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 MARCH 31, 2005. |
| [ ] | 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 May 3, 2005 there were 19,792,826 shares of the Registrant’s common stock outstanding.
LSI INDUSTRIES INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2005
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 |
17 | |
| ITEM 3. |
Quantitative and Qualitative Disclosures About Market Risk |
24 | |
| ITEM 4. | Controls and Procedures | 24 | |
PART II. Other Information |
|||
| ITEM 6. | Exhibits | 25 | |
| Signatures | 25 | ||
“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 the negative version thereof, 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, unfavorable outcomes of litigation, unexpected difficulties in integrating acquired businesses, and the ability to retain key employees of acquired businesses. The Company has no obligation to update any forward-looking statements to reflect subsequent events or circumstances.
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LSI INDUSTRIES INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
| Three Months Ended March 31 |
Nine Months Ended March 31 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 |
2004 |
2005 |
2004 | |||||||||||
| (in thousands, except per share data) | ||||||||||||||
| Net sales | $ | 67,814 | $ | 51,500 | $ | 210,448 | $ | 174,715 | ||||||
| Cost of products sold | 52,435 | 39,690 | 157,258 | 129,451 | ||||||||||
| Gross profit | 15,379 | 11,810 | 53,190 | 45,264 | ||||||||||
| Selling and administrative expenses | 12,165 | 10,333 | 36,786 | 33,184 | ||||||||||
| Goodwill impairment | -- | -- | 186 | -- | ||||||||||
| Operating income | 3,214 | 1,477 | 16,218 | 12,080 | ||||||||||
| Interest (income) | (18 | ) | (5 | ) | (29 | ) | (23 | ) | ||||||
| Interest expense | 50 | 58 | 195 | 194 | ||||||||||
| Income before income taxes | 3,182 | 1,424 | 16,052 | 11,909 | ||||||||||
| Income tax expense | 760 | 504 | 5,522 | 4,382 | ||||||||||
| Net income | $ | 2,422 | $ | 920 | $ | 10,530 | $ | 7,527 | ||||||
| Earnings per common share (see Note 5) | ||||||||||||||
| Basic | $ | 0.12 | $ | 0.05 | $ | 0.53 | $ | 0.38 | ||||||
| Diluted | $ | 0.12 | $ | 0.05 | $ | 0.53 | $ | 0.38 | ||||||
| Weighted average common shares | ||||||||||||||
| outstanding | ||||||||||||||
| Basic | 19,780 | 19,732 | 19,771 | 19,711 | ||||||||||
| Diluted | 20,109 | 20,107 | 20,043 | 20,033 | ||||||||||
The accompanying Notes to Financial Statements are an integral part of these financial statements.
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| March 31, 2005 |
June 30, 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| (In thousands, except share amounts) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 1,599 | $ | 205 | ||||
| Accounts and notes receivable, net | 41,953 | 42,545 | ||||||
| Inventories | 44,446 | 47,672 | ||||||
| Other current assets | 5,305 | 6,701 | ||||||
| Total current assets | 93,303 | 97,123 | ||||||
| Property, Plant and Equipment, net | 51,934 | 54,152 | ||||||
| Goodwill, net | 17,117 | 17,303 | ||||||
| Intangible Assets, net | 4,350 | 4,710 | ||||||
| Other Assets, net | 1,405 | 1,444 | ||||||
| $ | 168,109 | $ | 174,732 | |||||
| LIABILITIES & SHAREHOLDERS' EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 15,044 | $ | 18,289 | ||||
| Accrued expenses | 13,705 | 14,110 | ||||||
| Total current liabilities | 28,749 | 32,399 | ||||||
| Long-Term Debt | 3,000 | 11,554 | ||||||
| Other Long-Term Liabilities | 1,426 | 1,916 | ||||||
| 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 19,750,651 and 19,733,804 | ||||||||
| shares, respectively | 53,425 | 53,059 | ||||||
| Retained earnings | 81,509 | 75,804 | ||||||
| Total shareholders' equity | 134,934 | 128,863 | ||||||
| $ | 168,109 | $ | 174,732 | |||||
The accompanying Notes to Financial Statements are an integral part of these financial statements.
Page 4
LSI INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended March 31 | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2005 |
2004 | |||||||
| (In thousands) | ||||||||
| Cash Flows from Operating Activities | ||||||||
| Net income | $ | 10,530 | $ | 7,527 | ||||
| Non-cash items included in income | ||||||||
| Depreciation and amortization | 5,262 | 4,375 | ||||||
| Deferred income taxes | (440 | ) | (138 | ) | ||||
| Deferred compensation plan | (183 | ) | 120 | |||||
| Issuance of common shares as director compensation | 44 | -- | ||||||
| (Loss) on disposition of fixed assets | 49 | 89 | ||||||
| Goodwill impairment | 186 | -- | ||||||
| Changes in | ||||||||
| Accounts receivable | 592 | 4,166 | ||||||
| Inventories | 3,226 | (7,786 | ) | |||||
| Accounts payable and other | (2,265 | ) | 1,930 | |||||
| Net cash flows from operating activities | 17,001 | 10,283 | ||||||
| Cash Flows from Investing Activities | ||||||||
| Purchase of property, plant and equipment | (2,858 | ) | (4,158 | ) | ||||
| Proceeds from sale of fixed assets | 125 | 69 | ||||||
| Net cash flows from investing activities | (2,733 | ) | (4,089 | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Payment of long-term debt | (12,014 | ) | (3,713 | ) | ||||
| Proceeds from issuance of long-term debt | 3,460 | 990 | ||||||
| Cash dividends paid | (4,825 | ) | (3,784 | ) | ||||
| Exercise of Stock Options | 274 | 447 | ||||||
| Issuance (Purchase) of treasury shares, net | 231 | (178 | ) | |||||
| Net cash flows from financing activities | (12,874 | ) | (6,238 | ) | ||||
| Increase (decrease) in cash and cash equivalents | 1,394 | (44 | ) | |||||
| Cash and cash equivalents at beginning of year | 205 | 239 | ||||||
| Cash and cash equivalents at end of period | $ | 1,599 | $ | 195 | ||||
| Supplemental Cash Flow Information | ||||||||
| Interest paid | $ | 160 | $ | 196 | ||||
| Income taxes paid | $ | 4,616 | $ | 2,181 | ||||
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 March 31, 2005, and the results of its operations for each of the three and nine months ended March 31, 2005 and 2004, and its cash flows for the nine month periods ended March 31, 2005 and 2004. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2004 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 installation of products; service revenue generated from providing 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 which coincides with the completion of the earnings process.
Page 6
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.
The Company periodically receives either grants or credits for state income taxes when it expands a facility and/or its level of employment in certain states within which it operates. A grant is amortized to income over the time period that the state could be entitled to return of the grant if the expansion or job growth were not maintained, and is recorded as a reduction of either manufacturing overhead or administrative expenses. A credit is amortized to income over the time period that the state could be entitled to return of the credit if the expansion were not maintained, is recorded as a reduction of state income tax expense, and is subject to a valuation allowance review if the credit cannot immediately be utilized.
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 | 31 - 40 years | ||
| Machinery and equipment | 3 - 10 years | ||
| Computer software | 3 - 8 years |
Costs related to the purchase, internal development, and implementation of the Company’s fully integrated enterprise resource planning/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 depreciated over an eight year life from the date placed in service. 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 fifteen and forty years. The excess of cost over fair value of assets acquired (“goodwill”) is not 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. Historically, impairments have been recorded only with respect to goodwill (see Note 7).
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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.
The Company is party to various negotiations, customer bankruptcies, and legal proceedings arising in the normal course of business. The Company provides reserves for these matters when a loss is probable and reasonably estimable. 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. See also Footnote 12.
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 329,000 shares and 375,000 shares for the three months ended March 31, 2005 and 2004, respectively, and 272,000 shares and 322,000 shares for the nine months ended March 31, 2005 and 2004, respectively. See also Note 5.
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 and six month periods ended March 31, 2005 and 2004 would have been as follows:
| Three months ended March 31 |
Nine months ended March 31 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 |
2004 |
2005 |
2004 | |||||||||||
| (In thousands except earnings per share) | ||||||||||||||
| Net income as reported | $ | 2,422 | $ | 920 | 10,530 | $ | 7,527 | |||||||
| 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 | (89 | ) | (84 | ) | (293 | ) | (268 | ) | ||||||
| Pro forma net income | $ | 2,333 | $ | 836 | $ | 10,237 | $ | 7,259 | ||||||
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| Earnings per common share | ||||||||||||||
| Basic | ||||||||||||||
| As reported | $ | 0.12 | $ | 0.05 | $ | 0.53 | $ | 0.38 | ||||||
| Pro forma | $ | 0.12 | $ | 0.04 | $ | 0.52 | $ | 0.37 | ||||||
| Diluted | ||||||||||||||
| As reported | $ | 0.12 | $ | 0.05 | $ | 0.53 | $ | 0.38 | ||||||
| Pro forma | $ | 0.12 | $ | 0.04 | $ | 0.51 | $ | 0.36 |
Since SFAS No. 123 has not been applied to options granted prior to December 15, 1994, the resulting compensation cost shown above ma