LGL Group, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter report. LGL designs and manufactures frequency and spectrum control components through MtronPTI and, following its September 2016 acquisition of certain assets, timing and frequency instruments through PTF.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $20.891 million | $20.713 million |
| Gross margin | 33.7% | 33.1% |
| Operating loss | ($161,000) | ($788,000) |
| Loss before income taxes | ($17,000) | ($703,000) |
| Net income (loss) | $148,000 | ($711,000) |
| Operating cash flow | $278,000 | $689,000 |
| Cash and cash equivalents | $2.778 million | $5.553 million |
| Working capital | $10.135 million | $9.876 million |
Revenue increased 0.9%, primarily attributed to the PTF acquisition. Gross margin improved 0.6 percentage points; management cited a shift away from lower-margin commodity products and toward more complex products. Engineering, selling and administrative expense fell to $7.194 million from $7.638 million. The 2016 net profit followed a $165,000 income tax benefit; the company still reported a pretax and operating loss.
Cash used in investing activities was $3.045 million, including $2.695 million for marketable securities and $295,000 for the PTF acquisition. Cash plus marketable securities was $5.548 million at year-end 2016, versus $5.609 million in 2015. Current assets were $12.890 million and current liabilities $2.755 million, for a 4.68 current ratio. No borrowings were outstanding on the $3.0 million cash-collateralized revolving credit facility; the filing reports no long-term debt.
Changes, outlook and risks
- Electronic components generated $20.691 million of revenue and $1.011 million of segment operating income. Electronic instruments contributed $200,000 of revenue and incurred a $61,000 operating loss. Corporate expense was $1.111 million.
- PTF generated $200,000 of post-acquisition sales and a $57,000 loss through year-end. The acquisition cost $295,000 and produced a $4,000 bargain-purchase gain.
- Year-end backlog rose 19.9% to $10.549 million from $8.799 million. Management expected to fill the year-end 2016 backlog during 2017, while cautioning that cancellations, deferrals and scope changes may occur.
- Management believed cash and operating cash generation would fund working capital and capital expenditures for the next 12 months; it might seek additional capital for growth or strategic opportunities. No cash dividends are expected for the foreseeable future.
- Key risks include reliance on the electronic components business, cyclical end markets, customer concentration (largest customer was 15.7% of revenue), concentrated receivables, competition, supply constraints, and the uncertain conversion of backlog into sales. International revenue was 28.7% of total and was largely transacted in U.S. dollars.
- Other notable items: a $214,000 deferred tax asset was recognized after reversing a valuation allowance on foreign net operating losses; a $7.305 million valuation allowance remained. The company disclosed routine litigation only and no material off-balance-sheet arrangements. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether the backlog converts to 2017 revenue and whether margin improvement continues.
- Whether PTF can grow beyond its limited 2016 contribution and reach profitability.
- The sustainability of earnings given the operating loss and reliance on a tax benefit for reported net income.
- Cash generation and liquidity, including the effect of investment holdings and the cash-collateral requirement on revolver availability.
- Exposure to the largest customer and the four customers representing 35.1% of year-end receivables, and realizability of deferred tax assets.