Q4 2020 LGL Group Inc Earnings Call
Jeff
Joseph good morning, everyone. I am James TV CFO of the LGL Group Inc. Thank you everyone for joining our full year 2020 earnings call. Please note. This call will be recorded and we anticipate making the recording available on our website at ww.w sometime after the month. We have issued a press release reporting results for our fourth full fiscal quarter and our full year of 2020 before getting underway were 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 contained within our 2020 10K to be filed with the SEC for this most recent trade in the next couple of days this discussion.
And 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 may 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 update any forward-looking statements, whether as as a result of new information future events, or otherwise readers are cautioned that any forward-looking statements are not guarantees of future performance.
Thank you. James will now begin with a corporate snapshot of group. The company was founded in nineteen Seventeen and went public in ninety-six. And what was called the American curb exchange today a trades on the New York Stock Exchange under the symbol LGL and if we can just review some of the highlights of the company offers a corporate profile its principal operating subsidiary today is I'm from PTI a business that's engaged in the manufacturing of robust off decision engineered designs for frequency controls used in various forms of communications and medical and Evian X devices will talk about that out further in a moment as of December 31st, 2020 the company completed the year with Thirty one point two million dollars of annual revenue.
5.0
two million shares outstanding with 24 million
cash and marketable securities
and in addition to the twenty four point 1 million three point three four million was invested on a gross basis into a sponsor of a spak LGL systems acquisition Kang LGL systems acquisition Corp on March 15th announced a merger business combination with iron at cybersecurity month. We would recommend shareholders to look at both iron net website as well as LGL systems acquisition Corp website for further information and SEC filings.
It is the intention of the group to continue to participate in spak sponsorships across multiple industry verticals talk a bit more about that in a moment.
return the next slide slide for
as we use this opportunity to look back on 2020. We want to underscore a deep thanks to all the professionals the team at home group and subsidiary businesses who delivered for our customers and stakeholders during what is and continues to be a challenging backdrop?
As you've seen in the press release the results for the year 2020 reflect the strong underlying fundamental business-oriented very much towards defense space and medical Technologies.
2020 had significant shifts in customer mix as avionics within the Aerospace industry had a precipitous decline came back of COVID-19 risks at the same time COVID-19.
Caused supply chain disruptions really across the entire manufacturing footprint of the group its customers and suppliers will talk about that in a moment. So again for the full year groups Revenue 31.2 million vs. 31.9 million, which was actually the most robust reported results for the company that was in 2019 margins. The margins reflected really good operating discipline and management led by Bill drafts in Orlando team continue to deliver and adjust as the environment changed and it changed quite a bit. But we thank God we thank all this team in Orlando react in in India.
In Hong Kong for their efforts on behalf of RT clients and stakeholders.
The balance sheet for LG group is strong as we just outlined and we continue to look for ways to increase the strength of the balance sheet. We think it's important being that lgo group is dead and the Enron businesses are in the central business for example, during COVID-19 shutdowns or India facility, which was shut down by government may it was reopened at the request of General Electric health. So GE Health helped us reopen the facility because the PTI facility in Noida India produce is a critical component for ventilators, which we all are very acutely aware was a a critical device during the month COVID-19 demek. So we're very proud that we continue to deliver during that period of time also in 2020, we're dead.
Issued to our shareholders of record of Warrant dividends you can find information on the war and dividend in website. And on SEC filings is really a a strong message and distribution of you for shoulders as we look forward in 2021, which is a subsequent event as of recent LGL systems back announce the business combination. When I earn that cybersecurity again, we think that's a continued a good way to deploy Capital earn a return on that capital and have residual benefits for the broad shareholder set of the LG phone.
And then most excitingly we've also as of today announced that Michael ferrantino has been named president and CEO Michael replacing the interim CEO live in Arteaga who is in place and helped Stewart the business during the COVID-19 Dynamics. So we thank Ivan for his efforts on behalf of holders during this time Ivan remains on the board of lgo group. Let's turn the next slide.
So just as a graphical Dynamic and we can see that if we think about the drivers of a group, we have an operating business which could use the focus on cash generation efficiencies and Excellence. We'll talk a bit about that. The company is actively looking for a value-added mergers and Acquisitions. We've as many of you know, where shareholders for sometime have discussed m&a on various calls over the years. We've been very patient. We're also looking at new initiatives.
new initiatives to
Do both deploy capital resources and just overall the strengths and talents of our group and then the stack business we can talk further about tax in another session but the LG group believes that through its resources and relationships its ability to harvest access and capitalize on Deal flow is strong and will continue to be strong and we would like the LG phone holders to benefit on the back of that strength. So we do have in filings further and future specs that we intend to issue and sponge and we're confident that we can be adaptable to various market conditions as reflected in the iron that transaction and we will approach birth.
The process with bigger. We look forward to that road ahead.
Next slide is slide six.
So as we look forward operating businesses, we expect to expand both organically through tuck-ins through synergistic opportunities and lift out the the ability for us to transact in m&a that's benefited as well with significant deal flow coming from some of the residual benefits on the on the spec franchise again, we're prudent but we do look at areas to grow in Niche opportunities that have protected embedded franchise, So as to continue to deliver up the value chain for the customer customer set which will be varied not necessarily looking at our existing business that lends itself to what we call broadening the franchise of the LGL group. If you look at our website, you'll see some of its history. It's a diversified holding company over time.
Adding value to its subsidiaries. We continue to believe that that is a that is an opportunity for this company and its shareholders stocks across several calls as I mentioned will continue and we're excited on both this back as an investment itself, but also the residual benefits that come from this backup deal flow and the general Network effects.
The stock itself is a dynamic instrument which operates within the capital markets trading on the stock market and the expertise across both the management team, mark, this is this is James. Sorry to interrupt that we're having a couple of folks indicating. They're not hearing on the call. I just wanted to double-check if we can buy the operator Michelle. Are you there?
Maybe we lost connection James know I suspect they may have just dialed into the WebEx and not the dial-in number. I do know he's done. So
so this is being recorded right now. I do believe that this is still being recorded.
You are not lost sir. Mr.
Mister Mike is correct.
Some participants might have dialed to the WebEx portion of the call only.
I see so they cannot hear the the voice. So right this is the audio part sir. They have to dial here.
Okay.
So we can only continue James and Operator Operator this section that we've just had a band there for those that are on the call that our shoulders. We apologize but the operator you're going to need to cut this out for the recorded message. Okay, I will inform the post-conference services. Thank you. Yeah, we're we're on slide six months James. If you do have an efficient way to let your holders know that they need to dial a certain number. The press release may have been confusing. It's fully understandable. But what I don't have I don't have a mechanism to apologize to them at this time. Yeah, I don't either. Okay. So let's continue on slide 6. We were leaving off the network effects for the benefits coming from this back and the relationships.
That that we all bring to the table. Let us now move on to the operating business and I pass this to our new CEO and President Michael ferrantino. Thank you Mark. I'd like to give a brief overview of PTI. And and first I'd like to Echo Mark and thank God. I'm trying to PTI PTF teams for all of their hard work last year. They handle the many challenges related to COVID-19 and were able to keep revenues close to the 2019 levels.
Next slide please.
Slide number eight, please.
Thank you. So m p t i see significant opportunity in the defense landscape as a result. Our Focus has been to become a preferred supplier of critical frequency and Spectrum control components and modules used in the avionics military Aerospace and space markets these markets Place high value on the highly engineered recognized and custom Solutions. Our team is capable of providing.
next
please
so we are a a provider.
We are provider of tier three and tear for where we do components and modules of of the offerings. I just mentioned.
There is lower price sensitivity in these modules. We're a small variations in price can mean not much to the end system, but a great deal to us off next slide, please.
I'm trying PTI is a global company with 132,000 square feet of design and Manufacturing space with locations in the office in India. In addition. The company has a sales network of over thirty reps spread primarily through North America Europe and Asia.
next slide
despite the effects of COVID-19 2020 was a year with many positives including the release of several new products expanding our reach into not only existing customer in markets, but also into new ones these lead to key design wins and market share gains in our expanding customer base Investments continue to be met to drive the profitability through Automation and yield improvements. We are also enhancing our marketing efforts to promote.
our new products and capabilities
COVID-19. However, did have a negative impact on our gross margins primarily due to disruptions in our Workforce and supply-chain a decline in our avionics business a shutdown of six weeks at our India operation, which created the need to shift production back to the US.
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As we look forward we see growth opportunities in both existing and new areas including developing new technologies and products driven by our customers need for higher levels of integration and functionality smaller form-factors higher frequencies and lower phase noise.
These new products will help us gain market share within our existing Blue Chip client base and grow opportunities in areas such as medical and space.
We will continue to invest in both capacity and capabilities where we which will allow us to expand our International sales with lower-cost higher-performing products. And we will continue to look for synergistic Acquisitions of both product and Technical capabilities to further support our customer needs
Was that I'd like to turn the call over to Linda.
Revenue our annual revenues and twenty twenty or Thirty one point two verses 31.9 a decline it point seven million or 2.2% as mentioned previously the company and its team was successful and being able to offset the decline in the avionics Market with increased revenues in space defense and the medical markets are walk-ins declined from 39.2% in 2019, the 35.1% in 2029 us to the historic gross margins that are in a strong mid-30s and we were able to do this as we shifted the onshoring back to the US.
and with the
Shut down of our facility in India are adjusted. Ebitda was 8.6% in 2020.
We look at our backlog our backlog decreased from 21.9 million in 2019. It's a 19.8 million and 2020 were both strong and steady going into 2021.
You said like to turn it back to you?
Thank you Linda. Let me conclude by first thanking the company's directors for their vote of confidence and let the shareholders know that I look forward to continue serving them in this new role the opportunity for Thursday was strong and I am proud to be part of the team who will lead it into the future. We will strive for growth through continued product development and market share gains mergers and Acquisitions to diversify and expand as well as look for alternative areas of growth using our key strengths.
And now like to open the floor to questions.
Operator, please open the floor to questions.
Ladies and gentlemen, we will open it up for a question-and-answer session. If you wish to ask a question, please press star one on your telephone. If you wish to cancel your request, you may press the pound or hash key. Once again, there will be star want to ask your question. Please stand by while we can file the Q&A roster.
Your first question comes from. From private investor your line is now open.
Hey, good morning. All I appreciate you doing the call. I had a question as a relates to the franchise business. Could you put any kind of you know parameters around that and some kind of magnitude would give us something to think about in terms of how meaningful the iron that deal is and how meaningful potential ones going forward are relative to the investment.
Sure. Thanks. And thanks for thanks for your question. And we had some problems with the line. Some investors weren't able to listen in so we took that you were able to dial in and and listened to the presentation but regards to the spak franchise in the meaning of home of the iron that transaction as I'm sure you're familiar with the spak. The business combination was announced specs have a trust value that is about $10 per share their also warrants LGL group invested in the sponsorship that had both the economic participation in shares that convert to a shares that conversion occurs when the spak business combination is completed there for, you know voted on by shareholders. That's not expected wage.
until July
So the actual liquidity of the investment doesn't incur until that time which unique about the iron a transaction and you will see in various back transactions. There are multiple terms and conditions for for these transactions in the market iron that the pilot which is the private investment raised $125 million dollars, which is also equal to the minimum cash condition to close. So in that context the iron that transaction has met its financing conditions to close and therefore we can view that this transaction has already economic value for the LG group. There is of course variability that economic value that will be tied directly to the pro forma trading pattern of the stock but at $10 a share dead.
The economic value without including the benefits of the full warranty participation and without including the wage potential for the share price to appreciate that economic benefit is in the range of about 12 million dollars to the LG improved. That's just to L G L as a sponsor participant sponsor within the the spak partnership. So that's a dead a net number after the initial 3.3 million dollars initially invested and it is also not including any other additional Investments that may have done or will do with the company on a pro-forma basis. So the multiplier though just the rough math on the month.
Part of that will vary and each spak sponsorship will have a differentiated return profile, but certainly without Cherbourg appreciation assuming $10 on the trust account for higher net itself. So that's holding a lot of items static way. You can kind of roughly assume the twelve plus the three point three five already invested. So that's on a grow space is kind of north of 15 months and roughly around 12 net. And again that there there can be upside. There also can be of course downside to that based on stock price fluctuation.
So I hope that answers your question. We will of course as we've just outlined continue to pursue the build out of the opportunities around spak and for those of you that were able to listen to the iron net cybersecurity call for investors.
Management team has outlined that they've seen well in excess of a hundred transactions. Um and iron that had the attributes with them to transact on wage. Keep in mind those transactions all have to fit the criteria for the spak which would be closer to the iron net pro forma cap of a billion dollars or more certainly residual benefits for LG. Am going to shareholders would be any related flow of opportunities in a much smaller set.
So I hope that helps with the question. Thank you for it.
operator next question
Your next question comes from Tom of mff. Your line is not open. Yes, good morning. My question also has to do with the only aspect that we're currently involved in but you mentioned in a presentation that seems to be one of your pillars going forward my understanding until I just heard your answer was that we had just had an investment in the warrants. I'm I'm mistaken on that because how do you know that 15 million dollar value to the company at $10 wouldn't attribute any value to the warrants, which I think exercise 11 and 1/2. Can you explain that facet as far as the current investment is concerned at how you look at that as you do more specs in the future as you alluded to because I I never quite sure how we only invested in the warrants rather than the the actual spec itself because otherwise you just taking you know for lower on the totem pole there in terms of risk.
Yeah, Tom, thanks to the question know. So the first thing is is that the spak the the LG group invested in the stock sponsor this back sponsor includes both B shares which are non-tradable and restricted may have that binary risk, which is either up to 10 plus or two zero if there is a deal not an ounce but it also includes the warrants. So just for a point of clarification lgo group invested in the sponsor which took on all the risk Capital the sponsor is designed to have both a direct attribution to its investment month plus incentives to the the team broadly which includes those folks that are involved in in the day-to-day life eternity seeking for the spec But ultimately
LG a group did not invest only in the warrants. Okay. It's a partnership. It's all wrapped in and that's what you can see in the financial results under the variable interest Accounting Office. For example, if we follow gaap ebitda takes a haircut when the variable interest entity has an expense that flows through to the lgo group. It's dead, you know from an economic perspective. It's not an LG. Oh group expense, but it shows up in in the reported results due to the accounting office in terms of the actual detail of the spec business and further opportunities with stock investment should lgo group invest in further sponsors, which it in a sense to do and there are several and registration. We will have a separate call for investors around that topic. We do think that as public companies. Yep.
Sorry, it's companies seek to go public with.
1021 is really a
the year that we're all going to Mark in our calendars for the future in the capital markets cuz you have not only traditional IPOs which have been around but you're now you have the rec listings that can obviously help raise Capital, but then you have the spak phenomenon this back phenomenon besides specs obviously seeing its growth because of very low interest rates and liquidity job market specs also offer several very strong features for a company looking to go public. So we do plan to continue them in Stacks in the fashion that we've just outlined which is in the sponsor Partnerships that do take on all the risk Capital but therefore also have requisite rewards and obviously Tom the best mechanism to mitigate the risk is to ensure that the management team can identify
And transact with a business combination wholly dependent on the capital markets, but also wholly dependent on Deal flow and relationship sets. So the LG, oh group homes certainly believes that it's bringing forward quite a lot of good relationship sense for that opportunity and for shareholders.
Hope that answers your question. Yeah, that that that's helpful. I thought we just had the warrants and had to get above 11 and 1/2 at some point the new company down the road to have value to L G L and I couldn't understand why we would invest on those terms. So they your explanation is very helpful and what you're essentially saying is that as of the moment LGL economic interest is 24 million cash on the balance sheet. I think you said in today's presentation and plus about 15 million at $10 this year if it were to trade at 10 when the new company starts, so that's approaching forty million of money. Just those two figures along let alone you're the obvious business that you're running as well. Is that is that is that a way of looking at things? That's correct. There's so many that we haven't discussed today. And then also you may have ultimately the stack franchise will continue and as that continues we believe there is a real opportunity to continue to bring
Companies to Market and help add value to those companies in the process. Yes. Thank you very much for your time and explanation. Yep. Thank you for the question.
Thank you operator.
Once again in order to ask you a question, please press star one on your telephone.
There are no questions from participants online sir. You may continue continue to interest in the L G L group and this would conclude the call.
Ladies and gentlemen that does conclude today's conference call. Thank you for participating you may now disconnect speakers. Please stay on the line for your booth conference call. Thank you.
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