the prior-year tax benefit.
- Fourth-quarter 2011 net loss was $296,000. The filing text does not provide a clear fourth-quarter revenue value.
- Cash and cash equivalents were $13.709 million at year-end, versus $4.147 million a year earlier. Working capital was reported as $18.176 million, compared with $12.829 million. The filing’s MD&A gives current liabilities of $6.770 million, while the balance-sheet table reports $6.828 million; investors should reconcile this difference.
- Investing activities used $1.694 million, principally for machinery, equipment and ERP-system software. Financing activities provided $8.935 million, including $6.404 million of net proceeds from a February 2011 share offering and $3.026 million of net revolving-credit borrowings.
- At December 31, 2011, the Chase revolving facility had $3.026 million outstanding and $389,000 of available capacity, limited by the borrowing base. The company also had $400,000 outstanding under its Chase term loan; no amount was drawn on the separate commercial line. Interest expense was $109,000, down from $304,000.
Material changes and operating context
- Domestic revenue fell to $15.644 million from $25.212 million; international revenue was $20.037 million, versus $21.444 million. International sales increased to 56.2% of revenue from 46.0%.
- Year-end backlog declined 19.6% to $8.634 million from $10.734 million. Management expected to fill substantially all of the backlog during 2012, while cautioning that cancellations, deferrals and timing changes may occur.
- The ten largest customers represented 55.0% of revenue, down from 65.3%. One contract manufacturer accounted for 14.7% of revenue, and the company had no written long-term supply contract with it.
- Headcount was reduced by 34 during 2011; the company had 199 employees at year-end. Research and development expense increased to $1.878 million from $1.636 million.
- LGL issued 350,000 shares for net proceeds of $6.404 million and repurchased 35,454 shares for $315,000. It paid no cash dividends and said none were expected in the foreseeable future.
Outlook, risks and contingencies
- Management said cash, operating cash generation and available revolver capacity should be sufficient for working capital and capital expenditures over the next 12 months. This outlook depends in part on covenant compliance and continued access to the credit facility.
- MtronPTI failed the Chase net-income covenant at year-end: covenant-defined net income was $1.25 million against a $2.0 million minimum. Chase waived the breach, and the company was negotiating an amendment; completion was not assured. Management projected compliance through December 31, 2012, assuming an amendment and its current projections.
- Key risks include cyclical telecommunications spending, uncertain government budgets, customer and supplier concentration, potentially cancellable backlog, competition, international operations, availability of specialized components, and dependence on a single product line. Raw-material price volatility may also pressure margins.
- The company’s operations and products are subject to environmental and government-contracting requirements. No litigation was pending, and the filing reports no off-balance-sheet arrangements. The financial statements received an unqualified independent audit opinion; management concluded internal controls over financial reporting were effective at year-end.
- Management described plans to pursue market-share gains, product development and manufacturing and supply-chain efficiency, including expansion into additional timing-related markets. No quantitative earnings or revenue guidance was provided.
Important facts for investors to verify
- Whether Chase and LGL finalized the covenant amendment, and the company’s subsequent covenant compliance and borrowing availability.
- Whether operating demand, gross margins, and backlog stabilized or improved after the 2011 declines.
- Whether the $13.709 million cash balance is readily available to the parent, given subsidiary and lender restrictions.
- The reported working-capital/current-liability inconsistency and the precise year-end debt classification.
- Customer and contract-manufacturer concentration, order cancellations, and the extent to which 2011 backlog converted to revenue in 2012.