LGL Group Inc (LGL) 2010 Q2 法說會逐字稿

Good morning, everyone, and welcome to The LGL Group Q2 2010 earnings report. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. (Operator Instructions).

It is now my pleasure to turn the conference over to the Company's Chief Accounting Officer, Mr. LaDuane Clifton. Please go ahead.

Good morning and thank you for participating in today's call. Joining me today is our President and CEO, Mr. Greg Anderson.

Before we get started today, we have prepared a slide presentation for your reference that may be viewed as part of today's Web conference. The presentation materials are also available from our website at www.lglgroup.com. We ask that you locate these and use them as a guide for today's call. This call will be recorded and will be available for playback later today on our website. Other financial information and recent press releases are posted on our website as well.

Please note that our comments are covered by the Safe Harbor statement. During this call, we may include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, non-GAAP financial measures may be presented.

These statements are based on management's current expectations and are subject to uncertainties and changes in circumstances. Actual results may differ materially from these expectations due to changes in global, political, economic, business, competitive, market and regulatory factors. More detailed information about those factors is contained in The LGL Group's filings with the Securities and Exchange Commission. If at any time you need assistance during the call and Web conference, (Operator Instructions).

At this time, I would like to introduce our President and CEO, Craig Anderson.

Thank you, LaDuane, and good morning to everyone and thank you for joining this morning's call.

In today's call, I'd like to begin with a review of second-quarter business highlights; follow that with some financial highlights; then we'd like to review again why we believe we are a compelling investment opportunity; and lastly, we'll suddenly take time for your questions.

So, let's get started. Second-quarter results -- if you've had a chance to earn the earnings release that went out yesterday after market close, you can probably sense that we're excited to share second-quarter results. In our turnaround story, this is now the third consecutive quarter with both revenue and earnings growth. Total revenues for Q2 was $12.5 million. That was a 17% increase over the $10.7 million reported for Q1 of this year and a 73% increase over the $7.2 million reported for the second quarter of last year.

We saw increased revenues quarter-on-quarter in both of our major markets, which are telecom and what we call MISA -- military, instrumentation, space, and avionics. Overall, business through the first six months of 2010 remains balanced between these two major sectors.

The increase in revenues and operating efficiencies for the second quarter resulted in gross margins of 36.3%. We are pleased that the difficult changes made last year continued to deliver consistent results to our bottom-line. In the past, we've reported to you that significant changes were made in structural costs during 2009. Also during that time, we took the opportunity to streamline our operations.

Using 2008 as a baseline, the structural cost changes would exceed $4 million on an annualized basis. This is a new level of margin performance for our Company and we're obviously pleased to share that with you today. Basic and diluted earnings per share was $0.97 for second quarter and that's also a new level of performance.

More on business highlights -- new orders were again strong in both of our major markets, telecom and MISA. We're happy to report that backlogs grew modestly at the end of the second quarter to $14.4 million. That was up just from $14.3 million at the end of the first quarter. We feel that after having a strong revenue quarter and then to come back and support that with modest growth in our backlog demonstrates a healthy business and a solid outlook for the second half of 2010.

In prior quarters, we have mentioned that contracts for new products in the MISA market segment were won in the second half of 2009. Today, we can share that those contracts were largely shipped in the first half of this year and they did make a significant contribution to the quarter. And as expected, we did realize a nice improvement to working capital, which, at the end of the second quarter, was $8.9 million as compared to $6.6 million reported at the end of the first quarter. Overall, we feel our markets and our customer positions remain strong.

As we take a look at the second half of this year and its outlook, our backlog remains strong. The composition of that backlog has modestly shifted from MISA to telecom. Our major customers are reporting positive earnings and revenue growth. There are some signs of softening in the telecom as some of our customers have reported their earnings.

In the semiconductor industry, which can be a leading indicator for our telecom market segment, continues to project growth and capacities for over the next two years, so we think that's a positive outlook as well.

Turning to the financial section, if we take a look at our consolidated revenues, the trailing 12 months is now just at $40 million. We believe that from a financial perspective, years 2008 and 2009 are the most comparable periods to our trailing 12 months, as what was previous Lynch Systems was part of the LGL Group, but during '08 and '09, that has now just been the MtronPTI operating business.

If we look closer at '08 and '09 and the first couple quarters of 2010, the bars represent revenue. You can see that our new high water mark there of $12.5 million that we just are reporting for second-quarter. The green line is our gross margin and we're seeing those nice improvements there as well. The blue line is our percent EBITDA. Obviously, that is trailing nicely as well. So overall, we're pleased to present this as sort of some new information today for you on our call.

Again, backlogs, at the end of second quarter, we mentioned they were up slightly to just short of $14.4 million. That represents our fourth quarter in a row of really high and sustained levels of backlog, and we believe that does keep the Company well-positioned as we look ahead to the remainder of 2010.

Our capital position -- assets were just over $21 million. I mentioned that networking capital increased to $8.8 million; cash remained about the same at $3.6 million; long-term debt was $3.1 million; equity was $12.3 million; and the available line of credit on revolver was $2.9 million, which is an increase saying that we have got plenty of flexibility on our revolver at present.

Under key investment considerations, we believe the Company is sized correctly for today's macroeconomy. We continue to stay focused on improving margins. We direct our engineering towards higher revenue product opportunities and those value chain opportunities that we've spoken to you about a number of times.

We continue to expand the use of our Delhi, India manufacturing facility. We continue to leverage our position with our Asian contract factories. And we continue to employ the strategy of aligning our US operations to maximize their individual efficiencies.

We continue to preserve and grow our engineering expertise by looking for those value chain products. We have a number of opportunities where we are leveraging our position with ASIC development companies, which really helps feed our commercial products line. We continue to look for opportunities to go-to-market with new technologies companies. Recently, we've announced a collaboration with a company called Jackson Labs -- that brings us a new line of modules, specifically for the positioning market in both of our major sectors.

Our key OEM relationships remain strong, and obviously, we're trying to take a great advantage of our contract positions for 2010. When we talked about expanding our OEM position in China and India, we have opened a Shanghai sales office. That's directed specifically at some of our major OEMs that have moved there as well as entertaining OEM development within the regions.

And when we talk about expanding our product offerings, that's been a strength and a key part of our core business model for years. Our ability to collaborate with contract factories and development partners in Asia has been a significant part of our business and we continue to find opportunities to do that.

We believe we still are a compelling investment opportunity. Our reputation for high quality innovation stands. We have a global manufacturing and sales presence. We do have a new management team in place -- LaDuane and I have now been here in our roles for just a little over a year. And we are very, very focused on streamlining our cost structure and optimizing our supply chain.

The last slide is our circle chart. I think we've demonstrated that we've got a streamlined company structure. We've got improved focus with a new management team that's focused on our core strengths and opportunities. We're in markets where engineered products bring value. We have improved transparency in investor relations. In the second quarter, we did launch a new website for LGL, so we're hoping you have a chance to visit that. Our customer base remains strong, and we certainly are demonstrating that we've got a path to organic growth and improved bottom line.

So this concludes the slide in our second-quarter earnings report. At this time, I would like to ask the Operator to begin the question-and-answer portion of today's call.

(Operator Instructions). [Buzz Hiekey].

When will you all begin paying taxes? I guess you've got a lot of lost money in the last few years, so you didn't have any taxes to pay.

I'll let LaDuane respond to your question. Go ahead, LaDuane.

Yes, good morning. As of the end of 2009, we had net operating loss reported of $8.2 million. And so to date through Q2, we're at net income of about $3.2 million. So we're beginning to use those net operating losses and we'll be able to carry those forward. They actually don't expire until 2019, but we anticipate that at our current rate, we'll continue to eat through those as we go.

They do contain a valuation allowance, however, against those still, and we'll at this point, through the remainder of this year, that will remain in place. We'll evaluate at the end of the year.

(Operator Instructions). [Hindi Susonto].

You mentioned a new product contract in MISA segment won in the second-half 2009 contributed significantly to your second-quarter revenue. Could you give more insight into those contracts and how much additional revenue you expect to generate?

Okay, well, I won't be completely explicit, Hindi, but I will state that we use the word "significant," and by definition in the first half of this year, I would use, define significant as a minimum of 10%.

I would like to state that we do expect follow-on contracts from those original contracts, if I can use those words, in the quarters ahead. And we are experiencing that.

Okay. And then how much incremental revenue was generated by new product lines?

Well, again, I'm going to come back to words, not numbers. But I'll use the word significant again, which in my definition is a minimum of 10%.

Okay. Well, Greg, a number of tech companies have reported lower than normal lead-time and some component shortages. Was there any impact of component shortage on your revenue in the second quarter?

Yes, I can speak to that. Certainly, our lead-times have extended as well for some of the very same reasons. Our component supply chains reach all the way back to Japan for these specialized devices. And so we have felt some impacts. And certainly, we would feel that in both revenues -- and I would have to say we would have felt that in the second quarter and in the quarters ahead.

Okay. And in the last earnings call, you mentioned that lead-time was slightly extended to 20% above historical.

Yes?

What does your lead-time look like now? Has it returned closer to the historical level?

I would say at this point it has not. So it's still there. We're seeing some improvement, but frankly, I can't speak to it clearly enough to say that it's lessened.

Okay. And my last question before I get back to the queue, when do you expect to see sales growth returning in the MISA segment?

Well, the way -- I guess the way I would answer that is we had, quarter-on-quarter in the first half of this year, we had improved or increased new orders or bookings. And so, frankly, the business is healthy and it's growing.

Okay. Thank you.

(Operator Instructions). At this time, it appears we have no further questions.

I'd like to thank everyone for joining our call.

This ends the LGL Group's Q2 earnings report call. If you have any further questions, please send an email to Greg Anderson at ganderson@lglgroup.com or to LaDuane Clifton at lclifton@lglgroup.com.