LGL Group, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. LGL is a holding company operating in electronic components and electronic instruments, including frequency-control products and timing-reference instruments. The unaudited results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $5.262 million | $5.128 million | $16.745 million | $15.115 million |
| Gross margin | 33.2% | 34.6% | 33.9% | 33.4% |
| Operating income (loss) | $1,000 | ($28,000) | $153,000 | ($164,000) |
| Net income (loss) | $17,000 | $32,000 | $148,000 | ($78,000) |
| Net income (loss) per diluted share | $0.01 | $0.01 | $0.06 | ($0.03) |
- Cash flow: For the first nine months, operating cash flow was $186,000 (prior year: $268,000); investing cash outflow was $988,000 (prior year: $364,000). Cash and cash equivalents declined $802,000 to $1.976 million.
- Liquidity: Marketable securities were $3.787 million, making cash and marketable securities $5.763 million combined. Working capital was $10.711 million; current ratio was 5.44:1.
- Debt and credit: No revolving credit was drawn at September 30. A $3.0 million revolving facility expires September 30, 2018; borrowings require cash collateral. The filing reports no outstanding balance.
- Balance sheet: Total assets were $16.499 million, current liabilities $2.410 million, and stockholders’ equity $14.089 million.
Changes versus comparable periods
- Q3 revenue rose 2.6% year over year, but gross margin declined 1.4 percentage points. Management said Hurricane Irma caused lost production days at the Orlando facility.
- Nine-month revenue increased 10.8%. Management attributed about 60% of the increase to its shift away from lower-margin commodity business toward more complex products, particularly for aerospace and defense; the remainder was primarily attributable to the PTF acquisition in September 2016.
- Nine-month operating results improved to income from a loss, reflecting higher revenue and modestly improved gross margin. Q3 operating results improved slightly, as lower engineering, selling and administrative expense partly offset weaker gross margin.
- Nine-month net income also benefited from the comparison with a prior-year loss. Prior-year other income included $118,000 of net insurance proceeds and a $4,000 bargain-purchase gain; current-period other income included a $21,000 gain on marketable securities sales.
- Backlog was $9.917 million at September 30, down 8.8% from June 30 and 10.0% year over year. Management attributed the decline primarily to a three-year contract pushed from Q3 to Q4.
Outlook, risks, and notable items
- No quantitative earnings or revenue guidance was provided. Management expects to fill the entire reported backlog within 12 months, but cautioned that it cannot assure how much will be fulfilled in any particular year.
- Management believes cash and cash generated from operations will meet working-capital and capital-expenditure needs for the next 12 months, while noting it may seek additional capital for growth or strategic objectives.
- A rights offering was underway after quarter-end: three transferable rights per September 5 record-date share, each allowing purchase of one-quarter share at $5.50 per whole share, with an oversubscription feature. The deadline was extended to November 13, 2017. Proceeds, if any, were intended for general corporate purposes, acquisitions, and business development; no specific opportunity had been identified.
- The company held approximately $3.778 million in a market-neutral mutual fund managed by an entity related through a common director; one director was also a 10% stockholder and an executive of the fund manager.
- Management recorded a $30,000 tax provision for the nine-month period and maintained a full valuation allowance against remaining U.S. net deferred tax assets; it considered foreign NOL-related deferred tax assets realizable.
- Management reported no material pending legal proceedings beyond routine matters, no off-balance-sheet arrangements, and effective disclosure controls as of September 30. The company does not expect to pay cash dividends in the foreseeable future.
Important facts for investors to verify
- Whether the deferred three-year contract converted to revenue and how backlog developed after September 30.
- The final participation, share issuance, and net proceeds from the rights offering, and the use of any proceeds.
- Future operating margins and cash generation, given the Q3 margin decline and lower nine-month operating cash flow.
- The performance, liquidity, and governance implications of the marketable-securities investment managed by the related fund manager.
- Whether the credit facility remains undrawn and the company’s liquidity position after the reporting date.