LGL Group, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited results; amounts below are in thousands of dollars except per-share data.
Business context
LGL is a holding company operating in electronic components and electronic instruments. Its products include frequency and spectrum control components and frequency/time reference instruments. The electronic instruments segment reflects PTF, acquired in September 2016.
Financial performance and liquidity
| Metric | Three months ended June 30, 2017 | Six months ended June 30, 2017 |
|---|---|---|
| Revenue | $5,859; +12.0% year over year | $11,483; +15.0% |
| Gross margin | 31.9%, down from 33.9% | 34.3%, up from 32.8% |
| Operating income (loss) | $44, compared with $26 | $152, compared with $(136) |
| Net income (loss) | $20; $0.01 per share | $131; $0.05 per share, compared with $(110); $(0.04) per share |
| Operating cash flow | Not reported for quarter alone | $410, compared with $43 |
Electronic components revenue was $5,626 for the quarter and $11,018 for the six months; electronic instruments contributed $233 and $465, respectively. Management attributed most year-to-date revenue growth to its shift toward more complex, higher-value products, particularly in aerospace and defense; the balance came from PTF.
Quarterly gross margin declined due mainly to approximately $400 of lower-margin introductory projects, which management said are expected to lead to follow-on work at 32%–38% margins. Six-month margin improved, primarily alongside revenue growth. Quarter operating income rose modestly as lower engineering, selling and administrative costs partly offset weaker gross margin.
At June 30, cash and cash equivalents were $2,158, marketable securities were $3,813, and total current assets were $13,325 against current liabilities of $2,666. Working capital was $10,659 and the current ratio was 5.00:1. The company had no revolver borrowings and no other debt balance reported; its $3,000 revolving credit facility expires September 30, 2018. Six-month investing cash outflow was $1,030, primarily reflecting a $1,002 transfer of Treasury investments into equity securities; capital expenditures were $28. No financing cash flows were reported.
Changes, outlook and risks
- Revenue increased year over year in both the quarter and six-month period. The six-month period moved from an operating and net loss to profit.
- Backlog was $10,877 at June 30, flat sequentially and 12.3% above the year-earlier level. Management expects to fill the entire backlog within 12 months, but cautions it cannot assure how much will be fulfilled in any particular year. Backlog includes signed contracts and agreed letters of intent and is subject to cancellations, deferrals and scope changes.
- Management said existing cash, operating cash generation and available credit should cover working capital and capital expenditures for the next 12 months, while noting it may seek capital for growth or strategic objectives. No cash dividends are expected for the foreseeable future.
- The six-month tax provision was $28. Management retained a valuation allowance against U.S. net deferred tax assets but determined foreign NOL-related deferred tax assets are more likely than not to be realized; changes in that assessment could affect earnings.
- A market-neutral mutual fund investment of approximately $3,763 is managed by an entity related through a common director; one director and 10% stockholder is an executive of the fund manager. Management says transactions were directed solely at its discretion.
- The filing reports only routine litigation and no material pending legal proceedings; management does not expect routine claims to have a material adverse effect. It reported no off-balance-sheet arrangements and stated disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether introductory lower-margin projects convert into follow-on work at the margins management anticipates, and how the product-mix transition affects profitability.
- Backlog conversion, including the proportion represented by letters of intent and any cancellations, deferrals or changes in project scope.
- The composition, liquidity and valuation sensitivity of the $3,813 marketable-securities portfolio, including the related-party-managed fund exposure.
- Cash availability and the terms of the cash-collateralized revolving facility if drawn; confirm the company’s stated 12-month liquidity outlook.
- Future tax-asset realizability and any changes to the U.S. valuation allowance or foreign NOL assumptions.