LGL Group, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated interim results; dollars are in thousands except per-share amounts. LGL operates primarily through MtronPTI, which manufactures engineered electronic components used to control signal frequency and timing.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $5,850 | $6,965 | $11,981 | $14,363 |
| Gross margin | 23.3% | 25.7% | 24.7% | 29.2% |
| Operating loss | $(1,278) | $(818) | $(2,092) | $(1,096) |
| Net loss | $(1,269) | $(4,964) | $(2,078) | $(5,047) |
| Basic and diluted loss per share | $(0.49) | $(1.91) | $(0.80) | $(1.94) |
- Revenue fell 16.0% in Q2 and 16.6% in the first half, mainly from price compression and weaker demand in Internet Communications Technology (ICT), and to a lesser extent Aerospace and Defense.
- Gross margin declined year over year in both periods. Management attributed the deterioration to lower revenue and a $344 increase in accrued warranty expense related to two isolated product defects.
- Operating losses widened despite lower engineering, selling and administrative expenses. The 2014 results included $397 of restructuring charges.
- Net loss improved versus 2013 largely because 2013 included a $4,135 Q2 ($3,922 first-half) tax provision associated with the deferred-tax valuation allowance; no income tax provision was recorded in 2014. Thus, the narrower net loss does not reflect improved operating performance.
Cash flow, liquidity and debt
- At June 30, cash and cash equivalents were $6,125, down from $7,183 at year-end 2013. An additional $1,500 was classified as restricted cash and pledged as collateral for the revolving loan.
- For the six months, operating cash use was $576; investing cash use was $801, including $700 paid for the Trilithic filter-product-line assets; financing provided $319. The filing’s cash-flow statement heading says “three months ended,” but its figures correspond to six-month amounts described in MD&A.
- Working capital was $10,315, versus $12,446 at December 31, 2013. The current ratio declined to 2.84 from 3.76.
- The Chase revolving loan balance was $1,500, with no remaining borrowing capacity, and was due September 30, 2014. The company said it intended to repay it from existing funds before maturity. The loan was fully cash-collateralized, with the collateral unavailable for withdrawal.
- MtronPTI failed its $6,000 minimum tangible-net-worth covenant, reporting $3,075 under the agreement’s definition. Chase waived the June 30 breach in an August 6, 2014 letter.
- Management believed available cash and cash generated from operations would meet working-capital and capital-expenditure needs for the next 12 months, while noting that additional capital might be needed for growth or strategic objectives.
Material developments, outlook and risks
- On January 31, 2014, MtronPTI acquired certain Trilithic filter-product-line assets for $700 cash, excluding acquisition costs. The acquired intellectual property and equipment are intended to strengthen its RF and microwave portfolio; the filing reported $516 net carrying value for the acquired intangible assets at quarter-end.
- Backlog was $9,563 at June 30, up 5.4% year over year and 4.8% from March 31. Management expected to fill substantially all current backlog within 12 months, but cautioned that cancellations, deferrals and scope changes occur and did not specify when orders would be fulfilled.
- A further sales, general and administrative realignment began May 27, with implementation expected to be substantially complete in Q3 2014. The quarter’s $397 charge comprised approximately $334 employee-separation costs and $63 office-closure costs; $347 remained accrued at June 30.
- The company maintains a full valuation allowance against deferred tax assets, reflecting uncertainty about future realization. It also cited risks inherent in forward-looking statements and the possibility that backlog may change. No material litigation was reported; routine litigation was not expected to have a material adverse effect.
- No numerical revenue, earnings or margin guidance was provided. The board did not expect cash dividends in the foreseeable future.
Important facts for investors to verify
- Whether the company repaid or refinanced the $1,500 Chase facility by its September 30, 2014 maturity, and any subsequent covenant status or lender waiver.
- Whether operating performance and gross margins stabilized after the revenue decline and warranty accrual; monitor the effect of the two product defects.
- Whether the restructuring was completed in Q3 as planned and whether it produced sustainable cost savings.
- Backlog conversion, cancellations and the contribution of the acquired Trilithic products to revenue and profitability.
- The cash-flow statement’s apparent period-heading inconsistency and the actual six-month cash-flow figures.