Earnings Transcript for LGL - Q3 Fiscal Year 2019

Operator: Thank you for standing by and welcome to the LGL Q3 2019 Earnings Release Conference Call. At this time all participants are in a listen only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions]. Please be advised that this conference is being recorded. [Operator Instructions]. I'd like to hand the conference over to your speaker today Mr. Michael Ferrantino, Senior CEO. Thank you. Please go ahead.

Michael Ferrantino: Thank you very much. This is Michael. Welcome to third quarter call. Our agenda is pretty simple. We are going through. I am going to first introduce the people who are on the line. James Tivy, our CFO; is with Linda Biles, our Corporate Controller, and on the line is Tim Foufas, who is the Director of LGL, has been a longtime Director of LGL, as a matter of fact, and part of the management of DFNS available to answer some questions as we're going further. I'm going to turn it over to James and let James go through some of the financials. And when he finishes up, I'll address any questions that we all will address any questions that you have. Thank you. James?

James Tivy: Yeah. Good afternoon, everyone. Thanks for joining our Q3 2019 earnings call. 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 yesterday after the market closed reporting the results for our third fiscal quarter of 2019. Before getting underway, we're 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 2018 10-K in addition to our Form 10-Q to be filed with the SEC for this most recent quarter expected tomorrow. This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21-E 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. Let me summarize where LGL stands as of the third quarter of 2019. As of September 30, 2019, our order backlog was $23.3 million, which is an increase of 45%, compared to the backlog of $16.1 million reported as of September 30, 2018. The increase reflects the company's stronger execution and delivering design wins coupled with favorable market conditions. We have been building backlog faster than our growth and revenues, due to the orders being received sooner than planned. And this quarter reported a reduction only due to our production and revenues being higher than our sales. Total revenues for the three months ended September 30, 2019 were $8.588 million, an increase of $2.35 million or 35.5% from revenues of $6.338 million for the three months ended September 30, 2018. Total revenues for the nine months ended September 30, 2019 were $23.058 million an increase of $4.618 million or 25% from revenues of $18.44 million for the nine months ended September 30, 2018. Revenues increased across all product categories. Consolidated gross margin, which reflects consolidated revenues, less manufacturing cost of sales increased slightly as a percentage of revenues to 41.2% for Q3 2019 from 39.5% for Q3 of 2018. For the year to date period, consolidated gross margins decreased slightly to 39.4% from 39.6% for the prior year to date period. This decrease reflects a slight shift in our product mix shift during the quarter and year to date period. The company continues to execute on its long-term strategic shift towards higher margin products, but there will be fluctuations of product mix in the short-term. Operating income of $1.122 million for the three months ended September 30, 2019 was an improvement of $645,000 from operating income $477,000 for the three months ended September 30, 2018, and almost exceeded operating income for the full nine months of the prior year. Operating income of $2,412,000 for the three months ended September 30, 2019 was an improvement of $1,288,000 from operating income of $1,124,000 for the three months ended September 30, 2018. This was primarily due to the increase in revenues combined with a change in gross margin from our product mix. Net income for the three months ended September 30, 2019 was $4,530,000 compared to $478,000 for the three months ended September 30, 2018. And net income for the nine months ended September 30, 2019 was $6,051,000 compared to $1,143,000 for the nine months ended September 30, 2018 due primarily to the release of $3.3 million from our valuation allowance over our U.S. deferred tax assets, and also from our strong performance. Diluted net income per share for the three months ended September 30, 2019 and 2018 was $0.91 and $0.10 respectively. And diluted net income per share for the nine months ended September 30, 2019 and 2018 was $1.22 and $0.24 respectively. As of September 30, 2019, our consolidated working capital was $27 million, with $20.1 million in cash and marketable securities. As detailed in the 8-K and press release filed yesterday, LGL Group is a $3.3 million investor in the sponsor of an aerospace defense and communications SPAC, LGL Systems Acquisition Corp, which is now trading on NASDAQ under the symbol DFNS and further details can be located at www.dfns.ai and note the DFNS raised $172.5 million from qualified investors, in IPO that closed yesterday. With that, I'll now turn the call back over to Michael.

Michael Ferrantino: Thank you, James. Why don't we just open it up for questions and between the room I'll point to the right person who I think should respond. So let's open it up.

Operator: [Operator Instructions] We don't have any questions at this time. I apologize. We have a question from the line is Tom Macintosh [ph] from MFS. Your line is open.

Unidentified Analyst: Yes. Hi, good morning. Are you able to tell us what the equity percentage of the new entity, the SPAC that you call it, your warrants would be convertible into if this proves to be a success on our exercise?

Michael Ferrantino: Jim, do you want to take?

James Tivy: Sure. I'll take that. At this point, we can't get into the specifics. So I would just that you take a look at the public filing for the SPAC.

Unidentified Analyst: Okay. Can you go over the rationale as to how - why you went that way as opposed to just being an investor as opposed to upping [indiscernible] in terms of the risk 24-month period that seems to be, I don't know, either you have high confidence as to what can happen or something. But…

James Tivy: The SPAC have - are you familiar with SPAC, because they have a specific economics too which are attractive, and being part of the sponsor group.

Unidentified Analyst: Okay. I'm not. And I guess ultimately, I guess my part of the question is trying to - is why I'm figuring out you invested this way in the SPAC. So maybe could you expound on that for a second in just a general term perhaps?

James Tivy: I think, typically a SPAC, the sponsor retains a 20% ownership in the company, in the public company. And - but it has risk capital, which will lose, if there's not a combination, business combination within 24 months. So puts up risk capital, which is at risk and in return these sponsors will retain essentially a 20%. Now, mind you this is a generic explanation of a SPAC.

Unidentified Analyst: No, I appreciate that. I mean, because it seems like there has to be some incentive as to why you structured it this way. It goes back to you may recall I asked a question about this that you alluded to in a press release three or four months ago on your either your last earnings call or the earnings call before that, because I was kind of curious when you announced that you were looking at these sorts of things and now you've done a…

James Tivy: Don't forget the SPAC is targeting businesses from $350 million to a $1 billion within the aerospace defense and communication sectors. So clearly, much larger than the target profile for any acquisitions that LGL Group might have.

Unidentified Analyst: No, absolutely, I mean, you don't have to be a genius to see that. The filings of the SPAC and the jump in your stock two or three weeks ago were kind of hand in hand. So someone has a little bit of excitement about us trying to get some insights as to what they were saying. Thank you.

James Tivy: Thank you.

Operator: Your next question comes from the line of Vishal Mishra [ph]. Your line is now open.

Unidentified Analyst: Thank you. My question is answered. Thank you.

Operator: Your next question comes from the line of Michael [indiscernible]. Your line is open.

Unidentified Analyst: Hi, thanks for taking my question. I have got a quick question, when you look at your growth going forward in the aerospace business, are there any specific sub sectors in the general aerospace industry, that you feel have a lot of potential for you that you're sort of targeting or any sort of just what you've been doing before, radar, missiles?

Michael Ferrantino: I’d answer it this way. We think the communications market space point to point has a lot of growth and we participate through a couple of them larger OEMs and have enjoyed that market space and think it will grow. In addition to that, when I talked the last time to you Michael, we were talking about radar, our penetration in the rate on market is low, because it's higher frequency. We're currently about to start a project a new program, not research but to develop a new filter that would address radar applications and open up that portion of the market to us. So we've done a good job in missiles, great job in communications. We will continue to do that. What we've been doing is we've actually been gaining market share. And I think that with the engineering work that's going on in the company, we will be participating in a much higher level in the radar area.

Unidentified Analyst: Okay, great. And you've mentioned before, I think getting into more complex applications where it sort of sounds like you have less competition in engineering in designing these products.

Michael Ferrantino: Yeah.

Unidentified Analyst: But when you talk about that, are you - again are you targeting specific types of end products, that I think you've mentioned satellites before? It seems like you would have applicability in these for example.

Michael Ferrantino: No, I don't ever recall mentioning satellites in a big way, because we really don't focus on the bird [ph]. Through our PTI, precise timing and frequency operation, we do synchronization, the amplification and tie together the ground portion of the satellite business. So on the bird, not we're not there. And in terms of complex, what we've been doing for the last four and a half, five years after we said we were going in that direction, we look at a block diagram. And we go after and target particular applications and it can be anywhere, it can be communications, it can be missile, it can be EW. We are there in a harsh environment, because what we've been able to do is to build very high very stability, frequency control and filter products that we can stand, high temperature, and maybe lots of vibration like in a missile. So nothing has changed. We continue to focus on those target opportunities where we separate ourselves from the competitor. The average small competitor doesn't have the bandwidth that we have, but nothing's really changed. No, we're pretty consistent in the strategy that we put together, I think in '15.

Unidentified Analyst: Okay, thank you.

Michael Ferrantino: Welcome.

Operator: [Operator Instructions] There are no further questions at this time. Speakers, please continue.

Michael Ferrantino: Okay. Well I think if there are no further questions, I say our part LGL, we conclude the call and look forward to the next call. So we'll be signing off. Thank you.

Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may know disconnect.