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spk04: limited third quarter 2020 earnings call. At this time, all participants are in listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Rogers with Hayden IR. Thank you. You may begin.
spk00: Kim Rogers Thank you, operator. Welcome to McGaugh's third quarter 2020 earnings conference call. I would like to welcome all of you to the conference call and thank McGaugh's management for hosting this call. With us on the call today, Mr. Dror Chiron, CEO of McGaugh, and Mr. Kobi Vinokur, CFO. Dror will summarize key financial and business highlights, followed by Kobi, who will review McGaugh's financial results for the We will then open the call for questions and answer session. Before we start, I'd like to point out that this conference call may contain projections or other forward-looking statements regarding future events or the future performance of the company. These statements are only predictions and McGaugh cannot guarantee that they will, in fact, occur. McGaugh does not assume any obligation to update that information. Actual events or results may differ materially from those projected. including as a result of changing market trends, reduced demand and the competitive nature of the security systems industry, the unanticipated and unknown effect of the coronavirus, including on our operation and our clients, as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission. In addition, during the conference call, we will describe certain non-GAAP financial measures, which should be considered in addition to and not in lieu of comparable GAAP financial measures. Please note that in our press release, we have reconciled our non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. You can also refer to our website at www.magalsecurity.com for the most directly comparable financial measures and related reconciliation. And with that, I would now hand the call over to Dror. Dror, please go ahead.
spk02: Thank you, Kim. I'd like to thank everyone for joining us today to review our first quarter results. In my comments, all the comparisons are year-over-year, referring to the third quarter of 2019. Globally, the Magal team is executing well. Despite the impact of COVID restrictions, we continue to develop new business relationships, build a pipeline, and close sales. We are closing sales in both of our divisions, Magal Integrated Solutions, our project division, and the SENSTA product division. As a result, backlog in the third quarter rose to a record level. We reduced operating expenses by over 9% and reported EBITDA of $1.3 million. Here to date, we have lowered operating expense by $3.2 million. Magal has maintained profitability without restricting investment in sales and R&D, our primary growth drivers and an asset crucial to our future growth post-COVID. Ongoing investment in new products and upgrades to our platform enable the company to maintain competitive advantage and grow our business. As a percentage of total consolidated revenue, Magal's integrated solution was 54%, while Senstar was 46%, in line with previous quarterly performance to date in 2020. Both business segments continue to be impacted by COVID-19 in the third quarter. On a positive note, we announced two key contracts in the quarter. In August, we issued a press release stating that the global organization awarded CENSTAR a US$6.5 million contract to provide equipment to secure deployable military assets. This award recognized technological differentiation and the scope of CENSTAR offering by deployable security solutions. In early October, we announced a large contract to secure a governmental body principal premises in one of Africa's largest capitals. Magal's estimated share in this project is $10.5 million, and we anticipate increasing the revenue during the course of the project. The African contract is an excellent example of how both of Magal's divisions cooperate in delivering competitive advantages. The state-of-the-art security system includes a comprehensive range of Magal's proprietary products and platforms. As the project's core, it is Fortis Command Control, which is Magral property physical security information management system, or the PSIM. This new generation PSIM supports an underground perimeter intrusion detection system, PIDS, and Senstar Symphony Video Management software, the VMS. The VMS includes intelligent video analytics, the IVA capabilities. The project also features electronic access control hardware and the software and the secure communication network that supports the system's integration and operation. These are proprietary solutions that run on software and technology, chiefly created in-house by Magali and Senstar. Senstar's revenue declined by 5% compared to the 2019 third quarter. While we were down year over year, Senstar delivered almost 5% sequential growth. The division's largely transactional revenues, along with its geographical and product line diversity, has helped the division remain relatively stable in 2020. In the third quarter, Magal Integrated Solutions continued diversifying its revenue stream with an increase in sizeable key accounts abroad, continuing transactional business from smaller contracts and deals across new territories such as recent large contracts we won in Africa. Compared to the same period last year, Magal Integrated Solutions was down 26% in line with how the division has performed since the COVID outbreak. Shifting to an update on our four key verticals, energy, cultural facilities, critical infrastructure, and logistics. Energy continues to be impacted by this uneven recovery in global economy that has decreased demand for oil and gas and depressed commodity prices. This is causing delays in both large projects and new investments in the sector that were in the works before COVID. We began to see improvement in the energy vertical in the last few months. Projects are starting to come back to the table. As a result, we anticipate closing new deals in this vertical by year-end or the first quarter of 2021. Correction in the U.S. continues to be a strong vertical for us. We anticipate this strength to continue into fourth quarter. A new anti-drone solution is being tested to detect, track, and naturalize drones that enter the airspace over a sensitive area, and we are targeting it also to branch out facilities. We expect to expand our offering in the correctional vertical with this innovation technology. Vertical infrastructure continues to be a major vertical for us with seaports and airports in Latin America, Asia Pacific, Africa and Europe. We have had recent twins in these verticals. Logistic facilities worldwide have grown to meet increased demand related to the upgrade in online shopping. These large complex logistics facilities have greater security and operational needs. To meet these needs, we are launching an updated version of Symfony, our VMS software, and a dedicated analytic around VMS. We have upgraded the software to provide a comprehensive solution for securing logistics facilities and for specific operational capabilities, such as package tracking and movement management. This enhanced solution improves the ROI on our logistics customer security investment. Currently, two large logistics providers are using our new solution. The second project in Europe is being finalized those days for partial movement using our new VMS software and the IVA. Another innovative product we recently launched is Safe Spaces. This new video analytics solution, which is a camera and VMS platform agnostic, allows businesses to ensure they are maintaining COVID-related public safety requirements. Safe Spaces quickly identifies individuals not wearing masks and monitors social distancing, occupancy limits, and sanitation stands in public spaces and buildings. We have shipped units to several sites for testing and see encouraging interest from the market potential for this solution. Customer like Safe Spaces integrates with any VMS on the market and can be rapidly installed and deployed. The Safe Spaces hardware and software were all developed internally by Senstar in a very short time. Shifting to an overview of our performance by region, North America, mainly the U.S., continues to be stable and is tracking to our internal plan. EMEA is starting to recover, but APAC is mixed, depending on the country. Latin America as a region continues to struggle. Magal maintains a strong balance sheet with the net cash and related cash position of $53.4 million, and we have remained profitable year to date, despite the decline in our revenue. We have focused our use of capital on, one, retaining our experienced team critical and supporting our growth, two, continue our R&D investment, and three, keep looking for M&As. We prioritize investing in technology because it is an essential differentiator for Magali in the global security industry. Magali integrated solution is more than a system integrator. We develop our software in-house and are now launching a new version of Fortis, our PCIe command control, which is the backbone of our integrated solution platform magal developed technology for its customers like optical sensor for the israeli ministry of defense which we have incorporated into an our anti-drone system that i referred referenced earlier our anti-drone system is an entirely an in-house development solution that has numerous applications across our key verticals. Similarly, at Senstar, we continue to invest in an enhancement to Senstar Symfony VMS software, adding new features and new capabilities, and also upgrading our PIDF line of products. Another use of capital and priority is M&A. Current M&A opportunities in our pipeline are targeting technology that leverages our existing capabilities and brings innovation and new expertise. We are currently in discussion in a few competitive bidding processes and the hope to close one before shortly. At our AGM today, we received shareholders' approval for a framework to offer a cash dividend up to $25 million. Our ability to pay a dividend to shareholders is subject to the approval of the Israeli District Court. The final amount of any dividend payment would be decided by the Magal Board of Directors. I want to thank the Global Magal team for their contribution. I recognize the challenges we are all facing in our various roles at Magal and appreciate everyone's dedication and performances. With a strong balance sheet and industry-leading technological expertise and record backlog, Magal is positioned for recovery and growth post-COVID. I remain confident in our ability to execute our long-term strategy to grow revenue. Improve profitability and close M&A opportunities. And now I would like to hand the call over to Kobi to summarize the financial results. Kobi, please go ahead.
spk06: Thank you, Dror. Revenue for the third quarter of 2020 was $18.3 million, a decline of 18% compared with $22.2 million in the third quarter of 2019. The geographical breakdown as a percentage of revenue for the third quarter was as follows. Israel, 24% versus 23%. North America, 25% versus 33%. Latin America, 7% versus 3%. Europe, 21% versus 24%. Africa, 15% versus 17%. Asia and the rest of the world, 8% versus 10%. The breakout between Magali Integrated Solutions and Censors Product Revenue was 44% product and 56% projects. Magali Integration Solutions division revenue declined by 26% year-over-year, and Censors Product Division revenue declined by 5% year-over-year. Third quarter blended gross margin was 41.8% of revenue versus 45.1% last year. The gross margin decrease was primarily due to the increase in project revenue that carried a lower gross margin, partially offset by higher gross profit contribution from stem cell sales and cost savings in the quarter. Our operating expenses were $6.8 million, a 9% reduction from the prior year third quarter operating expenses of $7.5 million. The reduction in operating expenses is attributable primarily to payroll-related actions, such as delays in hiring, reduction in vacation liability, as well as the reduction in other expenses, such as travel and marketing, and subsidies received from the Canadian government. Again, I want to emphasize that we delivered these reductions while maintaining our continuous investments in R&D and sales personnel, our most important assets. Our employee headcount remained mostly unchanged. Operating income was $0.9 million in the third quarter of 2020 compared to $2.5 million in the third quarter of 2019. Financial income was $6,000 compared to financial expense of $0.6 million in the third quarter of the last year. This quarter, due to relative stability in forex markets, we did not record a non-cash expense as a result of the end-of-period valuation of monetary assets and liabilities. EBITDA for the third quarter was $1.3 million versus EBITDA of $3.1 million in the third quarter of the last year. Net income attributable to Magal shareholders in the quarter was $0.6 million or $0.01 per share versus a net income of $1.3 million or $0.06 per share in the third quarter of the prior year. Cash and cash equivalent short-term deposits and restricted cash and deposits as of September 30, 2020 increased to $53.4 million or $2.31 per share compared with cash and short-term deposits of $51.6 million or $2.23 per share as of the end of 2019. Our working capital decreased by $0.4 million as of September 30, 2020, in comparison to the end of the last year. A majority of the decrease is driven by the trade receivables collection. We're happy to take your questions now. Operator, to you, please.
spk04: Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment while we poll for questions. Once again, ladies and gentlemen, it is Star 1 to ask a question. Our first question comes from the line of Mike Disler with MNX Holdings. Please proceed with your question.
spk01: Good morning, gentlemen. Thank you for providing the information regarding the continued R&D investment. I think that's critical for the future of the company. As you know, I'm a very long-term shareholder. Just a quick item. You said that, I guess, resolution number three was approved this morning at your board meeting. And in light of the investment expense R&D over time and any potential acquisitions, down the road, for the last several years, the cash funds have been sitting on the books while gathering some dust, has always been there for basically R&D and acquisition. And my question is, and I suspect the board did this, but I just thought I'd ask both of you, is in light of the fact that we've had that cash hoard sitting there for R&D and for potential acquisitions, Wouldn't it be a more prudent use, instead of just returning it in the form of a dividend whereby the funds will have been taxed twice, meaning at the corporate level by McGaugh as paying the tax on earnings, as well as the shareholders who would then receive those distributions, at least in the United States, would have to pay a tax. Would it be slightly more prudent to use a small portion of those funds, and I've mentioned this before, to repurchase shares which does two things. One, you're able to buy them at a substantial discount to probably fair market value, certainly book value. Two, thereby reducing the outstanding share count, which would drive earnings. And three, not subject the shareholders receiving a dividend to any sort of taxation by whatever government would tax them. I'm just pointing that out, and I know that you guys have been careful stewards of the of that cash. And in fact, during the last two quarters, it's remarkable that you didn't really have to dip into it at all and remain profitable throughout this 2020 period. So my hat's off to you there. I just wanted you to consider the alternative use of that cash in light of what I just laid out. Thank you.
spk06: Hi Mike, I will take the question. So basically at this point of time the Board of Directors is still discussing the different ways of different potential or designation of using of the capital in light of, as we mentioned before, the M&A opportunities that are on the table as well as investment in, continuous investment in the company and achieving the strategic goals of the company. From the corporate law perspective, Both repurchase of shares or dividend distribution are regarded essentially as the same. It's a reduction of shareholders' equity. And therefore, based on the Israeli corporate law, we are required to obtain an approval of the Israeli court since the company doesn't have significant retained earnings to distribute. So currently we are in this, I would say, preliminary stage of removing this limitation. And once we get the approval from the Israeli court, the Board of Directors will have to reconvene and consider all the all the different components, different options, both what should stay and what should get back to the shareholders and in which manner.
spk01: Okay. Kobi, thank you very much. That was very thorough. Finally, I just wanted to say, keep up the good work. I do understand that by purchasing shares back, you are actually also reducing some of the liquidity out in the marketplace, which is not necessarily a good thing with only, say, 23 million, plus or minus a million shares available, not including the FEMI holdings, the total outstanding. And therefore, that would probably limit the number of shares available in the marketplace, which is not necessarily a good thing in terms of the size of institutions that can then seek to purchase shares. They need a certain amount of liquidity, as you are aware. So I fully understand the tightrope, the balancing act that you are doing, and I appreciate your full explanation. Thank you very much. I look forward to hearing from you next quarter. Be well. Thank you.
spk04: Thank you, Mike. As a reminder, it is star one to ask a question. Our next question comes from the line of Sam Hrabowski with SER Asset Management. Pleased to see you with your question.
spk05: Yes. Good morning, Drew and Kobe. Good afternoon. The backlog, you say, is the highest ever. What percentage did it increase from the prior quarter?
spk02: Same high, same low. It grew around 20% or so. Pardon?
spk03: Even close to 30%.
spk05: How much did it increase?
spk03: Close to 30%.
spk05: That's wonderful. That's wonderful. And you expect to close on an acquisition, presumably it will be a cash acquisition shortly. Is that in the $10 million range?
spk03: Actually, we are looking at a few in the range of, again, between $10 million to $30 million in revenue.
spk05: Oh, that's wonderful. All right. Hopefully that this COVID will end soon as they keep discovering vaccines and you can get on with business. Good luck, guys.
spk03: Thank you, Sam. Thank you.
spk04: There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.
spk02: Okay, thank you, operator. On behalf of the management of Magal, I would like to thank you for your continued interest and long-term support of our business. I look forward to updating you next quarter. Have a good day and keep safe. Thank you.
spk04: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.
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