The LGL Group, Inc. (LGL) Q4 2013 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the LGL Group Full Year and Q4 2013 Earnings Report. [Operator Instructions] This call also has a visual PowerPoint component in addition to the conference call. To view the PowerPoint, please click on the Join the Meeting link you received in your invitation and included in the press release announcing today's call. [Operator Instructions] And it is now my pleasure to turn the conference over to the company's Chief Financial Officer, Mr. LaDuane Clifton. Please go ahead.

Good morning, and thank you for joining our call today. With me is our President and CEO, Mr. Greg Anderson; and LGL's Vice Chairman, Michael Ferrantino. We prepared a slide presentation for your reference that may be viewed as part of today's web conference. The presentation materials are also available on our website, which is www.lglgroup.com. Please locate these and use them as a reference for today's call. This call will be recorded and will be available for playback later today or tomorrow on our website. Other financial information and recent press releases are posted on our website as well. Please note that our comments are covered by the Safe Harbor Statement. [Operator Instructions] At this time, I would like to introduce Mr. Anderson.

Good morning, everyone, and thank you for joining our Fourth Quarter and FY 2013 Earnings Call. I'll start, if you take a look at Slide 13, I've just got a couple of slides that help background the company. From a snapshot perspective, we've been around a long time. Our 2013 annual revenues were just at $26 million. We got a good mix of in- and outside the United States. Stock price ranged over the 52 weeks of $5.20 up to $6.50. Market cap runs at right under $15 million. Cash and cash equivalents are under $9 million, and we serve a very large market. LGL's subsidiary, at present, is MtronPTI. And it's a B2B OEM kind of business, really serving communications for both Internet, as well as Aerospace and Defense. We've got a nice balanced demand between about 2/3 Aerospace and Defense and about 1/3 Internet communications. Our IP really centers around our crystal technology, really getting into what's called low noise oscillators and our, really, our higher frequency filtering capability. We've got a nice platform. It's global, we have multiple U.S. sites, some international sales locations and supply around the world. And we do have in India manufacturing presence. It really gives us some advantages for cost, especially in the performance product end of our market. Our margins. We can protect those really by staying in sort of this high-performance, high-value, high realm [ph] kinds of products. We strive for long product life cycles, with repeat revenue streams. And we've got a management team with a good experience based around supply around the world. Our growth opportunities. We really focus on these long-standing relationships that we have with our large OEMs, these industry leaders. And of course, we're always after share gain opportunities as we develop new products and broaden our OEM portfolios, as well as our basis of who we serve. So we had a number of things take place in the fourth quarter of 2013, and I tried to just grab a few of those to share with you this morning, lots of details under each one of these. But last May we started talking about the strategic review process. We're here to say today that, that process is completed. In the fourth quarter of last year, we implemented a restructuring plan. Took that charge of $600,000, and that is what we had expected, planned and expected. We did have a modest book-to-bill, and that helped our backlog by a few percent. And really, lots of change in 2013 so that we, frankly speaking, don't repeat that kind of performance and we're really trying to position the company for 2014, not only in better financial terms, but really in growth and a bit of transformation of where we're actually allocating our capital. The highlights or most of these are really lowlights for the fourth quarter financially. Revenues were $5.7 million. That's the least that we've had in our 12-quarter roll, down 6%, down notably over the fourth quarter of '12. Margins remained essentially flat at 22%, even on the decreased revenue. We had a $0.50 loss on adjusted pretax. Backlogs at the end of the fourth quarter were $8.6 million, up 2.4% sequentially, and adjusted EBITDA was just -- was near 18% negative for the fourth quarter. If we take a look at the full year, I mentioned we had revenues of $26 million, just a little bit more. That's down almost 12% sequentially over '12. Gross margin was 26% for the year, that's flat. Even though we have these reduced revenues, it really is an indication that we were doing some cost management along the way and really had some operational gains to be able to maintain those margins. Our full adjusted pretax loss was $1.40 per share. And the year ended up at just -- at near 10% negative EBITDA -- adjusted EBITDA. And here's the picture form in those financials. Again, we can talk about in the blue, we have the bars is our revenue, gray is the margin revenue, and red, of course, is the negative EBITDA. That is certainly -- the challenge is to manage our cost, as well as get that top line growing. And that's what we expect to discuss a bit more in today's call. Cash and cash equivalents were $3.35 per share, or $2.29 on adjusted working capital. We've got a book value of just under $6.50. Slide 9. We've used this slide a number of times. I think it still stands. It's a good slide, and it talks about why we think we can grow this business. We do have a good capital position that allows us to invest organically. We're always looking for these key new products that can broaden and differentiate who we are to our clients. We've got lots of good offerings to our clients, and the question is can we widen that and actually go upstream with that. Many of our components are very sticky in our client systems. And so sometimes there's a long period between buys. Sometimes it's 9 months, sometimes it's even a year, but those revenues do come back and frankly speaking, they have nice margin to them when they do come back. A lot -- much of our R&D today is really in this RF and microwave space where we're trying to go up in frequency, targeting things like software defined radios and low noise radar, lots of harsh environment timing for G-sense and vibration and extreme temperatures. You find an awful lot of that in the Aerospace or avionics sector. And we do have a strong position in commercial avionics. There's lots of tough news out there in the defense side of our business. But frankly, in the commercial avionics side, the backlogs that we see with the Boeings and the Airbuses eventually trickles down to us. And that's -- we have a strong position in there both in communications, as well as in control systems for that sector. I mentioned our backlog came up just slightly to $8.6 million. This slide is just a GAAP to non-GAAP reconciliation. I won't spend time going through that. So as we work towards growth, a couple of negatives. Certainly in this Internet communications space, there's -- it's been a reduced demand for us, and price compressions have been difficult. So even when we might be up on the unit basis, maybe top line doesn't see it just because of the kind of price concessions that we have to make. In some cases we're choosing not to participate in that business. In some cases we can participate effectively and do. We mentioned the U.S. government spending is still an uncertainty. If there's any positive, we're really on the communication side, not so much on the missile side of that particular spend. And so there's forecast for tactical radios, UAVs, communication systems. I think in large part, those are generally positive. Of course we're in there fighting for share. We continue to have strong new product revenue streams even though our revenues are down, the what we call the 36-month new product portion of that is actually at a very healthy 15% to 20% range in both our timing products and our filtering products. And so we're -- we continue to be encouraged by that, that will then lead us to some top line growth. We talked lots of times about our working capital position. It is strong. And we entered into this restructuring. In the fourth quarter, we executed that. We believe we've got that behind us now. And so those efficiencies, we should be able to see those in margins and income and EBITDA as we go forward. Our drivers. We talk a lot about organic growth. Places where we invest are engineering. We're in there fighting for share gains in Aero/Defense clients. It's -- maybe it's a smaller pie, maybe it's a same sized pie, but we have good positions with our clients in our -- in the top 6 or 8, so to speak, and we're always trying to position for share gains and in some cases are. India is certainly an investment for us. We're continuing to look at ways where we can enhance that investment. There are some local Indian indigenous sales, I'll call that. And we're certainly always looking at operational investments for that particular facility and how we can leverage that into the Mtron subsidiary. IP investments, any way we can have more of what we have, the broader offerings, additional componentry that, that we can bring into the fold of MtronPTI and really get us to where we have greater barriers, and really, eventually we'd like to get to the point where we've got these sort of integrated subassemblies or integrated levels for our OEMs. And to do that, we have a strong offering today but it would be advantageous for us if we could bring a few additional types of technologies into the company that would enable that. Acquisitions and joint ventures, we're going to talk about the Trilithic acquisition in just a minute, having that capital structure, having the ability to move quickly, it's a key part in this kind of a market when companies are deciding to divest, are we going to be able to be there and move quickly. And certainly, being able to acquire when we feel it's a good value and we can integrate well into our strategy, that's a key part of our growth initiatives. I'd like to announce that we've completed our strategic review process. And really, the results are that we're going to continue to pursue our own engineering and acquisitions really for our core business. And we've made a number of changes in how we allocate our capital. Of course, we're going to be -- we talked a lot about transforming our company into these long and sticky revenue streams and getting to where we've got more differentiated product positions at our large OEMs. A number of significant actions took place in late 2013 and into 2014. We announced the distribution of warrants back in August. Our Vice Chairman, Michael Ferrantino Sr. joined us in October. We announced an initiative to restructure our company, which was really getting these capital allocations in line of where we really can create the greatest value for you, shareholders, and that took place in October. We began those efforts. At the end of January, we announced the acquisition of the filter assets of Trilithic. And from that, we got a couple of pieces of intellectual property. We certainly got some long and sticky revenues, we believe we're a chance for those, added a couple of new Aerospace clients to us. And so those are all sort of fit the strategy of where we'd like to go. And then in early March, we announced the appointment of Conrad Jordan. He joined us and he is the Vice President of our Timing Products Division, for all of our timing offerings that we have. And really he is a seasoned 20-year RF and microwave veteran really in the R&D space, marketing, business kind of a background. So we're looking forward to Conrad's experience. He comes to the company, not only with a component understanding, but a good sense of subsystem level understanding in this RF and microwave marketplace. Our strategy is clear. We're going to reinvigorate our intellectual property. We're going to invest in our own roadmap, where are clients -- where we think we have a number of opportunities to serve these same clients with technologies. Obviously, we're going to enhance that with acquisitions and joint ventures. We can leverage where we're at today. We've got great client positions. And if we bring these additional capabilities to them, we think that's a nice return on investments for the company and our shareholders. And really our focus is to invest in really differentiated and broader RF and microwave kinds of products and portfolios. In the bottom, I just have a couple of simple statements where we talk about transforming our product portfolio. Really this thing towards longer life cycles, higher competitive barriers, better margins, that's a journey that we began -- and probably began before last year, but we're certainly laser-focused on it now. And that will take a couple, 3 years, probably to really get the wheels going. We have long product life cycles, long incubation periods with many of our OEMs and so it's not something that you'd do overnight. But we believe that that's really a differentiator when it comes to long-term financial performance. If we can take some of the cycle out of it, get into these longer backlog kinds of business models, that's where we're pointing the company. I have one slide on the Trilithic asset acquisition. I expect questions on this, so I thought I would share some of the details, the whys and what fors. It's public. We purchased it for $700,000. Really what we were after was the intellectual property in the print positions. It's an active business. Probably was a -- I will say this that it wasn't the largest portion of Trilithic, and that was probably the reasons, the primary reasons for divesting. But it has an active backlog. And we've been -- we've had good success. We're early on here yet. We're less than 60 days into it, and but we're really transitioning those open orders and backlog over to MtronPTI. I talked about some new product IT, especially in the tunable filter area, we got a couple of different offerings that really enhance the ones that we worked on. There is an offering called tubular filters. And we've got a couple of top tier clients, and really some real good client positions or applications positions in this UAV market space, which we know is predicted to grow. This fits the model of being what we'll call asset light, so we're able to acquire, frankly, and integrate it fully into our existing -- essentially our existing overhead structure. So it's a pretty exciting time for us to be able to find that kind of target and hopefully integrate very quickly. With less than a couple of months into it, we are on plan and we've actually begun shipments, so it was accretive immediately. And certainly we expect it to have a favorable impact on 2014. So the key takeaways, there were a couple of new pieces of IP, a couple of new clients and really limited -- what we call structural cost adds. So once again, to recap our investment in considerations at the LGL level, strong capital, experienced management team and board. We're always interested in this joint venture M&A when it really fits in with our strategies. MtronPTI remains a strong brand. Lots of experience, some terrific clients. Mentioned our diversity of markets. Lots of the certifications that these difficult, I'll call it harsh, high rail kinds of certifications that we were actually able to do some of that in our worldwide manufacturing location in Delhi, India. We're really known as an industry leader in both technology and reliability and customer service. So at this time, I'd like to entertain your questions.

[Operator Instructions] We'll take our first question from Hendi Susanto.

Greg, what is your current expectation on software-defined radio in terms of timing of sampling by customers in your shipment and outlook for 2013? And it will be great if we can learn like how many customers are evaluating your software-defined radio products.

Good question, Hendi. I know I've talked a lot about, in these calls, about our software-defined radio offerings. I would say at present, we have sampled, I'm going to say, maybe not quite a half dozen, maybe 5 specific applications with several more on the drawing board today that are variance of the initial samples that we have in the marketplace. With confidence, we're getting good feedback on the performance. It's difficult to predict revenue. And I wish I could, but the time it takes for these products to get through the qualification and the incubation period and gain the clients' confidence into things that I would probably talk about in this call, I mean it's no less than 1 year, and sometimes it can be 3. And so at this point, we do expect some impacts in 2014. I would say that I'm not going to quantify that as being notable at present.

And then in light of healthy growth in the commercial Aerospace market, would you be able to share percentage or the amount of revenue coming from Aerospace and how was the number in 2013 compared to 2012?

So I'll verbalize that. Yes, I can Hendi. So I mentioned that our company is about 65% Aerospace and Defense. And I would expect, of that 65%, 20% to 25% is commercial avionics. We certainly saw a double-digit growth in that in '13. And we've just got strong backlog again for '14. So and that's split largely between radio and radar communications for things that fly, as well as this flight controls kinds of applications for our timing devices. So it's an area that we're certainly focused on. We do a lot of prototyping. We've got good client positions, and we are growing. I would say we're growing that segment equivalent to what that industry overall is growing.

And then LaDuane, how should we think of operating expenses in 2014, considering that -- considering the benefit of the restructuring in Q4? The restructuring will supposedly reduce your operating expenses by 10%. I'm wondering how much of that saving may go to reinvestment and how much is like pure reduction? Furthermore, how should we think of gross margin in 2014?

Okay, thank you. Operating expenses, we were on track and did reduce probably a little better than 10% of our operating expenses based on the run rate through Q3. Coming into '14, of course, that will improve. We will reinvest some of those savings as an example, the addition of Conrad Jordan, which is notable to improve our or lift up our R&D efforts. But I still believe that we'll end up being at a 10% reduction, so it's an improvement of almost $2 million to operating expenses as we go into 2014. In terms of margins, gross margin will benefit as well from the restructuring. But frankly, most gains in gross margins will have to come on higher volumes. We've already, as Greg mentioned, been operating pretty lean. We had 26% gross margin in '13, which was flat versus '12. And so we've been managing that as well as we can. Going into '14 we might see some gains, maybe a few points above 26 perhaps. So -- but that's going to be tied primarily to volumes, I believe.

Okay, Greg. You have been talking about sales opportunities in India for quite some time. May I inquire what markets you are targeting, the current status and expectation for 2014?

Most of it is defense-related. Indirectly, of course, we do business as avionics, whether the Boeings and those folks are selling airplanes to the country of India. So, I don't know that I would call that quite so much indigenous content. So most of our indigenous content is really at this time, in the defense side, we are continuing to work on the offset opportunities with our major OEMs, to provide them some relief in that regard and we hope that, that could end up leading us to some share gains. So it all ends up, frankly, as goods into that country, really between some defense and certainly some avionics as well.

Greg, would you be able to share some new products that are in your R&D?

I'll -- we're -- it's probably a little bit early, but -- on some things, but we are working on some very sensitive, we'll call it G-sense and vibration sensitive oscillators, and I'm not going to quantify that for you other than the market potential is large compared to a company like ours. And really what that would do would enhance things like radar in things that might be moving around, so if airplanes or UVs are moving around and they're really trying to get a clearer image, the noise of the oscillator, it's just extremely inherent to the value add that the performance of the radar can see. So we've got a couple, 3 offerings there that we're, I'll call it looking at strongly for a large investment. A number of new filter offerings as well. We have one that's called switched filter banks. We actually have begun the sampling of that and essentially, you're getting into the sort of high-power kinds of filtering in, a lot of times, things that fly as well. And so that market potential looks real as well. And we've got that technology available for sampling. So those are probably 2 of the bigger ones at present, besides the number of the tunable filter offerings that we have and are working on.

Okay. And then my last question, would you be able to share the revenue run rate that you are expecting from the acquisition of Trilithic's assets?

Well, we knew that was coming, Hendi, from someone. At this point, I think we obviously, we've publicly shared the purchase price, and I think at this point I'll stay away from giving revenue expectations. I would say it's certainly, it's probably even slightly ahead of our initial business plan that when we acquired the assets, so it's, at present, running strong. It certainly been, as I mentioned, it's accretive immediately. And it appears that it's going to fit this asset-light kind of model. So it appears that we're going to be able to get in and use our existing structure, retain these clients and build these products inside of our existing facilities without really having to make lots of additional either people or machine investments. So we do expect it to have the kind of contribution margin that maybe is even the equivalent to what our existing filter line has or maybe even has the potential to outdo that. So I'll probably, for this call, Hendi, I'm going to probably stay away from revenue expectations other than saying it's on plan from the internal plans that we put together and modeled when we looked to acquire.

And then if I may approach it differently, may I ask like what the historical run rate of that Trilithic assets?

They're bouncy, like we are. More than 1 and less than 3, Hendi.

[Operator Instructions] And it appears we have no further questions at this time.

Okay. Well, thank you, all, for joining our call this morning. 2013 was certainly a difficult year, and it led us into this strategic review process. We made a number of changes within the company, primarily really on how we allocate our capital and leadership changes. We're sharpening our focus on where we can create greater value with our -- with these RF and microwave kinds of offerings. We like our start to 2014. I'm not going to proclaim victory yet, but we certainly like our start. We've got the restructuring behind us. We were able to identify the acquisition early on in the year and execute. And we've got a couple of notable leadership adds, one to the Board of Directors, Mike Ferrantino, as well as Conrad Jordan joining us as our VP of our Timing Products area, and he's just got a real strong RF and microwave kind of background. So we like our start. We look forward to sharing those results as we work through the year and appreciate you joining the call this morning. Thank you.

Thank you, This ends the LGL Group's Full Year and Q4 2013 Earnings Report Call. If you have any further questions, please send an e-mail to Greg Anderson at ganderson@lglgroup.com or to LaDuane Clifton at lclifton@lglgroup.com. Once again, thank you for your participation. This does conclude today's conference. You may disconnect at any time, and have a great day.