LGL Group, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; filed November 14, 2011. Unaudited consolidated results. LGL is a holding company whose principal operating business designs, manufactures, and sells standard and custom engineered electronic components through MtronPTI.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $9.629m | $12.397m | $28.295m | $35.633m |
| Gross margin | 28.0% | 37.6% | 30.8% | 36.1% |
| Operating income | $0.122m | $2.191m | $1.069m | $5.746m |
| Net income | $0.091m | $1.978m | $0.678m | $5.221m |
| Diluted EPS | $0.03 | $0.88 | $0.26 | $2.32 |
Revenue fell 22.3% in Q3 and 20.6% year to date. Management attributed the declines mainly to weaker MISA-market orders amid government budget uncertainty and global economic weakness. Lower volume reduced gross margin by leaving fixed infrastructure costs spread over less revenue; increased engineering and selling efforts also raised SG&A. Approximate operating margins were 1.3% versus 17.7% in Q3 and 3.8% versus 16.1% year to date.
Cash, liquidity, and debt
- Cash and cash equivalents were $13.716m at September 30, 2011, versus $4.147m at December 31, 2010. Current assets were $27.223m and current liabilities $8.073m; working capital was $19.150m and the current ratio 3.37.
- Nine-month operating cash flow was $1.600m, compared with $3.024m in 2010. Investing used $1.285m, including capital expenditures and approximately $0.450m for replacement ERP software. Financing provided $9.254m. Cash increased $9.569m.
- Debt at quarter-end included $3.351m drawn on the Chase revolving facility and $0.483m on the Chase term loan (with $0.338m current and $0.145m long-term); total reported debt was approximately $3.834m. The revolving balance bore 3.25% interest at quarter-end. No amount was drawn on the separate $2m Chase commercial facility, and $0.398m of revolving capacity remained available under borrowing-base limits.
- The Chase facilities are secured by MtronPTI assets other than real estate and include financial covenants. The company reported compliance at September 30. Management said cash, operating cash generation, and available credit should cover working capital and capital spending for the next 12 months, while noting additional capital could be needed for growth or strategic flexibility.
Changes, outlook, and other notable items
- The February 2011 public offering of 350,000 shares generated $6.404m net proceeds and increased weighted-average shares, contributing to lower EPS. The company repurchased 35,443 shares for $0.315m through September 30; a total of 540,000 shares was authorized under its repurchase program.
- Backlog was $9.119m, down 24.6% from June 30 and 23.8% from September 30, 2010. Management expected to fill substantially all current backlog within 12 months but cautioned that timing is uncertain and cancellations, deferrals, and scope changes can occur.
- The prior FNBO credit agreement was repaid and terminated June 30, 2011, when the company entered into new Chase facilities. The company also invested in machinery and equipment and continued product-development and market-share efforts, targeting additional timing and frequency equipment markets.
- The nine-month effective tax rate was 32.9%, versus 3.9% in 2010, when NOL-related factors reduced the provision. Management said it did not expect federal cash income-tax payments until remaining NOL carryforwards were used. Q3 2011 income-tax provision was zero.
- No pending litigation, defaults, or off-balance-sheet arrangements were reported. A new two-year CEO employment agreement, effective November 2, 2011, was signed November 10; it provides a $200,000 annual base salary, bonus eligibility, and specified severance and equity-vesting provisions.
Investor verification priorities
- Track MISA orders, backlog conversion, cancellations, and customer-requested delivery timing against management’s 12-month expectation.
- Assess whether revenue recovery and manufacturing efficiency can restore gross margins, given the sharp year-over-year operating-profit decline.
- Monitor operating cash generation, capital spending, use of Chase facilities, borrowing-base availability, and compliance with covenant thresholds.
- Verify the remaining NOL-related deferred tax assets and their effect on future tax expense and cash taxes.
- Review the related-party-managed Treasury money market investment: $10.087m of the reported cash balance was invested in these funds at September 30, 2011.