1 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, 1999. _____ 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 ----- ----- Common Shares, no par value. Shares outstanding at November 1, 1999: 10,176,513
2 LSI INDUSTRIES INC. ------------------- FORM 10-Q --------- FOR THE QUARTER ENDED SEPTEMBER 30, 1999 ---------------------------------------- INDEX ----- Begins on Page ---- PART I. Financial Information ITEM 1. FINANCIAL STATEMENTS Consolidated Income Statements........................ 3 Consolidated Balance Sheets........................... 4 Consolidated Statements of Cash Flows................. 5 Notes to Financial Statements......................... 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 9 PART II. Other Information ITEM 6. Exhibits and Reports on Form 8-K...................... 12 Signatures ...................................................... 12 Page 2
3 PART I. FINANCIAL INFORMATION ----------------------------- ITEM 1. FINANCIAL STATEMENTS - ---------------------------- LSI INDUSTRIES INC. CONSOLIDATED INCOME STATEMENTS (Unaudited) Three Months Ended September 30 ------------------ (in thousands, except per 1999 1998 share data; unaudited) ---- ---- Net sales $ 64,014 $ 53,414 Cost of products sold 42,919 35,180 -------- -------- Gross profit 21,095 18,234 Selling and administrative expenses 12,605 11,973 -------- -------- Operating income 8,490 6,261 Interest expense 120 54 Interest (income) (283) (128) Other expense -- 32 -------- -------- Income before income taxes 8,653 6,303 Income tax expense 3,296 2,391 -------- -------- Net income $ 5,357 $ 3,912 ======== ======== Earnings per common share Basic $ .53 $ .41 ======== ======== Diluted $ .52 $ .40 ======== ======== The accompanying Notes to Financial Statements are an integral part of these financial statements. Page 3
4 LSI INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share amounts) September 30, June 30, 1999 1999 ------------- -------- ASSETS - ------ Current Assets Cash and cash equivalents $ 11,806 $ 13,881 Accounts receivable 41,162 39,630 Inventories 26,482 25,261 Other current assets 2,305 2,687 -------- -------- Total current assets 81,755 81,459 Property, plant and equipment, net 34,526 32,985 Goodwill and other assets, net 23,096 23,270 -------- -------- $139,377 $137,714 ======== ======== LIABILITIES & SHAREHOLDERS' EQUITY - ---------------------------------- Current Liabilities Notes payable to bank $ -- $ 379 Current maturities of long-term debt 196 196 Accounts payable 14,541 14,628 Accrued expenses 14,612 16,641 -------- -------- Total current liabilities 29,349 31,844 Long-Term Debt 1,670 1,705 Other Long-Term Liabilities 1,442 1,413 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 10,174,313 and 10,151,690 shares, respectively 45,896 45,588 Retained earnings 61,020 57,164 -------- -------- Total shareholders' equity 106,916 102,752 -------- -------- $139,377 $137,714 ======== ======== The accompanying Notes to Financial Statements are an integral part of these financial statements. Page 4
5 LSI INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Three Months Ended September 30 ------------------ 1999 1998 ---- ---- Cash Flows from Operating Activities Net income $ 5,357 $ 3,912 Non-cash items included in income Depreciation and amortization 1,370 1,098 Deferred income taxes 29 30 Deferred compensation plan 162 142 Loss on disposition of fixed assets -- 32 Changes in operating assets and liabilities Accounts receivable (1,532) 1,346 Inventories (1,221) 183 Accounts payable and other (1,693) (4,064) Change in liability for discontinued operations (41) (5) -------- -------- Net cash flows from operating activities 2,431 2,674 -------- -------- Cash Flows from Investing Activities Purchase of property, plant and equipment (2,737) (411) -------- -------- Net cash flows from investing activities (2,737) (411) -------- -------- Cash Flows from Financing Activities Decrease in notes payable to bank (379) -- Payment of long-term debt (35) (26) Cash dividends paid (1,501) (1,209) Purchase of treasury shares (300) (191) Exercise of stock options 446 273 -------- -------- Net cash flows from financing activities (1,769) (1,153) -------- -------- Increase (decrease) in cash and cash equivalents (2,075) 1,110 Cash and cash equivalents at beginning of year 13,881 9,338 -------- -------- Cash and cash equivalents at end of period $ 11,806 $ 10,448 ======== ======== Supplemental Cash Flow Information Interest paid $ 56 $ 48 Income taxes paid $ 790 $ 871 The accompanying Notes to Financial Statements are an integral part of these financial statements. Page 5
6 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, 1999, and the results of its operations and its cash flows for the periods ended September 30, 1999 and 1998. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 1999 annual report. NOTE 2: RECENT PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities," which establishes standards for reporting and disclosure of derivative and hedging instruments. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. The Company will not be affected by this new standard because the Company has no derivative or hedging financial instruments. NOTE 3: BUSINESS SEGMENT INFORMATION LSI operates in two business segments - the Image Group and the Commercial / Industrial Lighting Group. The Image Group manufactures and sells exterior and interior visual image elements (lighting, graphics, and menu board systems) for the petroleum / convenience store market and for multi-site retail operations. The Image Group includes the operations of LSI Petroleum Lighting, LSI Automotive, LSI Images, LSI Metal Fabrication, SGI Integrated Graphic Systems, Grady McCauley, and LSI Retail Graphics. The Commercial / Industrial Lighting Group manufactures and sells primarily outdoor, indoor, and landscape lighting for the commercial / industrial and multi-site retail markets. The Commercial / Industrial Lighting Group includes the operations of LSI Lighting Systems, Courtsider Lighting, Greenlee Lighting, LSI Marcole, and LSI MidWest Lighting. The Company's most significant market is the petroleum / convenience store market with approximately 37% and 47% of net sales concentrated in this market in the three months ended September 30, 1999, and 1998, respectively. Page 6
7 The following information is provided for the following periods: Three Months Ended September 30 ------------------- 1999 1998 ---- ---- (In thousands) NET SALES: Image Group $ 42,396 $ 37,954 Commercial / Industrial Lighting Group 21,618 15,460 -------- -------- $ 64,014 $ 53,414 ======== ======== OPERATING INCOME: Image Group $ 6,157 $ 4,469 Commercial / Industrial Lighting Group 2,333 1,792 -------- -------- $ 8,490 $ 6,261 ======== ======== IDENTIFIABLE ASSETS: Image Group $ 86,741 $ 75,601 Commercial / Industrial Lighting Group 39,136 21,803 -------- -------- 125,877 97,404 Corporate 13,500 11,870 -------- -------- $139,377 $109,274 ======== ======== CAPITAL EXPENDITURES: Image Group $ 1,725 $ 177 Commercial / Industrial Lighting Group 1,012 234 -------- -------- $ 2,737 $ 411 ======== ======== DEPRECIATION AND AMORTIZATION: Image Group $ 929 $ 821 Commercial / Industrial Lighting Group 441 277 -------- -------- $ 1,370 $ 1,098 ======== ======== Operating income of the business segments includes sales less all operating expenses including allocations of corporate expense, but excluding interest expense. Sales between business segments are immaterial. Identifiable assets are those assets used by each segment in its operations, including allocations of shared assets. Corporate assets consist primarily of cash and cash equivalents, and refundable income taxes. Page 7
8 NOTE 4: EARNINGS PER COMMON SHARE The following table presents the amounts used to compute earnings per common share and the effect of dilutive potential common shares on net income and weighted average shares outstanding: Three Months Ended (In thousands, except per share) September 30 ------------------ 1999 1998 ---- ---- BASIC EARNINGS PER SHARE - ------------------------ Net income $ 5,357 $ 3,912 ======= ======= Weighted average shares outstanding during the period, net of treasury shares 10,169 9,658 ======= ======= Basic earnings per share $ .53 $ .41 ======= ======= DILUTED EARNINGS PER SHARE - -------------------------- Net income $ 5,357 $ 3,912 ======= ======= Weighted average shares outstanding during the period, net of treasury shares 10,169 9,658 Effect of dilutive securities (A): Impact of common shares to be issued under stock option plans, a deferred compensation plan and contingently issuable shares 192 191 ------- ------- Weighted average shares outstanding (B) 10,361 9,849 ======= ======= Diluted earnings per share $ .52 $ .40 ======= ======= (A) Calculated using the "Treasury Stock" method as if dilutive securities were exercised and the funds were used to purchase Common Shares at the average market price during the period. (B) The exercise price of all options was less than the average fair market value of the common shares in the three month periods ended September 30,1999 and 1998. Page 8
9 NOTE 5: INVENTORIES Inventories consist of the following (in thousands): September 30, 1999 June 30, 1999 ------------------ ------------- Raw Materials $12,622 $12,485 Work-in-Process and Finished Goods 13,860 12,776 ------- ------- $26,482 $25,261 ======= ======= NOTE 6: CASH DIVIDENDS The Company paid cash dividends of $1,501,000 and $1,209,000 in the three month periods ended September 30, 1999 and 1998, respectively. In October 1999, the Company's Board of Directors declared an $0.08 per share regular quarterly cash dividend ($814,000) payable on November 16, 1999 to shareholders of record November 9, 1999. NOTE 7: SHAREHOLDERS' EQUITY The Company has a non-qualified Deferred Compensation Plan with all Plan investments in common shares of the Company. A total of 57,557 and 45,030 common shares were held in the Plan as of September 30, 1999 and June 30, 1999, respectively, and, accordingly, have been recorded as treasury shares. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL - ---------------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- NET SALES BY BUSINESS SEGMENT (In thousands, unaudited) Three Months Ended September 30 ------------------ 1999 1998 ---- ---- Image Group $42,396 $37,954 Commercial / Industrial Lighting Group 21,618 15,460 ------- ------- $64,014 $53,414 ======= ======= Page 9
10 RESULTS OF OPERATIONS - --------------------- THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 1998 Net sales of $64,014,000 in the first quarter of fiscal 2000 increased 20% over fiscal 1999 first quarter net sales of $53,414,000. Results of the Image Group in fiscal 2000 include the operations of LSI Retail Graphics (acquired April 1999; less than 2% of net sales in the first quarter of fiscal 2000). Results of the Commercial / Industrial Lighting Group include the operations of LSI MidWest Lighting (acquired January 1999; approximately 8% of net sales in fiscal 2000). Commercial / Industrial Lighting Group net sales increased 40% and Image Group net sales increased 12% in the first quarter of fiscal 2000 as compared to the prior year. The increase in the Commercial / Industrial Lighting Group net sales resulted primarily from the inclusion of the results of LSI MidWest Lighting and from increased sales of electrical wire harnesses. The increase in Image Group net sales is attributed primarily to growth in the Company's menu board system business and interior graphics, as well as to the inclusion of the results of LSI Retail Graphics. The Company's exterior fascia graphics sales volume, a component of the Image Group, was down approximately 12% as compared to the prior year. Net sales of the Image Group to the petroleum / convenience store market represented 37% and 47% of net sales in fiscal 2000 and fiscal 1999, respectively. While sales prices were increased, inflation did not have a significant impact on sales in 2000 as competitive pricing pressures held price increases to a minimum. Gross profit of $21,095,000 increased 16% over last year's gross profit of $18,234,000, and decreased as a percentage of net sales to 33.0% in fiscal year 2000 as compared to 34.1% in the prior year. The increase in amount of gross profit is due primarily to the 20% increase in net sales. The decrease in gross profit percentage is primarily related to lower margins from the lighting business that was acquired at the beginning of the second half of fiscal 1999. Selling and administrative expenses increased to $12,605,000 from $11,973,000 primarily as a result of the addition of the acquired businesses. As a percentage of net sales, selling and administrative expenses were at 19.7% in fiscal 2000 as compared to 22.4% in the prior year. The reduction of selling and administrative expenses as a percentage of net sales is primarily due to a significant amount of fixed costs with increasing net sales, as well as to significant sales increases of a product line in the Image Group which has significantly lower variable selling expenses. The Company reported net interest income of $163,000 in the first quarter of fiscal 2000 as compared to net interest income of $74,000 in the first quarter of fiscal 1999 primarily reflective of an increased amount of short-term cash investments. The Company's effective tax rate increased to 38.1% in the first quarter of fiscal 2000 as compared to 37.9% in fiscal 1999 primarily due to increased provision of state and local income tax. Net income of $5,357,000 increased 37% over $3,912,000 in the first quarter of fiscal 1998. The increased net income resulted from increased gross profit on higher net sales, and from the reporting of a larger amount of net interest income in fiscal 2000 as compared to 1999, partially offset by increased operating expenses and income taxes. Diluted earnings per share of $0.52 increased 30% in the first quarter of fiscal 2000 from $0.40 per share in fiscal 1999. The weighted average common shares outstanding for purposes of computing diluted earnings per share increased 5% in the first quarter of fiscal 2000 to 10,361,000 shares from 9,849,000 shares in 1999 primarily as a result of common shares issued to acquire businesses and the exercise of stock options during the year. Page 10
11 Certain recently issued accounting pronouncements will affect the Company's future financial statements and / or disclosures. See Note 1 to the accompanying consolidated financial statements for additional discussion. 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 September 30, 1999 the Company had working capital of $52.4 million, compared to $49.6 million at June 30, 1999. The ratio of current assets to current liabilities increased to 2.79 to 1 from 2.56 to 1. The increased working capital is primarily attributed to increased receivables and inventory, and decreased accrued expenses, partially offset by a reduction in cash and cash equivalents. The Company generated $2.4 million of cash from operating activities in the first quarter of fiscal 2000 as compared to $2.7 million in the first quarter of fiscal 1999. This modest decrease in net cash flows from operating activities in the first quarter of fiscal 2000 is primarily the net result of increased net income, increased accounts receivable and inventories, and a lesser decrease in accounts payable and accrued expenses. As of September 30, 1999, the Company's days sales outstanding were at approximately 58 days, increased from the June 30, 1999 statistic of 54 days. In addition to cash generated from operations, the Company's primary source of liquidity continues to be its lines of credit. The Company has two unsecured revolving lines of credit totaling $32 million, all of which was available as of October 29, 1999. A $12 million line of credit expires in the fourth quarter of fiscal 2000. The primary line of credit in the amount of $20 million is a three year committed credit facility expiring in fiscal 2002 with an annual renewal in the fourth quarter of fiscal 2000. The Company believes that the total of available lines of credit plus cash flows from operating activities is adequate for the Company's fiscal 2000 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants. Capital expenditures of $2.7 million in the first quarter of fiscal 2000 compare to $0.4 million in the prior year's first quarter. Spending in fiscal year 2000 was primarily related to capitalization of Company-wide enterprise resource planning software and related implementation costs, expansion of the Company's Cincinnati facilities, equipment, and tooling for new products. Capital expenditures totaling approximately $8 million are planned for fiscal 2000, exclusive of business acquisitions. On October 25, 1999 the Board of Directors declared a cash dividend of $0.08 per share (approximately $814,000) to be paid November 16, 1999 to shareholders of record on November 9, 1999. Cash dividends paid in the first quarter of fiscal 2000 totaled $1.5 million, a 24% increase over the $1.2 million paid in the first quarter of fiscal 1999. The Company has completed its review of its business systems, office support systems, and its facilities and equipment with respect to year 2000 programming deficiencies. No systems or equipment critical to operation of the business have been identified as having a year 2000 deficiency, and therefore the Company has not yet developed any contingency plans. The review has extended to major suppliers and customers, and this element of the review is expected to be completed by November 30, 1999. The Company does not anticipate material Page 11
12 costs to be incurred to modify or replace any affected systems. The Company anticipates completion of this process prior to November 30, 1999. The Company has not to date developed any contingency plans related to its major suppliers. Such plans will depend upon the responses from major suppliers in the event any of them should indicate that they will not be year 2000 compliant. 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. PART II. OTHER INFORMATION -------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ---------------------------------------- a) Exhibits 10.1 LSI Industries Inc. Retirement Plan (Amended and Restated as of October 1, 1999) 27 Financial Data Schedule b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter for which this Report is filed. [All other items required in Part II have been omitted because they are not applicable or are not required.] SIGNATURES ---------- 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. LSI Industries Inc. ------------------- BY: /s/ Robert J. Ready -------------------------------- Robert J. Ready President and Chief Executive Officer (Principal Executive Officer) BY: /s/ Ronald S. Stowell -------------------------------- Ronald S. Stowell Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) November 2, 1999 Page 12