Earnings Transcript for LGL - Q4 Fiscal Year 2019

Company Representatives: Marc Gabelli - Chairman James Tivy - Chief Financial Officer Ivan Arteaga - Interim CEO Bill Drafts - President of MtronPTI

Operator: Ladies and gentlemen, thank you for standing by and welcome to the LGL 2019 Annual Results 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 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.

James Tivy: 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 have 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 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 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 was $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.

Marc Gabelli: Thank you, James, and thank all of you for being available and attentive to your company, LGL Group. I'm joined today with two 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 as 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 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 who are considered as 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 operation. This period is one where in 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 have 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. 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 and 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 and it is our expectation that the facility will be back and running at 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 the strengthening of our balance sheet, where we had a program working with the investment bank Jefferies, in raising a bit of capital. That has been 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. 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 was 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 in 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 two to three 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 and how the world has evolved and what you see in the near team. Thank you, Bill.

Bill Drafts : 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 five months now since I've joined and I've had the chance to go across the country and meet our top customers. I went to South Dakota. I was actually booked on a flight to India this Friday 3, 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 products with very high precision engineering and the customers really like what we're doing. We're fortunate that we are 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 you know we're all working through this and the challenges that we have and I think it’s been a great five months. Didn’t see this coming at all, but we're reacting very well and of course as you mentioned, our number one concern for the safety and security of our staff and team, and we’ve invoked all the CDC rules 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 six 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 have run three 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 you know absolutely blue chip customers. 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.

Marc Gabelli: Thank you so much Bill and Kevin, we’ll move into Q&A.

Operator: [Operator Instructions]. Your first question is from the line of Chris Sakai.

Chris Sakai: Hi everyone. Someone new to LGL, but just had a question I guess on your – the India operations. If you could help me understand, so this will be mainly affecting the second quarter it sounds, and how much could we potentially see hit the revenue in the second quarter because of this.

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

Chris Sakai: Yes, I'm at Singular Research.

Marc Gabelli: 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 to Orlando. Some of the key customers are Department of Defense customers and without getting into too much of the granular detail, we utilize career 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 – you know 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 emailing and texting with the local authorities, both at the federal level in India, as well as in the local government of Noida, which is Uttar Pradesh, which is just outside of Delhi near the airport, and the authority certainly instituted this ban in a very draconian way. Some of you may have seen on 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 I've 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 have 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 released March 25 until April 15, have backlog they 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’s and to Chris’s question on sales.

James Tivy: Yeah, we've not done a full analysis, so we’ve on the back of a napkin figured out it's about one-third of our consolidated revenues, and maybe Bill has a little better break-out, but that was the level we had reached before all of our filings were due.

A - Marc Gabelli: Yeah, and when he says Chris, in 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 re-shift production into other areas of our backlog, so as to produce the revenue while there's delays coming out of India. So there's 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. So right now we have an edict from the government which says it will last until April 15. Bill, do you want to add something to that please?

Bill Drafts: 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 Mark, we do have inventory ship in Q2 and so there's zero 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 you know we don't have to knock down wall 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, you know if April 15 is the date and India opens up, then you know I think the impact to Q2 will certainly be manageable.

A - Marc Gabelli: Yeah, with that said Chris, we cannot give you estimates, but as James said, back to the envelope, one-third roughly of our revenues is touched that would come through India, but how that impacts 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 on-shoring the production and the testing, 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 – and manual labor, which gets expensive in the United States. So while we want to bring back business, on-shoring 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 them. So we can't give you any hard numbers, but we know it'll evolve and we hope to have a communication with all investors via forms of press releases as things crystallize. Is that alright Chris?

Chris Sakai: Yeah, thanks. That helps give me a better idea you know. The main focus here is the timing of it all. So yeah, that helps answer my question, yeah thanks for that.

A - Marc Gabelli: Thank you, Chris. Kevin, operator.

Operator: Yes, your next question is from Ian Cassel.

Q - Ian Cassel: Thanks gentlemen. I appreciate the ability to ask a question. I got on a little bit late, so I apologize if you answered this in your opening remarks. But I was wondering if you can comment a little bit about why you decided to raise some capital during the quarter, you know given your balance sheets in pretty good shape. Thank you.

A - Marc Gabelli: Thank you. It’s a great question. Ian, can you just state your company and your affiliation? Apologies.

Ian Cassel: Sure. I'm a private investor, also own MicroCapClub.com.

A - Marc Gabelli: Oh! Thank you. 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 interim PTI has shifted to a much more stable customer base under the oversights of Michael Ferrantino, our previous Chief Executive and Chairman. The stickiness and 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 themes and then of course looking elsewhere at different opportunities. If we continue along the attributes of defense oriented investing, we organized the LGL group to help become part of a sponsor group, focus 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 and business or as acquisition Corp and we believe that we are in a good position to be able to invest with a return and possibly 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 the 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 pencils. 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 two to three years to build value, certainly the debt markets at one point are 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 microcap is – also it’s accessible to people like yourself Ian 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 [inaudible] base at the time. They were to access and grow the business. Right, 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.

Ian Cassel: I appreciate the color on that. Maybe just – I just have one follow-up question then. You know related to bookings and they drop 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 you know they dropped again. I was just wondering if you could provide some color on that. I know you did in the press release, you know talking about January and February booking have picked back up. But just wondering if the last two quarters were just sort of normal course of business fluctuations or has there – you know lost any business or maybe you can just provide some commentary.

A - Marc Gabelli: Yeah, 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 your new at this, but Bill why don't you talk about kind of all 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 change if that's fair with you.

James Tivy : Yeah, I believe that's fair.

Bill Drafts: Yeah okay, absolutely. Thank you. Ian, our business, it's not unusual for us to receive blanket orders and so customers in the defense industry will be building a certain product and they want to secure the pricing and delivery and give us you know a good lead time, so that we can finish the qualification and such, and so being up there you know, all milk 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 to 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. Now we're negotiating that contract right now and we'll see that in the near future. And then we have two or three more others that are the same thing; we're in the negotiation. So you'll see some pretty wild swings in book-to-bill and that's just the nature of the business.

Marc Gabelli: Yeah just to take that a bit further, what Bill and his team are doing is also speaking to that core customers set and core product set and working diligently with new customers and Bill brings some relative relationships as well and some new customer channels. So you know they are 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?

Bill Drafts: Oh sure! At the – well, if we have the June IMS show in Los Angeles, we’ll be not announcing a couple of products that are really industry leading

A - Marc Gabelli: Thank you Bill, that’s great. So Ian the team is chugging away today by video call and the best they can. You know the elements of commerce are changing every day and you know 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.

Ian Cassel: Okay, thank you.

A - Marc Gabelli: Thank you for the questions. Kevin?

Operator: [Operator Instructions] There are no further questions at this time.

Marc Gabelli: Thank you very much, and thank you everybody. Stay safe. This is – you know I’d like to say this is an invisible enemy. Don’t underestimate it. So stay safe please, for the safety of our nation. Thank you very much.

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