LGL Group, Inc. — Q1 2017 Form 10-Q
Business context and period. The filing covers the unaudited three months ended March 31, 2017, compared with Q1 2016. LGL designs and manufactures frequency and spectrum control components and frequency/time reference instruments through its electronic components and electronic instruments segments. The instrument segment includes Precise Time and Frequency, acquired in September 2016. Financial figures below are in thousands of dollars unless otherwise stated.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparable period / December 31, 2016 |
|---|---|---|
| Revenue | $5,624 | $4,756 in Q1 2016 |
| Gross margin | 36.7% | 31.5% in Q1 2016 |
| Operating income (loss) | $108 | ($162) in Q1 2016 |
| Net income (loss) | $111; $0.04 per basic and diluted share | ($126); ($0.05) per share in Q1 2016 |
| Operating cash flow | $219 | $71 in Q1 2016 |
| Cash and cash equivalents | $1,989 | $2,778 at December 31, 2016 |
| Marketable securities | $3,793 | $2,770 at December 31, 2016 |
| Working capital / current ratio | $10,447 / 4.65:1 | $10,135 / 4.68:1 at December 31, 2016 |
| Debt | No revolver balance; $3,000 revolving credit facility available | No revolver balance at December 31, 2016 |
Manufacturing cost of sales was $3,558, and engineering, selling and administrative expense was $1,958. Investing activities used $1,008, primarily reflecting the reported purchase/transfer of marketable securities; capital expenditures were $6. There were no financing cash flows. Total assets were $16,895 and stockholders’ equity was $14,030 at quarter-end. Comprehensive income was $132, including a $21 unrealized gain on available-for-sale securities.
Changes versus Q1 2016
- Revenue rose 18.3%. Management attributed approximately 73% of the increase to its shift away from low-margin commodity products toward more complex, higher-margin products, particularly for aerospace and defense; approximately 27% was attributed to PTF.
- Gross margin improved by 5.2 percentage points, and operating results moved from a loss to income. Management cited higher revenue and improved product mix.
- Electronic components revenue increased to $5,392 from $4,756; electronic instruments contributed $232 versus none in the prior-year quarter. Segment operating income was $326 for components and $36 for instruments; unallocated corporate expense was $254.
- Order backlog was $10,877 at March 31, 2017, up 20.6% from $9,016 a year earlier. Other income declined to $12 from $42, with the prior-year amount primarily reflecting a gain on asset disposal.
Outlook, risks and unusual items
- Management said existing cash, operating cash generation and the available credit line should fund working capital and capital expenditure needs through May 31, 2018. It may seek additional capital for growth or strategic objectives; no formal earnings or revenue guidance was provided.
- Management expects to fill the entire backlog within 12 months but cautioned that it cannot assure the timing or portion fulfilled in a given year. Backlog includes signed contracts and agreed letters of intent and is subject to cancellations, deferrals and scope changes.
- The $3,000 revolver expires September 30, 2018, bears interest at 30-day LIBOR plus 200 basis points, and has a 0.75% annual fee on unused amounts. Borrowings require matching cash collateral; none was outstanding at quarter-end.
- The company recorded a $3 tax provision. It maintained a full valuation allowance against remaining U.S. net deferred tax assets while concluding foreign NOL-related deferred tax assets were more likely than not realizable.
- Approximately $3,736 was invested in a market-neutral mutual fund included in marketable securities. The fund manager is related through a common director, who is also a 10% LGL stockholder; management directed the fund transactions.
- Routine litigation was disclosed, with no material adverse effect expected. The company reported no off-balance-sheet arrangements, and management concluded disclosure controls were effective as of March 31, 2017.
Important facts for investors to verify
- Whether the reported revenue and margin improvement from the higher-value product strategy is sustainable and how much depends on aerospace and defense demand.
- Backlog quality and conversion: the total includes letters of intent and is not assured to be fulfilled on a particular schedule.
- Liquidity and investment exposure, including the relationship and governance around the market-neutral fund investment; distinguish cash from marketable securities.
- Whether cash generation and the unused, cash-collateralized revolver are adequate if working-capital needs or growth investment increase.
- Future realization of deferred tax assets, particularly U.S. assets subject to a full valuation allowance.