LGL Group, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This filing reports full-year results; standalone fourth-quarter financial results are not clearly provided. LGL operates primarily through MtronPTI, which designs and manufactures custom frequency-control components, including quartz crystals, oscillators and electronic filters.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $26.201 million | $29.706 million |
| Gross margin | 26.1% | 26.1% |
| Operating loss | $4.164 million | $1.782 million |
| Loss before taxes | $4.271 million | $1.844 million |
| Income tax provision (benefit) | $3.948 million provision | $524,000 benefit |
| Net loss | $8.219 million | $1.320 million |
| Basic and diluted loss per share | $3.17 | $0.51 |
| Cash used in operating activities | $664,000 | $469,000 |
| Cash and cash equivalents at year-end | $7.183 million | $8.625 million |
Revenue declined 11.8%, primarily from lower demand and price compression in Internet Communications Technology (ICT), and, to a lesser extent, weaker demand in Aerospace and Defense. Gross margin held steady, but the operating loss widened as lower sales and higher engineering, selling and administrative expenses offset that stability. The $3.948 million tax provision included a $5.661 million increase in the valuation allowance against deferred tax assets; the company recorded a full valuation allowance against its otherwise recognizable U.S. net deferred tax assets.
Cash, debt and liquidity
- Working capital was $12.446 million, down from $16.624 million; the current ratio was 3.76, versus 4.34 in 2012.
- Cash, cash equivalents and marketable securities totaled $7.244 million at year-end. This includes $1.5 million of restricted cash pledged as collateral and unavailable for general use.
- The Chase revolving facility had $1.181 million outstanding and approximately $319,000 of available borrowing capacity at year-end. It matures June 30, 2014, subject to lender-approved renewal options.
- MtronPTI failed to meet the facility’s $6 million tangible-net-worth covenant, reporting $5.142 million under the agreement’s definition. Chase waived the year-end 2013 breach by letter dated March 5, 2014.
- There was no long-term debt at December 31, 2013. Management said available cash, operating cash generation and remaining revolver capacity should cover working capital and capital expenditures for the next 12 months, while noting possible future capital needs.
Material changes, outlook and unusual items
- A restructuring plan initiated in October 2013 realigned customer-support operations, targeted at least a 10% reduction in structural costs, and was substantially completed during the fourth quarter. The $648,000 charge included $292,000 in employee separation costs, $107,000 in facility-related costs and $249,000 in non-cash asset impairment. The company reported a net headcount reduction of 31 during 2013.
- On January 31, 2014, MtronPTI acquired certain Trilithic filter-product-line assets for $700,000 in cash, adding intellectual property and equipment for fixed and tunable filters. Management expects the purchase to strengthen its RF and microwave product portfolio; benefits are not assured.
- Year-end order backlog was $8.601 million, down 1.2% from $8.703 million a year earlier. The company expected to fill substantially all current backlog within 12 months, but cautioned that orders can be cancelled, deferred or changed.
- Research and development expense rose to $2.285 million from $2.005 million. Management’s strategy emphasizes organic growth, product development and selective acquisitions; it gave no quantified revenue or earnings guidance.
- International revenue was $12.404 million, or 47.3% of total revenue, compared with $14.619 million, or 49.2%, in 2012. The largest customer contributed 10.8% of 2013 revenue. Two contract manufacturers accounted for 16.3% of revenue; one ceased frequency-control production in the fourth quarter, and the other was expected to remain significant in 2014.
- Operating cash outflow was partly offset by working-capital reductions, including lower receivables and inventory. Capital expenditures were $448,000. Cash declined by $1.442 million during the year.
Principal risks and contingencies
The company depends on a single product line and operates in cyclical, competitive markets with limited near- and medium-term revenue visibility. Other material risks include customer and contract-manufacturer concentration, order cancellations, supply-chain interruptions, international operations, U.S. government procurement requirements, and the ability to develop and qualify new products. The revolver’s borrowing base can shrink, and future covenant compliance or facility renewal may be difficult. Management stated it could not assure that restructuring or the Trilithic acquisition would restore profitability. No material litigation was reported; routine litigation was not expected to have a material adverse effect. The company reported effective disclosure controls and internal control over financial reporting as of December 31, 2013; the auditor did not provide an internal-control attestation.
Investor verification priorities
- Review the deferred-tax valuation allowance and the assumptions supporting any future realization of tax assets.
- Confirm the status and terms of the Chase facility after its June 30, 2014 maturity, including covenant compliance, waiver scope and borrowing availability.
- Track whether restructuring savings materialize and whether operating cash flow and profitability improve.
- Assess backlog conversion, customer demand and pricing, including the exposure to the largest customer and remaining contract manufacturer.
- Verify the Trilithic assets’ integration, purchase accounting and contribution to sales and margins.