LOWRANCE ELECTRONICS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


		For the quarterly period ended October 31, 2004


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


		For the transition period from _______ to _______

Commission File Number: 0-15240

LOWRANCE ELECTRONICS, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware		44-0624411

State of Incorporation		IRS Identification Number


12000 East Skelly Drive Tulsa, Oklahoma 74128

(Address of Principal Executive Offices)

Registrant’s telephone number, including area code: (918) 437-6881

Indicate by check mark 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 (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

YES þ NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES o NO þ

At October 31, 2004, there were 5,135,516 shares of Registrant’s $0.10 par value Common Stock outstanding.

LOWRANCE ELECTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands)


	Oct. 31,		Oct. 31,		July 31,
	2004		2003		2004
			(As Restated,
			See Note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	3,565	$	1,010	$	1,412
Trade accounts receivable, less allowances		8,079		6,284		10,276
Inventories		39,599		17,392		23,821
Current deferred income taxes		1,136		835		1,107
Prepaid income taxes		2,854		1,399		—
Prepaid expenses		2,563		1,260		2,041

Total current assets		57,796		28,180		38,657
PROPERTY, PLANT, AND EQUIPMENT, net		11,687		8,146		10,005
OTHER ASSETS		590		62		81

TOTAL ASSETS	$	70,073	$	36,388	$	48,743

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt	$	1,417	$	2,012	$	1,874
Accounts payable		9,377		4,859		6,072
Accrued liabilities:
Compensation and benefits		2,426		2,180		3,175
Product costs		2,215		983		1,968
Accrued taxes		156		145		671
Other		972		1,628		1,119

Total current liabilities		16,563		11,807		14,879
LONG-TERM DEBT, less current maturities		218		6,824		6,040
DEFERRED INCOME TAXES		2,021		515		1,169
STOCKHOLDERS’ EQUITY:
Common stock, $.10 par value, 10,000,000 shares authorized; 5,135,516 shares issued and outstanding at October 31, 2004; 3,761,196 shares issued and outstanding at July 31, 2004 and October 31, 2003		514		377		377
Paid-in capital		34,316		7,400		7,449
Retained earnings		16,076		9,335		18,721
Accumulated other comprehensive income		365		130		108

Total stockholders’ equity		51,271		17,242		26,655

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	70,073	$	36,388	$	48,743

The accompanying notes are an integral part of these condensed consolidated financial statements.

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LOWRANCE ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
(in thousands, except per share amounts)


	Three Months Ended
	Oct. 31,			Oct. 31,
	2004			2003
				(As Restated,
				See Note 1)
NET SALES	$	17,475		$	14,036
COST OF SALES		10,931			8,984

Gross profit		6,544			5,052
OPERATING EXPENSES:
Selling and administrative		7,133			5,848
Research and development		1,691			1,230

Total operating expenses		8,824			7,078

Operating loss		(2,280	)		(2,026	)

OTHER EXPENSES:
Interest expense		122			206
Other, net		65			137

Total other expenses		187			343

LOSS BEFORE INCOME TAXES		(2,467	)		(2,369	)
BENEFIT FOR INCOME TAXES		(762	)		(798	)

NET LOSS	$	(1,705	)	$	(1,571	)

NET LOSS PER COMMON SHARE:
Basic	$	(0.39	)	$	(0.42	)

Diluted	$	(0.39	)	$	(0.42	)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		4,395			3,761

Diluted		4,395			3,761

DIVIDENDS	$	940		$	940

OTHER COMPREHENSIVE LOSS NET OF TAX:
NET LOSS	$	(1,705	)	$	(1,571	)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT		257			163

COMPREHENSIVE LOSS	$	(1,448	)	$	(1,408	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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LOWRANCE ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED OCTOBER 31, 2004
(in thousands)


											Accumulated
	Common Stock										Other
					Paid-In			Retained			Comprehensive		Total
	Shares		Amount		Capital			Earnings			Income		Equity
Balance-
July 31, 2004		3,761	$	377	$	7,449		$	18,721		$	108	$	26,655
Net loss		—		—		—			(1,705	)		—		(1,705	)
Stock option plan expense		—		—		393			—			—		393
Net proceeds from secondary public offering		1,150		115		25,115			—			—		25,230
Cashless exercise of stock options		224		22		(22	)		—			—		—
Tax benefit from stock option exercises		—		—		1,381			—			—		1,381
Other comprehensive income:
Foreign currency translation adjustment		—		—		—			—			257		257
Dividends ($0.25 per common share)		—		—		—			(940	)		—		(940	)

Balance- October 31, 2004		5,135	$	514	$	34,316		$	16,076		$	365	$	51,271

The accompanying notes are an integral part of these condensed consolidated financial statements.

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LOWRANCE ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)


	Three Months Ended
	Oct. 31,			Oct. 31,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,705	)	$	(1,571	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		737			633
Gain on sale of fixed assets		—			(4	)
Deferred income taxes		823			168
Stock option plan expense		393			17
Tax benefit of stock options exercised		1,381			—
Changes in operating assets and liabilities:
(Increase)decrease in trade accounts receivable		2,197			2,147
(Increase)decrease in inventories		(15,778	)		(1,451	)
(Increase)decrease in prepaids and other assets		(3,885	)		(1,369	)
Increase (decrease) in accounts payable and accrued liabilities		2,141			2,243

Net cash provided by (used in) operating activities		(13,696	)		813

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(2,419	)		(374	)
Proceeds from sale of property, plant and equipment		—			4

Net cash used in investing activities		(2,419	)		(370	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit		25,716			16,114
Repayments of borrowings under line of credit		(31,011	)		(15,477	)
Dividend payment		(940	)		(940	)
Net proceeds from secondary public offering		25,230			—
Principal payments on term loan and capital lease obligations		(984	)		(499	)

Net cash provided by (used in) financing activities		18,011			(802	)
Effect of exchange rate changes on cash		257			163

Net increase (decrease) in cash and cash equivalents		2,153			(196	)
CASH AND CASH EQUIVALENTS — beginning of period		1,412			1,206

CASH AND CASH EQUIVALENTS — end of period	$	3,565		$	1,010

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	122		$	206
Income taxes		360			6
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital expenditures funded by capital lease borrowings	$	—		$	812
Cashless exercise of stock options		22			—

The accompanying notes are an integral part of these condensed consolidated financial statements.

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LOWRANCE ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED OCTOBER 31, 2004 AND 2003 (UNAUDITED)

(1) BASIS OF PRESENTATION

The financial statements subsequent to July 31, 2004 and with respect to the interim three month periods ended October 31, 2004 and 2003 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. Accounting policies for the three months ended October 31, 2004, are the same as those outlined in the Annual Report on Form 10-K filed relative to the year ended July 31, 2004. In the opinion of management, all adjustments necessary for a fair presentation of interim results of operations have been made to the interim statements. All such adjustments were of a normal, recurring nature. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report for the year ended July 31, 2004 filed with the Securities and Exchange Commission on Form 10-K.

Certain reclassifications have been made to the October 31, 2003 financial statements to conform to the classifications used for the period ended October 31, 2004

In May 2004, the Company adopted the fair value method of accounting for stock based compensation prescribed by SFAS No. 123 under the modified prospective method permitted by SFAS No. 148. The adoption of SFAS No. 123 was effective August 1, 2003 and was reflected in the Company’s annual consolidated financial statements for the year ended July 31, 2004. Accordingly, the October 31, 2003 interim consolidated financial statements presented herein have been restated to reflect the adoption of SFAS No. 123.

The following is a summary of the effects of the adoption of SFAS No. 123 on the Company’s previously reported consolidated financial statements as of and for the three months ended October 31, 2003.


				As
				Restated
				for the
	As			Adoption
	Previously			of SFAS
	Reported			No. 123
For the three months ended:
Selling and Administrative Expenses	$	6,652		$	5,848
Operating Loss		(2,830	)		(2,026	)
Loss Before Income Taxes		(3,173	)		(2,369	)
Net Loss		(2,237	)		(1,571	)
Net Loss Per Share:
Basic	$	(0.59	)	$	(0.42	)
Diluted	$	(0.59	)	$	(0.42	)
As of October 31:
Stockholders’ Equity	$	17,414		$	17,242

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(2) INVENTORIES

Inventories are priced at the lower of cost (first-in, first-out) or market and consist of the following:


	Oct. 31,			Oct. 31,			July 31,
	2004			2003			2004
	(in thousands)
Raw materials	$	12,727		$	6,045		$	6,895
Work-in-process		6,876			4,036			4,445
Finished goods		20,999			8,128			13,171
Reserves		(1,003	)		(817	)		(690	)

Total inventories	$	39,599		$	17,392		$	23,821

Discontinued finished goods inventory attributable to fiscal 2005 product decisions was approximately $3.1 million at October 31, 2004 as compared to approximately $3.4 million at July 31, 2004. All discontinued finished goods inventories are carried at cost, which management believes to be lower than expected realizable value. The Company expects the remaining inventory of discontinued products to be sold during fiscal 2005.

(3) PRODUCT WARRANTIES

The following represents a tabular presentation of the changes in the Company’s aggregate product warranty liability for the three-month reporting period.


	Three Months Ended
	Oct. 31,			Oct. 31,
	2004			2003
	(in thousands)
Beginning balance	$	1,193		$	1,004
Warranty cost incurred		(617	)		(580	)
New warranties issued		340			550
Change in beginning of period estimate		16			9

Ending balance	$	932		$	983

(4) LONG-TERM DEBT AND REVOLVING CREDIT LINE

Long-term debt and the revolving credit line are summarized below:


	Oct. 31,		Oct. 31,		July 31,
	2004		2003		2004
	(in thousands)
Revolving credit line		—	$	5,146	$	5,295
Term loan		—		990		542
Capitalized equipment lease obligations, payable in monthly installments of approximately $155,000 including interest at rates from 3.7% to 7.5%, with final payments ranging from January 2005 through June 2008		1,635		2,700		2,077

		1,635		8,836		7,914
Less — current maturities		1,417		2,012		1,874

Total long-term debt	$	218	$	6,824	$	6,040

At October 31, 2004, the Company’s financing facility consisted of a $26.5 million revolving credit line. The revolving credit line provides for borrowings up to $26.5 million based on varying percentages of

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qualifying categories of receivables and inventories. Borrowing against inventories is limited to $13 million in total. The interest rate on the financing facility is prime plus .25%, which was 4.75% as of October 31, 2004. The Company had $12.9 million available under the revolving credit line at October 31, 2004.

The Company was in compliance with all debt covenants at October 31, 2004.

The terms of the foregoing agreement include a commitment fee of .25% based on the unused portion of the revolving credit line in lieu of compensating balances.

The Company’s indebtedness is collateralized by substantially all of the Company’s assets.

(5) OPERATING SEGMENT INFORMATION

The Company has one reportable segment as the CEO and President, the Company’s Chief Decision Maker, provides oversight and review based upon financial statements and financial information presented at the consolidated level.

The Company markets its products internationally through foreign distributors, except in Canada and Australia where it has its own distribution operations. The majority of foreign sales are concentrated in Canada, Australia and Europe.

Long-lived assets in foreign countries are disclosed in Note 2 to the Consolidated Financial Statements included in the Company’s 2004 Annual Report on Form 10-K. There are no significant long-lived assets in any foreign country other than Mexico.

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(6) EARNINGS PER SHARE

Basic and diluted earnings per share is calculated as follows:


	Income			Shares		Per-Share
	(Numerator)			(Denominator)		Amount
For the three months ended October 31, 2004
Basic EPS
Net Income (loss) available to common stockholders	$	(1,705,000	)		4,394,516	$	(0.39	)

Effect of Dilutive Securities
2001 Stock Option Plan Options (a)		—			—

Diluted EPS
Net Income(loss) available to common stockholders + assumed conversions	$	(1,705,000	)		4,394,516	$	(0.39	)

For the three months ended October 31, 2003
Basic EPS
Net Income(loss) available to common stockholders	$	(1,571,000	)		3,761,196	$	(0.42	)

Effect of Dilutive Securities
2001 Stock Option Plan Options (a)		—			—

Diluted EPS
Net Income(loss) available to common stockholders + assumed conversions	$	(1,571,000	)		3,761,196	$	(0.42	)

(a) The 2001 Stock Option Plan options, which were outstanding for the entire three-month period ended October 31, 2003 but only for a portion of the three-month period ended October 31, 2004, are not included as they are anti-dilutive.

(7) SECONDARY PUBLIC OFFERING

On September 17, 2004, the Company completed a secondary public offering of 2,160,758 shares of common stock which included 1,000,000 shares that were sold by the Company. In conjunction with the offering, all outstanding stock options vested. On October 4, 2004, the Company completed the sale of an additional 150,000 shares that resulted from the exercise of the over-allotment option by JP Morgan Securities, Inc. The net proceeds from the sale of the 1,150,000 shares by the Company in the secondary public offering were $25,230,000.

The option holders exercised a portion of their options and sold the related shares in the secondary public offering. Prior to October 31, 2004, the option holders exercised all remaining outstanding options.

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Part I, Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the condensed consolidated financial statements, including the related notes, appearing in Item 1 of this Form 10-Q. For a description of our critical accounting policies and an understanding of the significant factors that influence our performance, see our Annual Report on Form 10-K for the year ended July 31, 2004.

As discussed in Note 1 to the condensed consolidated financial statements, the Company’s financial statements for the three months ended October 31, 2003 have been restated to reflect the adoption of SFAS No. 123. The accompanying management’s discussion and analysis gives effect to that restatement.

Company Overview

We design, manufacture, market and sell a comprehensive range of high-quality, cost-effective sound navigation and ranging (SONAR) and global positioning system (GPS) products and digital mapping systems under two different brand names (Lowrance and Eagle) for use in marine, general consumer (includes outdoor recreational use and vehicular navigation systems) and aviation markets. Our SONAR and combination SONAR/GPS products graphically display underwater information and are used as fishfinders, navigational and safety devices by both inland, coastal and offshore fishermen as well as recreational boaters. Our handheld and portable GPS products are used in avionic and vehicular navigational applications and by outdoor enthusiasts for camping, hunting, hiking and other recreational uses. Currently, we offer approximately 73 different marine, outdoor, aviation and original equipment manufacturer products.

We market our products to dealers, distributors, mass merchants and original equipment manufacturers who in turn sell our products in the consumer marketplace. Demand for our products has historically been seasonal with the lowest sales occurring in the first fiscal quarter (August through October) and the highest sales occurring in the third fiscal quarter (February through April) due to marine consumer purchases during the beginning of the fishing season. We focus on developing product lines that address most price points in our markets in order to provide a broad range of features to consumers. We have increased the number of new product introductions in each of the last three fiscal years and the current fiscal year. For the fiscal year 2005, we introduced more than 50 new SONAR and GPS products. The introduction of new products has resulted in the increase in sales and gross margin discussed below.

Our successful operations and strong competitive position are dependent to a great extent upon our ability to anticipate and react to the technological innovations inherent within our industry. To augment our continued inv

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(1)		BASIS OF PRESENTATION

		The financial statements subsequent to July 31, 2004 and with respect to the interim three month periods ended October 31, 2004 and 2003 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. Accounting policies for the three months ended October 31, 2004, are the same as those outlined in the Annual Report on Form 10-K filed relative to the year ended July 31, 2004. In the opinion of management, all adjustments necessary for a fair presentation of interim results of operations have been made to the interim statements. All such adjustments were of a normal, recurring nature. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report for the year ended July 31, 2004 filed with the Securities and Exchange Commission on Form 10-K.

		Certain reclassifications have been made to the October 31, 2003 financial statements to conform to the classifications used for the period ended October 31, 2004

		In May 2004, the Company adopted the fair value method of accounting for stock based compensation prescribed by SFAS No. 123 under the modified prospective method permitted by SFAS No. 148. The adoption of SFAS No. 123 was effective August 1, 2003 and was reflected in the Company’s annual consolidated financial statements for the year ended July 31, 2004. Accordingly, the October 31, 2003 interim consolidated financial statements presented herein have been restated to reflect the adoption of SFAS No. 123.

		The following is a summary of the effects of the adoption of SFAS No. 123 on the Company’s previously reported consolidated financial statements as of and for the three months ended October 31, 2003.

(2)		INVENTORIES

		Inventories are priced at the lower of cost (first-in, first-out) or market and consist of the following:

		Discontinued finished goods inventory attributable to fiscal 2005 product decisions was approximately $3.1 million at October 31, 2004 as compared to approximately $3.4 million at July 31, 2004. All discontinued finished goods inventories are carried at cost, which management believes to be lower than expected realizable value. The Company expects the remaining inventory of discontinued products to be sold during fiscal 2005.

(3)		PRODUCT WARRANTIES

		The following represents a tabular presentation of the changes in the Company’s aggregate product warranty liability for the three-month reporting period.

(4)		LONG-TERM DEBT AND REVOLVING CREDIT LINE

		Long-term debt and the revolving credit line are summarized below:

		qualifying categories of receivables and inventories. Borrowing against inventories is limited to $13 million in total. The interest rate on the financing facility is prime plus .25%, which was 4.75% as of October 31, 2004. The Company had $12.9 million available under the revolving credit line at October 31, 2004.

		The Company was in compliance with all debt covenants at October 31, 2004.

		The terms of the foregoing agreement include a commitment fee of .25% based on the unused portion of the revolving credit line in lieu of compensating balances.

		The Company’s indebtedness is collateralized by substantially all of the Company’s assets.

(5)		OPERATING SEGMENT INFORMATION

		The Company has one reportable segment as the CEO and President, the Company’s Chief Decision Maker, provides oversight and review based upon financial statements and financial information presented at the consolidated level.

		The Company markets its products internationally through foreign distributors, except in Canada and Australia where it has its own distribution operations. The majority of foreign sales are concentrated in Canada, Australia and Europe.

		Long-lived assets in foreign countries are disclosed in Note 2 to the Consolidated Financial Statements included in the Company’s 2004 Annual Report on Form 10-K. There are no significant long-lived assets in any foreign country other than Mexico.

(6)		EARNINGS PER SHARE

		Basic and diluted earnings per share is calculated as follows:

(7)		SECONDARY PUBLIC OFFERING

		On September 17, 2004, the Company completed a secondary public offering of 2,160,758 shares of common stock which included 1,000,000 shares that were sold by the Company. In conjunction with the offering, all outstanding stock options vested. On October 4, 2004, the Company completed the sale of an additional 150,000 shares that resulted from the exercise of the over-allotment option by JP Morgan Securities, Inc. The net proceeds from the sale of the 1,150,000 shares by the Company in the secondary public offering were $25,230,000.

		The option holders exercised a portion of their options and sold the related shares in the secondary public offering. Prior to October 31, 2004, the option holders exercised all remaining outstanding options.