LGL Group, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; financial statements are unaudited. LGL is a holding company whose subsidiaries manufacture and market electronic components for timing and frequency control applications.
Financial results
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Revenue | $6.131 million | $7.398 million; down 17.1% |
| Gross margin | 26.0% | 32.5% |
| Operating loss | $814,000 | $278,000 |
| Net loss | $809,000 | $83,000 |
| Basic and diluted loss per share | $0.31 | $0.03 |
| Cash used in operating activities | $540,000 | $736,000 |
| Cash and cash equivalents at period end | $6.097 million | $7.183 million at Dec. 31, 2013 |
| Restricted cash | $1.500 million | $1.500 million at Dec. 31, 2013 |
| Bank revolving loan outstanding | $1.395 million | $1.181 million at Dec. 31, 2013 |
| Working capital | $11.288 million | $12.446 million at Dec. 31, 2013 |
| Current ratio | 3.37 to 1 | 3.76 to 1 at Dec. 31, 2013 |
Investing activities used $760,000, including $700,000 of cash consideration for acquired product-line assets and $12,000 of capital expenditures. Financing activities provided $214,000, primarily from net borrowings. Interest expense was $8,000; the company recorded no income tax benefit in Q1 2014, versus a $213,000 benefit in Q1 2013. Gross profit was approximately $1.596 million, compared with $2.402 million in the prior-year quarter.
Material changes and business developments
- Revenue fell primarily because of price compression and weaker demand from existing customers in Internet Communications Technology (ICT), and to a lesser extent Aerospace and Defense.
- Gross margin declined by 6.5 percentage points, attributed to lower revenue and a less favorable product mix. Engineering, selling and administrative expense fell $270,000, partly offsetting the decline, following a 2013 restructuring.
- On January 31, 2014, MtronPTI acquired certain Trilithic fixed and tunable frequency filter product-line assets for $700,000 net cash consideration, excluding acquisition costs. The acquired intellectual property and equipment serve cellular, military and other wireless applications.
- Order backlog was $9.128 million at March 31, up 6.1% from December 31, 2013, and 9.2% year over year. Management attributed the increase to repeat orders and orders associated with the acquisition.
Liquidity, outlook and risks
- Management expects existing cash, operating cash generation and available revolving-credit borrowings to meet working-capital and capital-expenditure needs for the next 12 months, but said additional capital might be needed for growth, flexibility or strategic objectives.
- Management expects to fill substantially all current backlog within 12 months, but cautioned that cancellations, deferrals and scope changes occur and that it cannot assure the timing of fulfillment.
- The $1.5 million revolving credit facility was nearly fully drawn, leaving approximately $105,000 of available capacity at quarter end. Its obligations are secured by MtronPTI assets and cash collateral; the $1.5 million deposit is restricted and unavailable for general use. The facility’s stated maturity was September 30, 2014, following a May 5 lender-approved extension.
- MtronPTI failed its minimum tangible-net-worth covenant at March 31: $3.992 million against a $6.0 million requirement. Chase waived the noncompliance in a May 5, 2014 letter. Investors should monitor covenant compliance and future facility renewal or refinancing.
- The company maintains a full valuation allowance against deferred tax assets. It reported no material-adverse-effect litigation and identified no new risk factors in this 10-Q; the filing refers readers to the 2013 Form 10-K for broader risks.
- No cash dividends are expected for the foreseeable future. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether demand, pricing and product mix improve enough to restore revenue and gross margin, and whether backlog converts to sales as expected.
- Whether the Trilithic acquisition contributes revenue and strengthens the targeted ICT and Aero/Defense businesses.
- Whether the company sustains adequate unrestricted liquidity, given operating cash use, restricted collateral and limited remaining revolver capacity.
- Whether MtronPTI meets the credit agreement’s tangible-net-worth covenant after the waiver and obtains continued or replacement financing before maturity.
- Whether the full deferred-tax valuation allowance, inventory-obsolescence reserve and customer-receivable allowances remain appropriate as business conditions evolve.