LGL Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
Business context
LGL is a holding company operating in electronic components, including frequency and spectrum control products, and electronic instruments, including frequency and time reference standards. The electronic components business is its larger segment.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $6.338 million | $5.262 million | $18.440 million | $16.745 million |
| Gross margin | 39.5% | 33.2% | 39.6% | 33.9% |
| Operating income | $477,000 | $1,000 | $1.124 million | $153,000 |
| Net income | $478,000 | $17,000 | $1.143 million | $148,000 |
| Diluted EPS | $0.10 | $0.01 | $0.24 | $0.06 |
Q3 revenue increased 20.4%; nine-month revenue increased 10.1%. Management attributed growth principally to higher filter sales and, to a lesser extent, time-and-frequency products. Gross margin improved as the company shifted away from lower-margin purchased products toward more complex, higher-margin offerings. Approximate operating margins were 7.5% for Q3 2018 and 6.1% for the first nine months of 2018, versus approximately 0% and 0.9% in the respective prior-year periods.
- Segments: Q3 electronic components revenue was $6.028 million, with operating income of $1.126 million; electronic instruments revenue was $310,000, with operating income of $24,000. Nine-month segment revenue was $17.593 million and $847,000, respectively. Unallocated corporate expense was $673,000 for Q3 and $1.239 million year to date.
- Cash flow: Nine-month operating cash flow was $689,000, compared with $186,000 in 2017. Investing activities used $12.507 million, principally reflecting purchases of marketable securities; financing activities provided $954,000, mainly from warrant exercises.
- Liquidity: At September 30, cash and cash equivalents were $2.386 million and marketable securities were $16.261 million. Working capital was $24.279 million; the current ratio was 8.65:1. Cash declined from $13.250 million at year-end, primarily because funds were invested in marketable securities. The company reported no outstanding debt; its $3 million revolving credit facility expired September 30, 2018.
- Other balance-sheet data: Total assets were $30.191 million and stockholders’ equity was $27.016 million. Current liabilities totaled $3.175 million.
Material changes, outlook and risks
- Backlog was $16.062 million at September 30, up 62.0% from $9.917 million a year earlier. Management said it expected to fill the backlog within the next 12 months, but gave no assurance about the timing or portion fulfilled in any particular year; backlog includes signed contracts and agreed letters of intent.
- Management believed existing cash and cash generated from operations would meet working-capital and capital-expenditure needs for the next 12 months. No specific revenue or earnings guidance was provided. The company does not expect to pay cash dividends for the foreseeable future.
- Other income included investment gains: the statements report $164,000 for the first nine months of 2018, while a related-party note says investments managed by a related entity generated $200,000 of realized and unrealized investment income during 2018. The filing does not clearly reconcile these disclosed amounts. The company held $16.251 million with the related fund manager at quarter-end; management fees were expected to average less than 0.25% annually.
- The company adopted the new revenue-recognition standard effective January 1, 2018, with no cumulative adoption adjustment. It also adopted ASU 2016-01, recording a $35,000 cumulative adjustment to retained earnings; investment fair-value changes are now recognized in net income.
- The September 30 deferred-tax-asset balance was approximately $5.5 million, with a $5.4 million valuation allowance. Management said a full valuation allowance remained against U.S. net deferred tax assets, while certain foreign tax attributes were considered realizable; any future allowance release would affect earnings.
- The company disclosed ordinary-course exposure to product liability, patent, worker and other claims, but no material pending legal proceedings. It reported no off-balance-sheet arrangements and no material changes to internal control over financial reporting; disclosure controls were considered effective.
Important facts for investors to verify
- Whether the elevated backlog converts to revenue on the expected timetable, particularly given that it includes letters of intent and may be subject to cancellations or deferrals.
- The composition, liquidity, valuation and related-party governance of the $16.251 million held with the fund manager, and the discrepancy between the $164,000 and $200,000 investment-income disclosures.
- The status and terms of replacement borrowing capacity following expiration of the $3 million revolver.
- Future realizability of deferred tax assets and any change to the valuation allowance.
- Share-count comparability: weighted-average basic shares rose to 4.723 million for the nine-month period from 2.675 million in 2017, following warrant and option exercises; warrants produced $927,000 of proceeds and 123,593 shares were issued.