LGL Group Inc (LGL) 2009 Q1 法說會逐字稿

Good afternoon and welcome to the LGL Group's first quarter 2009 investor call. My name is Harold Castle and I'm the Chief Financial Officer. Joining us today are Bob Zylstra, our CEO and President, and Neal Renuart, our Corporate Controller. Please note that our financial information can be obtained by accessing our website, www.LGLGroup.com.

If I may, sometimes technology doesn't always work. Your phones are supposed to be muted. However, that is not the case. So if you would, if you could put it on mute. This way, we won't hear your background information and then when we're done, we'll unmute it.

Our comments are going to be covered by the Safe Harbor statement. At this point in time, I would like to introduce Bob Zylstra, who will provide us with a business update. Bob?

Thanks, Harold. During our call this afternoon, I plan to cover these general areas for our Company. First, we'll talk about our business in the midst of this global economic turmoil. Then I'll have a few comments regarding the impact of recent Company changes that we have already announced. We have a few comments on the Company's gross margin results for the past quarter, and then I'll make some comments about ongoing management direction for our Company.

So I'll begin by taking a look at the revenue trend, really, in the context of the current global economic turmoil. Our bookings and our revenue are clearly showing the impact of this economic problem. We are seeing routine reports from our customers and from industry analysts that all of our significant market segments are being affected, but to varying degrees.

By major market segment, our customers in telecommunications have reported revenue growth of anywhere from plus 5 to minus 37%. In the military, which is the best performing of our market segments, we have seen our customers report revenue growth of plus 2% to plus 10%. In avionics, we've seen minus 4 to minus 15%. In test and measurement we've seen minus 21 to minus 25. In general in our distribution markets, we've seen anywhere from minus 10 to minus 20%. So this sort of sets the context of our Company and the major revenue drop we've seen for the quarter.

For the period, we reported that our revenue dropped 25% from the fourth quarter of 2008 and 23% from the quarter a year ago. The fall in our customer revenue is the primary contributor to our reduced revenue. But we're also seeing the impact of a supply chain reduce its inventory level and this is further accentuated by the increased level of conservatism as our customers delay the placement of purchase orders until the last possible moment. Our Asia revenue is clearly showing the effect of telecommunications slowdown, and its effect on the orders being placed by OEMs to the Asian contract manufacturers and, hence, their orders to us.

Our sales and our management team are continuing to bring very focused support to these OEMs and these major market segments of telecommunications, military and aerospace, and test and measurement. We are most optimistic about the potential in the military markets for 2009. We also see selected opportunities in other traditional market segments, primarily among the Asian telecommunication OEMs. Seeing this, Our management team clearly recognizes the significant global economic turmoil and its impact on our markets. We are not offering guidance but we are closely monitoring the situation and are making adjustments in real time.

Moving on to an update on two announcement we made within the past few months. Earlier this year we announced the hiring of a Chief Operating Officer, Hans Wunderl. Hans is providing direct strong leadership in our manufacturing and in our sales efforts. We've made significant operational changes in our manufacturing operations.

We continue to move our manufacturing operation into India and into our contract suppliers, primarily in China. Although we've had almost no employee severance expenses, during this quarter, we did experience some significant expenses as we retrained a reduced USA workforce, redefined USA manufacturing jobs, and implemented processing changes. We expect these changes will have a growing positive effect on our margins going forward.

In response to the macroeconomic environment and its expected impact on our business, we had earlier announced spending reductions that are being implemented. We are on track to exceed the $3 million in annual structural spending. The most direct indicator of this is the spending reductions in Q1 operating expenses, where they dropped 21% from Q1 of 2008. Additional structural spending projects were implemented during the quarter, and further spending cuts were under evaluation.

Just a couple of comments regarding gross margins for the Company. In this business climate, we are experiencing increased pricing pressure from customers and from our competitors. During the quarter, we were able to make very real reductions in manufacturing overhead spending, which partially offset the declines in revenue and selling prices. Unfortunately, these changes were not sufficient to allow us to achieve a suitable gross margin percentage.

Our operations and engineering team have identified new opportunities where the Company's technology can enable new business. There are markets that have good potential business where we can penetrate with our engineering capabilities to design customized products. We have seen the emergence of new business to sell our electronic filter products into earth-orbiting satellites. These products are going for both military and commercial satellites that are being used for communications and other applications. At this time, these opportunities are small, but they are an important part of our business.

We continue to see our engineering capability as a key resource for the Company that will allow us to gain new business and improve margins by creating higher value products. Because of this, we will carefully manage our Company, resizing efforts in an attempt to best preserve this core capability of the Company. We do expect to be making some additional announcements on this regarding new technology and sales efforts during the upcoming few months.

It is clear to the management team that the economic climate will make the rest of the year very challenging. We believe we are taking the right steps to reduce our spending and to explore options for new business. We are monitoring the business situation closely and will be modifying plans as necessary, as the year continues to unfold. That brings my comments to an end, and with this I'm going to hand it back to Howard, if you'll give us an update on financial results, please . Howard, are you there?

I'm here. Sorry.

Our cash and capital resources continue to be strong. Company's cash and cash investments at March 31st, 2009 were $5.401 million. In addition, M-tron PTI has unused borrowing capacity of $4.117 million under its revolving line of credit at March 31st, 2009. As discussed in our 10-Q, our subsidiary M-tron PTI was not in compliance with our bank loans fixed charge and tangible net worth covenants. M-tron PTI received waivers from the banks for this non-compliance. We are currently in process of amending our bank agreements and we project that we will be in compliance through March 31, 2010.

A couple of additional comments regarding our operations. Our consolidated revenues decreased by $2.241 million, or 23% to $7.542 million for the first quarter of 2009 from $9.783 million for the comparable period in 2008. In addition, our consolidated revenues decreased by $2.456 million, or 25% from the fourth quarter of 2008. These decreases are primarily due, as Bob had mentioned before, to the general economic slowdown, and the corresponding decreases in demands for the electronic component in which our products are used.

Consolidated gross margins as a percentage of revenues for the first quarter of 2009 decreased to 21.9%, from 26.9% for the comparable period in 2008, and 25.2% in Q4 2008. These drops in gross margin dollars are primarily attributable to the overall slowdown in the revenues, combined with a minimum fixed cost infrastructure required to run the business at a reduced revenue volume.

Regarding our operating loss, our loss was $904,000 for the first quarter of 2009, which is an increase of $448,000 from the $456,000 operating loss we had for Q1 2008. This increase in operating loss could be primarily attributable to the previously described revenue decrease and the 5% reduction in gross margin. The increase in operating loss is partially offset by a decrease in engineering, selling and admin expenses of $531,000 in Q1 2009, compared to the same period in 2008. The reduction in engineering, selling and in admin expenses were primarily driven by a decrease in headcount, a decrease in professional fees, and a decrease in the cost of continuing to comply with Sarbanes-Oxley.

At this point in time, we'll open the phones, although I think the phones have been open the whole time during our discussion, so if you have it on mute, please take it off and we'd love to hear from you.

Are there any questions? Comments?

Well, I had a question. Can you give any guidance whatsoever on the impact of the new products that have been placed with a dozen or so companies?

I'll go ahead and take that. This is Bob Zylstra. Normally, we simply at that level detail, we normally do not report at that level of detail. We put out that press release really to give our shareholders and potential investors some insight into the amount of progress we were making on penetrating the space business, and we think it's a good reflection, again, of the progress we're making there. Other than saying that we expect that to be a growing portion of revenue for us over the next couple of years, I don't think we can give any specifics beyond that .

(technical issues) Let's make sure everybody gets on that flight, now. Sorry about that. Are there any further comments or questions?

Could I ask a question of Mr. Zylstra?

Please.

Mr. Zylstra, you attended a couple of investor conferences in the past couple months. Could you give us any general sense of what kind of comments you heard at any of those?

I think those investor presentations were primarily to reach a growing audience of potential investors for the Company. We believe that we have a good story, and quite frankly we believe the Company's decision that as we emerge, we can be a real significant investment opportunity for a number of today's stockholders, as well as future investors, and that was the primary objective in presenting to those conferences.

The general nature of response that we've had was an interest in the nature of our business, particularly the markets we approach, but I think the general question still remained as to what does the real economic impact or what will the economic impact be of the current broad economic problems that the world is looking at and that's a difficult question, obviously, to answer in this environment.

Are there any further questions?

Hello?

Well, if there are no further questions, I want to thank everyone for joining us this afternoon and have a pleasant day.