LGL Group, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. The LGL Group is a holding company whose subsidiaries design and manufacture engineered electronic components and timing and frequency products.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $5.128 million | $4.796 million | $15.115 million | $15.671 million |
| Gross margin | 34.6% | 33.1% | 33.4% | 33.0% |
| Operating loss | $(28,000) | $(154,000) | $(164,000) | $(648,000) |
| Net income (loss) | $32,000 | $(195,000) | $(78,000) | $(574,000) |
| Basic and diluted EPS | $0.01 | $(0.07) | $(0.03) | $(0.22) |
Q3 revenue rose 6.9% year over year, while nine-month revenue declined 3.5%. Management attributed pressure in the Internet Communications Technology segment to offshore price competition and said it is shifting from lower-margin commodity business toward more complex, higher-margin products, particularly in Aerospace and Defense. Nine-month SG&A was 34.5% of revenue versus 37.2% a year earlier.
For the nine months, operating cash flow was $268,000, down from $1.025 million. Investing cash use was $364,000, including $295,000 for the PTF acquisition and $112,000 in capital expenditures, partly offset by insurance proceeds. Cash declined $100,000 to $5.453 million. Working capital was $9.974 million; the current ratio was 4.83, versus 5.76 at year-end 2015. Total current liabilities were $2.605 million. The filing reports no revolver borrowings and no other debt balance.
Material developments and unusual items
- On September 2, the company acquired certain assets and assumed certain liabilities of Precise Time and Frequency, Inc. for $295,000 cash. The acquisition supports expansion into timing and frequency products. The preliminary allocation included $214,000 of intangible assets and a $4,000 bargain-purchase gain; valuation remained subject to review.
- From closing through September 30, the acquired business contributed $14,000 of sales and a $50,000 loss. The company recorded approximately $38,000 of acquisition-related costs in engineering, selling and administrative expenses.
- Other income included $74,000 of net insurance proceeds for damaged equipment and inventory in Q3; the nine-month amount was approximately $118,000. These proceeds and the bargain-purchase gain contributed to reported results.
- Nine-month stock-based compensation was $(4,000), reflecting actual forfeitures, compared with $201,000 expense in the prior-year period.
- Order backlog was $11.017 million at September 30, up 25.4% from September 30, 2015. Management expects to fill the backlog within 12 months, but cautions that cancellations, deferrals, and scope changes occur and offers no assurance about timing.
Liquidity, outlook, and risks
The renewed City National Bank revolving facility provides up to $3.0 million through September 30, 2018, at 30-day LIBOR plus 2.00%, with a 0.75% annual fee on unused amounts. It is secured only by cash collateral; no balance was outstanding and no related restricted cash was reported at September 30. Management believes cash and operating cash generation will cover working capital and capital spending for the next 12 months, but may seek capital for growth or strategic objectives. No specific earnings or revenue guidance was provided.
Key disclosed risks include price competition, uncertain conversion of backlog, customer credit and inventory-obsolescence exposure, and uncertainty in realizing deferred tax assets; the company maintains a full valuation allowance against those assets. Routine litigation was reported, with no proceedings believed material. Disclosure controls were deemed effective at a reasonable-assurance level, but acquired PTF assets and liabilities were excluded from that assessment while the business is integrated. The filing reports no off-balance-sheet arrangements and no market-risk disclosure applicable for the period.
Important facts for investors to verify
- Whether the preliminary PTF purchase-price allocation changes, and how the acquired business performs after integration.
- Whether backlog converts to revenue as expected, given the filing’s stated cancellation and timing uncertainties.
- How much future results depend on insurance recoveries and other acquisition-related or nonrecurring items.
- Whether operating cash flow improves and liquidity remains sufficient as working capital and acquisition needs evolve.
- Whether the company can sustain its shift toward higher-margin products amid continued competitive pricing pressure.