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Nov. 14, 2019, 5:14 p.m. EST

10-Q: LGL GROUP INC

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the accompanying condensed consolidated financial statements, the notes thereto and the other unaudited financial data included in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with the audited consolidated financial statements and the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. The terms "we," "us," "our," and the "Company" refer to The LGL Group, Inc. and unless otherwise defined herein, capitalized terms used herein shall have the same meanings as set forth in our condensed consolidated financial statements and the notes thereto.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q of the Company and the Company's other communications and statements, other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company intends for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable by law. Such statements include, in particular, statements about the Company's beliefs, plans, objectives, goals, expectations, estimates, projections and intentions. These statements are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond the Company's control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," "target," "goal," and similar expressions are intended to identify forward-looking statements. All forward-looking statements, by their nature, are subject to risks and uncertainties. Therefore, such statements are not intended to be a guarantee of the Company's performance in future periods. The Company's actual future results may differ materially from those set forth in the Company's forward-looking statements. For information concerning these factors and related matters, see "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on March 21, 2019, this Quarterly Report on Form 10-Q and our other filings with the SEC. However, other factors besides those referenced could adversely affect the Company's results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by the Company herein speak as of the date of this Quarterly Report on Form 10-Q. The Company does not undertake to update any forward-looking statement, except as required by law. As a result, you should not place undue reliance on these forward-looking statements.

Results of Operations

Backlog

As of September 30, 2019, our order backlog was $23,285,000, which is an increase of 45.0% compared to the backlog of $16,062,000 as of September 30, 2018. The increase reflects the Company's stronger execution in delivering design wins coupled with favorable market conditions. While we have been building backlog faster than our growth in revenues due primarily to orders being received sooner than planned, this quarter saw a reduction in backlog from the prior quarter as production increases that resulted in increased revenues more than offset our new orders, which had declined as expected this quarter following two record-breaking quarters. The backlog of unfilled orders includes amounts based on signed contracts as well as agreed letters of intent, which we have determined are firm orders likely to be fulfilled in the next 12 months.

Order backlog is adjusted quarterly to reflect project cancellations, deferrals, revised project scope and cost, and sales of subsidiaries, if any. We expect to fill our entire order backlog within the next twelve months, but cannot provide assurances as to what portion of the order backlog will be fulfilled in a given year.

Three months ended September 30, 2019 compared to three months ended September 30, 2018

Consolidated Revenues and Gross Margin

Total revenues for the three months ended September 30, 2019 were $8,588,000, an increase of $2,250,000, or 35.5%, from revenues of $6,338,000 for the three months ended September 30, 2018. Revenues increased across all product categories, including increased filter sales of $1,247,000, increased crystal and oscillator sales of $647,000, and increased sales of $263,000 from sales of purchased products, along with our time and frequency products, which increased $60,000.

Consolidated gross margin, which is consolidated revenues less manufacturing cost of sales, as a percentage of revenues increased slightly to 41.2% for the three months ended September 30, 2019, from 39.5% for the three months ended September 30, 2018. The increase reflects a shift in our product mix shipped during the quarter. The Company continues to execute its long-term strategic shift toward higher margin products, but there will be fluctuations of product mix in the short-term.

Stock-Based Compensation

For both the three months ended September 30, 2019 and 2018, stock-based compensation expense was $5,000. Compensation expense related to stock-based compensation is recognized over the applicable vesting periods. As of September 30, 2019, there was approximately $14,000 of total unrecognized compensation expense related to unvested stock-based compensation arrangements.

Operating Income

Operating income of $1,122,000 for the three months ended September 30, 2019 was an improvement of $645,000 from operating income of $477,000 for the three months ended September 30, 2018. This was primarily due to the increase in revenues and improvement in gross margin from the changes in product mix noted above.

Other Income, Net

For the three months ended September 30, 2019, other income, net was $82,000, compared to $73,000 for the three months ended September 30, 2018. These balances are comprised of gains from our investment portfolio.

Income Tax Provision

We recorded a tax (benefit) provision of(3,326,000) and $67,000 for the three months ended September 30, 2019 and 2018, respectively. The benefit in the quarter ended September 30, 2019 is primarily due to our release of substantially all of the valuation allowance on the Company's U.S. deferred tax assets, while the provision in the quarter ended September 30, 2018 resulted primarily from income in our foreign subsidiaries as all our U.S. taxable income had previously been sheltered by the valuation allowance.

Net Income

Net income for the three months ended September 30, 2019 was $4,530,000, compared to $478,000 for the three months ended September 30, 2018 due to the factors noted above. Diluted net income per share for the three months ended September 30, 2019 and 2018 was $0.91 and $0.10, respectively.

Nine months ended September 30, 2019 compared to nine months ended September 30, 2018

Consolidated Revenues and Gross Margin

Total revenues for the nine months ended September 30, 2019 were $23,058,000, an increase of $4,618,000, or 25.0%, from revenues of $18,440,000 for the nine months ended September 30, 2018. Revenues increased across all product categories including increased filter sales of $2,621,000, increased crystal and oscillator sales of $1,144,000, increased sales of $572,000 from purchased products, and increased sales from our time and frequency products of $200,000.

Consolidated gross margin, which is consolidated revenues less manufacturing cost of sales, as a percentage of revenues decreased slightly to 39.4% for the nine months ended September 30, 2019, from 39.6% for the nine months ended September 30, 2018. The decrease reflects a shift in our product mix shipped during the current year. The Company continues to execute its long-term strategic shift toward higher margin products, but there are still fluctuations of product mix in the short-term.

Stock-Based Compensation

For the nine months ended September 30, 2019 and 2018, stock-based compensation expense was $17,000 and $19,000, respectively. Compensation expense related to stock-based compensation is recognized over the applicable vesting periods. As of September 30, 2019, there was approximately $14,000 of total unrecognized compensation expense related to unvested stock-based compensation arrangements.

Operating Income

Operating income of $2,412,000 for the nine months ended September 30, 2019 was an improvement of $1,288,000 from operating income of $1,124,000 for the nine months ended September 30, 2018. This was primarily due to the increase in revenues, net of the reduction in gross margin from the changes in product mix noted above.

Other Income, Net

For the nine months ended September 30, 2019, other income, net was $352,000, compared to $164,000 for the nine months ended September 30, 2018. These balances are comprised primarily of gains from our investment portfolio.

Income Tax Provision

We recorded a tax (benefit) provision of $(3,286,000) and $146,000 for the nine months ended September 30, 2019 and 2018, respectively. The benefit in the nine months ended September 30, 2019 is primarily due to our release of substantially all of the valuation allowance on the Company's deferred tax assets, while the provision in the nine months ended September 30, 2018 results from income in our foreign subsidiaries as our U.S. taxable income had been previously sheltered by the valuation allowance.

Net Income

Net income for the nine months ended September 30, 2019 was $6,051,000, compared to $1,143,000 for the nine months ended September 30, 2018 due to the factors noted above. Diluted net income per share for nine months ended September 30, 2019 and 2018 was $1.22 and $0.24, respectively.

Liquidity and Capital Resources

As of September 30, 2019 and December 31, 2018, cash and cash equivalents were $11,161,000 and $15,508,000, respectively. In the first quarter of 2019, we invested $5,000,000 in an equity mutual fund, which is classified as marketable securities on our consolidated balance sheets.

Cash provided by operating activities was $1,089,000 and $689,000 for the nine months ended September 30, 2019 and 2018, respectively. The $400,000 increase was due to a year-over-year increase in net income of $4,908,000, offset by a year-over-year change in deferred tax benefit of $(3,334,000) and working capital accounts of $(1,174,000).

Cash used in investing activities for the nine months ended September 30, 2019 and 2018 was $5,826,000 and $12,507,000, respectively. The use of cash for the nine months ended September 30, 2019 was due to the purchase of $5,000,000 in marketable securities in the first quarter, combined with $826,000 in capital expenditures. Capital expenditures increased $594,000 due primarily to the replacement of the roof on our primary production facilities in Florida.

For the nine months ended September 30, 2019, cash provided by financing activities represented $390,000 received by the Company for the exercise of stock options. For the nine months ended September 30, 2018, financing activities represented $927,000 received by the Company for the exercise of stock warrants and $27,000 received by the Company for the exercise of stock options.

As of September 30, 2019, our consolidated working capital was $26,960,000, compared to $24,633,000 as of December 31, 2018. As of September 30, 2019, we had current assets of $31,845,000, current liabilities of $4,885,000 and a ratio of current assets to current liabilities of 6.52 to 1.00. As of December 31, 2018, we had current assets of $27,385,000, current liabilities of $2,752,000 and a ratio of current assets to current liabilities of 9.95 to 1.00. Management continues to focus on efficiently managing working capital requirements to match operating activity levels, and will seek to deploy the Company's working capital where it will generate the greatest returns.

We believe that existing cash and cash equivalents, marketable securities, and cash generated from operations will be sufficient to meet our ongoing working capital and capital expenditure requirements for the next 12 months from the date of this filing.

Our Board has adhered to a practice of not paying cash dividends. This policy takes into account our long-term growth objectives, including our anticipated investments for organic growth, potential technology acquisitions or other strategic ventures, and stockholders' desire for capital appreciation of their holdings. No cash dividends have been paid to the Company's stockholders since January 30, 1989, and none are expected to be paid for the foreseeable future.

Critical Accounting Policies

Our accounting policies and unaudited condensed consolidated financial statements have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. We believe we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. We believe that the accounting policies related to the following accounts or activities are those that are most critical to the portrayal of our financial condition and results of operations and require the more significant judgments and estimates:

Revenue recognition;

Accounts receivable allowance;

Inventory valuation;

Intangible assets;

Income taxes; and

Segment information.

There have been no significant changes to our critical accounting policies from those described in Note A - Accounting and Reporting Policies to the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, except as described in Note B.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Nov 14, 2019

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