Earnings Transcript for LGL - Q2 Fiscal Year 2018

Executives: Michael Ferrantino – Senior Chief Executive Officer James Tivy – Chief Financial Officer

Analysts: Mark Vanderwel - Individual Investor

Operator: Good afternoon. My name is Phia and I will be the conference operator today. At this time, I would like to welcome everyone to the LGL Quarter Two 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. At this time, I would like to turn the conference over to Michael Ferrantino, Senior CEO. Please go ahead sir.

Michael Ferrantino: Well, thank you and good afternoon everybody. Thank you for giving us some of your time today and welcome to our earnings call. With me today is James Tivy, who is LGL’s CFO; and Linda Biles, who serves as controller of both LGL subsidiaries and MtronPTI and PTF otherwise known as Precise Time and Frequency. We’re going to start with James, who will first read our safe harbor statement and then we will proceed with a review of our financial performance for the second quarter and for year-to-date. James?

James Tivy: Yes, good afternoon. Welcome again to our earnings conference call for the fiscal second quarter ended June 30, 2018. Please note that this call will be recorded and we anticipate making the recording available on our website at www.lglgroup.com after the call. We have issued a press release today after the market closed reporting our results for our second fiscal quarter of 2018. Before getting underway, we are 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 as well as the Form 10-Q to be filed with the SEC later today. 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 for you where LGL stands as of the second quarter of 2018 and for the year-to-date period. Total revenues were $6.2 million, an increase of just over 5% from revenues of $5.9 million in the prior year quarter. Consolidated gross margin as a percentage of revenues increased to 41.6% for Q2 from 31.9% from the second quarter of 2017. For the six months, total revenues were $12.1 million, an increase of 5.4% from $11.5 million for the prior year six months. Consolidated gross margin for the six months increased to 39.6% from 34.3% in the prior year. The increase in gross margins for both the quarter and six months reflects our strategy to move away from the low margin commodities business including purchase products and focus on achieving revenue growth through the development of more complex higher margin products, particularly in the aerospace and defense product markets. As of Q2 2018, our order backlog was $14.5 million, which is an increase of 33.1% compared to the backlog of $10.9 million as of Q2 2017. This increase was due primarily to orders being received sooner than planned and indicated strong base for our revenues over the next few quarters. Operating income of $489,000 for the three months ended June 30 was an improvement of $445,000 from operating income of $44,000 over three months ended June 30, 2017. Operating income of $647,000 for the six months ended June 30 of 2018 was an improvement of $495,000 from operating income of $152,000 for the six months ended June 30, 2017. The improvement in operating income for both the three and six months periods were due to the increase in revenues and improvements in gross margin. Net income for Q2 was $472,000 compared to $20,000 for Q2 of 2017. Basic and dilutive net income per share for Q2 2018 was $0.10 compared to $0.01 in Q2 of 2017. Net income for the six months was $665,000 compared to $131,000 for 2017. Basic and diluted net income per share was $0.14 for the six months ended June 30, 2018 and $0.05 for the comparable 2017 period. As of June 30, 2018, our consolidated working capital was $22,8 million with $1.2 million in cash and marketable securities. With that I'll now turn the call back over to Michael.

Michael Ferrantino: Thank you, James. Since this is our first meeting in quite some time, we thought it best to go directly to your questions. We want to really hear from you. And in the future, launching off of the kinds of questions you ask today, we’ll try to tailor our presentation to address those very things that you have in mind. And so without further ado, we're ready to answer as many questions as we can in the amount of time we have left.

Operator: [Operator Instructions] We do have a question from and [indiscernible]. Please go ahead.

Unidentified Analyst: Good afternoon guys. Congratulations on the pretty good quarter. I guess, Michael, how comfortable are you that the business is turned up going forward for a sustainable period rather than just a one or two quarter bump up because while your revenues were $6.2 million, they were I think $6 million in the quarter right before. So that's up I guess now 5%, it’s true, but – and it's gone against I think $5.9 million a year ago. So it's not knocking your stocks off 5%, however the backlog is up 33%. So are you expecting greater increases in the second half than we saw in this first half?

Michael Ferrantino: Yes, David, one of the challenges we have is bringing in skilled people, the kind of people we need to put these products together require pretty good dexterity and good eyesight. So we've done some unique and novel approaches to tap into new markets, probably time people that can come in from 9 to 2 and then other group of people that can come in from say 3 to 10. But you're right our backlog is that since I've been here, this is the highest that the backlog has been. It's all scheduled out over the next twelve months with the heaviest portions scheduled for the next two quarters. So I have a pretty high comfort zone that our ship along goals will increase and that the last half of the year will be – I think will be very good.

Unidentified Analyst: Right, even greater than the 5% increase you had year-over-year in this quarter, is that it?

Michael Ferrantino: I think it’s dependent on the number of people that we can bring in and get trained, yeah.

Unidentified Analyst: Okay. And you had discussions with that investment group that actually I think began back in October, a year – almost a year ago. And I thought it was done and buried at that time, but apparently a week ago you announced that you were still considering that deal on and then the next day you decided to see those discussions. And more than – I thought usual of their own – they were bidding for just Mtron and the other company would probably comprised about 90% of your – of LGL. Why did they – why were they interested in the entire company and not just those two divisions?

Michael Ferrantino: I really can tell you what I think. I can’t tell you exactly, but I preferred that they did not tie themselves up with a public company and they were looking to be private. And so, they came after us. You're right. It was even earlier than October when we started talking to them and then we put out a press release in October because it had moved at least to what a non-binding letter of intent. It was a long – it was a long one. I mean I think it's safe to say it was even unusual. I've been party to several and this was the longest that it ever took. We thought that over the course of the time that we were talking to them that we would stay quiet because we never had enough to come to the public and talk about to our shareholders. However, one of the things that they were looking for was they were looking for an indication of whether or not if we could come to an agreement that the shareholders would be in favor of it, not in favor of it. And that all happened very rapidly, David, and I think we – you saw some filings by one of our larger shareholders…

Unidentified Analyst: Right.

Michael Ferrantino: We have indicated that – looking at where we are today, I certainly agree 100% that it didn't make economic sense. So we thought in the best interest of our shareholders, our employees and our customers that we’re going to just run this business and continue to try to grow it.

Unidentified Analyst: Right, well that was probably a good idea, but these discussions did go on for a long time. So apparently there was interest on both sides, both the interested party to buy and you guys how far [indiscernible] you would have ended the discussions a long time ago I guess. So if the company was valued at 670 as it’s completed with what they wanted to pay. What were you looking for? I would say how far Paul was and why do you think they couldn't go up to the number before you cancelled it?

Michael Ferrantino: Let me first address maybe the timing because it wasn't continuous. There were significant breaks. We had a management presentation in early December and we didn't have anything to talk about from them until February. So it was not a continuous process like you'd expect it to be. So I don't think we ever felt that we were getting enough value for our shareholders. And when things started to improve and they started to improve in the fourth quarter, significantly improved because I think if you go back in time, we’ve had nine quarters of either that improvement and that's all the two years now. And we saw that the business was getting stronger and stronger and that David is a result of the kinds of businesses that we’re in. In other words from the time we get an RFQ to we supply samples through we get inter-production runs, it can be two to three years. and now we're seeing major platforms of that – a major weapon systems platforms primarily that we’re seeing production size orders. So that’s all started to come together in the fourth quarter. In the fourth quarter, I think, we booked over $7 million as well and we've done that now for three quarters in a row. So I think that’s upon self-examination we said. And maybe this business is getting fixed quicker and faster than we originally thought and we thought it would take a little bit longer…

Unidentified Analyst: Right…

Michael Ferrantino: When you get some wind behind you…

Unidentified Analyst: Yes…

Michael Ferrantino: I experience – I mean there is a little bit of luck too…

Unidentified Analyst: Right…

Michael Ferrantino: Thanks a lot for that. We’ve got some – back of us I'll take the luck, but I don't see a big turning in anytime soon. Now, I will tell you that typically my experience has been that the third quarter of the new orders for us is slow and most of that's related to government fiscal year, most of the contracts were all put out in the calendar of fourth quarter, first quarter and second quarter. And usually by the time we get to this period in time, third quarter, it does soften up a little bit, but it comes roaring back. So I don't think – I think we could have a perturbation. I don't think it's going to be big. I just see a – I don't – it's not monotonic line straight up, but it's continuing to get better.

Unidentified Analyst: Very good. Well it looks like things are starting to come together for you. Is any of this – is any of your sales volume – will any of that would be subject to possible tariffs that we have gone on with different countries throughout the world?

Michael Ferrantino: We look at the worst case scenario in our major businesses here in, MtronPTI. And it could have an impact of up to $100,000 in the worst possible case but because we have an operation in Hong Kong, we think we could mitigate a significant portion of that by much of the building has done in the same country that the tariffs I saw. Instead of bringing it here, we just take it through Hong Kong and bring it back into China, Vietnam Singapore wherever. So I don't think it's going to have – I don't think it has great consequences.

Unidentified Analyst: Very good. I wish you luck in the future with this stuff. And I’ll get back into the queue, there maybe some other questions. Thanks for answering mine, Michael.

Michael Ferrantino: You're very welcome, David.

Unidentified Analyst: Right.

Operator: [Operator Instructions] We do have a question from Boby you know ideally with [indiscernible]. Please go ahead.

Unidentified Analyst: Hey, guys. So what were – what costs were associated with exploring the asset sale over the last ten or eleven months? Do you guys have a number that you can put on that?

James Tivy: We’re under binding agreements that I really can’t reveal that, the confidentiality agreements going for sometime, so I'd prefer not to. I think we did enough in the press release. So…

Unidentified Analyst: Okay. And just want to make sure [indiscernible] base and just talking about the cost of maybe bankers or accounts or what not. What were those costs over the last ten months?

Michael Ferrantino: Bob, right…

Unidentified Analyst: Bobby, yeah.

Michael Ferrantino: Yeah, okay, I can tell you that we did not have a banker representing us. We did it ourselves. The legal fees from the beginning to now, we don't think – they'll have some cost, but we don't think that $50,000. So I would say in the scheme of things not a big deal.

Unidentified Analyst: Got it. Okay, thanks guys.

Michael Ferrantino: You’re welcome.

Operator: We do have a question from Mark Vanderwel. He is an individual investor.

Mark Vanderwel: I wonder if you could explain why your profitability has quite a dip here in the second quarter than in the first even though the revenue was only up slightly?

Michael Ferrantino: We do our best to try to answer you, Mark. The mix of our business was highly favorable in – especially in the month of June. We made an acquisition in 2014 of a product line from a company called Trilithic. And it was a great acquisition. We integrated it here in Orlando and most of the production we moved to India. So we had some substantial cost savings as a result of having the facility in India. And we anticipated that over time the sales revenue from this particular customer and those particular products were erode, but we had a search. And so a significant portion of our shipment in the month of June – not huge as it relates to the whole quarter, but significant was at a very high gross margin. So the mix was very favorable. However having said that that our margin is typically – I think when we have a poor quarter it's 35% and when we have a good one, it’s 39%. So margins have been – since – perhaps the last three years the kind you'd expect from a high-tech company.

Mark Vanderwel: Okay, thank you.

Michael Ferrantino: You’re welcome.

Operator: And there are no further questions at this time.

Michael Ferrantino: Well, I guess, I want to thank the people that asked us questions. We appreciate it that we’ve got a little insight into what interest you most with. We probably not going to comment on the last twelve months that we spent working on the acquisition, but we will comment on the fact that the company LGL is aggressively looking to make acquisitions in addition to the organic growth that we know we can do out of our two subsidiaries and we’ll be hopefully talking more about that in the future if we are judicious about the money that we were given by our shareholders. And so we're probably being extremely careful in deciding how do we employ it to which avenue and which kinds of acquisitions we're looking at. So more on that at the next call, scheduled at sometime in November. We're going to do it again. I'd like that then I guess we can conclude the meeting, James.

James Tivy: Yes, thank you very much operator and thanks everyone.