The LGL Group, Inc. (LGL) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Prince and I will be your conference operator today. At this time, I would like to welcome everyone to the LGL Second Quarter 2019 Earnings Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I'd like to turn the call over to Michael Ferrantino, Sr., CEO, you may begin.

Thank you. Good afternoon, everybody, and thank you for calling in. We really appreciate the attention that we're getting. Hopefully, it's reflected in share – increasing our shareholder value. I'm going to turn this – like the announcer said, James is going to – James Tivy, our CFO is going to review some of the financial numbers for you and then I'm going to pick back up and try to answer any questions that you have. So, James?

Thanks, Michael. Good afternoon, everyone. Thanks for joining our Q2 2019 earnings call. Please note that this call will be recorded and we anticipate making this recording available on our website at www.lglgroup.com after the call. We have issued a press release today after the market closed reporting the results for our second 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. 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 second quarter of 2019. So, as of June 2019, our order backlog was 24.5 million, which is an increase of 69.1%, compared to the backlog of 14.5 million as of June 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 expected. Total revenues for the three months ended June 30, 2019 were $7.838 million, an increase of $1.681 million or 27.3% from revenues of $6.157 million for the three months ended June 30, 2018. Total revenues for the six months ended June 30, 2019 were $14.470 million which is an increase of $2.368 million or 19.6% from revenues of $12.102 million for the six months ended June 30, 2018. Revenues increased across all product categories. Consolidated gross margin, which reflects consolidated revenues, less manufacturing cost of sales decreased slightly as a percentage of revenues to 40% for Q2 2019 from 41.6% for Q2 of 2018. For the year to date period, consolidated gross margin decreased slightly as well to 38.3% from 39.6% for the prior year to date period. This decrease reflects a shift in our product mix shift during the quarter. The company continues to execute its long-term strategic shift towards higher margin products, but there are still fluctuations of product mix in the short-term. Operating income of $856,000 for the three months ended June 30, 2019 was an improvement of $367,000 from operating income of $489,000 for the three months ended June 30, 2018. Operating income of $1.290 million for the six months ended June 30, 2019 was an improvement of $643,000 from operating income of $647,000 for the six months ended June 30, 2018. This was primarily due to our increase in revenues, net of the reduction in gross margin from changes in product mix. Net income for the three months ended June 30, 2019 was $939,000, compared to $472,000 for the three months ended June 30, 2018. And net income for the six months ended June 30, 2019 was $1.521 million, compared to $665,000 for the six months ended June 30, 2018, due primarily to our increased revenues. Basic and diluted net income per share for the three months ended June 30, 2019 and 2018 was $0.19 and $0.10 respectively and net income per share for the six months ended June 30, 2019 and 2018 was $0.31 and $0.14, respectively. As of June 30, 2019, our consolidated working capital was $25.6 million, with $18.7 million in cash and marketable securities. With that, I'll now turn the call back over to Michael.

Thank you, James. So, we're pretty pleased to hear, the management team is pretty pleased with the second quarter and we're – actually in the middle of the third quarter and feeling pretty good about it. So, without any further ado, let's open it up for questions.

Thank you. [Operator Instructions] And we have our first question from Ian Cassel from MicroCapClub. Your line is now open.

Thank you and congratulations on the quarter and the progress. I just have a few questions and I'll jump back in the queue. Where has the recent growth come from, is it just from a few of your customers or you're seeing it across the board?

We're seeing it – it's across the board, but we've had tremendous success with one particular OEM that a few years ago we were doing almost nothing and now we're up over a couple of million dollars. So, it's across the board, but in some cases, it's a real increase on a strategic customer, yes.

Okay. And I think probably a good lead indicator is sort of the amount of projects that you're in the engineering phase with. When you kind of look at that called engineering pipeline products, you're working on that might not be in production quite yet. How does it, kind of compare today to where it was maybe two-three years ago?

To be honest with you, it is not much different than it was two or three years ago, it's grown, but not substantially. It's grown in more complexity. So, the number of projects that we take on now are – I would say more complicated, challenge for our engineering, but have less competitors. And so longer term, I think for the company will be much better off with continuing strategy, and that was to do more complicated parts for the defense aerospace industry. In addition to that, we have got a pretty aggressive plan to hire more engineers because the organic growth that we've seen recently will only be sustainable if we can grow that engineering pipeline. And in fact, we have opportunities – with many of our key customers right now to take on more.

Excellent. When you're bidding and working on kind of new programs and what do you see as your advantage over that of your competitors?

I tell you our quality is probably the best-in-class compared to our competitors. We've been able to pick up some market share because clearly on quality and in some cases – when I say quality in general, they don't – our parts don't fail. And in general, we perhaps come closer to beating most of the specifications that we're working on compared to our competitors. So, there's a little bit of margin for our customers, and they like it. So, I would say that we're much – we're probably more robust in our approach to engineering is engineer to engineer. So, the open line of communications and not to say we don't want them to call our Sales Department, but the open lines of communications from engineer to engineer is pretty good in our company. We encourage that. So that when an engineer has a problem, even though it's not without pipe, but it's within the circuitry, he will call us and talk to us about it.

Okay. Thank you for that color. Last question then I'll get back in the queue. It looks like – many of your end customers are merging or getting acquired, do you see this as a risk or an opportunity for you?

It takes a long time for those – and I think you're talking probably about United Technologies and Raytheon the most recent?

Yes.

Yes. It's hard to predict how it will come out the other end. In both cases, we are – I won't say we're a strategic supplier because we're at the component level, but we're a key supplier to both of them. Now, whether or not we'll see an increase in business, it'll be a long-time because by the time they integrate their Purchasing Departments, it's probably two years. So, I don't think for the near future we'll see anything from it. And hopefully, I think our performance speaks for itself and our most recent increase in backlog and programs that we're on is evidence that they like us.

Yes. And, yes, congratulations again, usually great quarter guys. This is overused on earnings calls, but this time it's well deserved. So, great quarter. Thank you.

You're welcome. Thank you for the questions.

Next question is from [Tom MacIntyre from MFH Investments]. Your line is now open.

Yes. Hi. Thank you. I'm – perhaps following up the last question and answer. I'm going back to your press release in early June, where you've alluded to several and many things that may or possibly might happen. And I must admit, I've read that and I've read it now here in preparation for this call, a couple of times. I'm trying to figure out, you're telling us something, but I'll be gosh darn if I can figure out what it is you are telling us. And I've been with – as a shareholder in LGL for many, many years, and I've seen – I've seen a few announcements that along the way that caused some confusion. And I'm just wondering, if there's anything you can obviously, you have nothing to announce in terms of a transaction, but what were you getting at with that memo is my actual question.

You're talking about – in referencing the...

Yes. The – LGL to expand efforts in the defense and aerospace industries, kind of like why you have just – good follow up to the last question where you refer to various structures of ways you might do this or you might do that. And I'm saying, I'm wondering why they put out this press release when they had nothing to announce except that they might do something at some point. So, I'm trying to figure out – I'm trying to – perhaps I'm the only one that's been confused by this, but I've – you put it out for a reason and I'm trying to get some guidance as to what you're getting at.

Tom, are you specifically referring to the press release that we were – when we talked about sponsoring a SPEC?

Is that – what's the SPEC, special? Yes, it's your June 4 release, the headline is LGL to expand efforts in defense and industry, and you referred to various A&D verticals and you used a lot of stuff like that and made reference to what you might or might not do and what it might mean or might not mean and I'm just, and then you threw in the shareholder value and your balance sheet. I mean, there was so much gibberish in there. I'm trying to figure out, well, they got something in their minds so they wouldn't put out a press release, but obviously hasn't progressed anything and it's been bothering me now for two months that, it took away, frankly, in my mind from the success of your last quarter, which caught, I think, some people by off balance and hopefully this quarter will as well. But then all of a sudden, your press release went out like this, which was intimating something was in the works, but you weren't ready to say anything about it. So, I'm here, I'm now asking, what was the reason for that press release or maybe you'd give us some color to do why you put it out and what's on your minds?

Well, I'm sorry it caused confusion on your part, but I understand. I'll take a stab at it. You know that our balance sheet is quite strong and our cash position is pretty strong.

Yes. I just read some numbers after your release today and it's gotten stronger.

Right. And hopefully, it will continue that way until we can find the right investment to make. I think that we were trying to talk about our roots. LGL goes back a long time, even older than me, believe it or not. And it had positions in both aerospace defense industrial and even in telecommunications, going back to when it was, I think [indiscernible] Systems. So, I think what we were trying to say is that, even though we're focused on aerospace and defense and we continue to look at synergistic acquisitions that we can bolt on to the current subsidiaries that we have now, MtronPTI and PTF. We're not limiting ourselves to just that. We're trying to expand it so that at the end of the day, we can increase shareholder value. I'm pretty happy that the stock is going up, but I'm not exorbitant because I don't think it's where it should be. And so, until we can get, I think our revenue up even a little higher, I think our gross margins are world-class right now for the components business. That we've opened our eyes and said, let's not limit ourselves to just electronic components. And so, that was the essence of it. And in fact, we're trying to do that right now, but there's nothing more than I can announce.

Yes. That actually is somewhat helpful just in terms of what you're getting, although that part actually isn't in the press release. And while I've been a shareholder for well over a decade, I guess I don't go back far enough to take on some of the history you just referred to. I will say this, one of the other reasons I was a little perhaps uncomfortable with it is, because I have been here for over a decade and I have seen several versions of, you know when things get better, various strategies or ideas are employed or groups try to take you over and special committees are formed and all kinds of drama gets created and then it all just kind of dissipates and the stock at the end is actually lower than where we started out. So, I was a little confused that we were – now that we're having some better times operationally that we were getting ready to kind of take a walk on the wild side again and I'm talking about the rights, and there were some mergers. If you've been around as long as I have, what I'm talking about, there has been several periods of drama, and I was just worried that you were – now that things were better and your balance sheet, as you say, is strong, that you might be getting, you might be veering off of the course that you're currently on. And I guess you are, but I guess you're not ready to tell us.

No, no, no. We're expanding it. I think our principal focus is still aerospace and defense markets, but we're not going to limit it to just a component level.

Okay. Like I said, I think I was just a little taken off because it was a press release, I'm looking at it and it made a lot of buzz words and options that and yet there was nothing to announce. And so that made me nervous what can I say? I've been around a long time, I've seen the company do poorly and then do well, and I was afraid that maybe, I didn't know what this press release actually was getting at, is what I'm getting – is what I'm saying to you.

Well, I hope I've helped you, Tom.

Yes. Thank you.

Thanks for the question.

[Operator Instructions] Next question is from Michael Lu, a Private Investor. Your line is now open.

Hi. Thanks for taking my call. I want to say congratulations on the great quarter. So, I had a couple of questions. My first one is, given the recent rise in revenues the last few quarters, when – where do you expect to reach capacity in terms of production? I know you talked about hired more engineers, but more so like your current facilities and when you'll have to maybe spend more to expand those, if you could give us specific revenue range that you can currently support and when you would have to start spending some more?

Hi, Michael, long time we haven't talked, couple of weeks.

Yes.

Let me try to see if I can address it this way. From a plant point of view, I'm not going to say it's infinity, but we have a lot of capacity with floor space. We really do. And in fact, we have a full time for a shift, and we've most recently put on a part time second shift. I think we will get – we'll increase revenues once again and our modeling would suggest it's probably 5%, 7%, 8% that we can do with the existing equipment people. And that's probably going to be good enough to bring the backlog more in line with what I expect it to be. What we also talk about amongst ourselves is that what if a customer came along and wanted to place a $2 million, $3 million write-up for us, on us, and he wants delivery to be quicker than, let's say, normal. And we refer to that as a surge and everything that we do here now, we're using a lot over time, people are working a lot of hours. So, we've added resources, hard to get, especially the clear – getting people and getting them cleared. But we've been pretty successful in the last 90 to 120 days. So, what we're trying to do is to, be able to ship, let's say, $8 million on a 40-hour week, maybe it's 42 hours in selected cases. But to get away from people working 8 to 10 hours over time a week. So, we've loaded the factory to be able to get to that level and then with all the time to be able to do more in case we needed it. So, what we're trying to do is to say, okay, let's get – let's not use up all our capacity, let's increase it and we did. We've even bought some specialized equipment and have a few more pieces coming in that will allow us to take some labor down. So, we're always looking at how can we take an either semi-automate with a piece of equipment or do new jigs and fixtures to increase productivity. So, and it's all coming together, you can see it and the fact that we've – in 13 weeks, we're able to go up almost a $1 million in revenue. I know we don't compare it to the first quarter, but we did. That's an awful lot of parts going through this factory. And so, I'm pretty comfortable that facilities, I don't need another building. People we could – we're constantly bringing on people to get this backlog more in line. But I think we're pretty close to where I'd like to be.

Okay.

Long answer, I know, but I wanted to go through the fact that we wanted the ability to surge in the event we could and we wanted to be able to run the factory without using lots of overtime to make this revenue.

Yes. That's really good to hear. And then I guess it sounds like it's just a matter of hiring more engineers. Is there some sort of a lead time or training time between when you'd hire a new engineer and when they would actually, reach your full level of production that you would want?

Let's break it into different categories. For an engineer coming right out of school takes a long time. But we try – we have a few because we really need to have people that are experienced and I'm telling you 10, 15 years so that they can hit the ground running and even hitting the ground running, it's probably 6 to 7 months before they're really doing what we'd like them to do. In the case of getting people cleared, technicians, we try to hire experienced people, at least with some experience. Most of it is not going to be at this level because we're unique in the area, but we make sure that they can be screened to get secret clearance and that part takes 90 days alone. So, they're not working on anything that we want them that ultimately, they will for that incubation period. But it depends on the kind of job. The assembly people, the [indiscernible] we actually brought on board a trainer, an experienced trainer, so that instead of watching the assembly beside you or the lead operator, we actually have – let's not call them classes, but we're doing training, that's a lot more professional, I think. And it gets them up the curb a lot quicker. So, that part's been working for us too. It was an investment, but I think it's paying off.

Okay. Thanks. And then on a different note, I'm also curious about your margins. So, it seems like margins are constantly going up and especially your gross margin this last quarter is really incredible as you said. I was wondering, where do you see maybe normalized margins once you reached scale at your facilities in terms of gross margin, the bottom line too in the long-term?

Well, I think it's high 30's and the reason I think that those are good numbers is because if you look at the mix of our business, some of the business that we buy and resell is at a low margin because a much lower margin than what we engineer, but it falls to the bottom line and we like it. So, if that mix and the reason it's going up is that mix is changing. We are – we are dropping as the price compression on the buy and resell impacts us, we drop it and we replace it with, let's say, a filter – a spectrum control product that when we design it, we design it around a price. And so, our modeling says that if we can't come out of the box in production with 50% gross margin, then we're probably going to pass on that job. Now, that doesn't mean that for the 30-year life of some of our jobs, we're going to make 50% because after the first of first or second production run, these big OEMs come back and beat us up and say, okay, you're down the learning curve, we want some price reduction and usually it's 6% a year for a few years. So, in general, I would say we design for 50% knowing for well that within a few years that product is going to be a 35%. Does that give you some idea of how we go about it and what the composition is?

Yes. That's good information. Thanks. And I know you used to – I think you mentioned before you have some Legacy Telecom business that you're still…

Yes. That's what I'm talking about. Yes, that's right. Michael, it's the buy and resell, where we really don't do much handling, but there's not a lot – we almost act as a distributor.

Okay, I see. So, the main goal is to now grow the aerospace business and that'll [indiscernible].

That's been the goal since 2015, highly engineered products with less competition.

Yes. And you've definitely seems like you've executed very well on that goal so far. So, yes, just – I have one more question, just maybe your personal opinion, but what do you see as the biggest worry right now for you in the business? Because it seems like everything is going very great for now and you have really good visibility in the future. What could kind of darken that picture, if you will?

I don't think there's any one thing that wakes me up at night right now. I'd hate to have a competitor do something foolish and lose a major account. And we are on a watch for that all the time. But there's no one thing that keeps me up at night. There's a whole bunch of little things that do because I still think our share price is not reflective of our value, especially after all the hard work that's gone into it. I don't want to be a pain in the neck, but in a few years ago when we had quarters, where we lost as much money as we made this quarter. And, I don't think it's reflected in our share price. I don't think we're getting rewarded like we should. And I'm a large shareholder, that's why I feel that way.

Yes. For sure. Alright. Well, thank you. Yes. That's all with my questions. Thanks for taking my call.

You're welcome, Michael.

[Operator Instructions] We have a follow up question from Ian Cassel from MicroCapClub. Your line is now open.

I just had one last question, I know you're kind of involved now in a new CEO search. Unfortunately, I think you've done a great job, Michael. I'm just curious what attributes you're looking for in the next leader of the company and maybe the approximate timing of that?

Someone who'll do exactly what I've been doing and not change a thing, and come and agree to spend the rest of his life here. Not anything of many major consequences. No, all kidding aside, we're looking for somebody that can take us to the next level, built-in from an external M&A activity, somebody that's got some experience doing that. Somebody that can even help us from a manufacturing point of view, we still – I think we can still ring some more out of the plant and the equipment and the people we have. And I don't mean to beat them, I mean with jigs and fixtures and more modern techniques. So, we're really looking for a senior fellow who can take and – not have to come in and worry about being in the foxhole, but take the company to the next level.

Okay. Thank you.

[Operator Instructions] I'm showing no further questions. I'd like to turn the call back over.

Thank you all for participating. I really appreciate it and look forward to talking to you again sometime, I guess in November. Thanks a lot. Buy the stock.

This concludes today’s conference call. Thank you for your participation. You may now disconnect.