Notes to Condensed Cons
olidated Financial Statements
(Unaudited)
A.
|
Subsidiaries of the Registrant
|
The LGL Group, Inc. (the “Company”), incorporated in 1928 under the laws of the State of Indiana and reincorporated under the laws of the State of Delaware in 2007, is a holding company with subsidiaries engaged in the designing, manufacturing and marketing of highly-engineered,
high
reliability frequency and spectrum control products
used to control the frequency or timing of signals in electronic circuits, and in the design of high performance Frequency and Time Reference Standards that form the basis for timing and synchronization in various applications.
As of March 31, 2018, the subsidiaries of the Company were as follows:
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|
Owned By
The LGL
Group, Inc.
|
|
M-tron Industries, Inc.
|
|
|
100.0
|
%
|
Piezo Technology, Inc.
|
|
|
100.0
|
%
|
Piezo Technology India Private Ltd.
|
|
|
99.0
|
%
|
M-tron Asia, LLC
|
|
|
100.0
|
%
|
M-tron Industries, Ltd.
|
|
|
100.0
|
%
|
GC Opportunities Ltd.
|
|
|
100.0
|
%
|
M-tron Services, Ltd.
|
|
|
100.0
|
%
|
Precise Time and Frequency, LLC
|
|
|
100.0
|
%
|
Lynch Systems, Inc.
|
|
|
100.0
|
%
|
The Company operates through its two principal subsidiaries, M-tron Industries, Inc. (“MtronPTI”), which includes the operations of Piezo Technology, Inc. (“PTI”) and M-tron Asia, LLC (“Mtron”), and Precise Time and Frequency, LLC (“PTF”). The Company
operates in two identified segments. The first segment, the electronic components segment, is focused on the design and manufacture of highly-engineered, high reliability frequency and spectrum control products. These electronic components ensure reliability and security in aerospace and defense communications, low noise and base accuracy for laboratory instruments, and synchronous data transfers throughout the wireless and Internet infrastructure. The second segment, the electronic instruments segment, is focused on the design and manufacture of high performance Frequency and Time Reference Standards that form the basis for timing and synchronization in various applications.
The Company has operations in Orlando, Florida, Yankton, South Dakota, Wakefield, Massachusetts and Noida, India and sales offices in Sacramento, California, Austin, Texas and Hong Kong.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2018.
This interim information should be read in conjunction with the audited consolidated financial statements and related notes thereto set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (the “SEC”) on March 22, 2018. The accompanying unaudited condensed consolidated financial statements should also be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q.
Revenue Recognition
Effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09, "Revenue from Contracts with Customers", also known as the "New Revenue Standard" (“ASU 2014-09”), on a modified retrospective basis, with no cumulative effect of adoption to any of the financial statement line items. The Company’s revised policy is as follows:
The Company recognizes revenue from the sale of its products in accordance with the criteria in Accounting Standards Codification (“ASC”) 606,
Revenue From Contracts with Customers
, which are:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
6
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
The Company meets these conditions upon the Company’s satisfaction of the performance obligation, usually at the time of shipment to the customer, because title and control passes to the customer at that time. Our standard terms for customers are net due within 30 days, with a few exceptions, none regularly exceeding 60 days.
The Company provides disaggregated revenue details by segment in Note J – Segment Information, and geographic markets in Note K – Domestic and Foreign Revenues.
The Company offers a limited right of return and/or authorized price protection provisions in its agreements with certain electronic component distributors who resell the Company's products to original equipment manufacturers or electronic manufacturing services companies. As a result, the Company estimates and records a reserve for future returns and other charges against revenue at the time of shipment consistent with the terms of sale. The reserve is estimated based on historical experience with each respective distributor. These reserves and charges are immaterial as the Company does not have a history of significant price protection adjustments or returns.
The Company provides a standard assurance warranty that does not create a performance obligation.
The Company applies the practical expedient for shipping and handling as fulfillment costs.
Inventories are valued at the lower of cost or net realizable value using the FIFO (first-in, first-out) method. The Company reduces the value of its inventories to net realizable value when the net realizable value is believed to be less than the cost of the item. The inventory reserve for obsolescence as of March 31, 2018 and December 31, 2017 was $1,263,000 and $1,213,000, respectively.
Inventories are comprised of the following (in thousands):
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March 31,
2018
|
|
|
December 31,
2017
|
|
Raw materials
|
|
$
|
1,668
|
|
|
$
|
1,526
|
|
Work in process
|
|
|
1,585
|
|
|
|
1,337
|
|
Finished goods
|
|
|
755
|
|
|
|
1,012
|
|
Total Inventories, net
|
|
$
|
4,008
|
|
|
$
|
3,875
|
|
Intangible assets are recorded at cost less accumulated amortization which is included in engineering, selling and administrative expenses in the accompanying unaudited condensed consolidated statements of operations. Amortization is computed for financial reporting purposes using the straight-line method over the estimated useful lives of the assets, which range up to 10 years. The intangible assets consist of intellectual property and goodwill. The net carrying value of the amortizable intangible assets was $492,000 and $512,000 as of March 31, 2018 and December 31, 2017, respectively. Goodwill, which is not amortizable, was $40,000 as of both March 31, 2018 and December 31, 2017.
On September 30, 2016, MtronPTI renewed its Loan Agreement (the “CNB Loan Agreement”) with City National Bank of Florida (“City National”). The CNB Loan Agreement provides for a revolving line of credit in the amount of $3.0 million (the “CNB Revolver”), which bears interest at a variable rate equal to the 30-day London Interbank Offered Rate (“LIBOR”) plus 200 basis points to be set on the first day of each month, and expires on September 30, 2018. The CNB Loan Agreement also provides that MtronPTI will pay City National a fee equal to 0.75% per year on the daily unused amount. The Company's obligations under the CNB Loan Agreement are secured only by cash collateral and do not require any other liens.
As of March 31, 2018 and December 31, 2017, there was no balance outstanding under the CNB Revolver and no associated restricted cash.
7
F.
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Stock-Based Compensation
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The Company measures the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes the cost over the requisite service period, typically the vesting period.
The Company estimates the fair value of stock options on the grant date using the Black-Scholes-Merton option-pricing model. The Black-Scholes-Merton option-pricing model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. There is no expected dividend rate. Historical Company information was the basis for the expected volatility assumption as the Company believes that the historical volatility is indicative of expected volatility over the life of the option. The risk-free interest rate is based on the U.S. Treasury zero-coupon rates with a remaining term equal to the expected term of the option.
Compensation expense related to share-based compensation is recognized over the applicable vesting periods. As of March 31, 2018, there was approximately $38,000 of total unrecognized compensation expense related to unvested share-based compensation arrangements that will be recognized over a weighted average period of 1.8 years.
The Company computes earnings per share in accordance with ASC 260,
Earnings Per Share
. Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share adjusts basic earnings per share for the effects of stock options and other potentially dilutive financial instruments, only in the periods in which the effects are dilutive. The dilutive effect of share-based awards is reflected in earnings per share by application of the treasury stock method, which includes consideration of unamortized share-based compensation expense required under the Compensation – Stock Compensation Topic of the ASC.
For the three months ended March 31, 2018 and 2017, there were options to purchase 9,541 shares and 105,135 shares, respectively, of the Company's common stock and warrants to purchase 519,241 shares of common stock that were excluded from the diluted earnings per share computation because the impact of the assumed exercise of such stock options would have been anti-dilutive during the respective periods.
The following table reconciles basic weighted average shares outstanding to diluted weighted average shares outstanding for the three months ended March 31, 2018 and 2017:
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Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Weighted average shares outstanding - basic
|
|
|
4,696,415
|
|
|
|
2,675,466
|
|
Effect of diluted securities
|
|
|
109,781
|
|
|
|
13,018
|
|
Weighted average shares outstanding - diluted
|
|
|
4,806,196
|
|
|
|
2,688,484
|
|
Share Repurchase Program
On August 29, 2011, the Company’s board of directors (“the Board”) authorized the Company to repurchase up to 100,000 shares of its common stock in accordance with applicable securities laws. This authorization increased the total number of shares authorized and available for repurchase under the Company's existing share repurchase program to 540,000 shares, at such times, amounts and prices as the Company shall deem appropriate. As of March 31, 2018, the Company had repurchased a total of 81,584 shares of common stock at a cost of $580,000, which shares are currently held in treasury.
Warrants
On August 6, 2013, the Company distributed warrants to purchase shares of the Company's common stock as a dividend to holders of the Company's common stock as of July 29, 2013, the record date for the dividend. Stockholders received five warrants for each share of the Company's common stock owned on the record date. When exercisable, 25 warrants will entitle the holder to purchase one share of the Company's common stock at an exercise price of $7.50 per share (subject to adjustment).
The warrants are “European style warrants” and will only become exercisable on the earlier of (i) their expiration date, August 6, 2018, and (ii) such date that the 30-day volume weighted average price per share, or VWAP, of the Company's common stock is greater than or equal to $15.00 (subject to adjustment). Once the warrants become exercisable, they may be exercised in accordance with the terms of the warrant agreement between the Company and the warrant agent until their expiration at 5:00 p.m., Eastern Time, on the expiration date.
The warrants are quoted on the over-the-counter market under the symbol “LGLPW”.
8
I.
|
Fair Value Measurements
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Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value guidance identifies three primary valuation techniques: the market approach, the income approach and the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts such as cash flows or earnings, to a single present amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to observable inputs such as quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The maximization of observable inputs and the minimization of the use of unobservable inputs are required.
Classification within the fair value hierarchy is based upon the objectivity of the inputs that are significant to the valuation of an asset or liability as of the measurement date. The three levels within the fair value hierarchy are characterized as follows:
Level 1
- Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2
- Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3
- Unobservable inputs for the asset or liability for which there is little, if any, market activity for the asset or liability at the measurement date. Unobservable inputs reflect the Company's own assumptions about what market participants would use to price the asset or liability. These inputs may include internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.
Assets
To estimate the market value of its marketable securities, the Company obtains current market pricing from quoted market sources or uses pricing for identical securities. Assets measured at fair value on a recurring basis are summarized below (in thousands).
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Level 1
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Level 2
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Level 3
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Total at March 31,
2018
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|
Equity Mutual Fund (Marketable securities)
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|
$
|
3,797
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,797
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|
U.S. Treasury Mutual Fund (Marketable securities)
|
|
$
|
—
|
|
|
$
|
11,793
|
|
|
$
|
—
|
|
|
$
|
11,793
|
|
|
|
$
|
3,797
|
|
|
$
|
11,793
|
|
|
$
|
—
|
|
|
$
|
15,590
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total at December 31, 2017
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|
Equity Mutual Fund (Marketable securities)
|
|
$
|
3,803
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,803
|
|
U.S. Treasury securities (Cash and cash equivalents)
|
|
$
|
11,866
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,866
|
|
|
|
$
|
15,669
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,669
|
|
There were no transfers from level 2 to level 3 during the periods presented. There were no level 3 assets as of March 31, 2018 or December 31, 2017. The Company also has assets that may be subject to measurement at fair value on a non-recurring basis, including goodwill and intangible assets, and other long-lived assets. There were no liabilities subject to fair value on a non-recurring or recurring basis as of March 31, 2018 or December 31, 2017.
The Company reviews goodwill and the carrying value of long-lived assets at least annually or whenever events and circumstances indicate that the carrying amounts of the assets may not be recoverable. If it is determined that the assets are impaired, the carrying value would be reduced to estimated fair value.
9
The Company has two reportable business segments from operations: electronic components, which includes all products manufactured and sold by MtronPTI, and electronic instruments, which includes all products manufactured and sold by PTF. The Company's foreign operations in Hong Kong and India are subsidiaries of MtronPTI. The following table sets forth activity broken down by reportable business segment (in thousands):
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|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues from Operations
|
|
|
|
|
|
|
|
|
Electronic components
|
|
$
|
5,731
|
|
|
$
|
5,392
|
|
Electronic instruments
|
|
|
214
|
|
|
|
232
|
|
Total consolidated revenues
|
|
$
|
5,945
|
|
|
$
|
5,624
|
|
Operating Income from Operations
|
|
|
|
|
|
|
|
|
Electronic components
|
|
$
|
550
|
|
|
$
|
326
|
|
Electronic instruments
|
|
|
2
|
|
|
|
36
|
|
Unallocated corporate expense
|
|
|
(394
|
)
|
|
|
(254
|
)
|
Consolidated operating income
|
|
|
158
|
|
|
|
108
|
|
Interest income (expense), net
|
|
|
12
|
|
|
|
(6
|
)
|
Other income, net
|
|
|
24
|
|
|
|
12
|
|
Total other income
|
|
|
36
|
|
|
|
6
|
|
Income Before Income Taxes
|
|
$
|
194
|
|
|
$
|
114
|
|
Operating income is equal to revenues less cost of sales and operating expenses, excluding investment income, interest expense, and income taxes.
K.
|
Domestic and Foreign Revenues
|
For the three months ended March 31, 2018 and 2017, domestic revenues were $4,511,000 and $3,982,000, respectively, and foreign revenues were $1,434,000 and $1,642,000, respectively. Significant foreign revenues from operations (10% or more of foreign sales) were as follows (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Malaysia
|
|
$
|
695
|
|
|
$
|
823
|
|
All other foreign countries
|
|
|
739
|
|
|
|
819
|
|
Total foreign revenues
|
|
$
|
1,434
|
|
|
$
|
1,642
|
|
Total domestic revenue
|
|
$
|
4,511
|
|
|
$
|
3,982
|
|
The Company allocates its foreign revenue based on the customer's ship-to location.
L.
|
Commitments and Contingencies
|
In the ordinary course of business, the Company and its subsidiaries may become defendants in certain product liability, patent infringement, worker claims and other litigation. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable.
M.
|
Related Party Transactions
|
Certain balances held and invested in various mutual funds are managed by a related entity (the "Fund Manager"), which is related through a common director who is also a 10% stockholder and currently serves as an executive officer of the Fund Manager. The brokerage and fund transactions in 2018 and 2017 were directed solely at the discretion of the Company’s management.
As of
March 31, 2018
, the balance with the Fund Manager totaled $15,581,000 which is classified as marketable securities on the accompanying consolidated balance sheet. Amounts invested generated $32,000 of investment income during 2018 that is included within other income, net on the accompanying consolidated statement of operations.
As of
December 31, 2017,
the balance with the Fund Manager totaled $14,842,000, including $11,050,000 which is classified as cash and cash equivalents on the accompanying consolidated balance sheet, and $3,792,000 which is classified as marketable securities on the accompanying consolidated balance sheet.
10
N.
Recently Issued Accounting Pronouncements
In March 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118” to provide guidance for companies that may not have completed their accounting for the income tax effects of the Tax Cut and Jobs Act (“Tax Act”) in the period of enactment, which is the period that includes December 22, 2017. ASU 2018-05 provides for a provisional one year measurement period for entities to finalize their accounting for certain income tax effects related to the Tax Act. ASU 2018-05 requires disclosure of the reasons for incomplete accounting, additional information or analysis needed, among other relevant information. The Company expects to finalize its provisional amounts by the fourth quarter of fiscal 2018.
In February 2016, the FASB issued ASU 2016–02, “Leases (Topic 842)”. The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods and is to be applied utilizing a modified retrospective approach. The Company does not expect this standard to have a material impact on its consolidated financial statements because there are no material operating leases.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities
(Topic 825)”. ASU 2016-01 revises the classification and measurement of investments in certain equity investments and the presentation of certain fair value changes for certain financial liabilities measured at fair value. ASU No. 2016-01 requires the change in fair value of many equity investments to be recognized in net income. ASU 2016-01 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company adopted this guidance effective January 1, 2018 and made a cumulative effect adjustment to the Company's retained earnings of $35,000.
In May 2014, the FASB issued ASU 2014-09. This update is the result of a collaborative effort by the FASB and the International Accounting Standards Board to simplify revenue recognition guidance, remove inconsistencies in the application of revenue recognition, and to improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to receive for those goods or services. ASU 2014-09 became effective for us on January 1, 2018 and was applied on a modified retrospective basis, with no cumulative effect of adoption to any of the financial statement line items.
No other new accounting pronouncements issued or effective during the three months ended March 31, 2018 have had or are expected to have a material impact on the Company's consolidated financial statements.
11