The LGL Group, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; compared primarily with fiscal 2013. This is an annual report, not a standalone fourth-quarter report. LGL operates principally through MtronPTI, a single-segment manufacturer of engineered frequency- and spectrum-control electronic components for aerospace, defense, communications, networking, instrumentation and industrial markets.
Financial performance and position
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $23.013 million | $26.201 million |
| Gross margin | 27.5% | 26.1% |
| Operating loss | $2.829 million | $4.164 million |
| Net loss | $2.825 million | $8.219 million |
| Basic and diluted loss per share | $1.09 | $3.17 |
| Cash used in operating activities | $1.299 million | $0.664 million |
| Cash and cash equivalents at year-end | $5.192 million | $7.183 million |
| Working capital at year-end | $9.909 million | $12.446 million |
| Debt at year-end | $0 outstanding | $1.181 million bank note payable |
- Revenue declined 12.2%. Gross profit was approximately $6.328 million, consistent with the reported 27.5% gross margin.
- Investing activities used $1.011 million, including the $700,000 cash purchase of Trilithic filter-line assets. Financing activities provided $319,000, primarily reflecting release of the former $1.5 million cash collateral after termination of the Chase facility, net of debt repayment.
- Current assets were $12.934 million and current liabilities $3.025 million; the current ratio was 4.28. Total assets were $17.262 million and stockholders’ equity was $14.237 million.
- A new $3.0 million City National revolving facility runs to September 30, 2016 and bears interest at 30-day LIBOR plus 200 basis points. Outstanding borrowings require matching cash collateral; there was no borrowing or related restricted cash at year-end. The facility also carries a fee of 0.75% per year on unused capacity.
Changes, developments and management commentary
- Management attributed lower revenue mainly to price compression and lost share with certain Internet Communications Technology customers, and, to a lesser extent, reduced demand in aerospace and defense.
- Operating loss improved by $1.335 million, reflecting the 1.4-point gross-margin improvement and a $1.651 million reduction in engineering, selling and administrative expenses following restructuring. Restructuring charges were $465,000 in 2014 versus $648,000 in 2013.
- Net loss improved substantially from 2013, when a $3.948 million tax provision included a large valuation-allowance increase. The 2014 tax benefit was only $4,000; the company maintained a full valuation allowance against otherwise recognizable U.S. net deferred tax assets.
- The company acquired Trilithic filter-product assets for $700,000 and expanded Noida production and testing capacity, adding a design center. Strategic partnerships also broadened Spectrum Control offerings to millimeter-wave filters and diplexers up to 90 GHz and solid-state amplifiers.
- Year-end order backlog was approximately $8.8 million; the filing says management expected to fill the entire backlog in 2015, while cautioning that cancellations, deferrals and scope changes occur and fulfillment is not assured.
- Management stated that cash and expected operating cash generation should fund working capital and capital expenditures for the next 12 months, but noted that additional capital could be sought for growth or strategic objectives. No specific revenue or earnings guidance was provided.
- Research and development expense was $2.166 million, down from $2.285 million. The company reported one customer at 11.0% of revenue and three customers representing 31.3% of receivables at year-end.
Risks, contingencies and unusual items
- The business depends on one product line and operates in cyclical, competitive markets with limited near- and medium-term revenue visibility. Customer concentration, customer order cancellations, and international sales exposure add uncertainty.
- Operating cash use increased despite the smaller net loss. Cash declined by $1.991 million during the year. The revolver’s cash-collateral requirement limits usable borrowing capacity to the extent cash is available to secure draws.
- Accrued warranty expense rose to $242,000 from $22,000; management cited an isolated product defect and a related $220,000 increase in accrued warranty expense. The filing describes the standard warranty as one year.
- Inventory obsolescence reserve was $2.802 million, up from $2.586 million. Raw-material supply and pricing volatility, reliance on some single or limited sources, and product defects are identified risks.
- The company recorded a full valuation allowance against U.S. deferred tax assets; realization of tax attributes depends on future taxable income. U.S. federal and state NOL carryforwards were $9.471 million and $21.780 million, respectively.
- The company reported no material legal proceedings and no off-balance-sheet arrangements. Routine litigation may arise in the ordinary course. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end; the auditor issued an unmodified opinion on the financial statements and did not audit internal controls.
- No cash dividends have been paid since 1989, and none are expected for the foreseeable future. Management warned of volatility and limited liquidity in the company’s publicly traded shares and warrants.
Important facts for investors to verify
- Whether 2015 sales, gross margin and cash generation improved, and how much of the year-end backlog converted to revenue.
- Whether the restructuring and new product offerings deliver sustainable operating profitability, not just lower costs.
- Warranty claim developments and any further costs related to the isolated product defect.
- Cash availability, collateral requirements, and actual borrowing availability under the City National facility.
- Customer receivable concentration, inventory reserve adequacy and realization of deferred tax assets.
- The filing presents backlog as $8.792 million in one section and $8.793 million in another; verify the exact reported figure against the filed financial statements.