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Begins
on
Page
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PART
I.
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Financial
Information
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ITEM
1.
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Financial
Statements
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Condensed
Consolidated Income Statements
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3
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Condensed
Consolidated Balance Sheets
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4
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Condensed
Consolidated Statements of Cash Flows
|
5
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Notes
to Condensed Consolidated Financial Statements
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6
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ITEM
2.
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Management’s
Discussion and Analysis
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of
Financial Condition and Results of Operations
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21
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ITEM
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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30
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ITEM
4.
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Controls
and Procedures
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30
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PART
II.
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Other
Information
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ITEM
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
|
31
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ITEM
6.
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Exhibits
|
32
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Signatures
|
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32
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“Safe
Harbor” Statement under the Private Securities Litigation Reform Act of
1995
This
Form 10-Q 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,” “seeks,”
“may,” “will,” “should” or the negative versions of those words and similar
expressions, and by the context in which they are used. Such statements,
whether
expressed or implied, are based upon current expectations of the Company
and
speak only as of the date made. Actual results could differ materially from
those contained in or implied by such forward-looking statements as a result
of
a variety of risks and uncertainties. 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, the ability to retain key
employees of acquired businesses and the other risk factors that are identified
herein. In addition to the factors described in this paragraph, the risk
factors
identified in our Form 10-K constitute risks and uncertainties that may affect
the financial performance of the Company. The Company has no obligation to
update any forward-looking statements to reflect subsequent events or
circumstances.
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
LSI
INDUSTRIES INC.
CONDENSED
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(in
thousands, except per
share
data)
|
|
Three
Months Ended
March
31
|
Nine
Months Ended
March
31
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
sales
|
|
$
|
75,323
|
|
$
|
64,504
|
|
$
|
243,630
|
|
$
|
208,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products sold
|
|
|
56,849
|
|
|
49,451
|
|
|
179,840
|
|
|
156,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
18,474
|
|
|
15,053
|
|
|
63,790
|
|
|
52,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and administrative expenses
|
|
|
13,353
|
|
|
11,534
|
|
|
41,617
|
|
|
37,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
5,121
|
|
|
3,519
|
|
|
22,173
|
|
|
15,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(income)
|
|
|
(19
|
)
|
|
(163
|
)
|
|
(37
|
)
|
|
(358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
252
|
|
|
11
|
|
|
928
|
|
|
34
|
|
Income
before income taxes
|
|
|
4,888
|
|
|
3,671
|
|
|
21,282
|
|
|
15,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
1,590
|
|
|
1,256
|
|
|
7,454
|
|
|
5,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,298
|
|
$
|
2,415
|
|
$
|
13,828
|
|
$
|
9,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share (see Note 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.15
|
|
$
|
0.12
|
|
$
|
0.64
|
|
$
|
0.50
|
|
Diluted
|
|
$
|
0.15
|
|
$
|
0.12
|
|
$
|
0.63
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,692
|
|
|
20,201
|
|
|
21,669
|
|
|
20,159
|
|
Diluted
|
|
|
21,955
|
|
|
20,393
|
|
|
21,927
|
|
|
20,400
|
|
The
accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
LSI
INDUSTRIES INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In
thousands, except share amounts)
|
|
March
31,
2007
|
|
June
30,
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,061
|
|
$
|
3,322
|
|
Accounts
receivable, net
|
|
|
46,816
|
|
|
51,557
|
|
Inventories
|
|
|
52,955
|
|
|
45,345
|
|
Refundable
income taxes
|
|
|
382
|
|
|
139
|
|
Other
current assets
|
|
|
8,021
|
|
|
6,725
|
|
Total
current assets
|
|
|
111,235
|
|
|
107,088
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment, net
|
|
|
48,877
|
|
|
52,363
|
|
|
|
|
|
|
|
|
|
Goodwill,
net
|
|
|
42,200
|
|
|
59,802
|
|
|
|
|
|
|
|
|
|
Intangible
Assets, net
|
|
|
19,749
|
|
|
3,751
|
|
|
|
|
|
|
|
|
|
Other
Assets, net
|
|
|
1,372
|
|
|
1,397
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
223,433
|
|
$
|
224,401
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
--
|
|
$
|
22
|
|
Accounts
payable
|
|
|
15,744
|
|
|
22,974
|
|
Accrued
expenses
|
|
|
27,153
|
|
|
17,305
|
|
Total
current liabilities
|
|
|
42,897
|
|
|
40,301
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
6,518
|
|
|
16,571
|
|
Long-Term
Deferred Tax Liabilities
|
|
|
1,996
|
|
|
2,065
|
|
Other
Long-Term Liabilities
|
|
|
431
|
|
|
479
|
|
|
|
|
|
|
|
|
|
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
21,493,095 and 21,462,490
|
|
|
|
|
|
|
|
shares,
respectively
|
|
|
79,023
|
|
|
78,087
|
|
Retained
earnings
|
|
|
92,568
|
|
|
86,898
|
|
Total
shareholders’ equity
|
|
|
171,591
|
|
|
164,985
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES & SHAREHOLDERS’ EQUITY
|
|
$
|
223,433
|
|
$
|
224,401
|
|
The
accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
LSI
INDUSTRIES INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
|
Nine
Months Ended
March
31
|
|
|
|
2007
|
|
2006
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
13,828
|
|
$
|
9,990
|
|
Non-cash
items included in income
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
6,674
|
|
|
5,093
|
|
Deferred
income taxes
|
|
|
21
|
|
|
396
|
|
Deferred
compensation plan
|
|
|
131
|
|
|
985
|
|
Stock
option expense
|
|
|
520
|
|
|
340
|
|
Issuance
of common shares as compensation
|
|
|
30
|
|
|
31
|
|
(Gain)
Loss on disposition of fixed assets
|
|
|
(15
|
)
|
|
14
|
|
|
|
|
|
|
|
|
|
Changes
in
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
4,741
|
|
|
5,618
|
|
Inventories
|
|
|
(7,610
|
)
|
|
(166
|
)
|
Accounts
payable and other
|
|
|
966
|
|
|
(4,629
|
)
|
|
|
|
|
|
|
|
|
Net
cash flows from operating activities
|
|
|
19,286
|
|
|
17,672
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(4,860
|
)
|
|
(3,144
|
)
|
Proceeds
from sale of fixed assets
|
|
|
3,432
|
|
|
23
|
|
Acquisition
of business, net of cash received
|
|
|
(141
|
)
|
|
--
|
|
Purchases
of short-term investments
|
|
|
--
|
|
|
(9,000
|
)
|
Net
cash flows from investing activities
|
|
|
(1,569
|
)
|
|
12,121
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
Payment
of long-term debt
|
|
|
(19,956
|
)
|
|
--
|
|
Proceeds
from issuance of long-term debt
|
|
|
9,881
|
|
|
--
|
|
Cash
dividends paid
|
|
|
(8,158
|
)
|
|
(8,777
|
)
|
Exercise
of stock options
|
|
|
524
|
|
|
1,763
|
|
Purchase
of treasury shares
|
|
|
(285
|
)
|
|
(353
|
)
|
Issuance
of treasury shares
|
|
|
16
|
|
|
71
|
|
|
|
|
|
|
|
|
|
Net
cash flows from financing activities
|
|
|
(17,978
|
)
|
|
(7,296
|
)
|
|
|
|
|
|
|
|
|
(Decrease)
in cash and cash equivalents
|
|
|
(261
|
)
|
|
(1,745
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
3,322
|
|
|
7,210
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
3,061
|
|
$
|
5,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
907
|
|
$
|
38
|
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
7,821
|
|
$
|
5,348
|
|
|
|
|
|
|
|
|
|
Issuance
of common shares as compensation
|
|
$
|
30
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
The
accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
LSI
INDUSTRIES INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1:
INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
The
interim condensed consolidated financial statements are unaudited
and are
prepared in accordance with accounting principles generally accepted
in
the United States of America for interim financial information,
and 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, 2007, and
the results of its operations for the three and nine month periods
ended
March 31, 2007 and 2006, and its cash flows for the nine month
periods
ended March 31, 2007 and 2006. These statements should be read
in
conjunction with the financial statements and footnotes included
in the
fiscal 2006 annual report. Financial information as of June 30,
2006 has
been derived from the Company’s audited consolidated financial
statements.
|
NOTE
2:
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation:
The
consolidated financial statements include the accounts of LSI Industries
Inc.
(an Ohio corporation) and its subsidiaries, all of which are wholly owned.
All
intercompany transactions and balances have been eliminated.
Revenue
Recognition:
The
Company recognizes revenue in accordance with Securities Exchange Commission
Staff Accounting Bulletin No. 104, “Revenue Recognition." Revenue is recognized
when title to goods and risk of loss have passed to the customer, there is
persuasive evidence of a purchase arrangement, delivery has occurred or services
have been rendered, and collectibility is reasonably assured. Revenue is
typically recognized at time of shipment. Sales are recorded net of estimated
returns, rebates and discounts.
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 or post-shipment
service and maintenance of certain solid
state
LED
video screens or billboards, 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 has no
post-installation responsibilities, other than normal warranties.
Service
revenue from integrated design, project and construction management, and
site
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.
Post-shipment service and maintenance revenue, if applicable, related to
solid
state LED video screens or billboards is recognized according to terms defined
in each individual service agreement.
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.
Credit
and Collections:
The
Company maintains allowances for doubtful accounts receivable for estimated
losses resulting from either customer disputes or the inability of its customers
to make required payments. If the financial condition of the Company’s customers
were to deteriorate, resulting in their inability to make the required payments,
the Company may be required to record additional allowances or charges against
income. The Company determines its allowance for doubtful accounts by first
considering all known collectibility problems of customers’ accounts, and then
applying certain percentages against the various aging categories of the
remaining receivables. The resulting allowance for doubtful accounts receivable
is an estimate based upon the Company’s knowledge of its business and customer
base, and historical trends. The Company also establishes allowances, at
the
time revenue is recognized, for returns and allowances, discounts, pricing
and
other possible customer deductions. These allowances are based upon historical
trends.
The
following table presents the Company’s net accounts receivable at the dates
indicated.
(In
thousands)
|
|
March
31,
2007
|
|
June
30,
2006
|
|
Accounts
receivable
|
|
$
|
47,652
|
|
$
|
52,213
|
|
less
Allowance for doubtful accounts
|
|
|
(836
|
)
|
|
(656
|
)
|
Accounts
receivable, net
|
|
$
|
46,816
|
|
$
|
51,557
|
|
Facilities
Expansion Grants and Credits:
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.
Short-Term
Investments:
Short-term
investments consist of tax free (federal) investments in high grade government
agency backed bonds for which the interest rate resets weekly and the Company
has a seven day put option. These investments are classified as trading
securities and are stated at fair market value, which represents the most
recent
reset amount at period end. The Company invested in these types of short-term
investments for a certain period of time during fiscal 2006.
Inventories:
Inventories
are stated at the lower of cost or market. Cost is determined on the first-in,
first-out basis.
Property,
Plant and Equipment and related depreciation:
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 current business operating software was first implemented in
January 2000. All costs capitalized for the business operating software are
being 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. Leasehold improvements are depreciated over the shorter of
fifteen years or the remaining term of the lease.
The
following table presents the Company’s property, plant and equipment at the
dates indicated.
(In
thousands)
|
|
March
31,
2007
|
|
June
30,
2006
|
|
|
|
|
|
|
|
Property,
plant and equipment, at cost
|
|
$
|
103,380
|
|
$
|
102,484
|
|
less
Accumulated depreciation
|
|
|
(54,503
|
)
|
|
(50,121
|
)
|
Property,
plant and equipment, net
|
|
$
|
48,877
|
|
$
|
52,363
|
|
Intangible
assets:
Intangible
assets consisting of customer relationships, trade names and trademarks,
patents, technology and software, and non-compete agreements are recorded
on the
Company's balance sheet and are being amortized to expense over periods ranging
between two 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 7. The
Company
periodically evaluates intangible assets, goodwill and other long-lived assets
for permanent impairment.
Fair
value of financial instruments:
The
Company has financial instruments consisting primarily of cash and cash
equivalents, short-term investments, 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.
Product
warranties:
The
Company offers a limited warranty that its products are free of defects in
workmanship and materials. The specific terms and conditions vary somewhat
by
product line, but generally cover defects returned within one to five years
from
date of shipment. The Company records warranty liabilities to cover the
estimated future costs for repair or replacement of defective returned products
as well as products that need to be repaired or replaced in the field after
installation. The Company calculates its liability for warranty claims by
applying estimates to cover unknown claims, as well as estimating the total
amount to be incurred for known warranty issues. The Company periodically
assesses the adequacy of its recorded warranty liabilities and adjusts the
amounts as necessary.
Changes
in the Company’s warranty liabilities, which are included in accrued expenses in
the accompanying consolidated balance sheets, during the periods indicated
below
were as follows:
(In
thousands)
|
|
March
31,
2007
|
|
June
30,
2006
|
|
Balance
at beginning of the period
|
|
$
|
378
|
|
$
|
301
|
|
Additions
charged to expense
|
|
|
780
|
|
|
584
|
|
Deductions
for repairs and replacements
|
|
|
(984
|
)
|
|
(507
|
)
|
Balance
at end of the period
|
|
$
|
174
|
|
$
|
378
|
|
Contingencies:
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 Note 11).
Earnings
per common share:
The
computation of basic earnings per common share is based on the weighted average
common shares outstanding for the period net of treasury shares held in the
Company’s non-qualified deferred compensation plan. 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 263,000 shares
and 192,000 shares for the three months ended March 31, 2007 and 2006,
respectively, and 258,000 shares and 241,000 shares for the nine months ended
March 31, 2007 and 2006, respectively.
Stock
options:
The
Company recorded $114,200 in the first nine months of fiscal 2007 as a reduction
of income taxes payable, $104,100 as an increase in common stock, and $10,100
as
a reduction of income tax expense to reflect the tax credits it will receive
as
a result of disqualifying dispositions of shares from stock option exercises.
This had the effect of reducing cash flow from operating activities and
increasing cash flow from financing activities by $104,100. The Company recorded
$380,000 in the first nine months of fiscal 2006 as a reduction of income
taxes
payable, $373,000 as an increase in additional paid in capital, and $7,000
as a
reduction of income tax expense to reflect the tax credits it will receive
as a
result of disqualifying dispositions of shares from stock option exercises.
This
had the effect of reducing cash flow from operating activities and increasing
cash flow from financing activities by $373,000. See further discussion in
Note
10.
Recent
Pronouncements:
In
July
2006, the Financial Accounting Standards Board issued FASB Interpretation
No. 48
(FIN 48), “Accounting for Uncertainty in Income Taxes - an interpretation of
FASB Statement No. 109.” FIN 48 provides guidance for the recognition,
measurement, classification and disclosure of the financial statement effects
of
a position taken or expected to be taken in a tax return (“tax position”). The
financial statement effects of a tax position must be recognized when there
is a
likelihood of more than 50 percent that based on the technical merits, the
position will be sustained upon examination and resolution of the related
appeals or litigation processes, if any. A tax position that meets the
recognition threshold must be measured initially and subsequently as the
largest
amount of tax benefit that is greater than 50 percent likely of being realized
upon ultimate settlement with a taxing authority. In addition, FIN 48 specifies
certain annual disclosures that are required to be made once the interpretation
has taken effect. The Interpretation is effective for fiscal years beginning
after December 15, 2006. The cumulative effect of FIN 48 adoption will be
reported as an adjustment to the opening balance of retained earnings at
July 1,
2007. The Company is currently evaluating the impact of adopting FIN 48,
and
cannot currently estimate the impact on its consolidated results of operations,
cash flows or financial position.
In
September 2006, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements.” This
Statement defines fair value, establishes a framework for measuring fair
value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. The Statement applies under other accounting
pronouncements that require or permit fair value measurements. SFAS No. 157
is
effective for fiscal
years
beginning after November 15, 2007, or the Company’s fiscal year 2009. The
Company will be evaluating the impact of adopting SFAS No. 157, and cannot
currently estimate the impact on its consolidated results of operations,
cash
flows or financial position.
In
September 2006, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards (SFAS) No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans.” This Statement improves
financial reporting by requiring an employer to recognize the overfunded
or
underfunded status of a defined benefit postretirement plan as an asset or
liability in its statement of financial position and to recognize changes
in
that funded status in the year in which the changes occur through comprehensive
income. This Statement also improves financial reporting by requiring an
employer to measure the funded status of a plan as of the date of its year-end
statement of financial position, with limited exceptions. The effective date
to
initially recognize the funded status and to provide the required disclosures
is
for fiscal years ending after December 15, 2006, or the Company’s fiscal year
2007. The requirement to measure plan assets and benefit obligations for
fiscal
years ending after December 15, 2008, or the Company’s fiscal year 2009. The
Company is evaluating the impact of adopting SFAS No. 158 and cannot currently
estimate the impact on its consolidated results of operations, cash flows
or
financial position. We believe the impact will not be significant.
In
February 2007, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” This statement permits entities to
choose to measure many financial instruments and certain other items at fair
value. The objective of the pronouncement is to improve financial reporting
by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. This statement is effective
as of the beginning of an entity’s first fiscal year that begins after November
15, 2007, or in the Company’s case, July 1, 2008. The Company is evaluating the
impact of adopting SFAS No. 159 and cannot currently estimate the impact
on its
consolidated results of operations, cash flows or financial
position.
Comprehensive
income:
The
Company does not have any comprehensive income items other than net
income.
Use
of estimates:
The
preparation of the financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
NOTE
3:
MAJOR
CUSTOMER CONCENTRATIONS
|
The
Company’s net sales to a major customer in the Graphics Segment, CVS
Corporation, represented approximately $24,910,000, or 10% of consolidated
net sales in the nine months ended March 31, 2007. The Company’s net sales
to a major customer in the Lighting Segment, Wal-Mart Stores, Inc.,
represented approximately $7,297,000, or 11%, and $21,866,000 or
10% of
consolidated net sales in the three month and nine month periods,
respectively, ended March 31, 2006. Additionally, the balance of
accounts
|
|
receivable
from Wal-Mart Stores as of March 31, 2006 was approximately $4,522,000
or
11% of net accounts receivable.
|
NOTE
4: BUSINESS
SEGMENT INFORMATION
The
Company operates in the following three business segments: the Lighting Segment,
the Graphics Segment, and the Technology Segment. The Company is organized
such
that the chief operating decision maker (the President and Chief Executive
Officer) receives financial and operating information relative to these three
business segments, and organizationally, has a President of LSI Lighting
Solutions Plus,
a
President of LSI Graphics Solutions Plus,
and a
President of LSI Technology Solutions Plus
reporting directly to him. The Company’s most significant market is the
petroleum / convenience store market with approximately 27% and 24% of total
net
sales concentrated in this market for the three months ended March 31, 2007
and
2006, respectively, and approximately 24% and 25% of total net sales
concentrated in this market in the nine month periods ended March 31, 2007
and
2006, respectively. The following information is provided for the following
periods:
(In
thousands)
|
|
Three
Months Ended
March
31
|
|
Nine
Months Ended
March
31
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting
Segment
|
|
$
|
45,443
|
|
$
|
45,897
|
|
$
|
145,263
|
|
$
|
145,065
|
|
Graphics
Segment
|
|
|
23,792
|
|
|
18,607
|
|
|
83,889
|
|
|
63,661
|
|
Technology
Segment
|
|
|
6,088
|
|
|
--
|
|
|
14,478
|
|
|
--
|
|
|
|
$
|
75,323
|
|
$
|
64,504
|
|
$
|
243,630
|
|
$
|
208,726
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting
Segment
|
|
$
|
1,940
|
|
$
|
2,055
|
|
$
|
9,346
|
|
$
|
9,537
|
|
Graphics
Segment
|
|
|
2,458
|
|
|
1,464
|
|
|
10,687
|
|
|
5,835
|
|
Technology
Segment
|
|
|
723
|
|
|
--
|
|
|
2,140
|
|
|
--
|
|
|
|
$
|
5,121
|
|
$
|
3,519
|
|
$
|
22,173
|
|
$
|
15,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting
Segment
|
|
$
|
1,979
|
|
$
|
565
|
|
$
|
2,894
|
|
$
|
1,736
|
|
Graphics
Segment
|
|
|
497
|
|
|
931
|
|
|
1,322
|
|
|
1,408
|
|
Technology
Segment
|
|
|
45
|
|
|
--
|
|
|
644
|
|
|
--
|
|
|
|
$
|
2,521
|
|
$
|
1,496
|
|
$
|
4,860
|
|
$
|
3,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting
Segment
|
|
$
|
1,336
|
|
$
|
1,271
|
|
$
|
4,108
|
|
$
|
3,888
|
|
Graphics
Segment
|
|
|
666
|
|
|
400
|
|
|
2,009
|
|
|
1,205
|
|
Technology
Segment
|
|
|
194
|
|
|
--
|
|
|
557
|
|
|
--
|
|
|
|
$
|
2,196
|
|
$
|
1,671
|
|
$
|
6,674
|
|
$
|
5,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
2007
|
|
June
30,
2006
|
|
Identifiable
assets:
|
|
|
|
|
|
|
|
Lighting
Segment
|
|
$
|
103,323
|
|
$
|
103,852
|
|
Graphics
Segment
|
|
|
64,405
|
|
|
61,767
|
|
Technology
Segment
|
|
|
39,672
|
|
|
54,544
|
|
|
|
|
207,400
|
|
|
220,163
|
|
Corporate
|
|
|
16,033
|
|
|
4,238
|
|
|
|
$
|
223,433
|
|
$
|
224,401
|
|
Operating
income of the business segments includes net sales less all operating expenses
including allocations of corporate expense, but excluding interest expense.
The
table above does not include any intercompany sales between business
segments.
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, refundable income taxes and certain intangible
assets.
The
Company considers its geographic areas to be: 1) the United States, and 2)
Canada. The majority of the Company’s operations are in the United States; one
operation is in Canada. The geographic distribution of the Company’s net sales
and long-lived assets are as follows:
|
|
Three
Months Ended
March
31
|
|
Nine
Months Ended
March
31
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
sales (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
69,235
|
|
$
|
64,504
|
|
$
|
229,152
|
|
$
|
208,726
|
|
Canada
|
|
|
6,088
|
|
|
--
|
|
|
14,478
|
|
|
--
|
|
|
|
$
|
75,323
|
|
$
|
64,504
|
|
$
|
243,630
|
|
$
|
208,726
|
|
|
|
March
31,
2007
|
|
June
30,
2006
|
|
Long-lived
assets (b):
|
|
|
|
|
|
|
|
United
States
|
|
$
|
82,534
|
|
$
|
70,753
|
|
Canada
|
|
|
29,664
|
|
|
46,560
|
|
|
|
$
|
112,198
|
|
$
|
117,313
|
|
|
(a)
|
Net sales are attributed to geographic areas based upon the location
of
the operation making the sale.
|
|
(b)
|
Long-lived
assets includes property, plant and equipment, intangible assets,
goodwill, and other long term
assets.
|
NOTE
5: 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 (in thousands, except per share
data):
|
|
|
Three
Months Ended
March
31
|
|
Nine
Months Ended
March
31
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
BASIC
EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,298
|
|
$
|
2,415
|
|
$
|
13,828
|
|
$
|
9,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
during
the period, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
treasury shares (a)
|
|
|
21,489
|
|
|
20,201
|
|
|
21,470
|
|
|
20,159
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
the Deferred Compensation Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
during
the period
|
|
|
203
|
|
|
--
|
|
|
199
|
|
|
--
|
|
Weighted
average shares outstanding
|
|
|
21,692
|
|
|
20,201
|
|
|
21,669
|
|
|
20,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.15
|
|
$
|
0.12
|
|
$
|
0.64
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,298
|
|
$
|
2,415
|
|
$
|
13,828
|
|
$
|
9,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
21,692
|
|
|
20,201
|
|
|
21,669
|
|
|
20,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities (b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact
of common shares to be
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issued
under stock option plans,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a
deferred compensation plan,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
contingently issuable shares
|
|
|
263
|
|
|
192
|
|
|
258
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
(c)
|
|
|
21,955
|
|
|
20,393
|
|
|
21,927
|
|
|
20,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.15
|
|
$
|
0.12
|
|
$
|
0.63
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes
shares accounted for like treasury stock in accordance with EITF
97-14.
|
(b)
|
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.
|
(c)
|
Options
to purchase 237,067 common shares and 9,125 common shares during
the three
month periods ended March 31, 2007 and 2006, respectively, and
options to
purchase 187,263 common shares and 3,000 common shares during the
nine
month periods ended March 31, 2007 and 2006, respectively, were
not
included in the computation of diluted earnings per share because
the
exercise price was greater than the average fair market value of
the
common shares.
|
NOTE
6: BALANCE
SHEET DATA
|
The
following information is provided as of the dates indicated (in
thousands):
|
|
|
March
31, 2007
|
|
June
30,
2006
|
|
Inventories
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
24,319
|
|
$
|
21,508
|
|
Work-in-process
|
|
|
6,322
|
|
|
7,402
|
|
Finished
goods
|
|
|
22,314
|
|
|
16,435
|
|
|
|
$
|
52,955
|
|
$
|
45,345
|
|
|
|
|
|
|
|
|
|
Accrued
Expenses
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
$
|
7,001
|
|
$
|
6,902
|
|
Customer
prepayments
|
|
|
14,781
|
|
|
4,438
|
|
Other
accrued expenses
|
|
|
5,371
|
|
|
5,965
|
|
|
|
$
|
27,153
|
|
$
|
17,305
|
|
NOTE
7:
GOODWILL
AND OTHER INTANGIBLE ASSETS
The
Company acquired substantially all the net assets of SACO Technologies, Inc.
on
June 26, 2006. The acquisition was accounted for as a purchase, effective
on the
date of acquisition. The total purchase exceeded the estimated fair value
of net
assets by approximately $42.7 million. A preliminary valuation of the Company’s
goodwill and intangible assets was completed in the first quarter of fiscal
year
2007, and preliminary purchase price allocations have been made as of March
31,
2007. Identified intangible assets related to the LSI Saco acquisition are
being
amortized effective July 1, 2006 over appropriate asset lives. Goodwill and
certain intangible assets such as the Saco trade name, non-compete agreements
and customer relationships are included in the assets of the Technology Segment.
Intangible assets such as the Smartvision® trade name, the LED technology,
firmware and software are included as corporate assets. It is anticipated
that
the valuation analysis will be fully complete in the fourth quarter of FY
2007,
with no material changes to the Company’s financial statements.
The
following tables present information about the Company's goodwill and other
intangible assets on the dates or for the periods indicated.
|
|
As
of March 31, 2007
|
|
|
|
As
of June 30, 2006
|
|
|
|
(in
thousands)
|
|
|
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Goodwill
|
|
$
|
44,585
|
|
$
|
2,385
|
|
$
|
42,200
|
|
$
|
62,187
|
|
$
|
2,385
|
|
$
|
59,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Intangible Assets
|
|
$
|
24,173
|
|
$
|
4,424
|
|
$
|
19,749
|
|
$
|
6,430
|
|
$
|
2,679
|
|
$
|
3,751
|
|
Amortization
Expense of Other Intangible Assets
|
|
March
31, 2007
|
|
March
31, 2006
|
|
Three
Months Ended
|
|
$
|
585
|
|
$
|
120
|
|
Nine
Months Ended
|
|
$
|
1,745
|
|
$
|
359
|
|
|
The
Company expects to record amortization expense over each of the
next five
years as follows: 2007 through 2008 -- $2,326,000; 2009 through
2011 --
$2,101,000. These
|
|
amounts
are considered estimates pending the completion of the valuation
analysis
of the LSI Saco acquisition in the fourth quarter of FY
2007.
|
Changes
in the carrying amount of goodwill for the year ended June 30, 2006 and the
nine
months ended March 31, 2007 by operating segment, are as follows:
(in
thousands)
|
|
Lighting
Segment
|
|
Graphics
Segment
|
|
Technology
Segment
|
|
Total
|
|
Balance
June 30, 2005
|
|
$
|
135
|
|
$
|
16,982
|
|
$
|
--
|
|
$
|
17,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
--
|
|
|
--
|
|
|
42,685
|
|
|
42,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2006
|
|
|
135
|
|
|
16,982
|
|
|
42,685
|
|
|
59,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
--
|
|
|
--
|
|
|
50
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
to intangible assets
|
|
|
--
|
|
|
--
|
|
|
(17,652
|
)
|
|
(17,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of March 31, 2007
|
|
$
|
135
|
|
$
|
16,982
|
|
$
|
25,083
|
|
$
|
42,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
gross
carrying amount and accumulated amortization by major other intangible asset
class is as follows:
|
|
March
31, 2007
|
|
June
30, 2006
|
|
(in
thousands)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Amortized
Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
7,472
|
|
$
|
2,928
|
|
$
|
5,400
|
|
$
|
2,513
|
|
Trademarks
and tradenames
|
|
|
5,513
|
|
|
146
|
|
|
920
|
|
|
128
|
|
Patents
|
|
|
110
|
|
|
43
|
|
|
110
|
|
|
38
|
|
LED
Technology firmware, software
|
|
|
10,448
|
|
|
1,119
|
|
|
--
|
|
|
--
|
|
Non-compete
agreements
|
|
|
630
|
|
|
188
|
|
|
--
|
|
|
--
|
|
|
|
$
|
24,173
|
|
$
|
4,424
|
|
$
|
6,430
|
|
$
|
2,679
|
|
NOTE
8: REVOLVING
LINES OF CREDIT AND LONG-TERM DEBT
The
Company has an unsecured $50 million revolving line of credit with its bank
group. A total of $6.5 million was outstanding at March 31, 2007 at an average
interest rate of 5.9%, and $43.5 million was available as of that date. A
portion of this credit facility is a $20 million line of credit that expires
in
the third quarter of fiscal 2008. The remainder of the credit facility is
a $30
million three year committed line of credit that expires in fiscal 2010.
Annually in the third quarter, the credit facility is renewable with respect
to
adding an additional year of commitment to replace the year just ended. Interest
on the revolving lines of credit is charged based upon an increment over
the
LIBOR rate as periodically determined, an increment over the Federal Funds
Rate
as periodically determined, or at the bank’s base lending rate, at the Company’s
option. The increment over the LIBOR borrowing rate, as periodically determined,
fluctuates between 50 and 75 basis points depending upon the ratio of
indebtedness to earnings before interest, taxes, depreciation and amortization
(EBITDA). The increment over the Federal Funds borrowing rate, as periodically
determined, fluctuates between 150 and 200 basis points,
and
the
commitment fee on the unused balance of the $30 million committed portion
of the
line of credit fluctuates between 15 and 25 basis points based upon the same
leverage ratio. Under terms of these agreements, the Company has agreed to
a
negative pledge of assets, to maintain minimum levels of profitability and
net
worth, and is subject to certain maximum levels of leverage. The Company's
borrowings under its bank credit facilities through the third quarter of
fiscal
year 2007 averaged approximately $18.8 million at an approximate average
borrowing rate of 5.9%.
The
Company also established a $7 million line of credit for its Canadian
subsidiary. The line of credit expires in the third quarter of fiscal 2008.
Interest on the Canadian subsidiary’s line of credit is charged based upon an
increment over the LIBOR rate or based upon an increment over the United
States
base rates if funds borrowed are denominated in U.S. dollars or an increment
over the Canadian prime rate if funds borrowed are denominated in Canadian
dollars. There are no borrowings against this line of credit.
The
Company had two equipment loans at June 30, 2006 totaling $65,000 as a result
of
the acquisition of Saco Technologies. These loans were paid off in the first
quarter of fiscal 2007.
Long-term
debt:
(In
thousands)
|
|
|
|
March
31,
2007
|
|
June
30,
2006
|
|
|
|
|
|
|
|
Revolving
Line of Credit (3 year committed line)
|
$
|
6,518
|
|
$
|
16,528
|
|
|
|
|
|
|
|
|
Equipment
loans
|
|
--
|
|
|
65
|
|
|
|
|
|
|
|
|
Subtotal
|
|
6,518
|
|
|
16,593
|
|
|
|
|
|
|
|
|
Less
current maturities of long-term debt
|
|
--
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
Long-term
debt
|
$
|
6,518
|
|
$
|
16,571
|
|
NOTE
9: CASH
DIVIDENDS
The
Company paid cash dividends of $8,158,000 and $8,777,000 in the nine month
periods ended March 31, 2007 and 2006, respectively. In April, 2007, the
Company’s Board of Directors declared a $0.13 per share regular quarterly cash
dividend (approximately $2,794,000) payable on May 15, 2007 to shareholders
of
record May 8, 2007.
NOTE
10: EQUITY
COMPENSATION
On
July
1, 2005, the Company adopted SFAS No. 123(R), “Share-Based Payment,” which
requires the Company to measure the cost of employee services received in
exchange for an award of equity instruments and to recognize this cost in
the
financial statements over the period during which an employee is required
to
provide services.
Stock
Options
The
Company has an equity compensation plan that was approved by shareholders
which
covers all of its full-time employees, outside directors and advisors. The
options granted or stock awards made pursuant to this plan are granted at
fair
market value at date of grant or award. Options granted to non-employee
directors become exercisable 25%
each
ninety days (cumulative) from date of grant, and options granted to employees
generally become exercisable 25% per year (cumulative) beginning one year
after
the date of grant. Prior to fiscal 2007, options granted to non-employee
directors were immediately exercisable. The number of shares reserved for
issuance is 2,250,000, of which 1,579,920 shares were available for future
grant
or award as of March 31, 2007. This plan allows for the grant of incentive
stock
options, non-qualified stock options, stock appreciation rights, restricted
and
unrestricted stock awards, performance stock awards, and other stock awards.
As
of March 31, 2007, a total of 979,788 options for common shares were outstanding
from this plan as well as two previous stock option plans (both of which
had
also been approved by shareholders), and of these, a total of 526,931 options
for common shares were vested and exercisable. The approximate unvested stock
option expense as of March 31, 2007 that will be recorded as expense in future
periods is $1,787,000. The weighted average time over which this expense
will be
recorded is approximately 23 months.
The
fair
value of each option on the date of grant was estimated using the Black-Scholes
option pricing model. The below listed weighted average assumptions were
used
for grants in the periods indicated.
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
3/31/07
|
|
3/31/06
|
|
3/31/07
|
|
3/31/06
|
|
Dividend
yield
|
|
|
2.92%
|
|
|
3.58%
|
|
|
2.92%
|
|
|
3.58%
|
|
Expected
volatility
|
|
|
39.04%
|
|
|
39.72%
|
|
|
40.00%
|
|
|
39.72%
|
|
Risk-free
interest rate
|
|
|
4.6%
|
|
|
4.46%
|
|
|
4.6
%
|
|
|
4.46%
|
|
Expected
life
|
|
|
7
yrs.
|
|
|
7.5
yrs.
|
|
|
7
yrs.
|
|
|
7.5
yrs.
|
|
At
March
31, 2007, the 245,700 options granted in the first nine months of fiscal
2007 to
employees and non-employee directors had exercise prices ranging from $13.83
to
$18.19, fair values ranging from $4.88 to $6.55, and remaining contractual
lives
of between four and one-half years to ten years.
At
March
31, 2006, the 6,000 options granted in the first nine months of fiscal 2006
to
non-employee directors had exercise prices of $17.02, fair values of $5.63,
and
remaining contractual lives of approximately nine years and eight
months.
The
Company records stock option expense using a straight line Black-Scholes
method
with an estimated 10% forfeiture rate. The expected volatility of the Company’s
stock was calculated based upon the historic monthly fluctuation in stock
price
for a period approximating the expected life of option grants. The risk-free
interest rate is the rate of a five year Treasury security at constant, fixed
maturity on the approximate date of the stock option grant. The expected
life of
outstanding options is determined to be less than the contractual term for
a
period equal to the aggregate group of option holders’ estimated weighted
average time within which options will be exercised. It is the Company’s policy
that when stock options are exercised, new common shares shall be issued.
No
equity compensation expense has been capitalized in inventory or fixed
assets.
Information
related to all stock options for the nine months ended March 31, 2007 is
shown
in the table below:
(Shares
in thousands)
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at 6/30/06
|
|
|
784
|
|
$
|
10.32
|
|
|
6.4
yrs.
|
|
$
|
5,232,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
246
|
|
$
|
17.59
|
|
|
|
|
|
|
|
Forfeitures
|
|
|
(5
|
)
|
$
|
11.57
|
|
|
|
|
|
|
|
Exercised
|
|
|
(45
|
)
|
$
|
9.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at 3/31/07
|
|
|
980
|
|
$
|
12.15
|
|
|
6.5
yrs.
|
|
$
|
4,497,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at 3/31/07
|
|
|
527
|
|
$
|
10.20
|
|
|
4.8
yrs.
|
|
$
|
3,446,000
|
|
The
aggregate intrinsic value of stock options exercised in the nine months
ended
March 31, 2007 was $388,200. The Company received $419,800 of cash from
employees who exercised 45,119 options during the nine months ended March 31,
2007. Additionally, the Company recorded $114,200 as a reduction of federal
income taxes payable, $104,100 as an increase in common stock, and $10,100
as a
reduction of income tax expense related to the exercises of stock options
in
which the employees sold the common shares prior to the passage of twelve
months
from the date of exercise.
Information
related to unvested stock options for the nine months ended March 31, 2007
is
shown in the table below:
(Shares
in thousands)
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
unvested stock options at 6/30/06
|
|
|
312
|
|
$
|
10.62
|
|
|
8.5
yrs.
|
|
$
|
1,983,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(100
|
)
|
$
|
10.34
|
|
|
|
|
|
|
|
Forfeitures
|
|
|
(5
|
)
|
$
|
11.57
|
|
|
|
|
|
|
|
Granted
|
|
|
246
|
|
$
|
17.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
unvested stock options at 3/31/07
|
|
|
453
|
|
$
|
14.42
|
|
|
8.5
yrs.
|
|
$
|
1,051,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Compensation Awards
The
Company awarded a total of 1,916 common shares in the first nine months
of
fiscal 2007, valued at their approximate $30,000 fair market value on the
date
of issuance pursuant to the compensation programs for non-employee Directors
who
receive a portion of their compensation as an award of Company stock. Stock
compensation awards are made in the form of newly issued common shares
of the
Company.
Deferred
Compensation Plan
The
Company has a non-qualified deferred compensation plan providing for both
Company contributions and participant deferrals of compensation. The Plan
is
fully funded in a Rabbi Trust. All Plan investments are in common shares
of the
Company. As of March 31, 2007 there were 34 participants with fully vested
account balances. A total of 202,328 common shares with a cost of $2,226,900,
and 187,725 common shares with a cost of $1,957,500 were held in the Plan
as of
March 31, 2007 and June 30, 2006, respectively, and, accordingly, have been
recorded as treasury shares. The change in the number of shares held by this
plan is the net result of share purchases and sales on the open stock market
for
compensation deferred into the Plan and for distributions to terminated
employees. The Company does not issue new common shares for purposes of the
Nonqualified Deferred Compensation Plan. As a result of the Company changing
the
distribution method for this deferred compensation plan in April 2004 from
one
of issuing shares of Company stock to terminated participants to one of issuing
cash, it was determined that this plan was subject to variable accounting.
Therefore, the shares in this plan were “marked-to-market” in the first quarter
of fiscal 2006 and a $573,000 non-cash expense and long-term liability were
recorded to reflect the $16.82 per share market price of the Company’s common
shares at September 9, 2005, the date this Plan was amended to provide for
distributions to participants only in the form of common shares of the Company.
Accordingly, no future “mark-to-market” expense will be required with respect to
this plan. For the full fiscal year 2007, the Company estimates the Rabbi
Trust
for the Nonqualified Deferred Compensation Plan will make net repurchases
in the
range of 20,000 to 25,000 common shares of the Company. During the nine months
ended March 31, 2007 the Company used approximately $284,600 to purchase
common
shares of the Company in the open stock market for either employee salary
deferrals or Company contributions into the Nonqualified Deferred Compensation
Plan. The Company does not currently repurchase its own common shares for
any
other purpose.
NOTE
11:
LOSS
CONTINGENCY RESERVE
The
Company is party to various negotiations and legal proceedings arising in
the
normal course of business, most of which are dismissed or resolved with minimal
expense to the Company, exclusive of legal fees. In March 2007, the Company
received a favorable summary judgment decision as the defendant in a complex
lawsuit alleging patent infringement with respect to some of the Company’s menu
board systems sold over the past approximately ten years. The Company has
defended this case vigorously and has won every important decision, including
summary judgment to dismiss the allegations of patent infringement. The Company
made a reasonable settlement offer in the third quarter of fiscal 2005 and,
accordingly, recorded a loss contingency reserve in the amount of $590,000.
This
settlement offer was not accepted by the plaintiff and the Company received
a
counter offer of $4.1 million to settle the majority of the alleged patent
infringement. As a result of the favorable summary judgment decision, the
loss
contingency reserve of $590,000 has been written off to income in the third
quarter of fiscal 2007. The plaintiffs in this lawsuit have appealed the
summary
judgment decision. In what we believe the unlikely event the plaintiffs are
successful in this appeal, the lawsuit would be back in progress. In another
matter, the Company is contingently liable for $9,900 of lease payments in
the
remainder of fiscal 2007 related to an office facility currently being fully
subleased to an independent third party.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Net
Sales by Business Segment
(In
thousands)
|
|
Three
Months Ended
March
31
|
|
Nine
Months Ended
March
31
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Lighting
Segment
|
|
$
|
45,443
|
|
$
|
45,897
|
|
$
|
145,263
|
|
$
|
145,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Graphics
Segment
|
|
|
23,792
|
|
|
18,607
|
|
|
83,889
|
|
|
63,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
Segment
|
|
|
6,088
|
|
|
--
|
|
|
14,478
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
75,323
|
|
$
|
64,504
|
|
$
|
243,630
|
|
$
|
208,726
|
|
The
Company’s “forward looking statements” as presented earlier in this Form 10-Q in
the “Safe Harbor” Statement should be referred to when reading Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Results
of Operations
THREE
MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31,
2006
The
Company acquired SACO Technologies Inc. (renamed LSI Saco Technologies) on
June
26, 2006. The operating results of LSI Saco Technologies, which reported
net
sales of $6.1 million in the third quarter of fiscal 2007, have been included
in
the fiscal 2007 results. A new business segment was created with the acquisition
of LSI Saco, the Technology Segment, for which there were no results included
in
same period of fiscal 2006.
Net
sales
of $75,323,000 in third quarter fiscal 2007 increased 16.8% from fiscal 2006
third quarter net sales of $64,504,000. Lighting Segment net sales decreased
1%
to $45,443,000 and Graphics Segment net sales increased 28% to $23,792,000
as
compared to the same period of the prior year. The new Technology Segment
reported net sales of $6,088,000 in the third quarter of fiscal 2007. Sales
to
the petroleum / convenience store market represented 27% and 24% of third
quarter net sales in fiscal 2007 and 2006, respectively. Net sales to this,
the
Company’s largest niche market, are reported in both the Lighting and Graphics
Segments, depending upon the product or service sold, and were up 29% from
the
same period last year to $20,041,000 as Graphics sales to this market increased
significantly and Lighting sales decreased. The petroleum / convenience store
market has been, and will continue to be, a very important niche market for
the
Company; however, if sales to other markets and customers increase (including
through the addition of the Technology Segment) more than net sales to this
market, then the percentage of net sales to the petroleum / convenience store
market would be expected to decline.
The
$0.5
million decrease in Lighting Segment net sales is primarily the result of
decreased lighting sales to our niche markets of petroleum / convenience
stores,
automotive dealerships, and retail national accounts (totaling a net $3.2
million decrease), partially offset by a $3.1 million or 16% increase in
commissioned net sales to the commercial and industrial lighting market.
The
Company implemented price increases in fiscal year 2006 and August 2006 on
many
of its lighting products to follow general trends in the industry to recover
the
cost of increasing material components.
The
$5.2
million increase in Graphics Segment net sales is primarily the result of
increased net sales related to two image conversion programs in the petroleum
/
convenience store market ($6.7 million increase), partially offset by reduced
sales related to other customer programs. A significant store re-branding
program for a national retailer was completed during the third quarter of
fiscal
2007 and sales to this customer were slightly below last year’s sales.
Image
and
brand programs, whether full conversions or enhancements, are important to
the
Company’s strategic direction. Image programs include situations where our
customers refurbish their retail sites around the country by replacing some
or
all of the lighting, graphic elements, menu board systems and possibly other
items they may source from other suppliers. These image programs often take
several quarters to complete and involve both our customers’ corporate-owned
sites as well as their franchisee-owned sites, the latter of which involve
separate sales efforts by the Company with each franchisee. The Company may
not
always be able to replace net sales immediately when a large image conversion
program has concluded. Brand programs typically occur as new products are
offered or new departments are created within an existing retail store. Relative
to net sales to a customer before and after an image or brand program, net
sales
during the program are typically significantly higher, depending upon how
much
of the lighting, graphics or menu board business is awarded to the Company.
Sales related to a customer’s image or brand program are reported in either the
Lighting Segment and/or the Graphics Segment, depending upon the product
and/or
service provided.
Gross
profit of $18,474,000 in the third quarter of fiscal 2007 increased 23% from
the
same period last year, and increased as a percentage of net sales to 24.5%
as
compared to 23.3% last year. The increase in the gross profit percentage
is
primarily due to the increased weighting of net sales from the more profitable
Graphics and Technology Segments, with third quarter fiscal 2007 gross profit
percentages of approximately 28% and 25%, respectively. The increase in amount
of gross profit is due primarily to the net effects of the 17% increase in
net
sales (made up of a 1% decrease in the Lighting Segment, a 28% increase in
the
Graphics Segment, and the reporting of $6.1 million of net sales in the
Technology Segment), and increased margins on installation revenue. While
the
Company’s fiscal 2006 and fiscal 2007 sales price increases on select lighting
products improved fiscal 2007 gross profit, the following items also influenced
the Company’s gross profit margin: competitive pricing pressures, and other
manufacturing expenses ($0.7 million of increased wage, compensation and
benefits costs; $0.1 million of increased outside services; $0.1 million
of
increased rent expense).
Selling
and administrative expenses of $13,353,000 in the third quarter fiscal year
2007
increased $1.8 million, but decreased to 17.7% as a percentage of net sales
from
17.9% last year. Employee compensation and benefits expense increased $0.8
million in fiscal 2007 as compared to last year, partially as a result of
the
addition of LSI Saco Technologies as well as increases in the rest of the
Company. Other changes of expense between years include increased expense
related to amortization of intangible assets ($0.5 million, primarily associated
with the intangible assets of LSI Saco Technologies), increased research
&
development expense ($0.3 million), increased customer accommodations ($0.4
million), increased bad debt expense ($0.2 million), increased depreciation
expense ($0.1 million), increased product warranty expense ($0.1 million),
increased legal expenses ($0.1 million) and increased sales commissions ($0.1
million). These increases were partially offset by a third quarter fiscal
2007
reversal of a loss contingency reserve related to a menu board patent litigation
($0.6 million).
The
Company reported net interest expense of $233,000 in the third quarter of
fiscal
2007 as compared to net interest income of $152,000 in the same period last
year. The Company was in a positive cash position and was debt free for
substantially all of fiscal 2006 and generated interest income on invested
cash.
The Company is in a borrowing position in
fiscal
2007 primarily as a result of the LSI Saco Technologies acquisition in June
2006
as well as 2007 working capital needs. The effective tax rate in the third
quarter of fiscal 2007 was 32.5% reflective of Canadian tax rates and favorable
tax credits as compared to 34.2% in the third quarter of fiscal 2006.
Net
income increased 36.6% in the third quarter of fiscal 2007 to $3,298,000
as
compared to $2,415,000 last year. The increase is primarily the result of
increased gross profit on increased net sales, partially offset by increased
operating expenses and income taxes, as well as net interest expense as compared
to net interest income last year. Diluted earnings per share was $0.15 in
the
third quarter of fiscal 2007, as compared to $0.12 per share last year. The
weighted average common shares outstanding for purposes of computing diluted
earnings per share in the third quarter of fiscal 2007 were 21,955,000 shares
as
compared to 20,393,000 shares last year, increased primarily due to the 1.4
million shares issued as partial payment for the LSI Saco acquisition.
NINE
MONTHS ENDED MARCH 31, 2007 COMPARED TO NINE MONTHS ENDED MARCH 31,
2006
The
Company acquired SACO Technologies Inc. (renamed LSI Saco Technologies) on
June
26, 2006. The operating results of LSI Saco Technologies, which reported
net
sales of $14.5 million, have been included in the fiscal 2007 results. A
new
business segment was created with the acquisition of LSI Saco, the Technology
Segment, for which there were no results included in same period of fiscal
2006.
Net
sales
of $243,630,000 in the first nine months of fiscal 2007 increased 16.7% from
fiscal 2006 nine month net sales of $208,726,000. Lighting Segment net sales
increased 0.1% to $145,263,000 and Graphics Segment net sales increased 32%
to
$83,889,000 as compared to the same period of the prior year. The new Technology
Segment reported net sales of $14,478,000 in the first nine months of fiscal
2007. Sales to the petroleum / convenience store market represented 24% and
25%
of nine month net sales in fiscal 2007 and 2006, respectively. Net sales
to
this, the Company’s largest niche market, are reported in both the Lighting and
Graphics Segments, depending upon the product or service sold, and were up
12%
from the same period last year to $58,414,000 as Graphics sales to this market
increased significantly and Lighting sales decreased. The petroleum /
convenience store market has been, and will continue to be, a very important
niche market for the Company; however, if sales to other markets and customers
increase (including through the addition of the Technology Segment) more
than
net sales to this market, then the percentage of net sales to the petroleum
/
convenience store market would be expected to decline.
The
$0.2
million increase in Lighting Segment net sales is primarily the result of
decreased lighting sales to our niche markets of petroleum / convenience
stores,
automotive dealerships, quick service restaurants and retail national accounts
(net $5.2 million decrease), partially offset by a $5.8 million increase
in
commissioned net sales to the commercial and industrial lighting market.
The
Company implemented price increases in fiscal year 2006, and August 2006
on many
of its lighting products to follow general trends in the industry to recover
the
cost of increasing material components.
The
$20.2
million increase in Graphics Segment net sales is the result of increased
net
sales to CVS Corporation primarily for its program of re-branding stores
they
had purchased from another retailer ($14 million increase), as well as increased
net sales related to two image conversion programs in the petroleum /
convenience store market ($10.1 million increase), partially offset by reduced
sales related to other customer programs. Net sales to CVS were
approximately
$24.9 million or 10% of the Company’s total net sales in the first nine months
of fiscal 2007.
Image
and
brand programs, whether full conversions or enhancements, are important to
the
Company’s strategic direction. Image programs include situations where our
customers refurbish their retail sites around the country by replacing some
or
all of the lighting, graphic elements, menu board systems and possibly other
items they may source from other suppliers. These image programs often take
several quarters to complete and involve both our customers’ corporate-owned
sites as well as their franchisee-owned sites, the latter of which involve
separate sales efforts by the Company with each franchisee. The Company may
not
always be able to replace net sales immediately when a large image conversion
program has concluded. Brand programs typically occur as new products are
offered or new departments are created within an existing retail store. Relative
to net sales to a customer before and after an image or brand program, net
sales
during the program are typically significantly higher, depending upon how
much
of the lighting, graphics or menu board business is awarded to the Company.
Sales related to a customer’s image or brand program are reported in either the
Lighting Segment and/or the Graphics Segment, depending upon the product
and/or
service provided.
Gross
profit of $63,790,000 in the first nine months of fiscal 2007 increased 21%
from
the same period last year, and increased as a percentage of net sales to
26.2%
as compared to 25.2% last year. The increase in the gross profit percentage
is
primarily due to the increased weighting of net sales from the more profitable
Graphics and Technology Segments, each with nine month fiscal 2007 gross
profit
percentages of approximately 29%. The increase in amount of gross profit
is due
primarily to the net effects of the 17% increase in net sales (made up of
a 0.1%
increase in the Lighting Segment, a 32% increase in the Graphics Segment,
and
the reporting of $14.5 million of net sales in the Technology Segment). While
the Company’s fiscal 2006 and fiscal 2007 sales price increases on select
lighting products improved fiscal 2007 gross profit, the following items
also
influenced the Company’s gross profit margin: net increased manufacturing wages,
incentives and benefit costs ($1.3 million), competitive pricing pressures,
unabsorbed manufacturing costs in some of the Company’s facilities, and other
manufacturing expenses ($0.6 million of increased outside services, $0.3
million
increased rent expense, $0.2 million reduced utilities, and $0.5 million
of
increased supplies, maintenance and depreciation expense).
Selling
and administrative expenses of $41,617,000 in the first nine months of fiscal
year 2007 increased $4.4 million, but decreased to 17.1% as a percentage
of net
sales from 17.8% last year. The Company recorded a non-cash charge of $573,000
in fiscal 2006 related to variable accounting treatment of the Company’s
non-qualified deferred compensation plan, whereas there was no similar charge
in
fiscal 2007. Otherwise, employee compensation and benefits expense increased
$1.2 million in fiscal 2007 as compared to last year, primarily as a result
of
the addition of LSI Saco Technologies. Other changes of expense between years
include increased legal fees ($0.4 million, primarily associated with patent
litigation), increased expense related to amortization of intangible assets
($1.4 million, primarily associated with the intangible assets of LSI Saco
Technologies), increased research & development expense ($0.9 million),
increased customer accommodations ($0.5 million), increased product warranty
expense ($0.3 million), increased audit expenses ($0.2 million), increased
sales
commissions ($0.2 million on increased lighting sales), increased travel
expense
($0.1 million), increased bad debt expense ($0.3 million). These increases
were
partially offset by a third quarter fiscal 2007 reversal of a loss contingency
reserve related to a menu board patent litigation ($0.6 million).
The
Company reported net interest expense of $891,000 in the first nine months
of
fiscal 2007 as compared to net interest income of $324,000 in the same period
last year. The Company was in a positive cash position and was debt free
for
substantially all of fiscal 2006 and generated interest income on invested
cash.
The Company is in a borrowing position in
fiscal
2007 primarily as a result of the LSI Saco Technologies acquisition in June
2006
as well as nine month 2007 working capital needs. The effective tax rate
in the
first nine months of fiscal 2007 was 35.0% reflective of Canadian tax rates,
favorable tax credits and an adjustment to deferred taxes, as compared to
36.4%
in the first nine months of fiscal 2006.
Net
income increased 38.4% in the first nine months of fiscal 2007 to $13,828,000
as
compared to $9,990,000 last year. The increase is primarily the result of
increased gross profit on increased net sales, partially offset by increased
operating expenses and income taxes, as well as net interest expense as compared
to net interest income last year. Diluted earnings per share was $0.63 in
the
first nine months of fiscal 2007, as compared to $0.49 per share last year.
The
weighted average common shares outstanding for purposes of computing diluted
earnings per share in the first half of fiscal 2007 were 21,927,000 shares
as
compared to 20,400,000 shares last year, increased primarily due the 1.4
million
shares issued as partial payment for the LSI Saco acquisition.
Liquidity
and Capital Resources
The
Company considers its level of cash on hand, its borrowing capacity, 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
March
31, 2007 the Company had working capital of $68.3 million, compared to $85.3
million at December 31, 2006, and $66.8 million at June 30, 2006. The ratio
of
current assets to current liabilities was 2.59 to 1 as compared to a ratio
of
2.66 to 1 at June 30, 2006. The decrease in working capital from December
31,
2006 to March 31, 2007 relates primarily to a program in the Graphics Segment
whereby the Company receives full payment in advance of any shipments (for
which
a current liability has been recorded for customer prepayments and the cash
was
used to pay down the Company’s long-term debt) as well as a seasonal pay down of
accounts receivable which also resulted in a reduction of long-term debt.
The
increase in working capital from June 30, 2006 to March 31, 2007 was primarily
related to a significant increase in inventory ($7.6 million), increased
other
current assets and refundable income taxes ($1.5 million), decreased accounts
payable ($7.2 million), partially offset by decreased cash ($0.3 million)
and
decreased accounts receivable ($4.7 million), and increased accrued expenses
and
customer prepayments ($9.8 million).
The
Company generated $19.3 million of cash from operating activities in the
first
nine months of fiscal 2007 as compared to a generation of $17.7 million in
the
same period last year. The $1.6 million increase in net cash flows from
operating activities in the first nine months of fiscal 2007 is primarily
the
net result of a lesser increase in accounts receivable (unfavorable change
of
$0.9 million), a significantly larger increase in inventories (unfavorable
change of $7.4 million), an increase rather than a decrease in accounts payable
and accrued expenses (favorable change of $5.6 million), a decrease in net
deferred income tax liabilities ($0.4 million unfavorable), increased
depreciation and amortization (favorable $1.6 million), less expense related
to
the non-qualified deferred compensation plan (unfavorable $0.9 million),
and
more net income ($3.8 million favorable).
Net
accounts receivable were $46.8 million and $51.6 million at March 31, 2007
and
June 30, 2006, respectively. The decrease of over $4.7 million in net
receivables is primarily due to a seasonally larger amount of net sales in
the
fourth quarter of fiscal 2006 as compared to the third quarter of fiscal
2006.
The DSO (Days’ Sales Outstanding) was 55 days at both March 31, 2007 and June
30, 2006. The Company believes that its receivables are ultimately
collectible
or recoverable, net of certain reserves, and that aggregate allowances for
doubtful accounts are adequate.
Inventories
at March 31, 2007 increased $7.6 million from June 30, 2006 levels. Primarily
in
response to customer programs and the timing of shipments, inventory increases
occurred in the Lighting Segment of approximately $5.3 million (some of which
supports certain graphics programs), Graphics Segment of approximately $0.9
million, Technology Segment of approximately $1.4 million since June 30,
2006.
The $7.2 million decrease in accounts payable from June 30, 2006 to March
31,
2007 is primarily related to payments having been made in the third quarter
of
fiscal 2007 for inventory purchases of the second quarter in all Segments
in
support of anticipated sales and production volume.
Cash
generated from operations and borrowing capacity under two line of credit
facilities are the Company’s primary source of liquidity. The Company has an
unsecured $50 million revolving line of credit with its bank group, with
all $50
million of the credit line available as of May 1, 2007. This line of credit
consists of a $30 million three year committed credit facility expiring in
fiscal 2010 and a $20 million credit facility expiring in the third quarter
of
fiscal 2008. Additionally, in January 2007 the Company established a separate
$7
million annually renewable line of credit for the working capital needs of
its
Canadian subsidiary, LSI Saco Technologies. The Company believes that the
total
of available lines of credit plus cash flows from operating activities is
adequate for the Company’s fiscal 2007 operational and capital expenditure
needs. The Company is in compliance with all of its loan covenants.
The
Company used $1.6 million of cash related to investing activities in the
first
nine months of fiscal 2007 as compared to a use of $12.1 million in the same
period last year. The primary change between years relates to the fiscal
2007
$3.4 million of proceeds from the sale of fixed assets as two significant
rental
LED video screens in the Technology Segment were sold, and the fiscal 2006
purchase of $9.0 million of short-term investments. Capital expenditures
of $4.9
million in the first nine months of fiscal 2007 (includes $1.4 million as
the
initial payment for a Salvagnini fabrication center) compared to $3.1 million
in
the same period last year. Spending in both periods is primarily for tooling
and
equipment. The Company expects fiscal 2007 capital expenditures to be in
the $6
million range, exclusive of business acquisitions.
The
Company used $18.0 million of cash related to financing activities in the
first
nine months of fiscal 2007 as compared to a use of $7.3 million in the same
period last year. The $10.7 million change between years is primarily the
net
result of fiscal 2007 borrowings of $9.9 million on the Company’s line of credit
and fiscal 2007 payments against the line of credit of $20.0 million. Cash
dividend payments of $8.2 million in the first nine months of fiscal 2007
were
less than cash dividend payments of $8.8 million in the same period last
year.
The change between years relates to the fiscal 2005 special year-end dividend
of
approximately $2.0 million paid in the first quarter of fiscal 2006, partially
offset by a higher per share dividend rate and an increased number of
outstanding shares in fiscal 2007 for the regular quarterly cash dividend.
Additionally, the Company experienced less cash flow from the exercise of
stock
options in the first half of fiscal 2007 as compared to the same period last
year (unfavorable $1.2 million).
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 and has no off balance
sheet arrangements.
On
April
25, 2007 the Board of Directors declared a regular quarterly cash dividend
of
$0.13 per share (approximately $2,794,000) payable May 15, 2007 to shareholders
of record on May 8, 2007. The declaration and amount of dividends will be
determined by the Company’s Board of Directors, in its discretion, based upon
its evaluation of earnings, cash flow, capital requirements and future business
developments and opportunities, including acquisitions.
Carefully
selected acquisitions have long been an important part of the Company’s
strategic growth plans. The Company continues to seek out, screen and evaluate
potential acquisitions that could add to the Lighting, Graphics or Technology
product lines or enhance the Company’s position in selected markets. The Company
believes 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.
Critical
Accounting Policies and Estimates
The
Company is required to make estimates and judgments in the preparation of
its
financial statements that affect the reported amounts of assets, liabilities,
revenues and expenses, and related footnote disclosures. The Company bases
its
estimates on historical experience and on various other assumptions that
are
believed to be reasonable under the circumstances, the results of which form
the
basis for making judgments about the carrying values of assets and liabilities.
The Company continually reviews these estimates and their underlying assumptions
to ensure they remain appropriate. The Company believes the items discussed
below are among its most significant accounting policies because they utilize
estimates about the effect of matters that are inherently uncertain and
therefore are based on management’s judgment. Significant changes in the
estimates or assumptions related to any of the following critical accounting
policies could possibly have a material impact on the financial
statements.
Revenue
Recognition
The
Company recognizes revenue in accordance with Securities Exchange Commission
Staff Accounting Bulletin No. 104, “Revenue Recognition." Revenue is recognized
when title to goods and risk of loss have passed to the customer, there is
persuasive evidence of a purchase arrangement, delivery has occurred or services
have been rendered, and collectibility is reasonably assured. Revenue is
typically recognized at time of shipment. Sales are recorded net of estimated
returns, rebates and discounts. Any cash received from customers prior to
the
recognition of revenue is accounted for as a customer pre-payment and is
included in accrued expenses.
The
Company has four sources of revenue: revenue from product sales; revenue
from
the installation of product; service revenue generated from providing the
integrated design, project and construction management, site engineering,
and
site permitting; and revenue from shipping and handling. Product
revenue
is
recognized on product-only orders at the time of shipment in accordance with
EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” 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 or post-shipment
service and maintenance of certain solid state LED video screens or billboards,
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 has no
post-installation responsibilities, other than normal warranties. Service
revenue
from
integrated design, project and construction management, and site
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 revenue recognition criteria. Post-shipment service
and
maintenance revenue, if applicable, related to solid state LED video screens
or
billboards is recognized according to terms of each individual service
agreement. Shipping
and handling revenue
coincides with the recognition of revenue from sale of the product.
Income
taxes
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes;” accordingly,
deferred income taxes are provided on items that are reported as either income
or expense in different time periods for financial reporting purposes than
they
are for income tax purposes. Deferred income tax assets and liabilities are
reported on the Company’s balance sheet. Significant management judgment is
required in developing the Company’s income tax provision, including the
determination of deferred tax assets and liabilities and any valuation
allowances that might be required against deferred tax assets.
The
Company operates in multiple taxing jurisdictions and is subject to audit
in
these jurisdictions. The Internal Revenue Service and other tax authorities
routinely review the Company’s tax returns. These audits can involve complex
issues which may require an extended period of time to resolve. The impact
of
these examinations on the Company’s liability for income taxes cannot be
presently determined. In management’s opinion, adequate provision has been made
for potential adjustments arising from these examinations.
As
of
March 31, 2007 the Company had recorded a deferred New York state income
tax
asset in the amount of $816,000 related to the approximate $17.1 million
state
net operating loss carryover generated by the Company’s LSI Lightron subsidiary.
Additionally, as of March 31, 2007 the Company had recorded a deferred New
York
state income tax asset in the amount of $790,000, net of federal tax benefits,
related to non-refundable state tax credits. The Company has determined that
a
valuation reserve of $622,000 against certain state deferred tax assets is
required as of March 31, 2007 because the Company has determined in accordance
with Statement of Financial Accounting Standards No. 109 (SFAS No. 109) that
these assets will, more likely than not, not be realized. The Company will
continue to monitor the operations of this subsidiary to evaluate any potential
need to change this valuation reserve.
Equity
Compensation
The
Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R),
“Share-Based Payment,” effective July 1, 2005. SFAS No. 123(R) requires public
entities to measure the cost of employee services received in exchange for
an
award of equity instruments and recognize this cost over the period during
which
an employee is required to provide the services.
Asset
Impairment
Carrying
values of goodwill and other intangible assets with indefinite lives are
reviewed at least annually for possible impairment in accordance with Statement
of Financial Accounting Standards No. 142 (SFAS No. 142), “Goodwill and Other
Intangible Assets.” The Company’s impairment review involves the estimation of
the fair value of goodwill and indefinite-lived intangible assets using a
discounted cash flow approach, at the reporting unit level, that requires
significant management judgment with respect to revenue and expense growth
rates,
changes
in working capital and the selection and use of an appropriate discount rate.
The estimates of fair value of reporting units are based on the best information
available as of the date of the assessment. The use of different assumptions
would increase or decrease estimated discounted future operating cash flows
and
could increase or decrease an impairment charge. Company management uses
its
judgment in assessing whether assets may have become impaired between annual
impairment tests. Indicators such as adverse business conditions, economic
factors and technological change or competitive activities may signal that
an
asset has become impaired. The Company’s annual analysis and test for impairment
of goodwill was conducted as of July 1, 2006. There were no impairment charges
related to goodwill recorded by the Company during 2007 or 2006.
Carrying
values for long-lived tangible assets and definite-lived intangible assets,
excluding goodwill, are reviewed for possible impairment as circumstances
warrant in connection with Statement of Financial Accounting Standards No.
144
(SFAS No. 144), “Accounting for the Impairment or Disposal of Long-Lived
Assets.” Impairment reviews are conducted at the judgment of Company management
when it believes that a change in circumstances in the business or external
factors warrants a review. Circumstances such as the discontinuation of a
product or product line, a sudden or consistent decline in the forecast for
a
product, changes in technology or in the way an asset is being used, a history
of negative operating cash flow, or an adverse change in legal factors or
in the
business climate, among others, may trigger an impairment review. The Company’s
initial impairment review to determine if a potential impairment charge is
required is based on an undiscounted cash flow analysis at the lowest level
for
which identifiable cash flows exist. The analysis requires judgment with
respect
to changes in technology, the continued success of product lines and future
volume, revenue and expense growth rates, and discount rates. There were
no
impairment charges related to long-lived tangible assets or definite-lived
intangible assets recorded by the Company during 2007 or 2006.
Credit
and Collections
The
Company maintains allowances for doubtful accounts receivable for probable
estimated losses resulting from either customer disputes or the inability
of its
customers to make required payments. If the financial condition of the Company’s
customers were to deteriorate, resulting in their inability to make the required
payments, the Company may be required to record additional allowances or
charges
against income. The Company determines its allowance for doubtful accounts
by
first considering all known collectibility problems of customers’ accounts, and
then applying certain percentages against the various aging categories of
the
remaining receivables. The resulting allowance for doubtful accounts receivable
is an estimate based upon the Company’s knowledge of its business and customer
base, and historical trends. The Company also establishes allowances, at
the
time revenue is recognized, for returns and allowances, discounts, pricing
and
other possible customer deductions. These allowances are based upon historical
trends.
New
Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board issued FASB Interpretation
No. 48
(FIN 48), “Accounting for Uncertainty in Income Taxes - an interpretation of
FASB Statement No. 109.” FIN 48 provides guidance for the recognition,
measurement, classification and disclosure of the financial statement effects
of
a position taken or expected to be taken in a tax return (“tax position”). The
financial statement effects of a tax position must be recognized when there
is a
likelihood of more than 50 percent that based on the technical merits, the
position will be sustained upon examination and resolution of the related
appeals or litigation processes, if any. A tax position that meets the
recognition threshold must be measured initially and subsequently as the
largest
amount of tax benefit that is greater than 50 percent likely of
being
realized upon ultimate settlement with a taxing authority. In addition, FIN
48
specifies certain annual disclosures that are required to be made once the
interpretation has taken effect. The Interpretation is effective for fiscal
years beginning after December 15, 2006. The cumulative effect of FIN 48
adoption will be reported as an adjustment to the opening balance of retained
earnings at July 1, 2007. The Company is currently evaluating the impact
of
adopting FIN 48, and cannot currently estimate the impact on its consolidated
results of operations, cash flows or financial position.
In
September 2006, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements.” This
Statement defines fair value, establishes a framework for measuring fair
value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. The Statement applies under other accounting
pronouncements that require or permit fair value measurements. SFAS No. 157
is
effective for fiscal years beginning after November 15, 2007, or the Company’s
fiscal year 2009. The Company will be evaluating the impact of adopting SFAS
No.
157, and cannot currently estimate the impact on its consolidated results
of
operations, cash flows or financial position.
In
September 2006, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards (SFAS) No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans.” This Statement improves
financial reporting by requiring an employer to recognize the overfunded
or
underfunded status of a defined benefit postretirement plan as an asset or
liability in its statement of financial position and to recognize changes
in
that funded status in the year in which the changes occur through comprehensive
income. This Statement also improves financial reporting by requiring an
employer to measure the funded status of a plan as of the date of its year-end
statement of financial position, with limited exceptions. The effective date
to
initially recognize the funded status and to provide the required disclosures
is
for fiscal years ending after December 15, 2006, or the Company’s fiscal year
2007. The requirement to measure plan assets and benefit obligations for
fiscal
years ending after December 15, 2008, or the Company’s fiscal year 2009. The
Company will be evaluating the impact of adopting SFAS 158 and cannot currently
estimate the impact on its consolidated results of operations, cash flows
or
financial position.
In
February 2007, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” This statement permits entities to
choose to measure many financial instruments and certain other items at fair
value. The objective of the pronouncement is to improve financial reporting
by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. This statement is effective
as of the beginning of an entity’s first fiscal year that begins after November
15, 2007, or in the Company’s case, July 1, 2008. The Company is evaluating the
impact of adopting SFAS No. 159 and cannot currently estimate the impact
on its
consolidated results of operations, cash flows or financial
position.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
There
have been no material changes in the Registrant’s exposure to market risk since
June 30, 2006. Additional information can be found in Item 7A, Quantitative
and
Qualitative Disclosures About Market Risk, which appears on page 13 of the
Annual Report on Form 10-K for the fiscal year ended June 30, 2006.
ITEM
4. CONTROLS AND PROCEDURES
An
evaluation was performed as of March 31, 2007 under the supervision and with
the
participation of the Registrant’s management, including its principal executive
officer and principal financial officer, of the effectiveness of the design
and
operation of the Registrant’s disclosure controls and procedures pursuant to
Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act
of
1934. Based upon this evaluation, the Registrant’s Chief Executive Officer and
Chief Financial Officer concluded that the Registrant’s disclosure controls and
procedures were effective as of March 31, 2007, in all material respects,
to
ensure that information required to be disclosed in the reports the Registrant
files and submits under the Exchange Act are recorded, processed, summarized
and
reported as and when required.
There
have been no changes in the Registrant’s internal control over financial
reporting that occurred during the most recently ended fiscal period of the
Registrant or in other factors that have materially affected or are reasonably
likely to materially affect the Registrant's internal control over financial
reporting.
PART
II. OTHER INFORMATION
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
(c)
|
The
Company does not purchase into treasury its own common shares for
general
purposes. However, the Company does purchase its own common shares,
through a Rabbi Trust, in connection with investments of
employee/participants of the LSI Industries Inc. Non-Qualified
Deferred
Compensation Plan. Purchases of Company common shares for this
Plan in the
third quarter of fiscal 2007 were as
follows:
|
ISSUER
PURCHASES OF EQUITY SECURITIES
Period
|
(a)
Total
Number
of
Shares
Purchased
|
(b)
Average
Price
Paid
per
Share
|
(c)
Total Number of
Shares
Purchased as Part of Publicly Announced Plans or Programs
|
(d)
Maximum Number (or Approximate Dollar Value) of Shares that May
Yet Be
Purchased Under the Plans or Programs
|
1/1/07
to 1/31/07
|
213
|
$17.52
|
213
|
(1)
|
2/1/07
to 2/28/07
|
369
|
$18.19
|
369
|
(1)
|
3/1/07
to 3/31/07
|
350
|
$16.66
|
350
|
(1)
|
Total
|
932
|
$17.46
|
932
|
(1)
|
(1)
|
All
acquisitions of shares reflected above have been made in connection
with
the Company's Non-Qualified Deferred Compensation Plan, which has
been
authorized for 375,000 shares of the Company to be held in the
Plan. At
March 31, 2007 the Plan held 202,328 shares of the
Company.
|
ITEM
6. EXHIBITS
a)
|
Exhibits
|
|
|
|
|
|
31.1
|
Certification
of Principal Executive Officer required by Rule
13a-14(a)
|
|
|
|
|
31.2
|
Certification
of Principal Financial Officer required by Rule
13a-14(a)
|
|
|
|
|
32.1
|
Section
1350 Certification of Principal Executive Officer
|
|
|
|
|
32.2
|
Section
1350 Certification of Principal Financial
Officer
|
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)
|
May
4,
2007
Page
32