The LGL Group, Inc. (NYSE:LGL) Q4 2021 Earnings Conference Call March 29, 2022 10:00 AM ET
Company Participants
Michael Ferrantino – Chief Executive Officer
James Tivy – Chief Financial Officer
Conference Call Participants
Anja Soderstrom – Sidoti
Vishal Mishra – Mishra Capital
Eddie Reilly – EF Hutton
Operator
Please stand by, we’re about to begin. Good day and welcome to the LGL Group Incorporated Annual Earnings Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Mike Ferrantino. Please go ahead, sir.
Michael Ferrantino
Thank you. Good morning, and thank you for attending today’s call covering our financial results for the three months and 12 months ended December 31, 2021. Hopefully, you have had a chance to review our 10-K, which was released premarket opening yesterday. If not, it is available on our website. James Tivy, our CFO, will review our financial results at this time. James?
James Tivy
Yes. Good morning, everyone, and thanks for joining our full year 2021 earnings call. Please note that this call will be recorded and we anticipate making the recording available on our website sometime after the call. We have issued our 10-K yesterday before the market opened reporting the results for our fourth fiscal quarter and full year of 2021.
Before getting underway, we’re 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 there too contained within our 2021 10-K, which has been filed with the SEC. This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act – sorry 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. Any forward-looking statements are not guarantees of future performance.
Let me now summarize for you where LGL stands for the fourth quarter and for the full year of 2021. Our fourth quarter revenues of $7.2 million was $0.2 million, or 2.6% below 2020 revenues of $7.4 million. Operating loss for the quarter was $596,000 compared to $138,000 in the fourth quarter of 2020. Current period inflationary pressures, lower shipments and the $200,000 of MTronPTI spin-off costs reduced fourth quarter profitability.
Quarter backlog was $29.8 million versus $19.8 million at the beginning of the year and $21.8 million as of the third quarter of 2021. This improvement was from the recovering avionics market and strong defense orders, including a 2021 fourth quarter order for $6.3 million related to a major missile defense program, most of which is expected to ship subsequent to 2022.
For the full year, our revenues were $28.1 million versus $31.2 million for 2020, which was $3.1 million or 9.7% below the prior year. Our lower annual revenue reflects pre-COVID conditions during the first quarter of 2020 and the significant decline in shipments to the avionics market. Gross margins improved to 35.8% compared to 35.1% last year.
For the 2021 year, the company reported a $0.8 million operating loss, excluding the $1.3 million non-cash charitable donation of IronNet common stock, operating income was $0.5 million compared to $1.4 million for 2020. Lower sales and inflationary pressures and the spin-off costs offset the benefit from cost reductions, including the elimination of certain previously required costs to preserve manufacturing capabilities in response to the COVID-19 impacts on our business, and there were also benefits from a favorable product mix.
Net income was $14.6 million compared to $1 million last year, largely as a result of our SPAC-related investment. Diluted earnings per share was $2.74 compared to $0.19 per share in 2020. The significant increase reflects the favorable results of the company’s SPAC-related investment triggered by the IronNet business combination.
Our year-end 2021 net cash position, including marketable securities, was $45.8 million, which is more than $8.5 a share.
With that, I’ll now turn the call back over to Michael Ferrantino.
Michael Ferrantino
Thank you, James. As you’ve herd, we’ve ended the year with a strong and growing backlog, margins are improving and the balance sheet is strong. I’m proud of the entire LGL team’s success and dedication while facing the challenge of inflation, supply chain disruption and workforce headwinds.
We have released several new products in 2021 in both our spectrum control and frequency control product areas. These products extend our reach into the military and aerospace market and have contributed to our backlog growth.
The MTronPTI spin-off plan is progressing with solicitation of shareholder approval targeted for the second quarter of this year. We believe that the spin-off would enable shareholders to more clearly evaluate the performance and future potential of each entity on a standalone basis, while allowing each to pursue its own distinct strategic plans in growth opportunities.
I’ll now open the floor to questions. Operator, please open the call to any questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And our first question will come from Anja Soderstrom with Sidoti.
Anja Soderstrom
Hi, thank you for taking my questions. And so first the backlog, a very nice growth there. Can you quantify how much that is related to new business versus how much may be related to supply chain challenges?
Michael Ferrantino
Sure. In terms of new business, roughly 10% of that is related to new products that have been introduced in the past 12 to 18 months or so. There is some amount related to advanced orders from supply chain-related issues, but it’s relatively small.
Anja Soderstrom
Okay, thank you. And are there any new customers in there? Or is it mainly the expansion with current customers?
Michael Ferrantino
There is some new customer penetration. However, a large part of that backlog is with existing customers.
Anja Soderstrom
Okay, thank you. And you also alluded to the margin for the fourth quarter was due to raw material, but you’ve been able to pass some of that on and is there room for more of that to be passed on? And what is the lag there in terms of being able to pass that on to your customers, if you can?
Michael Ferrantino
Sure. There’s some room to pass on increases as our costs or supply costs go up. The lag generally is tied to the lead time on the orders, which vary from – really from eight to 12 weeks to slightly beyond that.
Anja Soderstrom
Okay, thank you. And you also talking about the recovering in the avionics market. You’re seeing benefits from that? Where do you think we are in the innings of that?
Michael Ferrantino
I think the – we’re in the early stages of that recovery, there’s still a long way to go.
Anja Soderstrom
Okay. So there’s more potential for you to increase that in the coming quarters?
Michael Ferrantino
That is correct.
Anja Soderstrom
Okay, thank you. And is there anything else you can talk us through in terms of how you are combating the inflationary pressures and sort of labor shortages if you – if you’re affected by that?
Michael Ferrantino
So in terms of the inflationary pressures, we are constantly looking at our sources and working with them as well as identifying additional sources. On the labor front, we’ve done a pretty good job of maintaining our workforce, and we will continue to do that.
Anja Soderstrom
Okay, thank you. And then very last, in terms of the spin-off of the MTronPTI business, you’ll have the shareholder vote in the second quarter, right?
Michael Ferrantino
That’s correct. That is what we’re targeting.
Anja Soderstrom
And what’s the timeframe then for term – in terms of actually going through with a spin-off and I would actually set up a management team of ready for that to be – to manage that entity?
Michael Ferrantino
Yes, that’s correct. The management team has been identified for that. And as far as the timing of that, there is a process that we’ll go through, but we would expect that to be completed in the third quarter.
Anja Soderstrom
Okay. And the management team will be sort of presented before the vote, or is that something that’s going to be revealed after or hasn’t before?
Michael Ferrantino
It would be within the proxy.
Anja Soderstrom
Within the proxy. Okay. Thank you. That was all for me.
Michael Ferrantino
Thank you, Anja.
Operator
[Operator Instructions] Moving on, we’ll go to Vishal Mishra with Mishra Capital.
Vishal Mishra
Hi, Mike, or James, just a clarification on the backlog, about $30 million and $6 million from the new order, most of it will be shipped in 2022. So maybe more than three will be – I’m just sort of wondering what is the backlog for the next 12 months, like convertible into the next 12-month, that is a number you provide that or you can give us more clarity on that?
James Tivy
Yeah, I think what we’ve seen is, obviously, there’s a big $6 million order which we don’t expect to ship until 2022 – until after 2022. It’s really just been – avionics is coming back and we’re having pretty good success with our existing customers.
Vishal Mishra
Okay. That’s all. Thank you.
Operator
[Operator Instructions] Moving on, we’ll go to Greg Greenberg, Investor.
Unidentified Analyst
Hi, gentlemen. I’m wondering if you can give us a little bit more color on how we should think of LGL Group with RemainCo. Should we think about it that it’s going to be investing in public companies or more like a SPAC for merger partner to bring the management and cash to it?
Michael Ferrantino
So post spin-off of MTronPTI, LGL will still have its operating entity PTF, but it will also be focusing on profitable growth through acquisition.
Unidentified Analyst
Okay. And then on the spin, is there any outside valuation or outside investor that may help us have a reference for what that business may be worth?
Michael Ferrantino
We have not conducted an outside evaluation at this point.
Unidentified Analyst
Okay. And then finally, can you just go over how the warrants will be affected assuming that the spend occurs?
Michael Ferrantino
Yeah, Greg, just on the warrants, there’s a formula and it was disclosed in the most recent pre-proxy, preliminary proxy we set out. It’s approximately related to the percentage of each of the two new companies subsequent to going – subsequent to the spin-off measuring their prices over the – over a short period. So if, for example, the MTron is 30% of the value of the two numbers, the two trading companies after the spin, then the prices of the LGL warrants will be reduced by 30% and the strike prices also adjusted.
Unidentified Analyst
Okay. Thank you very much.
Operator
[Operator Instructions] And moving on, we’ll go to Eddie Reilly with EF Hutton.
Eddie Reilly
Hey, guys, thanks for taking my question. I was just wondering if you could maybe unpack maybe the types of companies you’re looking at to acquire within the RemainCo after the spin-off?
Michael Ferrantino
I think post spin, there’ll be a wide variety of companies that would fit the criteria that we’re looking for. Not really much to say at this time.
Eddie Reilly
Okay, great. That’s really it for me. Thank you, guys.
Operator
And next we’ll go to [Mark Vanderwel with Vanderwel Family Practice] [ph].
Unidentified Analyst
Hello, I’m wondering if you could comment on what effect the war in Ukraine is having or you expect might have on your defense business?
Michael Ferrantino
Sure. I think there’s a couple of potential effects. Obviously, any increased spending in the defense budgets would be a potential benefit for the company. Also, where we are looking at are there opportunities where through some of the sanctions being put on Russia is, there are opportunities created through that, we’re evaluating that now.
Unidentified Analyst
Sanctions being put on them will actually benefit you?
Michael Ferrantino
Potentially, there is supply that might come out of Russia, that would be harder for certain countries to acquire that we might be able to capitalize on.
Unidentified Analyst
Never would have anticipated that. Thank you very much.
Operator
And gentlemen, there are no further questions in the queue. At this time, I’d like to turn it back to you for any additional or closing comments.
Michael Ferrantino
Sure, thank you. Well, if there are no more questions, this concludes our call. I would again like to thank you for joining our stockholders – for joining and our stockholders for their continued support of the company. Have a great day.
Operator
Thank you. And that does conclude today’s call. We’d like to thank everyone for their participation. You may now disconnect.
Be the first to comment