LGL Group Inc (LGL) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the LGL 2019 Annual Results Conference call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your first speaker today, Mr. James Tivy. Thank you. Please go ahead, sir.

Hello. Good afternoon, everyone, and thanks for joining our Q4 and annual results conference call. Please note this call will be recorded, and we anticipate making the recording available on our website at www.lglgroup.com after the call. We've issued a press release today before the market opened reporting the results for our fourth fiscal quarter and full year of 2019.

Before getting underway, we are required to advise you and all participants should note that the following discussions should be taken in conjunction with the most recent financial statements and notes thereto contained within our 2019 10-K to be filed with the SEC for this most recent period expected to be filed shortly.

This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements involve known and unknown risks and uncertainties, which are detailed in our filings with the SEC. Although the company believes that its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there could be no assurances that the company's actual results will not differ materially from any results expressed or implied by the company's forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Readers are cautioned that any forward-looking statements are not guarantees of future performance.

Let me summarize where LGL stands as of the fourth quarter and full year of 2019. As far as our results as of December 31, 2019, our order backlog was $21.9 million compared to the backlog of $17.5 million as of December 31, 2018. The increase reflects the company's stronger execution in delivering design wins, coupled with favorable market conditions.

Revenues increased 37.5%. The increase for the fourth quarter of 2019 is $8.8 million versus $6.4 million for the third quarter of 2019. For the full year, annual revenues increased 28.3% to $31.9 million as compared to $24.9 million reported for 2019, an increase of $7 million.

For the fourth quarter, adjusted EBITDA grew to $1.2 million from $0.4 million in the prior year, while for the full year, adjusted EBITDA was $4 million versus $1.9 million in the prior year.

Fourth quarter EPS rose to $0.19 per share from $0.05 per share on a diluted basis. For the full year, earnings per share rose to $1.41 per share from $0.29 per share on a diluted basis.

As of December 31, 2019, our consolidated working capital was $24.6 million, with $18.1 million in cash and marketable securities.

With that, I'll now turn the call back over to Marc.

Thank you, James, and thank all of you for being available and attentive to your company, LGL Group.

I'm joined today with 2 colleagues that many of you have spoken to in the past, Ivan Arteaga, who joins us as our Interim CEO; and Bill Drafts, who joined us in the fourth quarter as the President of MtronPTI. Both bring a long history in the respective areas, both with Ivan who is an investor as well as a manager and Bill Drafts as well as a manager and engineer. Bill, we're proud to say, comes from the Orlando area, and he's been spending a significant amount of time with both our customers and the professionals at MtronPTI and headquarters.

We are having this call obviously in a period of great uncertainty. The first and foremost point that we want to underscore is that we're in business, of course, to provide critical, precision engineered products for our customers. We're considered an essential business, but we are very cognizant that we have to adhere and ensure the safety of all of our professionals at LGL Group, broadly, both in the Orlando, South Dakota and Indian operations. This period is one wherein throughput, maximizing throughput in the factory, we are putting safety first.

Today, Orlando still operates with a strong backlog, which you can see in our reported results. However, as part of that backlog and what you've seen in today's press release, an important part of our supply chain which is owned and operated is our facility in Noida, India, just outside of Delhi. And many of you will know that India has instituted a national lockdown, which involves both transportation, manufacturing, logistics throughout the country. It's a great task for the country to incur. And at that same front, we are treated as an essential business in the United States in the defense activities. However, in India, defense activities are not considered an essential business. We're working with local government authorities to reopen the facility. Logistics have just been reopened in the country, and it is our expectation that the facility will be back and running some point in the month of April, although we can have no assurances that, that can happen, but we are working hard with government officials, both in the United States and in India.

With that said, you see that the quarter -- first quarter, we've also announced strengthening of our balance sheet, where we had a program working with the investment bank Jefferies in raising a bit of capital. That has since ceased, and that happened earlier in the first part of the quarter. As a company with a strong balance sheet, many of you know, we believe that there is a great opportunity to continue to build the vertical in the defense sector with and around our key attributes of precision engineered products in frequency timing. However, we also are looking for acquisitions and merger opportunities outside of our core competency, as seen in MtronPTI, and that activity continues. We take a conservative approach to the allocation of capital and a prudent approach. And in this environment, we are very cautious to make sure that operations maintain the strength that they have entered the quarter with. And we will be prudent -- as I've outlined, we'll be prudent and analytical and focus on the fundamentals of businesses as we move forward.

So with that, I have Bill Drafts and Ivan Arteaga, who, along with James Tivy, will help with Q&A. And before we enter into Q&A, I'm just going to allow, if we can, take a bit more of your time to allow Bill Drafts to just quickly introduce himself. And then operator, what we'll do is move to Q&A in about 2 to 3 minutes. Bill, if I can hand the call over to you to just give a brief introduction and maybe give us the bird's-eye view, since you started here in November, in how the world has evolved and both -- and what you see in the near term. Thank you, Bill.

Thank you very much, Marc. And I'd like to thank you and the Board for allowing me to join the team, and what a great team it is. And it's been just a fantastic, I guess, almost 5 months now since I've joined, and I've had the chance to go across the country, meet our top customers. I went to South Dakota. I was actually booked on a flight to India this Friday, the 3rd, and of course, that got canceled because of the issues you addressed.

But I can tell you that the opportunities for the company are great. We differentiate our product with very high-precision engineering. And the customers really like what we're doing. We're fortunate that we're an essential business, and so we're helping design products and deliver them to help defend the country and keep the airline industry going and the satellites in the sky and so on. And so we're all working through this and the challenges that we have.

And I think it's been a great 5 months, didn't see this coming at all, but we're reacting very well. And of course, as you mentioned, our #1 concern is for the safety and security of our staff and team, and we've invoked all the CDC roles here locally. And I'm very happy to report that to date, no cases of the virus in these facilities, and we're going to keep it that way by making sure that everything is clean, and we're keeping our 6 feet-or-more distance and so on. No visitors allowed, no travel and so on.

I come to MtronPTI with about 30 years of engineering technology management leadership. I've run 3 other companies before this. And I can tell you, I'm really enjoying this company because it just has a great team, great technology and absolutely blue chip customers. And so I'm really enjoying it.

And I don't want to tie up everybody's time, but I look forward to the Q&A session. Thank you.

Thank you so much, Bill. And Kevin will take -- we'll move in now into Q&A.

(Operator Instructions) Your first question is from the line of Chris Sakai.

I'm somewhat new to LGL, but just had a question, I guess, on your India operations. If you could help me understand. So will this -- this will be mainly affecting the second quarter, it sounds, and how much could we potentially see of -- hit to revenue in the second quarter because of this?

Thank you, Chris. And Chris, can you state your company or your affiliation, please?

Yes, I'm with Singular Research.

Thank you, Chris. That's an excellent question, and we're pleased to have you with us today on this call.

Chris, I'll start out, and then we can get into a few more details. But the India facility is part of a supply chain that helps service part of the filter product line primarily coming through Orlando. Some of the key customers are Department of Defense customers. And without getting into too much of the granular detail, we utilize courier services to be able to bring effectively designs that were organized in Orlando, bring them to India for assembly test and then they come back. And Bill can certainly walk through that a bit more. But that supply chain, as you've seen in one of our press releases, if we think about -- a lot of this depends on time, and that's something that nobody can answer. The folks in India are ready to go to work. We're in front of the magistrates. In fact, this weekend, I was -- myself and another director, we were e-mailing and texting with the local authorities, both at the federal level in India as well as in the local government of Noida, which is -- it's Uttar Pradesh, which is just outside of Delhi, near the airport. And the authorities certainly instituted this ban in a very draconian way. Some of you may have seen in the television, crowds of migrant workers that were stranded and the government is still adjusting. With that said, we've reached out to the staff and have told them that we're working on initiatives to try to bring people back to work. There is precedent in the local jurisdiction, another neighboring state, where they've gone back to work. This is really a decision with the local authorities. They've gone back to work. However, the employer is responsible for keeping them at the facility, so therefore, sleeping and ultimately eating there. We're organizing ourselves locally to see and determine if that is something that's feasible. But at the same time, we're subject to the local authorities.

The edict within India, and again, my colleagues can get into further detail, was -- and as we've released March 25 until April 15 have backlog that may be affected should this continue post that period. And we're organizing second source supplies -- suppliers in that context. It is an evolving process. The India facility itself is an important part of what comes through Orlando. But with that said, there are also alternatives. Why don't I pass this to Bill just to add to that slightly. And just for purposes of clarity, James Tivy, who was helpful with putting together some of the public disclosures, James, why don't you just walk through the public disclosure that we've offered or we will be offering in terms of actual granular detail as it relates to India and to Chris' question, sales?

Yes. We've not done a full analysis. So we've, on the back of the napkin, figured out it's about 1/3 of our consolidated revenues. And maybe Bill has a little better breakout, but that was the level we had reached before all of our filings were due.

Yes. And when he says, Chris, on the back of a napkin, it's a little bit more than that and that we're looking at actually all the components and the throughput that could be potentially affected. We're taking a conservative approach. We're trying to take a comprehensive approach. And then the key and open question is timing to the extent, as you know, as an organization, we do have some inventory to help satisfy our backlog. And we also can shift and reshift production into other areas of our backlog so as to produce the revenue while there's delays coming out of India. So there are some alternatives that can be taken based on the period of time. But much like all of us that are trying to understand the dynamics based on this uncertain and evolving risk, COVID-19 time is -- we're planning around an unknown element, which is the time, right? But right now, we have the edict from the government which says it will last until the 15th of April.

Bill, do you want to add something to that, please?

I think you both did a very good job of summarizing. It's a very dynamic situation. We are on the phone with our top customers, and we're reviewing the backlog. And just like you said, Marc, we do have inventory shipped in Q2, and so there's 0 impact there. And then we can bring things back, and we're investigating that and what kind of impacts that has as well. We are blessed that we have lots of capacity in Orlando. And so we don't have to knock down walls and expand the building to absorb any capacity that we decide to bring back if we believe that India will go past the April 15. But right now, if April 15 is the date, and India opens up then, I think the impact to Q2 will certainly be manageable.

Yes, and with that said, Chris, we cannot give you estimates. But as James said, back of the envelope, 1/3 roughly of our revenues is touched by what comes through India, but how that impact could possibly evolve in the second quarter is something we're still sharpening our pencils on. And just for a point of clarification, when Bill says bring back, what he means is we're onshoring the production and the testing and the assembly that otherwise would be done in India. Now a large part of what happens in India, we have clean rooms with multiple employees, close to 50-plus, which are operating with magnifying glasses and doing a lot of manual -- hand manual labor, which gets expensive in the United States. So while we want to bring back business, onshoring business, and we certainly can organize the skills in the United States to do that, there is a cost element involved, and that's something that we're analyzing today. There is, of course, alternatives. Those alternatives have a learning curve. Those alternatives have a curve. Right now, if we use the April 15 date, we're taking into -- this all into consideration in evaluating that. But -- so we can't give you any hard numbers, but we know it will evolve, and we hope to have communication with all investors via forms of press releases as things crystallize. Is that [helpful], Chris?

Yes. That helps give me a better idea. I know the main focus here is the timing of it all. So yes, that helps answer my question. Yes.

Thank you, Chris.

Yes. Your next question is from Ian Cassel.

I appreciate the ability to ask a question. I got in a little bit late, so I apologize if you answered this in your opening remarks. But I was wondering if you could comment a little bit about why you decided to raise some capital during the quarter given your balance sheet is in pretty good shape.

Thank you. It's a great question. Ian, can you just state your company and your affiliation? Apologies.

Sure. I'm a private investor, also on MicroCapClub.com.

Thank you, and that's an excellent forum. It's a pleasure to have you and all of your colleagues that look and invest in LGL Group. The question was related to the ability or the action taken by the Board to update the shelf and also raise some capital in the quarter. As we've outlined for our investors over the past few quarters, as the business of MtronPTI has shifted to a much more stable customer base under the oversight of Micheal Ferrantino, our previous Chief Executive and Chairman, the stickiness and the consistency of the overall economic structure of the business became improved. And with that said, the company started to look at alternatives to grow, and some of those alternatives were organic, so bringing on new products, investing in the business with new technologies, but also bringing on teams and then, of course, looking elsewhere at different opportunities. And if we continue along the attributes of defense-oriented investing, we organized the LGL Group to help become part of a sponsored group focused on larger acquisitions in the Department of Defense-oriented arena. And as a residual of that, we're seeing, let's call it, deal flow. And that deal flow is in a much smaller way than its investment in the LGL Systems business -- or Acquisition Corp. And we believe that we are in a good position to be able to invest with a return and possibly a transformative investment in a business. So the market correction, in fact, puts us in a good position to be able to think about allocating capital in a sector which, for the most part, is not exposed to the general consumer.

Now how valuations are changing is also still an evolving topic, and we're sharpening our pencil. But the ability and the opportunity to raise capital was what we thought was a good use of the platform of LGL looking into the next 2 to 3 years to build value. Certainly, the debt markets at one point in time are open and have been opened. And certainly, if there was to be an acquisition, we would explore the full use of the capital structure. But this company, being a micro-cap, is also -- it's accessible to people like yourself in that focus on fundamentals and look for special situations in the market. But at the same time, there were institutions that have an interest in the company. And it is something that we would consider, which is to kind of broaden the shareholder base over time to be able to access and grow the business. So I don't know if that helps. In specific terms, we don't have a parameter that we can outline for you, but that's basically the general thesis.

I appreciate the color on that. Maybe I just have one follow-up question then. Related to the bookings, I think they dropped a couple of quarters in a row. And I think Ferrantino guided all of us to the fact that they were going to drop, I think, a quarter ago. And so they dropped again. I'm just wondering if you could provide some color on that. I know you did in the press release talking about January and February bookings have picked back up. But just wondering if the last 2 quarters were just sort of normal course of business fluctuations or if they lost any business or maybe you can just provide some commentary.

Yes, that's terrific. And thank you for that question because it's an important part of looking at the barometer of the business. Bill, I know that you're new at this, but Bill, why don't you talk about kind of how the evolution of quarters work within the industry and the areas where you see traction and also where you see it slowing? We can -- I think we can provide that guidance, James, if that's fair with you.

Yes, I believe that's fair.

Yes, absolutely. Thank you. Ian, our business, it's not unusual for us to receive blanket orders and so our customers in the defense industry will be building a certain product, and they want to secure the pricing and delivery and give us a good lead time so that we can finish the qualification and such and so being at their all mill products for the most part. And so to go quarter-by-quarter and look at our book-to-bill ratio really is not a fair assessment of the business because it gets pretty lumpy. And so we are expecting some -- well, the reason for Q4 was one customer that we had planned on doing a larger order deferred it, and now we're negotiating that contract right now, and we'll see that in the near future. And then we have 2 or 3 more others that are same thing, we're in the negotiation. And so you'll see some pretty wild swings in book-to-bill, and that's just the nature of the business.

Yes. And just to take that a bit further, what Bill and his team are doing is also taking that core customer set and core product set. They are working diligently with new customers and Bill brings a wealth of relationships as well and some new customer channels. So they're very much working on trying to broaden a bit of the reach for some of the core product lines.

Bill, would you like to talk about maybe just one product that might be getting some traction?

Sure. The -- well, if we have the June IMS show in Los Angeles, we'll be announcing a couple of products that are really industry leading. One, addressing satcom, so satellites and communications, which is a big booming industry. You read about all the launches of satellites every day. And then the other product is a very stable vibration compensated OCXO. And on this last trip out West, I met with a number of very large customers. And I wish I could have bottled their excitement because it was really something. And so we're working with them to give them samples and get them designed into their products. And so these are both industry-leading products with exceptional specifications, really world-leading specifications. And I think if you see our website, you'll see the press releases on both those products.

Thank you, Bill. It's great. So Ian, the team is chugging away today by video call and the best they can. The elements of commerce are changing every day, and we're keeping at it. So thank you for the question on the backlog. The profile of the backlog, there is volatility to backlog historically. Also, as the business has evolved into some of the more of the major suppliers in the defense industry, you can get some more lumpiness. But with that said, we're trying to grow the base and broaden the base, okay? Thank you for the question.

(Operator Instructions) There are no further questions at this time.

Thank you very much, and thank you, everybody. Stay safe. This is -- I like to say this is an invisible enemy. And don't underestimate it. So stay safe, please, for the safety of our nation. Thank you very much.

That does conclude today's conference. Thank you for your participation. You may now disconnect.