Summary of LGL GROUP INC - Yahoo! Finance

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

Information included or incorporated by reference in this Quarterly Report on Form 10-Q may contain forward-looking statements. This information may involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different than the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may," "should," "expect," "anticipate," "estimate," "believe," "intend" or "project" or the negative of these words or other variations on these words or comparable terminology.

Results of Operations
Three months ended June 30, 2008 compared to three months ended June 30, 2007

Consolidated Revenues and Gross Margin

Consolidated revenues from continuing operations increased by $136,000, or 1.4%, to $10,150,000 for the second quarter 2008 from $10,014,000 for the comparable period in 2007. The increase is due primarily to an increase in foreign sales of $365,000 over the comparable period in 2007 offset by a decrease in domestic sales of $229,000. This growth in foreign sales is driven by the Company's customers' continuing migration of manufacturing into low labor cost regions.

Consolidated gross margin from continuing operations as a percentage of revenues for the second quarter 2008 increased to 25.7% from 25.3% for the comparable period in 2007.

Operating Loss

Operating loss from continuing operations of $394,000 for the second quarter 2008 is an improvement of $647,000 from the $1,041,000 operating loss for the comparable period in 2007. The $647,000 improvement was primarily driven by an impairment loss on Lynch Systems' assets recognized in the second quarter of 2007 of $905,000 compared to $0 in 2008, offset by an increase in engineering, selling and administrative expenses of $326,000 in the second quarter of 2008 compared to the same period in 2007, which was primarily driven by an increase in professional fees due to the Company's restatement of its financial statements for the first two quarters of 2007, fiscal 2006 and prior years and its continuing compliance requirements under Sarbanes-Oxley.

Other Income (Expenses)

Net interest expense for the second quarter 2008 was $66,000, compared with $91,000 for the comparable period in 2007 due to the overall reduction in Company debt in the second quarter of 2008 in relation to the comparable period in 2007, as well as a reduction in the variable interest rate on MtronPTI's revolving loan. In the second quarter of 2007, MtronPTI recognized $173,000 in other expense relating to the remeasurement process of consolidating one of its foreign subsidiaries, offset by the gain on the sale of vacant land of $88,000.

Income Taxes

The Company files consolidated federal income tax returns, which includes all subsidiaries. The income tax provision for the six-month period ended June 30, 2008 included foreign taxes. The provision gives effect to our estimated tax liability at the end of the year.

Due to the uncertainty surrounding the realization of the favorable U.S. tax attributes in future tax returns, we continue to record a full valuation allowance against our otherwise recognizable U.S. net deferred tax assets as of June 30, 2008 and December 31, 2007, except for the Company's $111,000 in AMT deferred tax assets which do not expire.

Index

Results of Discontinued Operations

As a result of the sale of Lynch Systems in the second quarter of 2007, we have reclassified the results of operations of Lynch Systems for all periods presented to "Discontinued Operations" within the Condensed Consolidated Statements of Operations, in accordance with accounting principles generally accepted in the United States of America.

For the quarter ended June 30, 2008, the revenues from discontinued operations were $0 and loss from discontinued operations was $15,000 compared with revenues of $1,244,000 and loss from discontinued operations of $803,000 including a loss on the sale of Lynch systems of $982,000 for the second quarter of 2007.

Net Loss

Net loss for the second quarter 2008 was $573,000 compared to net loss of $2,923,000 for the comparable period in 2007. The second quarter 2008 loss was comprised of a $558,000 loss from continuing operations and $15,000 loss from discontinued operations compared with a $1,138,000 loss from continuing operations and $1,785,000 loss from discontinued operations for the second quarter of 2007. The decrease in net loss is due to impairment loss on Lynch Systems' assets of $905,000 and total net loss from discontinued operations of $1,785,000 in the second quarter of 2007 compared to an impairment loss of $0 and net loss from discontinued operations of $15,000 for 2008.

Six months ended June 30, 2008 compared to six months ended June 30, 2007

Consolidated Revenues and Gross Margin

Consolidated revenues from continuing operations for the six-month period ending June 30, 2008 increased by $542,000, or 2.8%, to $19,933,000 from $19,391,000 for the comparable period in 2007. The increase is due primarily to an increase in foreign sales of $1,700,000 over the comparable period in 2007 offset by a decrease in domestic sales of $1,158,000. This growth in foreign sales is driven by the Company's customers' continuing migration of manufacturing into low labor cost regions.

Consolidated gross margin from continuing operations as a percentage of revenues for the six-month period ending June 30, 2008 increased to 26.3% from 23.2% for the comparable period in 2007. The improvement in gross margin reflects the Company's continuing efforts to improve upon its manufacturing and supply chain efficiency.

Operating Loss

Operating loss from continuing operations of $850,000 for the six-month period ending June 30, 2008 is an improvement of $881,000 from the $1,731,000 operating loss for the comparable period in 2007. The $881,000 improvement was caused by a margin percentage improvement of 3.1%, resulting in additional gross margin of $601,000 on a same sales level reflecting the Company's continuing efforts to improve upon its manufacturing inefficiencies experienced in 2007, offset by an increase in professional fees primarily due to the Company's restatement of its financial statements for the first two quarters of 2007, fiscal 2006 and prior years and its continuing compliance requirements under Sarbanes-Oxley. In addition, in 2007 the Company recognized an impairment loss on Lynch Systems' assets of $905,000.

Index

Other Income (Expenses)

Investment income from continuing operations decreased $1,526,000 to $0 for the six-month period ended June 30, 2008. This was due to the sale of substantially all of the marketable securities that were held for sale during the first quarter 2007. Net interest expense for the six-month period ended June 30, 2008 was $129,000, compared with $180,000 for the comparable period in 2007 due to the overall reduction in Company debt in 2008 in relation to the comparable period in 2007, as well as a reduction in the variable interest rate on MtronPTI's revolving loan. In the second quarter of 2007, MtronPTI recognized $173,000 in other expense relating to the remeasurement process of consolidating one of its foreign subsidiaries.

Income Taxes

Results of Discontinued Operations

For the six-month period ended June 30, 2008, the revenues from discontinued operations were $0 and loss from discontinued operations was $5,000 compared with revenues of $2,534,000 and loss from discontinued operations of $1,007,000 including a loss on the sale of Lynch Systems of $982,000 for the comparable period in 2007.

Net Loss

Net loss for the six-month period ended June 30, 2008 was $1,163,000 compared to a net loss of $2,275,000 for the comparable period in 2007. The six-month period ended June 30, 2008 loss was comprised of a $1,158,000 loss from continuing operations and $5,000 loss from discontinued operations compared with a $286,000 loss from continuing operations and $1,989,000 loss from discontinued operations for the comparable period in 2007. The decrease in net loss is due to an impairment loss on Lynch Systems' assets of $905,000 and total net loss from discontinued operations of $1,989,000, offset by investment income of $1,526,000 during the six-month period ended June 30, 2007 compared to an impairment loss of $0, net loss from discontinued operations of $5,000 and investment income of $0 for 2008.

Liquidity and Capital Resources

The Company's cash, cash equivalents and investments in marketable securities at June 30, 2008 was $4,937,000 as compared to $5,281,000 at December 31, 2007. MtronPTI had unused borrowing capacity of $4,154,000 under MtronPTI's revolving line of credit at June 30, 2008, as compared to $4,465,000 at December 31, 2007. At June 30, 2008, MtronPTI had $1,346,000 outstanding in its revolving loan, compared with $1,035,000 at December 31, 2007.

At June 30, 2008, the Company's net working capital was $9,929,000 as compared to $10,984,000 at December 31, 2007 after taking into account the reclassification of Lynch Systems assets into "Assets or Liabilities of Discontinued Operations." At June 30, 2008, the Company had current assets of $16,622,000 and current liabilities of $6,693,000. After taking into account the reclassification of Lynch Systems assets into "Assets or Liabilities of Discontinued Operations," at December 31, 2007, the Company had current assets of $17,225,000 and current liabilities of $6,241,000. The ratio of current assets to current liabilities was 2.48 to 1.00 at June 30, 2008, compared to 2.76 to 1.00 at December 31, 2007.

Index

Cash used in operating activities from continuing operations was $305,000 for the six months ended June 30, 2008, compared to cash used in operating activities from continuing operations of $1,648,000 for the six months ended June 30, 2007. The decrease in cash used in operating activities is due to cash used in the six months ended June 30, 2007 to pay down accounts payable and accrued liabilities of $1,286,000 compared to $27,000 for the six months ended June 30, 2008.

Cash used in investing activities from continuing operations was $89,000 for the six months ended June 30, 2008, versus cash provided of $2,433,000 for the six months ended June 30, 2007. The cash from investing activities came primarily from the sale of securities in March 2007. The proceeds of that sale were $2,292,000.

Cash provided by financing activities from continuing operations was $118,000 for the six months ended June 30, 2008, compared with $194,000 for the six months ended June 30, 2007. The decrease in cash provided by financing activities is due primarily to a decrease in net borrowings on the Company's note payable offset by a decrease in scheduled repayments of its long-term debt.

At June 30, 2008, total liabilities of $10,545,000 was $38,000 more than the total liabilities at December 31, 2007 of $10,507,000. The debt increased due to the increase in MtronPTI's borrowing on its revolving loan, which was partially offset by a decrease in term loans outstanding due to scheduled repayments. At June 30, 2008, the Company had $409,000 in current maturities of long-term debt compared with $419,000 at December 31, 2007. The increase in consolidated debt was in addition to the decrease in cash and cash equivalents of $329,000.

The Company believes that existing cash and cash equivalents, cash generated from operations and available borrowings on its revolver, will be sufficient to meet its ongoing working capital and capital expenditure requirements for the foreseeable future.

On October 14, 2004, MtronPTI, entered into the FNBO Loan Agreement. The FNBO Loan Agreement provides for a short-term credit facility of up to $5,500,000, the FNBO Revolving Loan. The provisions of the FNBO Revolving Loan were subsequently amended, most recently on June 30, 2008. The principal balance of the FNBO Revolving Loan currently bears interest at 30-day LIBOR plus 2.1%, with interest only payments due monthly and the final payment of principal and interest due on June 30, 2009. At June 30, 2008, the amount outstanding under the revolving credit loan was $1,346,000. The Company had $4,154,000 of unused borrowing capacity under its revolving line of credit at June 30, 2008, compared to $4,465,000 at December 31, 2007.

The FNBO Loan Agreement also provides for a term loan in the original principal amount of $2,000,000, the FNBO Term Loan. The provisions of the FNBO Term Loan were subsequently amended, most recently on January 24, 2008. Under such amendment, the original principal amount of the FNBO Term Loan is approximately $1,410,000, and the principal balance bears interest at 30-day LIBOR plus 2.1%, with principal and interest payments due monthly and the final payment of principal and interest due January 24, 2013.

The FNBO Loan Agreement contains a variety of affirmative and negative covenants, including, but not limited to, financial covenants that MtronPTI maintain: (i) tangible net worth of not less than $7,000,000, (ii) a ratio of current assets to current liabilities of not less than 1.5 to 1.0; (iii) a ratio of total liabilities to tangible net worth of not greater than 2.75 to 1.0; and
(iv) a fixed charge ratio of 1.2 to 1.0. At June 30, 2008, the Company was in compliance with these covenants.

All outstanding obligations under the FNBO Loan Agreement are guaranteed by the Company.

In connection with the FNBO Term Loan, MtronPTI entered into a separate interest rate swap agreement with FNBO from which it receives periodic payments at the LIBOR Base Rate and makes periodic payments at a fixed rate of 5.60% through the life of the FNBO Term Loan. The Company has designated this swap as a cash flow hedge in accordance with FASB 133 "Accounting for Derivative Instruments and Hedging Activities". The fair value of the interest rate swap at June 30, 2008 is $6,000 net of any tax effect, and is included in "swap liability on hedge contracts" on the condensed consolidated balance sheets. The change in fair value is reflected in other comprehensive loss, net of any tax effect.

Index

On September 30, 2005, MtronPTI entered into the RBC Loan Agreement, which provides for a loan in the original principal amount of $3,040,000, the RBC Term Loan. The RBC Term Loan bears interest at LIBOR Base Rate plus 2.75% and is being repaid in monthly installments based on a 20 year amortization, with the then remaining principal balance and interest due on the fifth anniversary of the RBC Loan Agreement. The RBC Loan Agreement contains a variety of affirmative and negative covenants, including, but not limited to, financial covenants that MtronPTI maintain: (i) a ratio of total liabilities to tangible net worth of at least 4.0 to 1.0; (ii) tangible net worth of at least $4.2 million; and (iii) a fixed charge coverage ratio of not less than 1.2 to 1.0. At June 30, 2008, the Company was in compliance with these covenants.

All outstanding obligations under the RBC Loan Agreement are collateralized by security interests in the assets of MtronPTI and guaranteed by the Company.

In connection with the RBC Term Loan, MtronPTI entered into a five-year interest rate swap from which it receives periodic payments at the LIBOR Base Rate and makes periodic payments at a fixed rate of 7.51% with monthly settlement and rate reset dates. The Company has designated this swap as a cash flow hedge in accordance with FASB 133 "Accounting for Derivative Instruments and Hedging Activities". The fair value of the interest rate swap at June 30, 2008 is ($84,000) net of any tax effect, and is included in "swap liability on hedge contracts" on the condensed consolidated balance sheets. The change in fair value is reflected in other comprehensive loss, net of any tax effect.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.