FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003. |
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO ________________. |
Commission File No. 0-13375
LSI Industries Inc.
State of Incorporation - - Ohio IRS Employer I.D. No. 31-0888951
10000 Alliance Road
Cincinnati, Ohio 45242
(513) 793-3200
Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
As of October 31, 2003 there were 15,759,317 shares of the Registrant’s common stock outstanding.
LSI INDUSTRIES INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
INDEX
| Begins on Page | |||
|---|---|---|---|
| PART I. Financial Information | |||
| ITEM 1. | Financial Statements | ||
|
Consolidated Income Statements Consolidated Balance Sheets Consolidated Statements of Cash Flows Notes to Financial Statements |
3 4 5 6 | ||
| ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
15 | |
| ITEM 3. |
Quantitative and Qualitative Disclosures about Market Risk |
21 | |
| ITEM 4. | Controls and Procedures | 21 | |
PART II. Other Information |
|||
| ITEM 6. | Exhibits and Reports on Form 8-K | 21 | |
| Signatures | 22 | ||
Note: All share and per share data reflect the 5-for-4 stock split announced October 28, 2003, to be effective November 14, 2003.
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995:
This document contains certain forward-looking statements that are subject to numerous assumptions, risks or uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Forward-looking statements may be identified by words such as “estimates,” “anticipates,” “projects,” “plans,” “expects,” “intends,” “believes,” “should” and similar expressions and by the context in which they are used. Such statements are based upon current expectations of the Company and speak only as of the date made. Risks and uncertainties include, but are not limited to, the impact of competitive products and services, product demand and market acceptance risks, reliance on key customers, financial difficulties experienced by customers, the adequacy of reserves and allowances for doubtful accounts, fluctuations in operating results or costs, unexpected difficulties in integrating acquired businesses, and the ability to retain key employees of acquired businesses.
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LSI INDUSTRIES INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
| Three Months Ended September 30 | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2003 |
2002 | |||||||
|
(in thousands, except per share data) |
||||||||
| Net sales | $ | 59,099 | $ | 56,045 | ||||
| Cost of products sold | 43,876 | 40,991 | ||||||
| Gross profit | 15,223 | 15,054 | ||||||
| Selling and administrative expenses | 11,019 | 12,304 | ||||||
| Operating income | 4,204 | 2,750 | ||||||
| Interest (income) | (9 | ) | (3 | ) | ||||
| Interest expense | 84 | 117 | ||||||
| Income before income taxes | 4,129 | 2,636 | ||||||
| Income tax expense | 1,528 | 421 | ||||||
| Income before cumulative effect of | ||||||||
| accounting change | 2,601 | 2,215 | ||||||
| Cumulative effect of accounting | ||||||||
| change, net of tax | -- | 18,541 | ||||||
| Net income (loss) | $ | 2,601 | $ | (16,326 | ) | |||
| Earnings (loss) per common share (see Note 4) | ||||||||
| Basic | ||||||||
| Earnings per share before cumulative | ||||||||
| effect of accounting change | $ | .13 | $ | .11 | ||||
| Earnings (loss) per share | $ | .13 | $ | (.83 | ) | |||
| Diluted | ||||||||
| Earnings per share before cumulative | ||||||||
| effect of accounting change | $ | .13 | $ | .11 | ||||
| Earnings (loss) per share | $ | .13 | $ | (.82 | ) | |||
| Weighted average common shares outstanding | ||||||||
| Basic | 19,698 | 19,715 | ||||||
| Diluted | 19,968 | 19,944 | ||||||
The accompanying Notes to Financial Statements are an integral part of these financial statements.
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LSI INDUSTRIES INC.
CONSOLIDATED BALANCE
SHEETS
(Unaudited)
| September 30, 2003 |
June 30, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| (In thousands, except share amounts) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 174 | $ | 239 | ||||
| Accounts and notes receivable, net | 40,548 | 37,314 | ||||||
| Inventories | 41,368 | 40,326 | ||||||
| Other current assets | 5,561 | 5,626 | ||||||
| Total current assets | 87,651 | 83,505 | ||||||
| Property, Plant and Equipment, net | 54,401 | 55,009 | ||||||
| Goodwill, net | 17,303 | 17,303 | ||||||
| Intangible Assets, net | 5,071 | 5,193 | ||||||
| Other Assets, net | 1,733 | 1,766 | ||||||
| $ | 166,159 | $ | 162,776 | |||||
| LIABILITIES & SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Current maturities of long-term debt | $ | 85 | $ | 85 | ||||
| Accounts payable | 12,945 | 13,603 | ||||||
| Accrued expenses | 11,648 | 10,184 | ||||||
| Total current liabilities | 24,678 | 23,872 | ||||||
| Long-Term Debt | 14,989 | 13,999 | ||||||
| Shareholders' Equity | ||||||||
| Preferred shares, without par value; | ||||||||
| Authorized 1,000,000 shares; none issued | -- | -- | ||||||
| Common shares, without par value; | ||||||||
| Authorized 30,000,000 shares; | ||||||||
| Outstanding 19,692,330 and 19,702,020 | ||||||||
| shares, respectively | 52,516 | 52,585 | ||||||
| Retained earnings | 73,976 | 72,320 | ||||||
| Total shareholders' equity | 126,492 | 124,905 | ||||||
| $ | 166,159 | $ | 162,776 | |||||
The accompanying Notes to Financial Statements are an integral part of these financial statements.
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LSI INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended September 30 | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2003 |
2002 | |||||||
| (In thousands) | ||||||||
| Cash Flows from Operating Activities | ||||||||
| Net income (loss) | $ | 2,601 | $ | (16,326 | ) | |||
| Non-cash items included in income | ||||||||
| Cumulative effect of accounting change | -- | 24,522 | ||||||
| Depreciation and amortization | 1,469 | 1,386 | ||||||
| Deferred income taxes | -- | (5,952 | ) | |||||
| Deferred compensation plan | 32 | 95 | ||||||
| Changes in | ||||||||
| Accounts receivable | (3,234 | ) | 3,695 | |||||
| Inventories | (1,042 | ) | (109 | ) | ||||
| Accounts payable and other | 904 | (5,457 | ) | |||||
| Net cash flows from operating activities | 730 | 1,854 | ||||||
| Cash Flows from Investing Activities | ||||||||
| Purchase of property, plant and equipment | (739 | ) | (2,162 | ) | ||||
| Net cash flows from investing activities | (739 | ) | (2,162 | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Payment of long-term debt | -- | (84 | ) | |||||
| Proceeds from issuance of long-term debt | 990 | 1,240 | ||||||
| Cash dividends paid | (945 | ) | (947 | ) | ||||
| Purchase of treasury shares | (101 | ) | (167 | ) | ||||
| Net cash flows from financing activities | (56 | ) | 42 | |||||
| Increase (decrease) in cash and cash equivalents | (65 | ) | (266 | ) | ||||
| Cash and cash equivalents at beginning of year | 239 | 357 | ||||||
| Cash and cash equivalents at end of period | $ | 174 | $ | 91 | ||||
| Supplemental Cash Flow Information | ||||||||
| Interest paid | $ | 75 | $ | 92 | ||||
| Income taxes paid | $ | 72 | $ | 74 | ||||
The accompanying Notes to Financial Statements are an integral part of these financial statements.
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LSI INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: INTERIM FINANCIAL STATEMENTS
| The interim financial statements are unaudited and are prepared in accordance with rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of Management, the interim financial statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of September 30, 2003, and the results of its operations and its cash flows for the periods ended September 30, 2003 and 2002. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2003 annual report. |
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of LSI Industries Inc. (an Ohio corporation) and its subsidiaries, all of which are wholly owned. All significant intercompany transactions and balances have been eliminated.
The Company has four sources of revenue: revenue from product sales; revenue from the installation of products; service revenue generated from providing the integrated design, project and construction management, site engineering, and site permitting; and revenue from shipping and handling.
Product revenue is recognized on product-only orders at the time of shipment. Product revenue related to orders where the customer requires the Company to install the product is generally recognized when the product is installed. In some situations, product revenue is recognized when the product is shipped, before it is installed, because by agreement the customer has taken title to and risk of ownership for the product before installation has been completed. Other than normal product warranties or the possibility of installation, the Company has no post-shipment responsibilities.
Installation revenue is recognized when the products have been fully installed. The Company is not always responsible for installation of products it sells and, other than normal warranties, has no post-installation service contracts or responsibilities.
Service revenue from integrated design, project and construction management, site engineering and permitting is recognized at the completion of the contract with the customer. With larger customer contracts involving multiple sites, the customer may require progress billings for completion of identifiable, time-phased elements of the work, in which case revenue is recognized at the time of the progress billing.
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Shipping and handling revenue coincides with the recognition of revenue from sale of the product.
Amounts received from customers prior to the recognition of revenue are accounted for as customer pre-payments and are included in accrued expenses.
Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out basis.
Property, plant and equipment are stated at cost. Major additions and betterments are capitalized while maintenance and repairs are expensed. For financial reporting purposes, depreciation is computed on the straight-line method over the estimated useful lives of the assets as follows:
| Buildings Machinery and equipment Computer software |
31 - 40 years 3 - 10 years 3 - 8 years |
Costs related to the purchase, internal development, and implementation of the Company’s business operating software system are either capitalized or expensed in accordance with the American Institute of Certified Public Accountants’ Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” The capitalized implementation costs are apportioned to and placed in service for each operating company as that company implements and begins utilization of the business operating software. The current business operating software was first implemented in January 2000. All costs capitalized for the business operating software will be fully depreciated by December 31, 2007. Other purchased computer software is being depreciated over periods ranging from three to five years.
Intangible assets consisting of customer lists, trade names, patents and trademarks are recorded on the Company’s balance sheet and are being amortized to expense over periods ranging between two and seventeen years. The excess of cost over fair value of assets acquired (“goodwill”) was amortized to expense over periods ranging between fifteen and forty years through fiscal 2002. Beginning in fiscal 2003, goodwill is no longer amortized, but is subject to review for impairment. See additional information about goodwill and intangibles in Note 6. The Company periodically evaluates intangible assets, goodwill and other long-lived assets for permanent impairment. Impairments have been recorded only with respect to goodwill (see Note 6).
The Company has financial instruments consisting primarily of cash and cash equivalents, revolving lines of credit, and long-term debt. The fair value of these financial instruments approximates carrying value because of their short-term maturity and/or variable, market-driven interest rates. The Company has no financial instruments with off-balance sheet risk.
Page 7
The Company is party to various negotiations, customer bankruptcies, and legal proceedings arising in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations, cash flows or liquidity.
The computation of basic earnings per common share is based on the weighted average common shares outstanding for the period. The computation of diluted earnings per share is based on the weighted average common shares outstanding for the period and includes common share equivalents. Common share equivalents include the dilutive effect of stock options, contingently issuable shares (for which issuance has been determined to be probable), and common shares to be issued under a deferred compensation plan, all of which totaled 270,000 shares at September 30, 2003 and 229,000 shares at September 2002. All share and per share data reflect the five-for-four stock split declared by the Company on October 20, 2003. See also Note 4.
The company applies the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation expense has been reflected in the financial statements as the exercise price of options granted to employees and non-employee directors is equal to the fair market value of the Company’s common shares on the date of grant. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS No. 123), “Accounting for Stock Based Compensation.”
If the Company had adopted the expense recognition provisions of SFAS No. 123, net income and earnings per share for the three months ended September 30, 2003 and 2002 would have been as follows:
| Three months ended September 30 | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2003 |
2002 | |||||||
| (In thousands except earnings per share) | ||||||||
| Net income (loss) as reported | $ | 2,601 | $ | (16,326 | ) | |||
| Add: Stock-based compensation | ||||||||
| expense included in reported net | ||||||||
| income, net of related tax effects | -- | -- | ||||||
| Deduct: Total stock-based compensation | ||||||||
| determined under the fair value based | ||||||||
| method for all awards, net of tax effects | 86 | 97 | ||||||
| Pro forma net income (loss) | $ | 2,515 | $ | (16,423 | ) | |||
| Earnings (loss) per common share | ||||||||
| Basic | ||||||||
| As reported | $ | 0.13 | $ | (0.83 | ) | |||
| Pro forma | $ | 0.13 | $ | (0.83 | ) | |||
| Diluted | ||||||||
| As reported | $ | 0.13 | $ | (0.82 | ) | |||
| Pro forma | $ | 0.13 | $ | (0.82 | ) | |||
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Since SFAS No. 123 has not been applied to options granted prior to December 15, 1994, the resulting compensation cost shown above may not be representative of that expected in future years.
The Company does not have any comprehensive income items other than net income.
Certain reclassifications may have been made to prior year amounts in order to be consistent with the presentation for the current year. The primary reclassification has been the Company’s business segment data as a result of organizational changes and the establishment of new reportable business segments. See Note 3.
The preparation of the financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
NOTE 3: BUSINESS SEGMENT INFORMATION
| Effective July 1, 2003, the Company re-aligned its business segments and operates in the following two business segments: the Lighting Segment and the Graphics Segment. The Company is organized such that the chief operating decision maker (the President and Chief Executive Officer) now receives financial and operating information relative to these two business segments, and organizationally, has a President of LSI Lighting Solutions Plus (currently vacant) and a President of LSI Graphics Solutions Plus reporting directly to him. In the seven years prior to fiscal 2004, the Company reported business segments of the Image Segment and the Commercial / Industrial Lighting Segment. All prior period information has been revised to reflect the Company’s new segments. |
| The Lighting Segment manufactures and sells primarily proprietary exterior, interior and landscape lighting fixtures and systems. The Lighting Segment includes the operations of LSI Lighting Systems, LSI Petroleum Lighting, LSI Automotive Lighting, Quick Service Restaurant Lighting, LSI Metal Fabrication, LSI Courtsider Lighting, LSI Greenlee Lighting, LSI Marcole, LSI MidWest Lighting and LSI Lightron. The Graphics Segment manufactures and sells custom exterior and interior graphics and visual image elements, as well as menu board systems. The Graphics Segment includes the operations of LSI Grady McCauley, LSI Integrated Graphics, LSI Retail Graphics, LSI Adapt, and LSI Images. The Company’s most significant market to which both the Lighting and Graphics Segments sell products and services, is the petroleum / convenience store market with approximately 29% of total net sales concentrated in this market in the three month periods ended September 30, 2003 and 2002. The strategy of selling both lighting and graphics to customers in the implementation, roll out or refurbishment of their exterior and/or interior visual image programs continues to be very important to the Company. |
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The following information is provided for the following periods:
| Three Months Ended September 30 | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2003 |
2002 | |||||||
| (In thousands) | ||||||||
| Net sales: | ||||||||
| Lighting Segment | $ | 36,200 | $ | 34,337 | ||||
| Graphics Segment | 22,899 | 21,708 | ||||||
| $ | 59,099 | $ | 56,045 | |||||
| Operating income (loss): | ||||||||
| Lighting Segment | $ | 1,925 | $ | 2,189 | ||||
| Graphics Segment | 2,279 | 561 | ||||||
| $ | 4,204 | $ | 2,750 | |||||
| Capital expenditures: | ||||||||
| Lighting Segment | $ | 575 | $ | 1,866 | ||||
| Graphics Segment | 164 | 296 | ||||||
| $ | 739 | $ | 2,162 | |||||
| Depreciation and amortization: | ||||||||
| Lighting Segment | $ | 1,059 | $ | 907 | ||||
| Graphics Segment | 410 | 479 | ||||||
| $ | 1,469 | $ | 1,386< | |||||