The LGL Group, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. LGL designs and manufactures frequency and spectrum-control components and frequency and time-reference instruments through its electronic components and electronic instruments segments. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $6.157 | $5.859 | $12.102 | $11.483 |
| Gross margin | 41.6% | 31.9% | 39.6% | 34.3% |
| Operating income | $0.489 | $0.044 | $0.647 | $0.152 |
| Net income | $0.472 | $0.020 | $0.665 | $0.131 |
| Diluted EPS | $0.10 | $0.01 | $0.14 | $0.05 |
- Revenue and margins: Q2 revenue rose 5.1% year over year; first-half revenue rose 5.4%. Management attributed stronger gross margins to shifting away from lower-margin purchased products toward more complex, higher-margin products, particularly for aerospace and defense markets.
- Segment revenue, Q2: Electronic components generated $5.834 million versus $5.626 million; electronic instruments generated $0.323 million versus $0.233 million. First-half segment revenues were $11.565 million and $0.537 million, respectively.
- Cash flow: First-half operating cash flow was $0.270 million, compared with $0.410 million in 2017. Capital expenditures were $0.202 million. Investing cash outflow of $11.977 million principally reflects $11.775 million invested in marketable securities.
- Liquidity and debt: At June 30, cash and cash equivalents were $1.565 million and marketable securities were $15.664 million, versus cash of $13.250 million and securities of $3.803 million at year-end 2017. Working capital was $22.760 million; the current ratio was 9.07. No borrowings were outstanding on the $3.0 million bank revolver. The revolver was scheduled to expire September 30, 2018.
- Other balance-sheet items: Total assets were $28.419 million and stockholders’ equity was $25.600 million. Current liabilities were $2.819 million. The filing reports no material operating lease impact expected from the forthcoming lease standard.
Changes, outlook and notable items
- Q2 operating income increased by $0.445 million year over year; first-half operating income increased by $0.495 million. Management cited revenue growth and product-mix-driven margin improvement.
- Backlog at June 30 was $14.478 million, up 33.1% from $10.877 million a year earlier. Management said it expects to fill the entire backlog within 12 months, while cautioning that it cannot assure how much will be fulfilled in any particular year. The company attributed the increase partly to orders received earlier than planned.
- Other income included investment-related gains recognized in net income following adoption of ASU 2016-01: $0.073 million in Q2 and $0.104 million for the first half. Adoption resulted in a $0.035 million cumulative adjustment to retained earnings. Revenue-standard adoption had no cumulative financial-statement effect.
- At June 30, $15.656 million of investments were managed by a related entity linked through a common director who was also a 10% stockholder and executive officer of the fund manager. The company reported $0.106 million of investment income from amounts invested with the manager during the first half.
- On August 6, 2018, after quarter-end, warrant exercises generated approximately $0.927 million in gross proceeds and 123,593 shares. The filing does not provide a forecast for revenue, earnings, or margins beyond its backlog commentary.
- Management said existing cash, cash equivalents and operating cash generation should meet working-capital and capital-expenditure needs for the next 12 months. No cash dividends were expected for the foreseeable future. Management reported effective disclosure controls; no material pending legal proceedings were identified beyond routine matters.
- Tax provisions were $0.078 million for Q2 and $0.079 million for the first half. Management maintained a full valuation allowance against remaining U.S. net deferred tax assets, while concluding certain foreign-loss deferred tax assets were more likely than not to be realized.
Important facts for investors to verify
- Whether the $3.0 million revolver was renewed or replaced when it reached its stated September 30, 2018 expiration.
- The composition, liquidity and risk profile of the $15.664 million securities portfolio, including the related-party fund-manager relationship.
- Backlog conversion, cancellations or deferrals, and whether orders received earlier than planned translate into sustained shipments and revenue.
- The sustainability of margin gains as product mix changes, and the effect of lower purchased-product sales on future revenue.
- The effects of warrant exercises and other share issuances on the share count and per-share results; the filing reports a substantial difference in weighted-average shares versus 2017 but does not explain that comparison in the supplied discussion.
- Future realizability of deferred tax assets and any changes to the related valuation allowances.