FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 [ ]
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of the latest practicable date.
Common Shares, no par value: Shares outstanding at February 3, 2003: 15,767,751
LSI INDUSTRIES INC.
FOR THE QUARTER ENDED DECEMBER 31, 2002
INDEX
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995
This Form 10-Q contains forward-looking statements regarding the earnings and projected business, among other things. These are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve substantial risks and uncertainties that could cause actual results to differ materially from those expected. These 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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CONSOLIDATED INCOME STATEMENTS
(Unaudited)
The accompanying Notes to Financial Statements are an integral part of these financial statements.
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CONSOLIDATED BALANCE SHEETS
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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NOTES TO FINANCIAL STATEMENTS
NOTE 1: INTERIM FINANCIAL STATEMENTS
NOTE 2: RECENT PRONOUNCEMENTS
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NOTE 3: BUSINESS SEGMENT INFORMATION
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The following information is provided for the following periods:
NOTE 4: EARNINGS PER COMMON SHARE
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NOTE 5: ACCOUNTS AND NOTES RECEIVABLE
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NOTE 6: BALANCE SHEET DATA
The following information is provided as of the dates indicated (in thousands):
NOTE 7: GOODWILL AND INTANGIBLE ASSETS
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(in thousands)
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NOTE 8: REVOLVING LINES OF CREDIT AND LONG-TERM DEBT
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Long-term debt: (In thousands)
NOTE 9: CASH DIVIDENDS
NOTE 10: SHAREHOLDERS’ EQUITY
(In thousands, unaudited)
Net sales of $57,275,000 in the second quarter of fiscal 2003 decreased 25% from the second quarter fiscal 2002 net sales of $76,694,000. Commercial / Industrial Lighting Segment net sales decreased 10% and Image Segment net sales decreased 33% as compared to the prior year. The decrease in Commercial / Industrial Lighting Segment net sales is attributed to
economic softness in the commercial / industrial market. The decrease in Image Segment net sales is primarily attributed to continued softness in the petroleum / convenience store market for both lighting and graphics products. Additionally, net sales of the significant menu board program originally scheduled to conclude in the second quarter were down 65% as compared to last year’s second quarter. The Company expects some additional sales in the third and fourth quarters of fiscal 2003 as the remaining restaurants implement this new menu board system. A different customer, who had previously indicated that they would initiate a new menu board program late in the third quarter of fiscal 2003, has now postponed the program at least six months. Net sales of the Image Segment to the petroleum / convenience store market represented 31% and 36% of total net sales in second quarters of fiscal 2003 and fiscal 2002, respectively. Sales to this market decreased 37% in the second quarter of fiscal 2003 as compared to the same period last year due to general economic conditions in this market and much lower volume associated with an image conversion program of a major oil company. The Company believes concerns about the Middle East have had the effect of reducing spending by the major oil companies. The Company believes this slow down is temporary and that the re-imaging programs will start back up in the second half of fiscal 2003. The petroleum / convenience store market has been, and will continue to be a very important niche market for the Company. While sales prices in some markets that the Company serves were increased, inflation did not have a significant impact on sales in fiscal 2003 as competitive pricing pressures held price increases to a minimum. During this temporary period of economic softness, in certain situations the Company has accepted lower-than-normal sales prices and lower-than-normal margins where necessary to protect market share.
Gross profit of $15,020,000 in the second quarter of fiscal 2003 decreased 31% from last year’s gross profit of $21,740,000. The decrease in amount of gross profit is due primarily to the 25% decrease in net sales, product mix and competitive pressures. Selling and administrative expenses decreased 25% to $10,624,000 from $14,133,000, with the reduction primarily the result of reduced sales. The Company adopted Financial Accounting Standards Statement No. 142 effective July 1, 2002, and accordingly did not record any goodwill amortization expense in fiscal 2003. Second quarter 2002 selling and administrative expense includes $335,000 of goodwill amortization expense. As a percentage of net sales, selling and administrative expenses were at 18.5% in the second quarter of fiscal 2003 as compared to 18.4% last year. The Company continued the task of converting its business operating software system company-wide. Total implementation costs expensed were $296,000 ($0.01 per share, diluted) in the second quarter of fiscal 2003, as compared to expense of $173,000 ($0.01 per share, diluted) in the same period last year. Expenditures are expected to continue into calendar year 2004. See additional discussion in Liquidity and Capital Resources regarding depreciation of this business operating system.
The Company reported interest expense of $106,000 in the second quarter of fiscal 2003 as compared to $223,000 in the same period last year. The change between years is primarily reflective of both reduced interest rates and reduced average outstanding borrowings on the Company’s line of credit. The effective tax rate in the second quarter of fiscal 2003 was 37.5% as compared to 38.3% in the same period last year.
Net income of $2,687,000 in the second quarter of fiscal 2003 decreased 42% from $4,607,000 in the same period last year. The decrease is primarily the result of decreased gross profit from decreased net sales, partially offset by decreased operating expenses, interest expense and income taxes. Diluted earnings per share of $0.17 in the second quarter of fiscal 2003 decreased 41% from $0.29 per share reported in the same period of fiscal 2002. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the second quarter of fiscal 2003 was 15,929,000 shares as compared to 15,994,000 shares in the same period of last year.
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Net sales of $113,320,000 in the second quarter of fiscal 2003 decreased 21% from the first half fiscal 2002 net sales of $143,743,000. Commercial / Industrial Lighting Segment net sales decreased 11% and Image Segment net sales decreased 27% as compared to the prior year. The decrease in Commercial / Industrial Lighting Segment net sales is attributed to economic softness in the commercial / industrial market. The decrease in Image Segment net sales is primarily attributed to continued softness in the petroleum / convenience store market for both lighting and graphics products. Additionally, net sales of the significant menu board program originally scheduled to conclude in the second quarter of fiscal 2003 were down 56% as compared to last year’s first half. The Company expects some additional sales in the third and fourth quarters of fiscal 2003 as the remaining restaurants implement this new menu board system. A different customer, who had previously indicated that they would initiate a new menu board program late in the third quarter of fiscal 2003, has now postponed the program at least six months. Net sales of the Image Segment to the petroleum / convenience store market represented 30% and 35% of total net sales in first half of fiscal 2003 and fiscal 2002, respectively. Sales to this market decreased 33% in the first half of fiscal 2003 as compared to the same period last year due to general economic conditions in this market and much lower volume associated with an image conversion program of a major oil company. The Company believes concerns about the Middle East have had the effect of reducing spending by the major oil companies. The Company believes this slow down is temporary and that the re-imaging programs will start back up in the second half of fiscal 2003. The petroleum / convenience store market has been, and will continue to be a very important niche market for the Company. While sales prices in some markets that the Company serves were increased, inflation did not have a significant impact on sales in fiscal 2003 as competitive pricing pressures held price increases to a minimum. During this temporary period of economic softness, in certain situations the Company has accepted lower-than-normal sales prices and lower-than-normal margins where necessary to protect market share.
Gross profit of $30,074,000 in the first half of fiscal 2003 decreased 26% from last year’s gross profit of $40,824,000. The decrease in amount of gross profit is due primarily to the 21% decrease in net sales, product mix and competitive pressures. Selling and administrative expenses decreased 15% to $22,928,000 from $26,917,000. The Company recorded $0.7 million more bad debt expense in the first half of fiscal 2003 as compared to the same period last year. The Company adopted Financial Accounting Standards Statement No. 142 effective July 1, 2002, and accordingly did not record any goodwill amortization expense in fiscal 2003. First half 2002 selling and administrative expense includes $668,000 of goodwill amortization expense. As a percentage of net sales, selling and administrative expenses were at 20.2% in the first half of fiscal 2003 as compared to 18.7% last year. Excluding the goodwill amortization and incremental bad debt expense, selling and administrative expenses in the first half of fiscal 2003 as compared to the same period last year would have decreased 15%, primarily as a result of the 21% reduction in net sales. The Company continued the task of converting its business operating software system company-wide. Total implementation costs expensed were $609,000 ($0.01 per share, diluted) in the first half of fiscal 2003, as compared to expense of $307,000 ($0.01 per share, diluted) in the same period last year. Expenditures are expected to continue into calendar year 2004. See additional discussion in Liquidity and Capital Resources regarding depreciation of this business operating system.
The Company reported interest expense of $223,000 in the first half of fiscal 2003 as compared to $426,000 in the same period last year. The change between years is primarily reflective of both reduced interest rates and reduced average outstanding borrowings on the
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Company’s line of credit. The effective tax rate in the first half of fiscal 2003 was reduced to 29.3%, compared to 38.6% last year, as a result of the Company recording federal and state income tax credits that had not previously been recognized. The Company expects a 37.5% effective income tax rate in the remaining quarters of fiscal 2003.
Net income of $4,902,000 in the first half of fiscal 2003 decreased 41% from $8,309,000 in the same period last year. The decrease is primarily the result of decreased gross profit from decreased net sales, partially offset by decreased operating expenses, interest expense and income taxes. Diluted earnings per share of $0.31 in the first half of fiscal 2003 decreased 40% from $0.52 per share reported in the same period of fiscal 2002. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first half of fiscal 2003 was 15,941,000 shares as compared to 15,991,000 shares in the same period of last year.
Liquidity and Capital Resources
The Company considers its level of cash on hand, its current ratio and working capital levels to be its most important measures of short-term liquidity. For long-term liquidity indicators, the Company believes its ratio of long-term debt to equity and its historical levels of net cash flows from operating activities to be the most important measures.
At December 31, 2002 the Company had working capital of $52.2 million, compared to $55.8 million at June 30, 2002. The ratio of current assets to current liabilities increased to 3.27 to 1 from 2.84 to 1. The decreased working capital is primarily attributed to decreased inventories, other current assets, and accounts and notes receivable, partially offset by decreased accounts payable and accrued expenses. The reduction in accounts receivable is attributed to a reduction in the days sales outstanding. The reduction in accrued expenses is primarily due to the first quarter funding of compensation and benefit plans, and reductions of performance-based compensation and benefit plan accruals.
The Company generated $11.6 million of cash from operating activities in the first half of fiscal 2003 as compared to $13.3 million in the same period of fiscal 2002. The decrease in net cash flows from operating activities in the first half of fiscal 2003 is primarily the net result of decreased net income, decreases in accounts payable and accrued expenses, and decreased depreciation and amortization expense, partially offset by a larger decrease in accounts receivable and a decrease in inventories.
As of December 31, 2002, the Company’s days sales outstanding were at approximately 61 days, down 3 days from June 30, 2002. Net accounts and notes receivables were $34.6 million and $42.3 million at December 31, 2002 and June 30, 2002, respectively. Collection cycles from a few large customers in the Image Segment, as well as several other customers, have been very slow due to a combination of factors, including customer cash availability and economic conditions. The majority of one such open customer account (petroleum / convenience store customer) was converted into a collateralized note receivable during fiscal 2002, with the balance of the note at $1.9 million and the unsecured receivable at $0.2 million as of December 31, 2002. This note provides for scheduled payments, to which the customer is behind. The Company also has unsecured accounts receivable, as well as dedicated inventory, from Kmart, the large national retailer that filed Chapter 11 bankruptcy in January 2002. The Company’s total exposure is approximately $1.7 million. Subject to continual review, shipments to Kmart have resumed on a limited basis on open account. Two additional customers in the Image Segment filed bankruptcy in the first quarter of fiscal 2003. The Company recorded an additional $1.0 million bad debt expense and $0.2 million inventory
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obsolescence expense as a result of these unexpected bankruptcies, with just over half of this total expense to cover exposure to these bankruptcies and the remainder to provide additional reserves for unknown loss exposures. The four customers discussed above represent approximately 10% of the Company’s total net accounts and notes receivable. The Company believes that the receivables and inventory discussed above are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.
Cash generated from operations is the Company’s primary source of liquidity. In addition, the Company has an unsecured $50 million revolving line of credit with its bank group. As of January 22, 2003 there was approximately $40.7 million available on this line of credit. This line of credit is composed of a $30 million three year committed credit facility expiring in fiscal 2005 and a $20 million credit facility with an annual renewal in the third quarter of fiscal 2003. The Company believes that the total of available lines of credit plus cash flows from operating activities is adequate for the Company’s fiscal 2003 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.
Capital expenditures of $3.4 million in the first half of fiscal 2003 compares to $6.3 million in the same period of fiscal 2002. The primary spending in fiscal 2002 was for a new manufacturing facility for LSI Lightron. Fiscal 2003 spending is for completion of this facility as well as tooling and equipment throughout the Company. Capital expenditures in fiscal 2003 are expected to be approximately $8 million, exclusive of business acquisitions.
The Company used $8.1 million in financing activities in the first half of fiscal 2003 as compared to a use of $7.2 million in the same period of fiscal 2002. The change is the net result of less stock option exercises and a $1.2 million borrowing of long-term debt in fiscal 2003, and a higher amount of repayment of funded debt in the first half of fiscal 2003 as compared to same period last year.
The Company has been implementing a fully integrated enterprise resource planning / business operating system over the past three fiscal years, and will continue to do so into fiscal 2004. A certain portion of the $7.8 million of software expenditures that are capitalized to date are being depreciated by the subsidiary companies currently using the software. More of this capitalized asset will be depreciated as additional companies implement this software, with scheduled full write-off to occur in fiscal 2008. Some additional capitalization of this internal-use software is expected.
On January 28, 2003 the Board of Directors declared a regular quarterly cash dividend of $0.06 per share (approximately $946,000), payable February 18, 2003 to shareholders of record on February 11, 2003. During the first half of fiscal 2003, the Company paid cash dividends in the amount of $1,893,000, as compared to $1,830,000 in the same period of fiscal 2002.
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 (SFAS No. 141), “Business Combinations,” and issued Statement of Financial Accounting Standards No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets.” SFAS No. 141 eliminated the pooling-of-interests method of accounting for business combinations and requires that all business combinations be accounted for as purchases. In addition, SFAS No. 141 establishes new rules concerning recognition of intangible assets arising in a purchase business combination and requires enhanced disclosure of information in the period in which a business combination is completed. SFAS No. 142 establishes new rules on accounting for goodwill whereby goodwill will no longer be amortized
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to expense, but rather will be subject to impairment review. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001. The Company has adopted SFAS No. 142 effective July 1, 2002 and is currently evaluating the impact to its financial statements, financial position, results of operations and cash flows related to its implementation.
The Company has completed the first phase of the transitional goodwill impairment test required by Statement of Financial Accounting Standards No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets.” This test required the Company to assess the fair value, as determined on a discounted cash flow basis, of each reporting unit that has goodwill on its balance sheet, and compare that value to the carrying value of the reporting unit’s net assets. Based upon this analysis, there is an indication that the recorded net goodwill of two reporting units in the Commercial / Industrial Lighting Segment (totaling $23,593,000) and two reporting units in the Image Segment (totaling $3,868,000) may be significantly impaired. The second phase of the transitional goodwill impairment test and final determination of the amount of impairment will be completed not later than June 2003. The impairment will be a non-cash and non-operating charge, booked net of income tax as a change in accounting methods, and will be recorded as of the date of adoption of SFAS No. 142, July 1, 2002.
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143 (SFAS No. 143), "Accounting for Asset Retirement Obligations," and in August 2001 issued Statement of Financial Accounting Standards No. 144 (SFAS No. 144), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 143 establishes standards of accounting for asset retirement obligations (i.e., legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees) and the associated asset retirement costs. SFAS No. 144 replaces existing accounting pronouncements related to impairment or disposal of long-lived assets. The Company adopted both SFAS No. 143 and No. 144 effective July 1, 2002 with no significant impact on its financial condition or results of operations.
In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS No. 146), “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal of facilities, and must be implemented not later than December 31, 2002. The Company is currently evaluating the impact of these statements, but does not expect any significant impact on its financial condition or results of operations when they are implemented.
In November 2002, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board issued consensus 00–21, “Revenue Arrangements with Multiple Deliverables.” This consensus provides guidance and specific criteria to determine if and how multiple deliverables should be separated, and whether revenue associated with each deliverable should be recorded at a separate time. The Company is currently evaluating the impact of this consensus, but does not expect any significant impact on its financial condition or results of operations upon implementation.
In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 148 (SFAS No. 148), “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share. SFAS No. 148 does not require companies to
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expense employee stock options. The expanded annual disclosure requirements and the transition provisions are effective for fiscal years ending after December 15, 2002 (the Company’s fiscal year 2003) and the new interim period disclosures are required in financial statements for interim periods beginning after December 15, 2002 (the Company’s fiscal 2003 third quarter). The Company is currently evaluating the impact of this statement, but does not expect any significant impact on its financial condition or results of operations upon implementation.
The Company continues to seek opportunities to invest in new products and markets, and in acquisitions which fit its strategic growth plans in the lighting and graphics markets. The Company believes that adequate financing for any such investments or acquisitions will be available through future borrowings or through the issuance of common or preferred shares in payment for acquired businesses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Nothing to report.
ITEM4. CONTROLS AND PROCEDURES.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company’s Annual Meeting of Shareholders held November 14, 2002, the following actions were taken by shareholders:
4.1 All persons nominated as Class B Directors were elected with the votes for each person being:
NameWilfred T. O'GaraJames P. Sferra
Shares For 14,117,552.41911,471,264.794
Shares - Withheld Authority 297,943.537 2,944,231.163
SharesAbstainedN/AN/A
4.2 Ratification of the appointment of Grant Thornton LLP as independent certified public accountants for fiscal 2003.
Shares For14,178,862.616
Shares Against228,091.000
Shares Abstained8,542.341
Broker Non-VotesN/A
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
b) Reports on Form 8-K
[All other items required in Part II have been omitted because they are not applicable or are not required.]
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
February 7, 2003
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I, Robert J. Ready, the principal executive officer of LSI Industries Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of LSI Industries Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant,including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of the end of the reportingperiod of this quarterly report (the “Evaluation Date”); and
(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the audit committee of Registrant’s board of directors:
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect theRegistrant’s ability to record, process, summarize and report financial data, and have identified for theRegistrant’s auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role inthe Registrant’s internal controls; and
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6. The Registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: February 7, 2003
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I, Ronald S. Stowell, the principal financial officer of LSI Industries Inc., certify that:
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In connection with the filing with the Securities and Exchange Commission of the Quarterly Report of LSI Industries Inc. (the “Company”) on Form 10-Q for the period ended December 31, 2002 (the “Report”), I, Robert J. Ready, Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Robert J. Ready Robert J. ReadyChairman of the Board, Chief Executive Officer and President
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In connection with the filing with the Securities and Exchange Commission of the Quarterly Report of LSI Industries Inc. (the “Company”) on Form 10-Q for the period ended December 31, 2002 (the “Report”), I, Ronald S. Stowell, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
/s/ Ronald S. Stowell Ronald S. StowellVice President, Chief Financial Officer and Treasurer
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