LGL Group Inc (LGL) 2020 Q4 法說會逐字稿

Good morning, everyone. I'm James Tivy, CFO of the LGL Group, Inc. Thank you, everyone, for joining our full Year 2020 earnings call. Please note, this call will be recorded, and we anticipate making the recording available on our website at www.lglgroup.com sometime after the call. We've issued a press release reporting the results for our fourth fiscal quarter and our full year of 2020.

Before getting underway, we're required to advise you and all participants should note that the following discussion should be taken in conjunction with the most recent financial statements and notes thereto contained within our 2020 10-K to be filed with the SEC for this most recent period in the next couple days. 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 can 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.

Thank you, James. We'll now begin with a corporate snapshot of LGL Group. The company was founded in 1917 and went public in 1946 on what was called the American Curb Exchange. Today, it trades on the New York Stock Exchange under the symbol LGL.

And if we can just review some of the highlights of the company and its basic corporate profile. Its' principal operating subsidiary today is MtronPTI, a business that's engaged in the manufacturing of robust precision-engineered designs for frequency controls used in various forms of communications and medical and avionics devices. We'll talk about that further in a moment.

As of December 31, 2020, the company completed the year with $31.2 million of annual revenue, 5.2 million shares outstanding with $24 million of cash and marketable securities. And in addition to the $24.1 million, $3.34 million was invested on a gross basis into a sponsor of a SPAC, LGL Systems Acquisition Corp.

LGL Systems Acquisition Corp on March 15, announced a merger, business combination with IronNet Cybersecurity. We would recommend shareholders to look at both IronNet website as well as LGL Systems Acquisition Corp website for further information and SEC filings. It is the intention of the LGL group to continue to participate in SPAC sponsorships across multiple industry verticals. We'll talk a bit more about that in a moment.

If we turn to next slide, Slide 4. As we use this opportunity to look back on 2020, and we want to underscore a deep thanks to all the professionals, the team at LGL Group and subsidiary businesses who delivered for our customers and stakeholders during what is and continues to be a challenging backdrop.

As you've seen in the press release, the results for the year 2020 reflect the strong underlying fundamental business-oriented very much towards defense and space and medical technologies. 2020 had significant shifts in customer mix as avionics within the aerospace industry had a precipitous decline on the back of COVID-19 risks.

At the same time, COVID-19 caused supply chain disruptions really across the entire manufacturing footprint of the LGL group, its customers and suppliers. And we'll talk a bit about that in a moment. So again, for the full year, LGL Group's revenue $31.2 million versus $31.9 million, which was actually the most robust reported results for the company. That was in 2019.

Margins reflected really good operating discipline, and management led by Bill Drafts in Orlando and his team continued to deliver and adjust as the environment changed, and it changed quite a bit. So we thank Bill. We thank all his team in Orlando, in Yankton, in India, and in Hong Kong for their efforts on behalf of our key clients and stakeholders.

The balance sheet for LGL group is strong, as we just outlined, and we continue to look for ways to increase the strength of the balance sheet. We think it's important being that LGL group is and the Mtron businesses are an essential business.

For example, during COVID-19 shutdowns, our India facility, which was shut down by government mandate, was reopened at the request of General Electric Health, so GE Health helped us reopen the facility because the MtronPTI facility in Noida, India produces a critical component for ventilators, which we all are very acutely aware was a critical device during the COVID-19 pandemic. So we're very proud that we continued to deliver during that period of time.

Also, in 2020, we issued to our shareholders of record a warrant dividend. You can find information on the warrant dividend in our website and on SEC filings. It was really a strong message and distribution of value for shareholders as we look forward.

In 2021, which is a subsequent event as of recent LGL Systems, SPAC announced the business combination with IronNet Cybersecurity. Again, we think that's a continued good way to deploy capital, earn a return on that capital and have residual benefits for the broad shareholder set of the LGL Group.

And then most excitingly, we've also, as of today, announced that Michael Ferrantino has been named President and CEO. Michael replaces the interim CEO, Ivan Arteaga, who was in place and helped steward the business during the COVID-19 dynamics. So we thank Ivan for his efforts on behalf of shareholders during this time. Ivan remains on the Board of LGL Group.

Let's turn to the next slide. So just as a graphical dynamic, we can see that -- if we think about the drivers of LGL Group, we have an operating business, which continues to focus on cash generation, efficiencies and excellence, and we'll talk a bit about that. The company is actively looking for value-added mergers and acquisitions. We've, as many of you know, our shareholders for some time have discussed M&A on various calls over the years. We've been very prudent. We're also looking at new initiatives to both deploy capital resources and just overall the strength and talents of our group.

And then the SPAC business. We can talk further about SPACs in another session. But ultimately, LGL group believes that, through its resources and relationships, its ability to harvest, access and capitalize on deal flow is strong and will continue to be strong. And we would like the LGL Group shareholders to benefit on the back of that strength. So we do have in filings further and future SPACs that we intend to issue and sponsor. And we're confident that we can be adaptable to various market conditions as reflected in the IronNet transaction. And we will approach the process with vigor. We look forward to that road ahead.

Next slide is Slide 6. So as we look forward, operating businesses we expect to expand both organically through tuck-ins, through synergistic opportunities and lift-outs. The ability for us to transact in M&A, that's benefited as well with significant deal flow coming from some of the residual benefits on the SPAC franchise. Again, we're prudent, but we do look at areas to grow in niche opportunities that have protected embedded franchise characteristics so as to continue to deliver up the value chain for the customer, a customer set which will be varied, not necessarily looking at our existing business.

That lends itself to what we call broadening the franchise of the LGL Group. If you look at our website, you'll see some of its history. It's a diversified holding company over time, adding value to its subsidiaries. We continue to believe that, that is an opportunity for this company and its shareholders. SPACs across several verticals, as I mentioned, will continue. And we're excited on both the SPAC as an investment itself but also the residual benefits that come from the SPAC, its deal flow and the general network effects.

The SPAC itself is a dynamic instrument, which operates within the capital markets trading on the stock market and the expertise across both the management team and directors...

(technical difficulty)

Marc, this is James. Sorry to interrupt. We're having a couple of folks indicating they're not hearing on the call. I just wanted to double check if we can with the operator. Michelle, are you there?

You are not lost, sir. Some participants might have dialed to the Webex portion of the call only.

Okay. So we can only continue, James.

Yes, correct.

Okay. So let's continue on Slide 6. We were leaving off on the network effects for the benefits coming from the SPAC and the relationship set that we all bring to the table. Let us now move on to the operating business. And I pass this to our new CEO and President, Michael Ferrantino.

Thank you, Marc. I'd like to give a brief overview of MtronPTI. And first, I'd like to echo Marc and thank both the MtronPTI teams for all of their hard work last year. They handled the many challenges related to COVID-19 and were able to keep revenues close to the 2019 levels.

Slide No. 8, please. So MtronPTI sees significant opportunity in the defense landscape. As a result, our focus has been to become a preferred supplier of critical frequency and spectrum control components and modules used in the avionics, military, aerospace and space markets. These markets place high value on the highly engineered, ruggedized and custom solutions our team is capable of providing.

Next slide, please. So we are a provider of Tier 3 and Tier 4, where we do components and modules of the offerings I just mentioned. There is lower price sensitivity in these modules where small variations in price can mean not much to the end system but a great deal to us.

Next slide, please. MtronPTI is a global company with 132,000 square feet of design and manufacturing space with locations in the U.S. and India. In addition, the company has a sales network of over 30 reps spread primarily through North America, Europe and Asia.

Next slide. Despite the effects of COVID-19, 2020 was a year with many positives, including the release of several new products, expanding our reach into not only existing customers and markets but also into new ones. These led to key design wins and market share gains in our expanding customer base.

Investments continue to be made to drive profitability through automation and yield improvements. We are also enhancing our marketing efforts to promote our new products and capabilities. COVID-19, however, did have a negative impact on our gross margins primarily due to disruptions in our workforce and supply chain, a decline in our Avionics business, a shutdown of 6 weeks at our India operation, which created the need to shift production back to the U.S.

Next slide. As we look forward, we see growth opportunities in both existing and new areas, including developing new technologies and products, driven by our customers' need for higher levels of integration and functionality, smaller form factors, higher frequencies and lower phase noise. These new products will help us gain market share within our existing blue-chip client base and grow opportunities in areas such as medical and space.

We will continue to invest in both capacity and capabilities where we -- which will allow us to expand our international sales with lower-cost higher-performing products. We will continue to look for synergistic acquisitions of both product and technical capabilities to further support our customer needs.

With that, I'd like to turn the call over to Linda.

Our annual revenues in 2020 were $31.2 million versus the $31.9 million, a decline of $0.7 million or 2.2%. As mentioned previously, the company and its team was successful in being able to offset the decline in the avionics market with increased revenues in space, defense and the medical market.

Our gross margins declined from 39.2% in 2019 to 35.1% in 2020, returning us to the historic gross margins that are in the strong mid-30s. And we were able to do this as we shifted the onshoring back to the U.S. with the shutdown of our facility in India. Our adjusted EBITDA was 8.6% in 2020.

And when we look at our backlog, our backlog decreased from $21.9 million in 2019 to $19.8 million in 2020, where it remains strong and steady going into 2021.

Mike, I'd like to turn it back to you.

Thank you, Linda. Let me conclude by first thanking the company's directors for their vote of confidence and let the shareholders know that I look forward to continue serving them in this new role. The opportunity for LGL is strong, and I am proud to be part of the team who will lead it into the future. We will strive for growth through continued product development and market share gains, mergers and acquisitions to diversify and expand, as well as look for alternative areas of growth using our key strengths. I'd now like to open the floor to questions. Operator, please open the floor to questions.

(Operator Instructions) Your first question comes from [Doug], a private investor.

I appreciate you doing the call. I had a question as it relates to the SPAC franchise business. Could you put any kind of parameters around that and some kind of magnitude to give us something to think about in terms of how meaningful the IronNet deal is and how meaningful potential ones going forward are relative to the investment?

Sure. Thanks. And thanks for your question. We had some problems with the line. Some investors weren't able to listen in, so we're glad that you were able to dial in and listen to the presentation.

With regards to the SPAC franchise and the meaningfulness of the IronNet transaction, as I'm sure you're familiar with the SPAC, the business combination was announced. SPACs have a trust value that is at $10 per share. There are also warrants. LGL Group invested in the sponsorship that had both the economic participation in B shares that convert to A shares. That conversion occurs when the SPAC business combination is completed, therefore, voted on by shareholders. That's not expected until July. So the actual liquidity of the investment doesn't incur until that time.

What's unique about the IronNet transaction, and you will see in various SPAC transactions, there are multiple terms and conditions for these transactions in the market. IronNet, the PIPE, which is the private investment, raised $125 million, which is also equal to the minimum cash condition to close. So in that context, the IronNet transaction has met its financing conditions to close. And therefore, we can view that this transaction has already economic value for the LGL Group.

There is, of course, variability to the economic value that will be tied directly to the pro forma trading pattern of the stock. But at $10 a share, the economic value, without including the benefits of the full warrant participation and without including the potential for the share price to appreciate, that economic benefit is in the range of about $12 million to the LGL group. And that's just to LGL as a sponsor -- participant sponsor within the SPAC partnership. So that's a net number after the initial $3.3 million initially invested. And it is also not including any other additional investments that LGL Group may have done or will do with the company on a pro forma basis.

So the multiplier, though, just a rough math on the multiplier, that will vary. And each SPAC sponsorship will have a differentiated return profile. But certainly, without share price appreciation, assuming $10 on the trust account for IronNet itself. So that's holding a lot of items static, you can kind of roughly assume the 12 plus the 3.35 already invested. So that's on a gross basis, kind of north of 15 and roughly around 12 net. And again, there can be upside. There also can be, of course, downside to that based on stock price fluctuation.

So I hope that answers your question. We will, of course, as we've just outlined, continue to pursue the buildout of the opportunities around SPACs. And for those of you that were able to listen to the IronNet Cybersecurity call for investors, the SPAC management team has outlined that they've seen well in excess of 100 transactions, and IronNet had the attributes for them to transact on. And keep in mind, those transactions all have to fit the criteria for the SPAC, which would be closer to the IronNet pro forma cap of $1 billion or more. Certainly, residual benefits for LGL Group and its shareholders would be any related flow of opportunities in a much smaller set. So I hope that helps with the question.

Your next question comes from [Tom of MFF].

My question also has to do with the, not only the SPAC that we're currently involved in, but you mentioned in the presentation that seems to be one of your pillars going forward. My understanding until I just heard your answer was that we -- LGL had just had an investment in the warrants. Am I mistaken on that? Because how do you know that $15 million value to the company at $10 wouldn't attribute any value to the warrants, which I think are exercisable at 11.5.

Can you explain that facet as far as the current investment is concerned and how you look at that as you do more SPACs in the future as you alluded to? Because I never quite understood how we only invested in the warrants rather than the actual SPAC itself because, otherwise, you're just taking -- we're lower on the totem pole there in terms of risk.

Yes. Tom, thanks for the question. No. So the first thing is, is that the SPAC -- that the LGL Group invested in the SPAC sponsor. The SPAC sponsor includes both B shares, which are nontradable and restricted and have that binary risk, which is either up to 10-plus or to 0 if there's a deal not announced. But it also includes the warrants.

So just for a point of clarification, LGL Group invested in the sponsor, which took on all the risk capital. The sponsor is designed to have both a direct attribution to its investment plus incentives to the team broadly, which includes those folks that are involved in the day-to-day opportunity seeking for the SPAC. But ultimately, LGL Group did not invest only in the warrants, okay? It's a partnership. It's all wrapped in, and that's what you can see in the financial results under the variable interest accounting.

For example, if we follow GAAP, EBITDA takes a haircut when the variable interest entity has an expense that flows through to the LGL Group. It's -- from an economic perspective, it's not an LGL Group expense, but it shows up in the reported results due to the accounting.

In terms of the actual detail of the SPAC business and further opportunities with SPAC investment, should LGL Group invest in further sponsors, which it intends to do, and there are several in registration, we will have a separate call for investors around that topic. We do think that as public companies -- sorry, as companies seek to go public, we think 2021 is really a year that we're all going to mark on our calendars for the future in the capital markets because you have, not only traditional IPOs, which have been around, but you now have direct listings that can obviously help raise capital, but then you have the SPAC phenomenon. And the SPAC phenomenon, besides SPACs obviously seeing its growth because of very low interest rates and liquidity in the market, SPACs also offer several very strong features for a company looking to go public. So we do plan to continue to invest in SPACs in the fashion that we've just outlined, which is in the sponsor partnerships that do take on all the risk capital but, therefore, also have requisite rewards.

And obviously, Tom, the best mechanism to mitigate the risk is to ensure that the management team can identify and transact with a business combination, wholly dependent on the capital markets but also wholly dependent on deal flow and relationship sets. So the LGL Group hopes -- certainly believes that it's bringing forward quite a lot of good relationship sets for that opportunity and for shareholders. I hope that answers your question.

Yes. That's helpful. I thought we just had the warrants and had to get above 11.5 at some point, the new company down the road to have value to LGL, and I couldn't understand why we would invest in those terms. So your explanation is very helpful. And what you're essentially saying is that, as of the moment, LGL economic interest is $24 million in cash on the balance sheet. I think you said in today's presentation and plus about $15 million at $10 a share, if it were to trade at $10 when the new company starts. So that's approaching $40 million, just those 2 figures alone, let alone your -- the obvious business that you're running as well. Is that a way of looking at things?

That's correct. There are some NOLs that we haven't discussed today. And then also you have -- ultimately, the SPAC franchise will continue. And as that continues, we believe there is a real opportunity to continue to bring companies to market and help add value to those companies in the process.

(Operator Instructions) There are no questions from participants online. Sir, you may continue.

Well, if there are no more questions, I would like to thank everyone for participating and your continued interest in the LGL group, and this would conclude the call.

Ladies and gentlemen, that does conclude today's conference call. Thank you for participating. You may now disconnect. Speakers, please stay on the line for your post conference call.

Thank you.