LGL Group Inc (LGL) 2010 Q4 法說會逐字稿

Good morning, everyone, and welcome to the LGL Group quarter-four 2010 earnings call. 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). This call also has a virtual PowerPoint component in addition to the conference call. (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, sir.

Good morning, and welcome to everyone for today's call. Joining me today as well is our President and CEO, Mr. Greg Anderson.

Before we get started today, I'll point out as well that we've prepared a slide presentation for your reference; that can be viewed as part of the Web conference. Presentation materials are also available from our Website at www.lglgroup.com. We ask that you locate these and use them as a reference as we go through the report.

As the Operator mentioned, the call will be recorded and will be available for playback later today on our Website. Other financial information and press releases are also posted there and we welcome you to take a look and see. Please note that our comments are covered by the Safe Harbor statement.

During the 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 uncertainty 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 you need assistance during the call and the Web conference, please press star-zero for the Operator. And at this time, I would like to introduce you to our President and CEO, Mr. Greg Anderson.

Thank you, LaDuane, and good morning and thank you for attending our call today. I'd like you to turn to slide three, which is really just an introduction and our agenda for this morning's call. Our typical topics of business highlights some financials; we'll review our strategic growth initiatives; and of course, take time for questions.

On the business highlights section, we did complete our fifth consecutive quarter of positive earnings, so we're glad to share that. Obviously, 2010 was a turnaround year for the Company. We're excited that we're able to reach new revenue levels of $46.7 million; that's up almost 50% from over 2009. We also achieved an annualized gross margin of 35%; that's up 11 percentage point of over '09. We're going to talk a lot today about pretax earnings. Our pretax earnings -- our earnings per share was $2.88 and 2010 EBITDA of 16.1%. Again, our customer position still remains strong and we'll speak more to that as we go through today's presentation.

Q4 itself -- revenues for the fourth quarter were $11 million. That's almost 20% increase over the same quarter of 2009. We do want to report today that new orders were softer in the last half of the fourth quarter, and that really was across both of our major markets, which we namely call Telecom and MISA. Our backlogs at the end of the fourth quarter was $10.7 million and our fourth quarter gross margin was 31.7%, and that's very comparable to what took place in the fourth quarter of 2009.

For full-year results, again, I mentioned that revenues were $46.7 million against 2009 revenues of $31.3 million. We had a pretax net income, it's a non-GAAP number, of $6.5 million, and a pretax earnings per share of $2.88. We had a net income on a GAAP basis of $9.4 million and 2010 EPS of $4.19 on a GAAP basis. We had the benefits and the realizations of some net operating loss carryforwards and a reduction in those valuations. We can answer those questions later in the call, should you have them.

As we look towards the first half of 2011, our customers are reporting some market softness. Many of the larger ones have talked about flat revenues in either the first quarter or the first half of the year, and that really is what we're experiencing as well. Our repeat orders from our existing contracts have been sluggish. Many of you are -- we fall in the semi-space for a lot of the analysts, and I think if you take a broad stroke at semis, you'll see that the first half remains fairly flat and they are predicting growth in the second half. Clearly, our cash position and our working capital is significantly improved as we finished 2010 and started 2011.

The financial highlights section -- the bars represent our historical revenues normalized here to the MtronPTI business unit. You can see again the $46.7 million, that is a high-water mark as compared to the previous five years. Our quarterly income statements -- again, revenue was 11%; margins were down at [31.7%] -- very comparable to a year ago; and EBITDA was [11.3%].

Our backlog trends we reported at the end of the year at $10.7 million. And again, I mentioned really a couple of reasons for that. One, obviously, we've had some reduced order activity and that really began in the last half of 2004. This kind of a number, a $10.7 million number is really more of a normalized, what I would call backlog for our business.

A year ago, it was much higher. And I think we reported, we discussed many times with you, where we won some large contracts. They obviously loaded up early. We had some incubation time to those contracts, and did those shipments in the second and third quarter of last year. At present, those repeat orders against those new product contracts really have what I would call a normal book-to-bill versus having a long incubation period to them.

On the income statement trends, we've talked about revenue; you can see our gross profit. EBITDA for the year was $7.5 million or 16%. We had pretax earnings of $6.5 million, or 14% and a non-GAAP number as well in our pretax earnings per share of $2.88.

Our capital structure as of the end of the year -- assets are up nicely; net working capital was more than double where we were a year ago; our cash on hand at the end of the year was a little over $4 million. Our debt is primarily gone as we paid off the RBC loan as well as retired our revolver. Our available line of credit stands open at $4 million.

So we substantially improved the Company's balance sheet. Free cash flow for the year was $4.6 million. I mentioned previous that we did pay down the revolving line of credit as well as the -- pay off the RBC loan again, so we are essentially debt-free at this time. And in February of this year, we did successfully go through a capital raise. We placed 350,000 shares at $20 per share. The net proceeds of that raise was $6.5 million, which further strengthens the balance sheets from the number shared on the previous page and really positions the Company to utilize its equity and debt, or cash to fund the many strategic initiatives that we have on our plate at present.

Page 16 is just a reconciliation of GAAP against non-GAAP, and that's provided for your reading and analysis.

Our strategic growth initiatives -- we talked to you a couple of times about those efforts. So, today, as we look forward to laying that foundation for growth, really, we have significantly improved our business fundamentals. We've talked a lot about that through the year. We've come back to being a growth company. We achieved the profitabilities that we were after. We've improved our working capital position.

Our framework, which are really our four pillars, the things that we are focusing on as we look to deliver further growth to the business, obviously, we're going to reinvest in our organic business, and we'll have a number of new products that are coming to market today and throughout the year. We're actively looking at joint ventures to either expand our IP position or our supply chain, or anything that will enable the flexibility of our supply.

We are looking at synergistic acquisitions and, really, we will be very focused on this -- sort of this high-value-added engineering complements to our existing business; anything where we can drive our ASPs, deepen our positions at our OEMs; anything to build those kinds of relationships. And we've mentioned several times that we will remain open to greenfield opportunities. We think there are a number of other businesses that are related that could potentially benefit from the strengths of the LGL platform. And we'll look at those throughout the year as they present themselves.

So at this time, we'd like to entertain your questions. So, Operator?

(Operator Instructions). Krishna Shankar, ThinkEquity.

Yes. Congratulations, Greg and LaDuane, on an excellent 2010. I had a few questions in terms of the business segments and the outlook for 2011. You indicated that you would expect growth to resume in the second half in 2011. Can you give us some sense on what the seasonality, and the process of inventory reduction and slow-down in your customers -- you know, what would a typical seasonal revenue profile look like in Q1, Q2? And with this current industry slow-down, how do you think we should be forecasting or modeling that?

Well, I'll go first, Krishna -- and good morning, by the way. I happen to be in California, so I think if you're in California, we're on the same time.

Yes.

When it comes to the seasonality, I just don't -- to speak to that, I just don't think there is much of a cycle to the business other than the lagging effects of what takes place at our major OEMs. So when they soften up, obviously, there's a long supply chain that exists between the contract manufacturers all the way down to the component suppliers, namely ourselves.

I believe we're still feeling the effects of some of that inventory build that took place and those supply chain lagging effects, if you will, that took place throughout 2010. A couple of our larger customers are -- they've spoken openly about it. Of course, they avoid being very definitive, as I will be as well in this call. But they have spoken openly that they do expect that certain normal business shift is expected to return, and growth is expected in the second half.

That's really all I can speak to from the business cycle itself. LaDuane, comments there as well?

Yes, just to reiterate, I think that -- we went through the process of having the contract, really, the order process going through and getting the forecast from customers, which took place October/November timeframe at that time. And we've mentioned before, customer growth was expected to be 5% to 8% over 2010.

Today, we still hear that they expect that growth as a total percentage being pushed more toward the back half of the year. It would probably be safe to say that that total growth forecast for the year might be impacted. But all the same, that's the message we continue to receive from our customers.

And I (multiple speakers) --

(multiple speakers) So as you look at 2011, we should sort of be looking at your customer or sort of customer revenue growth sort of at the low end of that range, you know, 3% to 5%, maybe 5%, something like that, for your customers?

I think that's right. It would seem to me that it's off to a slow start for them. And so the original forecast, while probably still fairly accurate -- seeing as they made those later in 2010, fourth-quarter's timeframe -- I do believe they may be starting slower than they expected. But we should see growth through the -- we should still have growth for the year-over-year.

Okay. And are you seeing similar trends in both the MISA segment and the Telecom segment? Can you highlight the key differences and key customers in each of those two segments?

Well, on the Telecom sector's side, the major players that we have there are companies like Cisco and Ericsson and Ciena, and a number of what I would call the next level of telecoms.

On the MISA side, there are customers like Rockwell, Honeywell, Raytheon, Agilent Systems, Harris, RF -- those are probably the majors. So we all can watch the dynamics that are taking place in military spending, and certainly, there's some political aspects to that as well.

Of course, with our MISA customers -- and we've mentioned this before -- we have some munitions type programs, but to be honest, even in MISA, we're primarily in communications-based applications. And so, that's helpful for us as we look forward. And, like you said, there's uncertainty at times in the political environment. So -- yes.

Okay. And then you've -- based on this capital that you raised here early in 2011, can you give us some sense for where you stand in your discussions on strategic opportunities? And whether this could be a joint venture or a small acquisition outright that you're looking at? And what kind of an impact that might have on P&L in on the second half of 2011, both in terms of revenues and margin impact and operating expenses?

Hey, I'll take that one. As far as the capital raise they went through -- I mean, we had a number of reasons for that raise. Primarily, the first aspect was really to get the flexibility that we wanted on the balance sheet. We've got a number of things ahead of us there, all the way from we'd like to take a look at our commercial banking lines and make sure that we finance there with more flexibility than we previously had in the past. Obviously, the strength in the balance sheet also gives us the confidence and the credibility to move forward on a number of our strategic initiatives.

What I can tell you on the strategic initiatives, although we're not ready to disclose any of those today, we are really active in all areas. So when it comes to the organic business, we have hired a couple of engineers, brought them on; so we are eagerly designing new products with those engineers. On the IP joint venture supply, we have two active discussions on the IP side and one discussion on increasing some flexibility in our supply chain. I can't disclose whether those would be home runs or singles, or nothing at present other than they're active.

On the synergistic acquisition side, we have taken a look at a number of companies. Again, nothing today that I would disclose, although we have that under NDA. And we are actually spending some time on greenfield. We think there's some nice fits that are extensions to our core components business. And so we've spent some time in that as well.

So what I can tell you, Krishna, is, in 2011, a great deal of my time, along with key members of the Board, will be spent on those strategic initiatives.

Okay. My final question is, can you highlight some of the new products that you're working on and the potential for some of the new products that you're working on in-house for organic growth during 2011, 2012?

Okay. Sure. On the timing side, we really have three new product actions right now. I will say we did launch another one in the fourth quarter. And if you would go to our Website, you'll see it's a timing device called an OCXO. But really what that is, is that one plays into 4G backhaul. And we've won some nice customer contracts and seen some nice growth on that.

As we look at this year, we have just recently launched two new GPSDO modules. Again, very specific timing applications. And those are really targeted towards more the commercial markets, and those could go into anything from broadcast timing to radio systems. We're also expanding our offering of very small, miniaturized timing devices that are very precise. Again, those play both in commercial and the MISA. So we've got a couple of offerings today. We're really adding two of those offerings.

And then we're also adding a timing device. And just for a very technical explanation, it's called a 100 megahertz [SC], but really it -- again, that has some very specific applications in instrumentation, the MISA market as well as a number of commercial applications. So we like to do those kinds of new products that play across both of our markets.

On the filter side, we are expanding our offering on what we call high-power filters, which ends up being more on the transmission side of systems. We are expanding our offering on cavity filters. So we had some very nice wins in the cavity filter technology in 2010, and we're adding a couple of new, I'll call it designs, to that portfolio. And later this year, we're hoping to launch what is called a tunable filter, which would be more probably a subsystem kind of a offering. We've got customers today asking for that, and so we are deploying engineering resources at this time.

So we're excited about those. In all cases there we've got customers pulling on all of those items. And we are eagerly trying to complete the engineering and provide those launches.

Great. And my final question is, can you comment on the recent events in Japan and how that -- do you have any customers in Japan? And also how [the throughput] through your supply chain in Asia-Pacific and the US?

Excellent question. It's pretty dynamic yet with that horrific event. What I can say is our customer base isn't so deep, so our revenues are really not terribly exposed. Our supply chains, more from a raw material perspective, do have some exposure.

Our early reports at this time is that we have fortunately escaped any major damages to either our raw material factories or potential supply factories that are -- they're contract factories to us. Again, it's pretty dynamic yet. As late as very early this morning and very late last night, I was answering emails and phone calls on that very topic, just to try and understand the situation.

At present, it appears that we have at least avoided any initial significant impacts to the business. And as bad as those kinds of items are, there may be ways that they could be opportunistic for us, for some companies as well. Other suppliers or competitors may not have been so fortunate and I'm not ready to comment on that; but we're certainly willing to help our customer base any way we can during that kind of a disaster.

Great. Thank you very much and all the best for 2011.

Thank you, Krishna.

(Operator Instructions). Hendi Susanto, Gabelli & Co.

Good morning, all; thank you for taking my questions. (multiple speakers) My first question is about the gross margin. The gross margin in the fourth quarter was impacted by product mix toward lower margin items. Could you refresh our memory and tell us which product groups have higher gross margin and which ones have lower gross margin?

Honestly, there's really not a lot of difference when it comes to the product families themselves, Hendi. Okay? So -- but there are certain, I'll call it, part numbers inside of those product families that can contribute differently. So I can't be very explicit, just because there we probably have, frankly, 3,000 active part numbers. So it's hard for me to grab any one and say, well, that one there is the one that caused the problem.

I will say that I just want to comment -- we didn't see any significant inefficiencies and yields in those kinds of items. Our fixed cost of sales was where it was supposed to be for the fourth quarter. So I'm happy to report that those kinds of consistencies were there. I really believe it was more of a variable cost aspect to the part numbers that were actually built and sold during that time period.

Okay. And how do you mitigate the impact of softness in your market on your gross margin in the first half of 2011? Any new initiatives on your part?

Well, I mean, it's difficult to mitigate everything that takes place in top line. So we're leveraged nicely, and so any top line that we get really from any product in any of those families that we've talked about, we just get some really nice lift to that. So we are certainly exposed to top line hits when it comes to spreading our fixed cost of sales against margin.

I will say that as far as managing costs, we have not significantly added any structural costs to the Company. We're still at what we feel is a very competitive and a very good cost structure; always trying to improve that. In fact, we have actions today to reduce our fixed cost base to help mitigate these top line swings, and really, are getting ourselves positioned in 2011 to really continue to be at the lowest cost structure that we've ever been at in the Company.

Thank you.

[David Igel], private investor.

Good morning. Congratulations. I just had a chance -- I didn't get a chance to go through the numbers very closely, because I'm out on the West Coast; so, it was a little -- like yourselves, a little late last night. But it seemed that you had a pretty -- on terms of bottom line, an excellent fourth quarter, if you were to break out by itself.

Yes, I think we had -- to be specific, I believe we reported 46% -- $0.46 pretax and a little over $1 million of those pretax earnings.

Okay. Any further comment on analysis of the fourth quarter by itself on profitability?

I mean, for us, it was a solid quarter. Second and third quarter were really our high-water marks. We were pleased with it. We're working hard on revenue, frankly. We believe we now have the Company where it can consistently make money, so we're spending a great deal of our energy now where we're trying to leverage the platform for growth.

Okay. And then the other thing is, in terms of the new products you announced in the fourth quarter, do you see them contributing significantly in the year ahead?

The answer to that is we have one -- defining significant -- in the past, I have used a number of 10% of revenue and 10% impacts. I'm not going to go there with that. I can tell you on the one that we announced in the fourth quarter, we have won some nice contracts and they are increasing in volume. And in fact, they're pulling pretty hard on our factories. So, I would say that healthy and from a new product development standpoint. And we are reaping some of those benefits in the first quarter, in light of some market softness.

I would add to that, 2010 was a bit unique to have two significant products come through that both individually would have been considered fairly sizable; but then to have them both come out Q1, Q2 of last year, really had a nice driver right there. And like Greg has mentioned, we've continued to receive repeat orders against those.

New product launches today, and it's just the nature of each customer, what they need and require; they tend to be stretched -- call it stretched out a bit, so that their impact perhaps may not be quite as noticeable as having two come out at nearly the same time.

All the same, as Greg has outlined, there's a lot of effort going into it. And they're all very exciting, frankly, as we build towards higher-level systems or integrated systems and modules, as well as offering the play across our entire -- both Telecom and MISA market segments.

And one thing you've mentioned in the annual meeting, was a lot of your product cycle, it's five and 10 years to reap the benefits.

Yes, that part has not changed. Our revenue streams are very sticky. So, we continue -- the repeat order aspect of our business is where we're really sluggish, as I mentioned earlier in the slides; but I don't believe at all that that's because those products have reached the end of their life cycle. It's just part of the, I'll call it, the business cycle within those. So yes, they tend to be very sticky. Once they're designed in, they're very precise for very specific applications and they tend to have a long product lifecycle.

Thank you very much.

Thank you.

And I'm showing we have no further questions in queue at this time.

Okay. Well, listeners, thanks for joining this morning. 2010 was a great year for LGL. It was a good turnaround. In 2011, we are focused on leveraging the platform for growth. We've talked about that with you a number of times, both organically as well as strategically.

We certainly look forward to providing you more updates as we move throughout the year. And we are actually presenting at the ROTH Conference here this morning in just a few hours. So if any of you happen to be at the Conference, we look forward a chance to meet and shake your hands and get to know you. So, thanks again for attending.

This is the LGL update for investors on current business activities. 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. You may disconnect at any time. Thank you, and have a wonderful day.