Lgl Group, Inc. (the) (NYSE:LGL)

Lgl Group, Inc. (NYSE AMEX:LGL) ($6.58, $32.3M market cap), a company that engages in the design, manufacture, and marketing of standard and custom-engineered electronic components in the United States and internationally announced Q3 2018 results:

• Sales of $6.3 million vs $5.3 million in the prior year
• EPS of $0.10 vs $0.01 in the prior year
• Backlog up 62% to $16.1 million from $9.9 million in September quarter

“Revenues and backlog increased substantially, and our book to bill ratio continue to grow. We experienced growth of 20.4% in revenues over the prior year quarter, while at the same time backlog increased 62%, exceeding $16 million at the end of the quarter. This very strong performance in sales and revenues, combined with our continued profitability, validates our strategy of pursuing and developing higher margin, market-driven, highly engineered assemblies in the defense and aerospace markets.”

Mr. Ferrantino continued, “We are continuing to work in pursuit of shareholder value. With the solidified performance of our core business we are looking at opportunities to deploy our available capital, either inside or outside our industry, wherever our management expertise could facilitate rapid top and bottom-line growth.”

You can see our past coverage on LGL here.

This is a reprint of the Shareholder letter that LGL released as part of its 2009 annual report.

November 15, 2010

To our Stockholders:

This is my first letter to you. I am excited about the turnaround that has taken place at LGL. I am equally excited about the future and what it may hold. The global recession that began in 2008 and continued throughout 2009 had a major impact on our financial performance, but it also brought with it the urgency for change. During the first half of 2009, our strategy and focus was to drive structural cost out of the enterprise without impairing the Company’s ability to serve customers, to develop new products, and to remain opportunistic to grow revenues.

Sequential quarters of revenue growth, solid earnings, and record backlogs reported during Q4 2009 and the first half of 2010 are evidence that our strategies and efforts were sound.

As we finish 2010 and look ahead toward 2011, our customer and technology positions remain strong, the Telecommunications Infrastructure and MISA (Military-Instrumentation-Space-Avionics) Communications market segments that we service are forecasting growth, and LGL will begin 2011 with a revitalized outlook and a significantly improved balance sheet.

FY 2009 and H1 2010 in Review

Q4 2008 saw a sharp decline in new orders, both for the Company and the economy in general, signaling a difficult recessionary period ahead. With the rapid slowdown of new orders, the Company took immediate actions to accelerate its efforts to reduce structural costs through right-sizing, realigning, and streamlining its operations. The Company’s goal was to reposition itself to better serve customers while significantly reducing its overall cost base. In addition to the structural and operational changes, a complete changeover in senior management also took place in 2009. In February, the Board of Directors brought in Hans Wunderl, who became our interim Chief Operating Officer, to oversee the process of setting the Company back on the path to profitability. My appointment to Chief Executive Officer followed in July 2009, and then we completed the senior management changes by bringing on a new principal financial officer, LaDuane Clifton, in August 2009.

While it can be a difficult decision to eliminate jobs and cut costs, it was essential to make those changes to survive the recession. While revenues for FY 2009 decreased to approximately $31,300,000 and gross profits decreased to $7,400,000, working capital also reached a low of approximately $5,400,000 at the end of Q4 2009. Our efforts resulted in a reduction of more than $4,000,000 in structural costs.

The beginning of the turnaround in the Company’s performance became apparent in Q4 2009 as we began to realize significant sequential improvement in our business fundamentals.

Revenue began to grow again, reaching $9,200,000 and $10,700,000 for Q4 2009 and Q1 2010, respectively. Q2 2010 revenues reached a quarterly record of $12,500,000. Over the same three quarters, we also began seeing the gains from the operating efficiencies that we had worked to put in place, realizing improvements in gross margins to 31.6% and 34.1% for Q4 2009 and Q1 2010, respectively, and then another quarterly record for Q2 2010, with gross margins of 36.2%. Structural costs reached an all-time low in Q4 2009 and have been maintained at that level throughout the first half of 2010.

As a result of the hard work and our continuing focus on operational improvement, the Company has returned to profitability, reporting net income of $330,000, $1,070,000 and $2,180,000 for Q4 2009, Q1 2010 and Q2 2010, respectively. Earnings per share for the same three quarters were $0.15, $0.48, and $0.97, respectively. The improved earnings also had a positive impact on the Company’s balance sheet, as working capital grew to approximately $8,800,000 at the end of Q2 2010. In addition, the Company’s order backlog, which represents firm orders that are expected to be shipped within the next twelve months, reached a record level of approximately $14,400,000 at the end of Q2 2010.

Launching New Technology

Sustained organic growth can only be achieved by developing new products for our customers.

Our strategy includes continuing to invest in highly-engineered products. We have focused our research and development efforts on technologies that increase the complexity of our product portfolio and move it further up in the value chain, which is a key element in growing stockholder value.

During the second half of FY 2009, our investments in design engineering led to an expansion of our cavity filter product offerings for the MISA market segment and were well received.

Specifically, we won new contracts with end-use application in the Homeland Security and Public Safety sectors. These contracts made significant contributions to revenue during the first half of 2010. Repeat orders for this technology have already been received.

We enjoyed benefits from significant design engineering investment in our timing device product lines as we successfully launched production of an ultra-precise device known as a double-oven oscillator. There are applications for this technology in both the Telecom and MISA market segments and this technology is an essential building block in our efforts to become a module and subsystem supplier. Specific contracts were won during the second half of 2009 with end-use applications within military systems in support of anti-terror efforts.

These contracts also had a significant impact on revenues during the first half of 2010, and additional orders are anticipated.

Looking ahead, design efforts are continuing on a number of fronts, including development of small format ASIC-based timing devices for very precise timing applications. These cutting edge components will serve as a building block for a host of new products. This investment of design engineering resources should bring new product opportunities for both the Telecom and MISA market segments.

Improving Flexibility

As our markets recover and investments in new technology are required, a careful eye toward managing costs across the enterprise is essential. Our management team remains vigilant in seeking methods of driving waste and process inefficiency out of our operations and our supply chain. I am personally committed to reducing structural costs while improving our overall operating flexibility. To mitigate risk, we must build a flexible organization that can maintain profitability even through unexpected down cycles. In addition, we are focusing our capital investments on developing state of the art design engineering expertise and reinforcing a sales force with strong customer positions that can be further leveraged.

Improving our financial flexibility is another key element to sustaining solid business performance. Significant progress has been made in overall working capital levels largely by posting sequential quarters with earnings, generating cash from operations, and reducing the Company’s debt. It is our intent to continue to improve our financial flexibility seeking to simplify the requirements of our remaining credit facilities, and by raising equity capital.

Looking Forward H2 2010 and FY 2011

The Company entered into 2010 with a record backlog, a very strong customer base, growing markets, and a significantly improved operating cost base. To date, we have reaped the promise of these indicators in the first of half of 2010. We expect to finish FY 2010 overall much stronger than the prior few years and enter FY 2011 positioned for further success. For our customers, our stockholders, and our talented employees, it is critical that we deliver consistent financial performance. Credibility is only earned by demonstration, and not through words alone.

As we look ahead, we have defined four pillars for growth, which include: (i) organic investment into our core components business, which represents the potential to increase supply capacities; (ii) joint venture investments that will allow us to gain access to intellectual property or new technology that will spur further growth higher into the product value chain, or to diversify and expand our supply capacity; (iii) merger and acquisition opportunities involving companies that are engineering-centric and produce custom order products at a low volume, and therefore provide synergy in combination with our core business; and (iv) exploration of greenfield opportunities that have the capability to bring new markets, new customers and diverse new technologies to the Company.

The strengths of our operating platform continue to be our ability to engineer precision devices, our ability to service blue chip OEM customers as preferred suppliers by providing them a wide offering of frequency control products, our military-cleared supply chain that supports both hardware and software, and a worldwide operating base for sales, engineering, and manufacturing.

We are pleased that the improvement in business fundamentals has been recognized by the investment community. It is management’s intent to continue to create stockholder value by growing our operating platform, aligning senior management incentives with longer term value creation, and by broadening the existing stockholder base. All of these items are an active part of our strategy for the Company.

2010 Annual Meeting

Please accept my personal invitation to attend our 2010 Annual Meeting in person on December 15, 2010, in New York, New York. I look forward to the opportunity of seeing many of you and sharing further insight on our strategies for growth.

As always, I want to thank all of our employees, associates and leaders for staying focused through a very difficult, but exciting time. Their commitment to excellence and their passion for delivering quality customer service have been a fundamental part of the Company’s turnaround.

I want to thank our loyal customers for their patronage and feedback, both good and bad; constructive feedback provides us the opportunity to improve.

Finally, I thank all of you, our stockholders for continuing to support us with your investments.

Our goal is to create stockholder value through strategic growth and sustained gains in operating performance.

Respectfully,

Gregory P. Anderson

President and Chief Executive Officer

Added to the GeoSpecial list on May 26, 2010 @ $11.72

Catalyst: 2010 first quarter financials indicated that business was on the verge of a significant improvement.

Peak performance: Reached a high of  $34.70 on October 19, 2010.
Current road block: Business may have leveled off; Filed a shelf to potentially offer stock.
Price at time of alert to remove LGL from the GeoSpecial list: $28.00

On October 29, 2010 we removed LGL from the GeoSpecial list @ $28.00 .  Given the sharp gains in LGL shares, we found it prudent to revisit the story after

• The release of 2010 third quarter earnings
• We gain more clarity on capital raising goals. We do think there is a good chance that the company is evaluating acquisition candidates to drive growth in 2011.

We will continue to monitor the LGL story.

2010 second quarter highlights:

• Total revenues for the three-month period ended June 30, 2010 were approximately $12,535,000, an increase of 73.2% from the comparable period in 2009.
  
• Net income for the three-month period ended June 30, 2010 was approximately $2,177,000, compared with a net loss of approximately ($937,000) for the comparable period in 2009.
  
•  Basic and diluted earnings per share was $0.97 for the three-month period ended June 30, 2010, compared to loss per share of ($0.43) for the comparable period in 2009.

"Revenue growth was primarily due to increased demand from existing customers for existing products in our Telecom, Military, Instrumentation, Space and Avionics market segments," according to Greg Anderson, LGL's President and Chief Executive Officer. "The revenue growth also resulted from the expansion of the Company's product portfolio through the introduction of new lines of cavity filters and double-oven oscillators, which entered into production during the first half of 2010. The introduction of these new product lines represents a technical advancement of the Company's existing product offerings and expands our ability to offer our customers a broad array of highly-engineered frequency control solutions."

"We enter the second half of 2010 pleased that the execution of the Company's initiatives by the new leadership team has met the mandate of the Board of Directors prescribed in late 2008 to return the Company to profitability," said Marc Gabelli, LGL's Chairman of the Board. He continued saying, "We seek to drive further improvements in shareholder value through structural cost discipline and an opportunistic approach to growth opportunities in the marketplace."

The conference call was very bullish. The company continues to build on its:

• Margin expansion initiatives
• Product expansion
• Expansion into Asia

On May 24th 2010 we coded LGL as a GeoBargain on the Radar. As promised we listened to the 2010 first quarter conference call that took place on May 25th 2010. The optimism by the company highlighted in our initial research note carried through to the conference call. The company commented that 2010 2nd quarter financial results should be strong; fueled by a strong back log,  healthy customer base demand and a strong book to bill ratio of over 1. (Book to bill ratio is an indicator of demand in the semiconductor industry that affects the outlook of LGL’s telecom customers).

We have decided to code LGL as a GeoSpecial as opposed to a GeoBargain for the following reasons:

• Company will not provide guidance past the 2010 2nd quarter.
  
• The Company commented that the backlog in its Government division (MISA) may soften from current levels due to the orders being delivered in the 2010 first half. However, management strongly suggested that its telecom business will offset this situation. Still this may make investors hesitate.
  
• We need more insight into potential for long term top line growth. Most of the company’s recent EPS gains have resulted from an improved cost structure. It appears likely that the company will report around $40.0 million in revenues for 2010. Basically, revenues are still within a historical range. In order to become increasingly excited about this story the company will have to prove that it can exit this range going into 2011. In light of the current cost structure, aggressive sales gains are not necessary to power the bottom line. The company is taking the following steps that will hopefully drive revenues.:

• Directly penetrate emerging markets. Currently the company has attacked these markets through third party arrangements.
• Introduce high margin products
• Introduce new products to that will have a broader appeal to its customers.
• Execute an acquisition or a joint venture strategy to develop higher margin products.
  
• Debt to equity ratio is 31.6%. GeoBargains require a debt to equity of under 20%.
  
• We are uncertain of capital requirements needed to execute long term growth plans.

Still, investors may still flock to LGL shares as it executes its turn around strategy.

We are still hoping for a pull back in LGL shares.

On May 18, 2010 we issued an alert on Lgl Group @ $11.05 after it reported its first quarter 2010 financials. The growth in sales and EPS reported in the press release were impressive.

"Revenues for the quarter ended March 31, 2010 were $10,701,000, an increase of 41.9% from the comparable period in 2009. Net income for the first quarter of 2010 was $1,066,000 compared with a net loss of ($1,008,000) for the same period in 2009. Diluted earnings per share was $0.47 or $0.31 tax adjusted for the first quarter of 2010 compared to diluted loss per share of ($0.46) for the same period in 2009."

Unfortunately, the company did not provide a financial table or filing at the time of the press release. Furthermore, the conference call has not yet occurred. These two factors made it difficult for us to outline a definitive investment conclusion on LGL.

On May 21, 2010 the 2010 10Q was filed at which time we were able to confirm that, except for an insignificant tax expense, the financial information provided in the press release is clean.

We have followed the LGL story in the past, which included three years of stagnant revenues. Over this time, the company reported only three profitable quarters; two in 2007 and one in 2009. The 2010 first quarter marks it fourth profitable quarter over this period and the first back to back profit (Q4 2009 to Q1 2010).

After some preliminary due diligence we found that the company has:

• Revamped its product line to target high growth industries and expanded it’s geographic reach to emerging countries such as China.

The Company is continuing its efforts to grow revenue by expanding into new geographic regions and into additional segments of the timing and frequency equipment market, such as alternative energy management, energy exploration, military personnel protection and homeland security.

Increase in demand was also reflected in foreign sales, primarily to Asia, which grew 37.3% to $5,077,000 for the quarter ended March 31, 2010, compared to $3,698,000 for the quarter ended March 31, 2009.

• Reduced costs:

The increase in the gross margin percentage is primarily the result of fixed infrastructure costs being spread over a larger revenue base, and the Company's implementation of its plan to effect permanent structural cost reductions in overhead, engineering, and administrative expenses. Greg Anderson, LGL's President and Chief Executive Officer, said, "Management continues to seek ways to reduce the cost structure of the Company and create long-term improvement in operating efficiencies

"The Company expects that the continued effort to improve its manufacturing and supply chain efficiency will benefit its operating margins in future quarters."

• Proclaimed a goal of taking steps to maximize shareholder value:

"Management continues to seek opportunities to grow shareholder value through any number of options, which could include joint ventures, marketing partnerships and other ways to drive synergistic opportunities. In addition, management continues to seek ways to reduce its structural spending creating long-term improvement and lasting efficiencies in our business fundamentals," said Mr. Anderson. He continued, noting "With the continuing volatility in the marketplace, we are keeping our focus on improving our balance sheet and continue to evaluate measures.

The fruits of these efforts first surfaced in the company's 2009 fourth quarter where non-GAAP EPS came in at $0.31.

Favorable trends observed in the first quarter show that revenues grew at a much faster pace than expenses, a relationship that is commonly referred to as high fixed leverage:

• Sales increased 41.9% while cost of goods grew 18.5%.
• Operating expenses actually slightly decreased.

Of course when sales decline profits can decline at an accelerated rate. From our perspective we prefer fixed leverage scenarios when a company is in a strong growth phase.

We also listened to the 2009 4th quarter conference call replay which was quite bullish:

• Feeling the effects of an improving economy.
• Experiencing a positive recovery in revenues.
• Revenue levels can be maintained for the near term. ($9.2 million in the fourth quarter).
• Based on verbal commitments from customers the 2010 revenue run rate could come in around $40.0 million.
• Customers and markets remain strong.
• Cost structure will be maintained.
• Will embark on stronger IR campaign

Placing a value on LGL is initially challenging since the company has a negative trailing EPS, requiring a forecast of future EPS. We know that the company has a backlog of $14,260,000 that it expects to fill in 2010. If we apply first quarter 2010 margins to this backlog, it translates into an additional EPS of $0.60 or $0.40 tax adjusted.

Combined with the knowledge that LGL cost structure is expected to remain at current levels and that near term revenue levels should be at least at $9.2 million for the remaining three quarters, we have postulated that LGL can achieve 2010 EPS of $1.52 or $0.98 tax adjusted. If the company can achieve $40 million in revenues, then EPS could reach $1.77 or $1.17 taxed adjusted. For investors who are willing to apply a P/E of 15 on forward EPS, this implies a short-term target of $14.70 to $17.55.

Now that costs are under control, can the company continue to drive revenues?

We will participate in the company's first quarter 2010 on May 25, 2010, in order to gain a better grip on the sales trends as this can dramatically affect the bottom line in either direction and influence our ultimate decision on how aggressive we will be. We are postulating that there is a decent chance that the company can approach or exceed the higher end of our revenue assumptions.

We are coding LGL as a strong GeoBargain on the Radar and hope the stock pulls back after its recent sharp rise.

Disclosure: Long LGL