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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales – products
|
|
$ |
63,198 |
|
|
$ |
70,131 |
|
|
$ |
221,420 |
|
|
$ |
233,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales – installation
|
|
|
1,582 |
|
|
|
5,192 |
|
|
|
17,423 |
|
|
|
10,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales
|
|
|
64,780 |
|
|
|
75,323 |
|
|
|
238,843 |
|
|
|
243,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products sold
|
|
|
48,798 |
|
|
|
56,849 |
|
|
|
173,651 |
|
|
|
179,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
15,982 |
|
|
|
18,474 |
|
|
|
65,192 |
|
|
|
63,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and administrative expenses
|
|
|
14,456 |
|
|
|
13,353 |
|
|
|
45,231 |
|
|
|
41,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1,526 |
|
|
|
5,121 |
|
|
|
19,961 |
|
|
|
22,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(income)
|
|
|
(66 |
) |
|
|
(19 |
) |
|
|
(316 |
) |
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
15 |
|
|
|
252 |
|
|
|
53 |
|
|
|
928 |
|
Income
before income taxes
|
|
|
1,577 |
|
|
|
4,888 |
|
|
|
20,224 |
|
|
|
21,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
580 |
|
|
|
1,590 |
|
|
|
7,451 |
|
|
|
7,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
997 |
|
|
$ |
3,298 |
|
|
$ |
12,773 |
|
|
$ |
13,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share (see Note 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.05 |
|
|
$ |
0.15 |
|
|
$ |
0.59 |
|
|
$ |
0.64 |
|
Diluted
|
|
$ |
0.05 |
|
|
$ |
0.15 |
|
|
$ |
0.58 |
|
|
$ |
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,786 |
|
|
|
21,692 |
|
|
|
21,753 |
|
|
|
21,669 |
|
Diluted
|
|
|
21,908 |
|
|
|
21,955 |
|
|
|
21,996 |
|
|
|
21,927 |
|
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,
2008
|
|
|
June
30,
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
4,509 |
|
|
$ |
2,731 |
|
Short-term
investments
|
|
|
-- |
|
|
|
8,000 |
|
Accounts receivable,
net
|
|
|
41,171 |
|
|
|
55,750 |
|
Inventories
|
|
|
48,863 |
|
|
|
49,731 |
|
Refundable income
taxes
|
|
|
2,327 |
|
|
|
364 |
|
Other current
assets
|
|
|
4,905 |
|
|
|
6,782 |
|
Total current
assets
|
|
|
101,775 |
|
|
|
123,358 |
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment, net
|
|
|
45,898 |
|
|
|
47,558 |
|
|
|
|
|
|
|
|
|
|
Goodwill,
net
|
|
|
42,200 |
|
|
|
42,200 |
|
|
|
|
|
|
|
|
|
|
Intangible
Assets, net
|
|
|
17,421 |
|
|
|
19,166 |
|
|
|
|
|
|
|
|
|
|
Other
Assets, net
|
|
|
1,322 |
|
|
|
1,330 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
208,616 |
|
|
$ |
233,612 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES &
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
13,372 |
|
|
$ |
19,834 |
|
Accrued
expenses
|
|
|
11,935 |
|
|
|
35,127 |
|
Total current
liabilities
|
|
|
25,307 |
|
|
|
54,961 |
|
|
|
|
|
|
|
|
|
|
Long-Term
Deferred Tax Liabilities
|
|
|
2,250 |
|
|
|
2,175 |
|
Other
Long-Term Liabilities
|
|
|
3,168 |
|
|
|
415 |
|
|
|
|
|
|
|
|
|
|
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 21,587,096
and 21,493,327 shares,
respectively
|
|
|
81,307 |
|
|
|
79,326 |
|
Retained
earnings
|
|
|
96,584 |
|
|
|
96,735 |
|
Total shareholders’
equity
|
|
|
177,891 |
|
|
|
176,061 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES & SHAREHOLDERS’ EQUITY
|
|
$ |
208,616 |
|
|
$ |
233,612 |
|
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
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
Net income
|
|
$ |
12,773 |
|
|
$ |
13,828 |
|
Non-cash items included in net
income
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
6,644 |
|
|
|
6,674 |
|
Deferred income
taxes
|
|
|
155 |
|
|
|
21 |
|
Deferred compensation
plan
|
|
|
90 |
|
|
|
131 |
|
Stock option
expense
|
|
|
929 |
|
|
|
520 |
|
Issuance of common shares as
compensation
|
|
|
34 |
|
|
|
30 |
|
(Gain) on disposition of fixed
assets
|
|
|
3 |
|
|
|
(15 |
) |
Allowance for doubtful
accounts
|
|
|
(106 |
) |
|
|
166 |
|
Inventory obsolescence
reserve
|
|
|
139 |
|
|
|
473 |
|
|
|
|
|
|
|
|
|
|
Changes in
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
14,685 |
|
|
|
4,575 |
|
Inventories
|
|
|
729 |
|
|
|
(8,083 |
) |
Accounts payable and
other
|
|
|
(12,823 |
) |
|
|
(9,377 |
) |
Reserve for uncertain tax
positions
|
|
|
2,793 |
|
|
|
-- |
|
Reserve for uncertain tax
positions charged against retained earnings
|
|
|
(2,582 |
) |
|
|
-- |
|
Customer
prepayments
|
|
|
(17,029 |
) |
|
|
10,343 |
|
Net cash flows from operating
activities
|
|
|
6,434 |
|
|
|
19,286 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchases of property, plant and
equipment
|
|
|
(3,243 |
) |
|
|
(4,860 |
) |
Proceeds from sale of fixed
assets
|
|
|
1 |
|
|
|
3,432 |
|
Acquisition of business, net of
cash received
|
|
|
-- |
|
|
|
(141 |
) |
Proceeds from sale of short-term
investments
|
|
|
8,000 |
|
|
|
-- |
|
Net cash flows from (used in)
investing activities
|
|
|
4,758 |
|
|
|
(1,569 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Payment of long-term
debt
|
|
|
(958 |
) |
|
|
(19,956 |
) |
Proceeds from issuance of
long-term debt
|
|
|
958 |
|
|
|
9,881 |
|
Cash dividends
paid
|
|
|
(10,342 |
) |
|
|
(8,158 |
) |
Exercise of stock
options
|
|
|
1,076 |
|
|
|
524 |
|
Purchase of treasury
shares
|
|
|
(228 |
) |
|
|
(285 |
) |
Issuance of treasury
shares
|
|
|
80 |
|
|
|
16 |
|
Net cash flows (used in)
financing activities
|
|
|
(9,414 |
) |
|
|
(17,978 |
) |
|
|
|
|
|
|
|
|
|
Increase
(Decrease) in cash and cash equivalents
|
|
|
1,778 |
|
|
|
(261 |
) |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
2,731 |
|
|
|
3,322 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
4,509 |
|
|
$ |
3,061 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
62 |
|
|
$ |
907 |
|
Income
taxes paid
|
|
$ |
10,550 |
|
|
$ |
7,821 |
|
Issuance
of common shares as compensation
|
|
$ |
34 |
|
|
$ |
30 |
|
|
|
|
|
|
|
|
|
|
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, 2008, and the results of its operations
for the three and nine month periods ended March 31, 2008 and 2007, and
its cash flows for the nine month periods ended March 31, 2008 and 2007.
These statements should be read in conjunction with the financial
statements and footnotes included in the fiscal 2007 annual
report. Financial information as of June 30, 2007 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 and 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 the time of shipment.
Sales are recorded net of estimated returns, rebates and
discounts. Amounts received from customers prior to the recognition
of revenue are accounted for as customer pre-payments and are included in
accrued expenses. Revenue is recognized in accordance with Emerging
Issues Task Force (EITF) 00-21, “Revenue Arrangements with Multiple
Deliverables.”
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 and in
accordance with generally accepted accounting principles.
Shipping
and handling revenue coincides with the recognition of revenue from sale of the
product.
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.
The
following table presents the Company’s net accounts receivable at the dates
indicated.
(In
thousands)
|
|
|
|
|
|
|
Accounts
receivable
|
|
$ |
41,887 |
|
|
$ |
56,572 |
|
less
Allowance for doubtful accounts
|
|
|
(716 |
) |
|
|
(822 |
) |
Accounts receivable,
net
|
|
$ |
41,171 |
|
|
$ |
55,750 |
|
Facilities
Expansion Tax Incentives and Credits:
The
Company periodically receives either tax incentives 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 tax incentive is amortized to
income over the time period that the state could be entitled to return of the
tax incentive 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
available-for-sale 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 during fiscal 2007 and the
first half of fiscal 2008.
Cash
and Cash Equivalents:
The cash
balance includes cash and cash equivalents which have original maturities of
less than three months. At March 31, 2008 and June 30, 2007, the bank
balances included $2,495,000 and $2,421,000, respectively, in excess of FDIC
insurance limits.
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)
|
|
|
|
|
|
|
Property,
plant and equipment, at cost
|
|
$ |
103,192 |
|
|
$ |
100,847 |
|
less
Accumulated depreciation
|
|
|
(57,294 |
) |
|
|
(53,289 |
) |
Property, plant and equipment,
net
|
|
$ |
45,898 |
|
|
$ |
47,558 |
|
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)
|
|
|
|
|
|
|
Balance
at beginning of the period
|
|
$ |
314 |
|
|
$ |
378 |
|
Additions
charged to expense
|
|
|
1,081 |
|
|
|
1,172 |
|
Deductions
for repairs and replacements
|
|
|
(1,031 |
) |
|
|
(1,236 |
) |
Balance
at end of the period
|
|
$ |
364 |
|
|
$ |
314 |
|
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
12).
Research
and Development Costs:
Research
and development expenses are costs directly attributable to new product
development and consist of salaries, payroll taxes, employee benefits,
materials, supplies, depreciation and other administrative costs. All
costs are expensed as incurred and are classified as operating
expenses. Research and development costs incurred total $1,079,000
and $589,000 for the three month periods ended March 31, 2008 and 2007,
respectively and $2,798,000 and $1,829,000 for the nine month periods ended
March 31, 2008 and 2007, respectively.
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 122,000 shares and 263,000 shares for
the three months ended March 31, 2008 and 2007, respectively and 243,000 shares
and 258,000 shares for the nine months ended March 31, 2008 and 2007,
respectively.
Stock
Options:
The
Company recorded $228,500 in the first nine months of fiscal 2008 as a reduction
of federal income taxes payable, $221,300 as an increase in common stock, and
$7,200 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
$221,300. The Company recorded $114,200 in the first nine months of
fiscal 2007 as a reduction of federal income taxes payable, $104,100 as an
increase in additional paid in capital, 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. See further discussion in Note
11.
Recent
Pronouncements:
In
September 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 157, “Fair Value
Measurements.” This Statement provides a new definition of 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. Two FASB Staff Positions (FSP) were
subsequently issued. In February 2007, FSP No. 157-2 delayed the
effective date of this SFAS No. 157 for non-financial assets and non-financial
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. This FSP is effective for fiscal
years beginning after November 15, 2008, or the Company’s fiscal year
2010. FSP No. 157-1, also issued in February 2007, excluded FASB No.
13 “Accounting for Leases” and other accounting pronouncements that address fair
value measurements for purposes of lease classification or measurement under
FASB No. 13. However, this scope exception does not apply to assets
acquired and liabilities assumed in a business combination that are required to
be measured at fair value under FASB Statement No. 141, “Business Combinations”
or FASB No. 141R, “Business Combinations.” This FSP is effective upon
initial adoption of SFAS No. 157. 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. SFAS No. 158
requires companies to measure plan assets and benefit obligations for fiscal
years ending after December 15, 2008, or the Company’s fiscal year
2009. The Company has adopted the disclosure provisions of SFAS No.
158 and as such, did not have a significant 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 election is made on an instrument-by-instrument
basis and is irrevocable. If the fair value option is elected for an
instrument, SFAS No. 159 specifies that all subsequent changes in fair value for
that instrument shall be reported in earnings. 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.
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007),
“Business Combinations,” which replaces SFAS No. 141. The statement
retains the purchase method of accounting for acquisitions, but requires a
number of changes,
including
changes in the way assets and liabilities are recognized in the purchase
accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of
acquisition related costs as incurred. SFAS No. 141R is effective for
us beginning July 1, 2009 and will apply prospectively to business combinations
completed on or after that date.
Comprehensive
Income:
The
Company does not have any comprehensive income items other than net
income.
Reclassifications:
Certain
reclassifications may have been made to prior year amounts in order to be
consistent with the presentation for the current year. This included
the presentation of changes in non-cash items, specifically the allowance for
doubtful accounts, the inventory obsolescence reserve and customer prepayments,
within the condensed consolidated statements of cash flows, and identification
of installation revenues on the face of the condensed consolidated income
statements. The Company has also revised its business segment
reporting in these financial statements to now report two business segments
(Lighting and Graphics), rather than three segments as had previously been
reported. See further discussion in Note 4.
Use
of Estimates:
The
preparation of the financial statements in conformity with accounting principles
generally accepted in the United States of America 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 sells both lighting and graphics products into its most
significant market, the petroleum / convenience store market, with
approximately 22% and 27% of total net sales concentrated in this market
for the three months ended March 31, 2008 and 2007, respectively, and
approximately 30% and 24% of total net sales concentrated in this market
for the nine month periods ended March 31, 2008 and 2007,
respectively.
|
|
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.
|
NOTE
4: BUSINESS
SEGMENT INFORMATION
|
Statement
of Financial Accounting Standards (SFAS) No. 131, “Disclosures about
Segments of an Enterprise and Related Information,” establishes standards
for reporting information regarding operating segments in annual financial
statements and requires selected information of those segments to be
presented in interim financial statements. Operating segments
are identified as components of an enterprise for which separate discrete
financial information is available for evaluation by the chief operating
decision maker (the Company’s President and Chief Executive Officer) in
making decisions on how to allocate resources and assess
performance. While the Company has thirteen operating segments,
it has only two reportable operating business
segments: Lighting
|
and
Graphics. These segments are strategic business units organized
around product categories that follow management’s internal organization
structure with a President of LSI Lighting Solutions Plus and a President of LSI
Graphics Solutions Plus
reporting directly to the Company’s President and Chief Executive
Officer.
|
The
Lighting Segment includes outdoor, indoor, and landscape lighting that has
been fabricated and assembled for the commercial, industrial and
multi-site retail lighting markets, including the petroleum/convenience
store market. The Lighting Segment includes the operations of
LSI Ohio Operations, LSI Metal Fabrication, LSI MidWest Lighting, LSI
Lightron and LSI Greenlee Lighting. These operations have been
integrated and have similar economic characteristics. LSI
Marcole, which produces wire harnesses used in the Company’s lighting
products and also manufactures electric wiring used by appliance
manufacturers in commercial and industrial markets, has been aggregated
into the Lighting Segment based on its overall immateriality compared to
the consolidated amounts of the reportable business segment and
management’s plans to continue to integrate its Lighting operations by
increasing its intercompany volume.
|
|
The
Graphics Segment designs, manufactures and installs exterior and interior
visual image elements related to image programs, menu board systems, solid
state LED digital advertising billboards, and solid state LED digital
sports and entertainment video screens. These products are used
in visual image programs in several markets, including the
petroleum/convenience store market and multi-site retail
operations. The Graphics Segment includes the operations of
Grady McCauley, LSI Retail Graphics and LSI Integrated Graphic Systems,
which have been aggregated as such facilities manufacture two-dimensional
graphics with the use of screen and digital printing, fabricate
three-dimensional structural graphics sold in the multi-site retail and
petroleum/convenience store markets, and exhibit each of the similar
economic characteristics outlined in paragraph 17 of SFAS No.
131. The Graphics Segment also includes LSI Images, which
manufactures three-dimensional menu board systems, and LSI Adapt, which
provides customers with surveying, permitting, engineering and
installation services related to products of the Graphics
Segment. The results of LSI Images, LSI Adapt, the solid-state
LED billboards and sports video boards, and the Smartvision video screens
for the entertainment market have been aggregated into the Graphics
Segment based on the overall immateriality of these operating segments
compared to the consolidated amounts of the reportable Graphics business
segment as these operating segments are driven by a few contract-specific
programs that vary year-over-year.
|
|
In
its evaluation of business segment reporting, the Company determined that
the total of external revenues reported by the operating segments in the
Lighting Segment (LSI Ohio Operations, LSI Metal Fabrication, LSI MidWest
Lighting, LSI Lightron, Greenlee Lighting) and the operating segments in
the Graphics Segment (Grady McCauley, LSI Retail Graphics and LSI
Integrated Graphic Systems) comprised more than 75% of total consolidated
revenue.
|
|
Effective
with the first quarter of fiscal 2008, the Company has realigned its
business segment reporting structure to reflect changes in its
manufacturing operations and changes in its internal management reporting
to the President and CEO, and to appropriately report operating results to
shareholders of the Company. This change resulted in the former
Technology Segment, which was comprised of the LSI Saco Technologies
operations, being collapsed into the Lighting and Graphics
Segments. LSI Saco Technologies will serve as the Company’s
R&D center with its primary mission to continue to develop solid-state
LED technology to be employed in both the Lighting
and
|
|
Graphics
Segments, and will also be responsible for Smartvision® video screens for
the entertainment market and some specialty LED lighting. The
marketing and sales of solid-state LED billboards and sports video boards
has been transferred from LSI Saco Technologies and will be overseen by
the President of LSI Graphics Solutions Plus. The
marketing and sales of all LED light fixtures will be overseen by the
president of LSI Lighting Solutions Plus. Segment information
from earlier periods contained herein has been recast to reflect the
change in business segment
composition.
|
|
Summarized
financial information for the Company’s reportable business segments for
the three months and nine months ended March 31, 2008 and 2007, and as of
March 31, 2008 and June 30, 2007 is as
follows:
|
(In
thousands)
|
|
Three
Months Ended
March
31
|
|
|
Nine
Months Ended
March
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting
Segment
|
|
$ |
44,869 |
|
|
$ |
46,450 |
|
|
$ |
141,594 |
|
|
$ |
147,787 |
|
Graphics
Segment
|
|
|
19,911 |
|
|
|
28,873 |
|
|
|
97,249 |
|
|
|
95,843 |
|
|
|
$ |
64,780 |
|
|
$ |
75,323 |
|
|
$ |
238,843 |
|
|
$ |
243,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting
Segment
|
|
$ |
1,392 |
|
|
$ |
2,161 |
|
|
$ |
8,889 |
|
|
$ |
9,778 |
|
Graphics
Segment
|
|
|
134 |
|
|
|
2,960 |
|
|
|
11,072 |
|
|
|
12,395 |
|
|
|
$ |
1,526 |
|
|
$ |
5,121 |
|
|
$ |
19,961 |
|
|
$ |
22,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting
Segment
|
|
$ |
275 |
|
|
$ |
1,979 |
|
|
$ |
2,144 |
|
|
$ |
2,893 |
|
Graphics
Segment
|
|
|
425 |
|
|
|
542 |
|
|
|
1,099 |
|
|
|
1,967 |
|
|
|
$ |
700 |
|
|
$ |
2,521 |
|
|
$ |
3,243 |
|
|
$ |
4,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting
Segment
|
|
$ |
1,353 |
|
|
$ |
1,333 |
|
|
$ |
4,136 |
|
|
$ |
4,097 |
|
Graphics
Segment
|
|
|
820 |
|
|
|
863 |
|
|
|
2,508 |
|
|
|
2,577 |
|
|
|
$ |
2,173 |
|
|
$ |
2,196 |
|
|
$ |
6,644 |
|
|
$ |
6,674 |
|
|
|
|
|
|
|
|
Identifiable
assets:
|
|
|
|
|
|
|
Lighting
Segment
|
|
$ |
105,468 |
|
|
$ |
112,266 |
|
Graphics
Segment
|
|
|
85,025 |
|
|
|
97,507 |
|
|
|
|
190,493 |
|
|
|
209,773 |
|
Corporate
|
|
|
18,123 |
|
|
|
23,839 |
|
|
|
$ |
208,616 |
|
|
$ |
233,612 |
|
|
Segment
net sales represent sales to external customers. Intersegment
revenues were eliminated in consolidation as
follows:
|
(In
thousands)
|
|
Three
Months Ended
March
31
|
|
|
Nine
Months Ended
March
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting
Segment net sales to the Graphics Segment
|
|
$ |
480 |
|
|
$ |
701 |
|
|
$ |
3,179 |
|
|
$ |
2,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Graphics
Segment net sales to the Lighting Segment
|
|
$ |
353 |
|
|
$ |
591 |
|
|
$ |
1,332 |
|
|
$ |
1,864 |
|
|
Segment
operating income, which is used in management’s evaluation of segment
performance, represents net sales less all operating expenses including
allocations of corporate expense, but excluding interest
expense.
|
|
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:
(In
thousands)
|
|
Three
Months Ended
March
31
|
|
|
Nine
Months Ended
March
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
63,000 |
|
|
$ |
69,235 |
|
|
$ |
232,488 |
|
|
$ |
229,152 |
|
Canada
|
|
|
1,780 |
|
|
|
6,088 |
|
|
|
6,355 |
|
|
|
14,478 |
|
|
|
$ |
64,780 |
|
|
$ |
75,323 |
|
|
$ |
238,843 |
|
|
$ |
243,630 |
|
|
|
|
|
|
|
|
Long-lived
assets (b):
|
|
$ |
101,567 |
|
|
$ |
104,653 |
|
United States
|
|
|
5,274 |
|
|
|
5,601 |
|
Canada
|
|
$ |
106,841 |
|
|
$ |
110,254 |
|
|
(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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER
SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
997 |
|
|
$ |
3,298 |
|
|
$ |
12,773 |
|
|
$ |
13,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding during the
period, net of treasury shares
(a)
|
|
|
21,576 |
|
|
|
21,489 |
|
|
|
21,544 |
|
|
|
21,470 |
|
Weighted average shares
outstanding in the
Deferred Compensation Plan during
the period
|
|
|
210 |
|
|
|
203 |
|
|
|
209 |
|
|
|
199 |
|
Weighted average shares
outstanding
|
|
|
21,786 |
|
|
|
21,692 |
|
|
|
21,753 |
|
|
|
21,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share
|
|
$ |
0.05 |
|
|
$ |
0.15 |
|
|
$ |
0.59 |
|
|
$ |
0.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER
SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
997 |
|
|
$ |
3,298 |
|
|
$ |
12,773 |
|
|
$ |
13,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding - Basic
|
|
|
21,786 |
|
|
|
21,692 |
|
|
|
21,753 |
|
|
|
21,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of common shares to be
issued under
stock option plans, and
contingently issuable
shares, if any
|
|
|
122 |
|
|
|
263 |
|
|
|
243 |
|
|
|
258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding (c)
|
|
|
21,908 |
|
|
|
21,955 |
|
|
|
21,996 |
|
|
|
21,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per
share
|
|
$ |
0.05 |
|
|
$ |
0.15 |
|
|
$ |
0.58 |
|
|
$ |
0.63 |
|
|
(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 627,283 common shares and 237,067 common shares during the
three month periods ending March 31, 2008 and 2007, respectively, and
options to purchase 528,758 common shares and 187,263 common shares during
the nine month periods ended March 31, 2008 and 2007, 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):
|
|
|
|
|
|
|
|
Inventories
|
|
|
|
|
|
|
Raw materials
|
|
$ |
22,902 |
|
|
$ |
23,111 |
|
Work-in-process
|
|
|
7,566 |
|
|
|
8,211 |
|
Finished goods
|
|
|
18,395 |
|
|
|
18,409 |
|
|
|
$ |
48,863 |
|
|
$ |
49,731 |
|
|
|
|
|
|
|
|
|
|
Accrued
Expenses
|
|
|
|
|
|
|
|
|
Compensation and
benefits
|
|
$ |
6,339 |
|
|
$ |
8,837 |
|
Customer
prepayments
|
|
|
1,461 |
|
|
|
18,490 |
|
Accrued
Commissions
|
|
|
1,257 |
|
|
|
1,287 |
|
Accrued income
taxes
|
|
|
72 |
|
|
|
1,726 |
|
Other accrued
expenses
|
|
|
2,806 |
|
|
|
4,787 |
|
|
|
$ |
11,935 |
|
|
$ |
35,127 |
|
|
|
|
|
|
|
|
|
|
Other
Long-Term Liabilities
|
|
|
|
|
|
|
|
|
Reserve for uncertain tax
positions
|
|
$ |
2,793 |
|
|
$ |
-- |
|
Other long-term
liabilities
|
|
|
375 |
|
|
|
415 |
|
|
|
$ |
3,168 |
|
|
$ |
415 |
|
NOTE
7: GOODWILL AND OTHER
INTANGIBLE ASSETS
The
Company completed its annual goodwill impairment test in fiscal 2008 as of July
1, 2007. For purposes of this test, the Company determined it had
seven reporting units, of which five have goodwill. Based upon this
analysis, there was no goodwill impairment.
|
The
Company identified its reporting units in conjunction with its annual
goodwill impairment testing. In connection with the
realignment of its operating business segments (see Note 4), the Company
allocated certain amounts of the goodwill and intangible assets that
resulted from the LSI Saco Technologies acquisition to certain of its
reporting units based upon the relative fair values of these reporting
units. The Company relies upon a number of factors, judgments
and estimates when conducting its impairment testing. These
include operating results, forecasts, anticipated future cash flows and
market place data, to name a few. There are inherent
uncertainties related to these factors and judgments in applying them to
the analysis of goodwill
impairment.
|
The
following tables present information about the Company's goodwill and other
intangible assets on the dates or for the periods indicated.
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
44,585 |
|
|
$ |
2,385 |
|
|
$ |
42,200 |
|
|
$ |
44,585 |
|
|
$ |
2,385 |
|
|
$ |
42,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Intangible Assets
|
|
$ |
24,173 |
|
|
$ |
6,752 |
|
|
$ |
17,421 |
|
|
$ |
24,173 |
|
|
$ |
5,007 |
|
|
$ |
19,166 |
|
Amortization Expense of
Other Intangible Assets
|
|
|
|
|
|
|
Three
Months Ended
|
|
$ |
581 |
|
|
$ |
585 |
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
$ |
1,745 |
|
|
$ |
1,745 |
|
|
The
Company expects to record amortization expense over each of the next five
years as follows: 2008 -- $2,326,000; 2009 through 2012 --
$2,101,000.
|
The
carrying amounts of goodwill for both June 30, 2007 and March 31, 2008 are as
follows: Lighting Segment $11,320,000 and Graphics Segment
$30,880,000; total Company $42,200,000.
The gross
carrying amount and accumulated amortization by major other intangible asset
class is as follows:
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Intangible
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$ |
7,472 |
|
|
$ |
3,483 |
|
|
$ |
7,472 |
|
|
$ |
3,068 |
|
Trademarks and trade
names
|
|
|
920 |
|
|
|
168 |
|
|
|
920 |
|
|
|
151 |
|
Patents
|
|
|
110 |
|
|
|
51 |
|
|
|
110 |
|
|
|
45 |
|
LED Technology firmware,
software
|
|
|
10,448 |
|
|
|
2,612 |
|
|
|
10,448 |
|
|
|
1,493 |
|
Non-compete
agreements
|
|
|
630 |
|
|
|
438 |
|
|
|
630 |
|
|
|
250 |
|
|
|
|
19,580 |
|
|
|
6,752 |
|
|
|
19,580 |
|
|
|
5,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived Intangible
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade
names
|
|
|
4,593 |
|
|
|
-- |
|
|
|
4,593 |
|
|
|
-- |
|
|
|
|
4,593 |
|
|
|
-- |
|
|
|
4,593 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Intangible Assets
|
|
$ |
24,173 |
|
|
$ |
6,752 |
|
|
$ |
24,173 |
|
|
$ |
5,007 |
|
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 in the U.S. As of March 31, 2008, all $50 million of this line
of credit was available. A portion of this credit facility is a $20
million line of credit that expires in the third quarter of fiscal
2009. The remainder of the credit facility is a $30 million three
year committed line of credit that expires in fiscal 2011. 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 has had no borrowings under its bank
credit facilities in the U.S. in fiscal year 2008.
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
2009. 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. While there has been some activity in the line of
credit during the first nine months of fiscal 2008, there are no borrowings
against this line of credit as of March 31, 2008.
The
Company is in compliance with all of its loan covenants as of March 31,
2008.
NOTE
9: RESERVE
FOR UNCERTAIN TAX LIABILITIES
The
Company adopted the provisions of FASB Interpretation No. 48 (FIN 48),
“Accounting for Uncertainty in Income Taxes,” on July 1, 2007. As a
result of adoption, the Company recognized $2,582,000 in reserves for uncertain
tax positions and recorded a charge of $2,582,000 to the July 1, 2007
retained earnings balance. As of the adoption date, penalties were
$523,000 of the reserve. Additionally, tax and interest, net of
federal tax, were $1,592,000 and $467,000, respectively, of the reserves as of
July 1, 2007. Of the $2,582,000 reserve for uncertain tax positions,
$2,059,000 would have an unfavorable impact on the effective tax rate if
recognized.
For the
three and nine months ended March 31, 2008, the Company recognized an additional
$37,000 and $211,000 tax expense, respectively, related to the increase in
reserves for uncertain tax positions. The Company is recording
estimated interest and penalties related to potential underpayment of income
taxes as a component of tax expense in the Consolidated Income
Statement. While it is reasonably possible that the amount of
reserves for uncertain tax positions may change in the next twelve months, the
Company does not anticipate that total reserves for uncertain tax positions will
significantly change due to the settlement of audits or the expiration of
statutes of limitations in the next twelve months.
The
Company files a consolidated federal income tax return in the United States, and
files various combined and separate tax returns in several state and local
jurisdictions. With limited exceptions, the Company is no longer subject to U.S.
Federal, state and local tax examinations by tax authorities for fiscal years
ending prior to June 30, 2003. The Company is currently under audit
by the Internal Revenue Service on its fiscal year 2006 Federal Income Tax
Return.
The
Company paid cash dividends of $10,342,000 and $8,158,000 in the nine month
periods ended March 31, 2008 and 2007, respectively. In April, 2008,
the Company’s Board of Directors declared a $0.15 per share regular quarterly
cash dividend (approximately $3,238,000) payable on May 13, 2008 to shareholders
of record as of May 6, 2008.
NOTE
11: EQUITY
COMPENSATION
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 1,249,752 shares were
available for future grant or award as of March 31, 2008. 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, 2008, a total
of 1,201,482 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 599,532 options for common shares were
vested and exercisable. The approximate unvested stock option expense
as of March 31, 2008 that will be recorded as expense in future periods is
$2,796,000. The weighted average time over which this expense will be
recorded is approximately 22 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
3.61% |
|
|
|
2.92% |
|
|
|
3.61% |
|
|
|
2.92% |
|
Expected
volatility
|
|
|
37.32% |
|
|
|
39.04% |
|
|
|
36.38% |
|
|
|
40.00% |
|
Risk-free
interest rate
|
|
|
2.5% |
|
|
|
4.6% |
|
|
|
4.3% |
|
|
|
4.6% |
|
Expected
life
|
|
4.3
yrs.
|
|
|
7
yrs.
|
|
|
4.3
yrs.
|
|
|
7
yrs.
|
|
At March
31, 2008, the 328,200 options granted in the first nine months of fiscal 2008 to
employees and non-employee directors had exercise prices ranging from $12.58 to
$19.76, fair values ranging from $3.07 to $6.61, and remaining contractual lives
of between four years and eleven months to nine years and five
months.
At March
31, 2007, the 245,700 options granted in the first nine months of fiscal 2007 to
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.
The
Company records stock option expense using a straight line Black-Scholes method
with an estimated 4.2% forfeiture rate (revised in the second quarter of fiscal
2008 from the 10% forfeiture rate previously used). 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. As of March 31, 2008, the Company expects that approximately
577,000 outstanding stock options, net of forfeitures, having a weighted average
exercise price of $17.57, weighted average remaining contractual terms of 8.5
years and aggregate intrinsic value of $237,000 will vest in the
future.
Information
related to all stock options for the nine months ended March 31, 2008 is shown
in the table below:
|
|
|
|
|
|
|
Average
Remaining
Contractual
Term
|
|
|
|
Outstanding
at 6/30/07
|
|
|
983,788 |
|
|
$ |
12.16 |
|
6.3 yrs.
|
|
$ |
5,642,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
328,200 |
|
|
$ |
19.74 |
|
|
|
|
|
|
Forfeitures
|
|
|
(5,500 |
) |
|
$ |
16.14 |
|
|
|
|
|
|
Exercised
|
|
|
(105,006 |
) |
|
$ |
9.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at 3/31/08
|
|
|
1,201,482 |
|
|
$ |
14.45 |
|
6.8 yrs.
|
|
$ |
1,790,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at 3/31/08
|
|
|
599,532 |
|
|
$ |
11.31 |
|
5.1 yrs.
|
|
$ |
1,543,300 |
|
The
aggregate intrinsic value of stock options exercised in the nine months ended
March 31, 2008 was $913,649. The Company received $855,000 of cash
and 8,068 shares from employees who exercised 105,006 options during the nine
months ended March 31, 2008. Additionally, in this nine month period, the
Company recorded $228,500 as a reduction of federal income taxes payable,
$221,300 as an increase in common stock, and $7,200 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, 2008 is
shown in the table below:
|
|
|
|
|
|
|
Remaining
Contractual
Term
|
|
|
|
Outstanding
unvested stock options at 6/30/07
|
|
|
443,157 |
|
|
$ |
14.40 |
|
8.3 yrs.
|
|
$ |
1,552,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(163,907 |
) |
|
$ |
13.38 |
|
|
|
|
|
|
Forfeitures
|
|
|
(5,500 |
) |
|
$ |
16.14 |
|
|
|
|
|
|
Granted
|
|
|
328,200 |
|
|
$ |
19.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
unvested stock options at 3/31/08
|
|
|
601,950 |
|
|
$ |
17.57 |
|
8.5 yrs.
|
|
$ |
247,400 |
|
Stock Compensation
Awards
The
Company awarded a total of 1,876 common shares in the first nine months of
fiscal 2008, valued at their approximate $33,875 fair market value on the date
of issuance pursuant to the compensation programs for non-employee directors and
twenty year service awards for fourteen employees 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, 2008 there were 36
participants, and all but one had fully vested account balances. A
total of 208,733 common shares with a cost of $2,397,200, and 203,688 common
shares with a cost of $2,249,400 were held in the Plan as of March 31, 2008 and
June 30, 2007, 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 Non-Qualified
Deferred Compensation Plan. For the full fiscal year 2008, the
Company estimates the Rabbi Trust for the Non-Qualified Deferred Compensation
Plan will make net repurchases in the range of 14,000 to 15,000 common shares of
the Company. During the nine months ended March 31, 2008 the Company
used approximately $228,000 to purchase common shares of the Company in the open
stock market for either employee salary deferrals or Company contributions into
the Non-Qualified Deferred Compensation Plan. The Company does not
currently repurchase its own common shares for any other purpose.
NOTE
12: 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. Since October of 2000, the Company has been 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 eleven
years. The Company has defended and intends to continue to
defend this case vigorously. 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. In
March 2007, the Company received a favorable summary judgment
decision. As a result of the favorable summary judgment
decision, the loss contingency reserve of $590,000 was written off to
income in the third quarter of fiscal 2007. The plaintiffs in
this lawsuit appealed the summary judgment decision and in March 2008 the
summary judgment decision was vacated by the Appeals Court and the lawsuit
was remanded back to the lower level court for additional
consideration. With this lawsuit back in progress, the Company
intends to vigorously defend itself. In accordance with
Statement of Financial Accounting Standards No. 5, “Accounting for
Contingencies,” the Company has not recorded a loss contingency reserve
because the probability and estimate of loss, if any, is
uncertain.
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting
Segment
|
|
$ |
44,869 |
|
|
$ |
46,450 |
|
|
$ |
141,594 |
|
|
$ |
147,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Graphics
Segment
|
|
|
19,911 |
|
|
|
28,873 |
|
|
|
97,249 |
|
|
|
95,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
64,780 |
|
|
$ |
75,323 |
|
|
$ |
238,843 |
|
|
$ |
243,630 |
|
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.
The
Company has streamlined its segment reporting to the two segments of Lighting
and Graphics, and accordingly, results of fiscal 2007 have been recast into
these two segments. This change in segment reporting did not have any
impact on previously reported consolidated financial results of the
Company.
Results of
Operations
THREE
MONTHS ENDED MARCH 31, 2008 COMPARED TO THREE MONTHS ENDED MARCH 31,
2007
Net sales
of $64,780,000 in third quarter of fiscal 2008 decreased 14.0% from fiscal 2007
third quarter net sales of $75,323,000. Lighting Segment net sales
decreased 3.4% to $44,869,000 and Graphics Segment net sales decreased 31.0% to
$19,911,000 as compared to the prior year. Sales to the petroleum /
convenience store market represented 22% and 27% of net sales in the third
quarter of fiscal 2008 and 2007, 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 down 29% from
last year to $14,179,000 as Graphics sales to this market decreased
significantly (40%) and Lighting sales decreased (10%). 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 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 $1.6 million or 3.4% decrease in
Lighting Segment net sales is primarily the net result of a $1.9 million or 7.8%
increase in commissioned net sales to the commercial and industrial lighting
market offset by a $3.3 million net decrease in lighting sales to our niche
markets of petroleum / convenience stores, automotive dealerships, and retail
national accounts (one large national retailer represented a reduction of
approximately $4.2 million as their new store construction program slowed and
the Company has transitioned from primarily interior lighting to primarily
exterior lighting under a new contract).
The $9.0 million or 31.0% decrease in
Graphics Segment net sales is primarily the result of completion of or reduction
in volume of graphics programs, including three image
conversion
programs
in the petroleum / convenience store market ($7.1 million decrease), a menu
board program for a quick serve restaurant retailer ($1.5 million decrease), a
sports LED video screen customer ($1.9 million decrease) and an LED billboard
customer ($2.0 million decrease), partially offset by increased net sales
related to a menu board program for a quick serve restaurant retailer ($4.2
million increase). See Note 3 to these financial statements on Major
Customer Concentrations.
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 or graphics 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 $15,982,000 in third
quarter of fiscal 2008 decreased 13% from last year, and increased slightly as a
percentage of net sales to 24.7% as compared to 24.5% last year. The
decrease in the amount of gross profit is due primarily to the effects of the
14% decrease in net sales (made up of a 3.4% decrease in the Lighting Segment
and a 31.0% decrease in the Graphics Segment), and decreased margins on
installation revenue. The following items also influenced the
Company’s gross profit margin on a consolidated basis: competitive
pricing pressures, less manufacturing overhead absorption, and other
manufacturing expenses in support of production requirements ($0.1 million of
decreased wage, compensation and benefits costs; $0.1 million of decreased
factory supplies, repairs and maintenance).
Selling and administrative expenses of
$14,456,000 in the third quarter of fiscal year 2008 increased $1.1 million, and
increased to 22.3% as a percentage of net sales from 17.7% last
year. Fiscal 2007 administrative expense included a favorable
reversal of a $0.6 million loss contingency reserve, with no similar favorable
item in fiscal 2008. Other changes of expense between years include
increased sales commission expense ($0.6 million), increased research &
development expense ($0.5 million, primarily associated with research and
development spending related to solid-state LED technology), decreased legal
expenses ($0.3 million), increased outside services ($0.2 million) and decreased
warranty expense ($0.1 million).
The Company reported net interest
income of $51,000 in third quarter of fiscal 2008 as compared to net interest
expense of $233,000 last year. The Company was in a positive cash
position and was debt free during the third quarter of fiscal 2008 and generated
interest income on invested cash. The Company was in a borrowing
position during the third quarter of fiscal 2007. The effective tax
rate in third quarter of fiscal 2008 was 36.8% as compared to 32.5% in the same
period of fiscal 2007, primarily as a result of favorable tax credits in the
fiscal 2007 third quarter.
Net income of $997,000 decreased 69.8%
in third quarter of fiscal 2008 as compared to $3,298,000 last
year. The decrease is primarily the result of decreased gross profit
on decreased net sales and increased operating expenses, partially offset by net
interest income as compared to net interest expense last year, and decreased
income taxes. Diluted earnings
per share
was $0.05 in third quarter of fiscal 2008, as compared to $0.15 per share last
year. The weighted average common shares outstanding for purposes of computing
diluted earnings per share in third quarter of fiscal 2008 was 21,908,000 shares
as compared to 21,955,000 shares last year.
NINE
MONTHS ENDED MARCH 31, 2008 COMPARED TO NINE MONTHS ENDED MARCH 31,
2007
Net sales
of $238,843,000 in first nine months of fiscal 2008 decreased 2.0% from fiscal
2007 nine month net sales of $243,630,000. Lighting Segment net sales
decreased 4.2% to $141,594,000 and Graphics Segment net sales increased 1.5% to
$97,249,000 as compared to the prior year. Sales to the petroleum /
convenience store market represented 30% and 24% of net sales in the first nine
months of fiscal 2008 and 2007, 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 23% from last
year to $70,496,000 as Graphics sales to this market increased significantly
(47%) and Lighting sales decreased (8%). 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 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 $6.2 million or 4.2% decrease in
Lighting Segment net sales is primarily the net result of a $6.5 million or 8.9%
increase in commissioned net sales to the commercial and industrial lighting
market, offset by an $11.5 million decrease in lighting sales to our niche
markets of petroleum / convenience stores, automotive dealerships, and retail
national accounts (one large national retailer represented approximately $12.9
million of this reduction as their new store construction program slowed and the
Company has transitioned from primarily interior lighting to primarily the
exterior lighting under a new contract).
The $1.4 million or 1.5% 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 ($17.3 million increase), and to a menu board conversion program for a
quick serve restaurant retailer ($19.6 million increase). These
increases were partially offset by completion of programs or reduction of net
sales to other graphics customers, including an image conversion program for a
national drug store retailer ($13.7 million decrease), a petroleum / convenience
store customer ($6.0 million decrease), an LED billboard customer ($2.0 million
decrease), reduced project sales to a customer involved in sports scoreboards
and video screens ($5.5 million reduction), reduced sales for a menu board
conversion program for a quick serve restaurant retailer ($2.6 million decrease)
and changes in volume or completion of other graphics programs. See
Note 3 to these financial statements on Major Customer
Concentrations.
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 or graphics 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 $65,192,000 in first
nine months of fiscal 2008 increased 2% from last year, and increased as a
percentage of net sales to 27.3% as compared to 26.2% last year. The
increase in the gross profit percentage is primarily due to the increased
weighting of net sales from the more profitable Graphics Segment and gross
profit percentage improvements in both segments. The increase in
amount of gross profit is primarily due to increased installation sales and
improvements in the Graphics gross margin percentage, partially offset by
reduced gross profit from reduced lighting net sales and decreased margins on
installation revenue The following items also influenced the
Company’s gross profit margin on a consolidated basis: competitive
pricing pressures, and other manufacturing expenses in support of increased
production requirements ($0.4 million of increased wage, compensation and
benefits costs; $0.4 million of decreased outside services; $0.2 million
decreased lease and rental expense; $0.1 million increased depreciation expense;
$0.1 million decreased utilities and property taxes; and $0.1 million decreased
repairs and maintenance).
Selling and administrative expenses of
$45,231,000 in the first nine months of fiscal year 2008 increased $3.6 million,
and increased to 18.9% as a percentage of net sales from 17.1% last
year. Employee compensation and benefits expense increased $1.0
million in first nine months of fiscal 2008 as compared to last
year. Other changes of expense between years include increased sales
commission expense ($1.6 million), increased research & development expense
($1.0 million, primarily associated with research and development spending
related to solid-state LED technology), increased outside services ($1.0
million), decreased legal expenses ($0.8 million), increased warranty expense
($0.3 million), decreased bad debt expense ($0.2 million), decreased
depreciation expense ($0.1 million), and increased repairs and maintenance ($0.1
million). Additionally, fiscal 2007 administrative expense included a
favorable reversal of a $0.6 million loss contingency reserve, with no similar
favorable item in fiscal 2008.
The Company reported net interest
income of $263,000 in first nine months of fiscal 2008 as compared to net
interest expense of $891,000 last year. The Company was in a positive
cash position and was debt free for substantially all of the first nine months
of fiscal 2008 and generated interest income on invested cash. The
Company was in a borrowing position the first nine months of fiscal
2007. The effective tax rate in first nine months of fiscal 2008 was
36.8% as compared to 35.0% in the same period of fiscal 2007, primarily as a
result of favorable tax credits in fiscal 2007.
Net
income of $12,773,000 decreased 7.6% in first nine months of fiscal 2008 as
compared to $13,828,000 last year. The decrease is primarily the
result of increased gross profit on decreased net sales, and net interest income
as compared to net interest expense last year, offset by increased operating
expenses. Diluted earnings per share was $0.58 in first nine months
of fiscal 2008, as compared to $0.63 per share last year. The weighted average
common shares outstanding for purposes of computing diluted earnings per share
in first nine months of fiscal 2008 were 21,996,000 shares as compared to
21,927,000 shares last year.
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, 2008 the Company had
working capital of $76.5 million, compared to $68.4 million at June 30,
2007. The ratio of current assets to current liabilities was 4.02 to
1 as compared to a ratio of 2.24 to 1 at June 30, 2007. The $8.1
million increase in working capital from June 30, 2007 to March 31, 2008 was
primarily related to decreased accrued expenses and customer prepayments ($23.2
million), decreased accounts payable ($6.5 million) and increased refundable
income taxes ($2.0 million) partially offset by decreased net accounts
receivable ($14.6 million), decreased cash and short-term investments ($6.2
million), decreased other current assets ($1.9 million) and decreased net
inventories ($0.9 million),
The Company generated $6.4 million of
cash from operating activities in first nine months of fiscal 2008 as compared
to generation of $19.3 million of cash last year. The $12.9 million
decrease in net cash flows from operating activities in first nine months of
fiscal 2008 is primarily the net result of less net income ($1.1 million
unfavorable), a larger decrease in accounts receivable (favorable change of
$10.1 million), a decrease rather than an increase in inventories (favorable
change of $8.8 million), more of a decrease in accounts payable and accrued
expenses (unfavorable change of $3.4 million), a decrease rather than an
increase in customer prepayments (unfavorable $27.4 million), an increase in the
reserve for uncertain income tax positions (favorable change of $0.2 million),
and increased stock option expense (favorable change of $0.4 million), a
reduction rather than an increase in the bad debt reserve (unfavorable change of
$0.3 million), and less of an increase in the obsolete inventory reserve
(unfavorable change of $0.3 million).
Net accounts receivable were $41.2
million and $55.8 million at March 31, 2008 and June 30, 2007,
respectively. The decrease of $14.6 million in net accounts
receivable is primarily due to a lesser amount of net sales in the third quarter
of fiscal 2008 ($64.8 million) as compared to the fourth quarter of fiscal 2007
($93.8 million). The DSO (Days’ Sales Outstanding) increased to 59
days at March 31, 2008 as compared to 48 days at June 30, 2007 (primarily as a
result of timing of payments from the Company’s Graphics customers), thereby
partially offsetting the reduction in accounts receivable. 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, 2008 decreased
$0.9 million from June 30, 2007 levels. Inventory of the Graphics
Segment increased approximately $0.1 million, while inventory in the Lighting
Segment decreased approximately $1 million (some of this inventory supports
certain graphics programs) since June 30, 2007. The $6.5 million
decrease in accounts payable from June 30, 2007 to March 31, 2008 is primarily
related to flow of materials in support of reduced anticipated sales and
production volume, particularly in the Company’s Graphics Segment.
The $23.2 million decrease in accrued
expenses from June 30, 2007 to March 31, 2008 is primarily related to a decrease
in customer prepayments ($17.0 million), decreased accruals for compensation and
benefits ($2.5 million), decreased accrued income taxes ($1.7 million) and
decreased other accrued expenses ($2 million). The Company adopted
FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN
48), as of July 1, 2007 by recording a liability of $2,582,000 and a
corresponding charge to Retained Earnings. The Company added $211,000
to this liability and recorded a corresponding income tax expense in the first
nine months of fiscal 2008. See Note 9 to the March 31, 2008
financial statements.
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 in the
U.S., with all $50 million of the credit line available as of April 24,
2008. 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
2009. Additionally, the Company has a separate $7 million annually renewable
line of credit for the working capital needs of its Canadian subsidiary, LSI
Saco Technologies, all of which is available as of April 24,
2008. The Company believes that the total of available lines of
credit plus cash flows from operating activities is adequate for the Company’s
fiscal 2008 operational and capital expenditure needs. The Company is in
compliance with all of its loan covenants.
The Company generated $4.8 million of
cash related to investing activities in first nine months of fiscal 2008 as
compared to a use of $1.6 million in the same period last year. The
primary change between years relates to the fiscal 2007 proceeds from the sale
of fixed assets (as two significant rental LED video screens were sold, $3.4
million unfavorable), less purchase of fixed assets ($1.6 million unfavorable),
and the fiscal 2008 divesture of short-term investments ($8.0 million generation
of funds). The Company expects fiscal 2008 capital expenditures to be
in the $5 million range, exclusive of business acquisitions.
The Company used approximately $9.4
million of cash related to financing activities in first nine months of fiscal
2008 as compared to a use of $18.0 million the same period last
year. The $8.6 million change between years is primarily the result
of activities with the Company’s lines of credit ($10.1 million
unfavorable). The first nine months of fiscal 2008 was a period in
which the debt that was borrowed was also paid off, whereas the first nine
months of fiscal 2007 was a period of net payment of borrowed
money. Cash dividend payments of $10.3 million in first nine months
of fiscal 2008 were greater than cash dividend payments of $8.2 million in the
same period last year. The change between years relates to the fiscal
2007 special year-end dividend of approximately $1.1 million paid in the first
quarter of fiscal 2008, and a higher per share dividend rate and an increased
number of outstanding shares in first nine months of fiscal 2008 for the regular
quarterly cash dividend. Additionally, the Company experienced
increased cash flow from the exercise of stock options in first nine months of
fiscal 2008 as compared to the same period last year (favorable $0.6
million).
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 and has no off balance sheet arrangements.
On April 23, 2008 the Board of
Directors declared a regular quarterly cash dividend of $0.15 per share
(approximately $3,238,000) payable May 13, 2008 to shareholders of record on May
6, 2008. 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 or Graphics
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 and 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. Amounts received from customers prior to the recognition
of revenue are accounted for as customer prepayments and are included in accrued
expenses. Revenue is recognized in accordance with EITF
00-21.
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 and in
accordance with generally accepted accounting principals. 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. In management’s
opinion, adequate provision has been made for potential adjustments arising from
these examinations.
As of March 31, 2008 the Company had
recorded two deferred state income tax assets, one in the amount of $22,000
related to a state net operating loss carryover generated by the Company’s New
York subsidiary, and the other in the amount of $938,000, net of federal tax
benefits, related to non-refundable state tax credits. The Company
has determined that these deferred state income tax assets totaling $960,000 do
not require any valuation reserves because, in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), these assets will, more
likely than not, be realized.
The Company adopted the provisions of
FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income
Taxes,” on July 1, 2007. As a result of adoption, the Company
recognized $2,582,000 in reserves for uncertain tax positions and recorded a
charge of $2,582,000 to the July 1, 2007 retained earnings
balance. As of the adoption date, penalties were $523,000 of the
reserve. Additionally, tax and interest, net of federal tax, were
$1,592,000 and $467,000, respectively, of the reserves as of July 1,
2007. Of the $2,582,000 reserve for uncertain tax positions,
$2,059,000 would have an unfavorable impact on the effective tax rate if
recognized.
As of March 31, 2008, the Company
recognized an additional $211,000 tax expense related to the increase in
reserves for uncertain tax positions. The Company is recording
estimated interest and penalties related to potential underpayment of income
taxes as a component of tax expense in the Consolidated Income
Statement. While it is reasonably possible that the amount of
reserves for uncertain tax positions may change in the next twelve months, the
Company does not anticipate that total reserves for uncertain tax positions will
significantly change due to the settlement of audits or the expiration of
statutes of limitations in the next twelve months.
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. While the Company’s annual analysis and test for impairment
of goodwill conducted as of July 1, 2007 has not been audited, indications are
that goodwill is not impaired. There were no impairment charges
related to goodwill recorded by the Company during fiscal 2008 or
2007.
Carrying values for long-lived tangible
assets and definite-lived intangible assets, excluding goodwill and
indefinite-lived intangible assets, 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 fiscal year 2008 or
2007.
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 September 2006, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 157, “Fair Value Measurements.” This Statement provides a
new definition of 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. Two FASB
Staff Positions (FSP) were subsequently issued. In February 2007, FSP
No. 157-2 delayed the effective date of this SFAS No. 157 for non-financial
assets and non-financial liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis. This FSP
is effective for fiscal years beginning after November 15, 2008, or the
Company’s fiscal year 2010. FSP No. 157-1, also issued in February
2007, excluded FASB No. 13 “Accounting for Leases” and other accounting
pronouncements that address fair value measurements for purposes of
lease
classification
or measurement under FASB No. 13. However, this scope exception does
not apply to assets acquired and liabilities assumed in a business combination
that are required to be measured at fair value under FASB Statement No. 141,
“Business Combinations” or FASB No. 141R, “Business
Combinations.” This FSP is effective upon initial adoption of SFAS
No. 157. 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. SFAS No. 158 requires companies to measure plan assets and
benefit obligations for fiscal years ending after December 15, 2008, or the
Company’s fiscal year 2009. The Company has adopted the disclosure
provisions of SFAS No. 158 and as such, did not have a significant 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
election is made on an instrument-by-instrument basis and is
irrevocable. If the fair value option is elected for an instrument,
SFAS No. 159 specifies that all subsequent changes in fair value for that
instrument shall be reported in earnings. 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.
In December 2007, the Financial
Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 141 (revised 2007), “Business Combinations,” which
replaces SFAS No. 141. The statement retains the purchase method of
accounting for acquisitions, but requires a number of changes, including changes
in the way assets and liabilities are recognized in the purchase
accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of
acquisition related costs as incurred. SFAS No. 141R is effective for
us beginning July 1, 2009 and will apply prospectively to business combinations
completed on or after that date.
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,
2007. 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,
2007.
ITEM 4. CONTROLS
AND PROCEDURES
An evaluation was performed as of March
31, 2008 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, 2008, 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
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(c)
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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 2008 were as
follows:
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|
ISSUER
PURCHASES OF EQUITY SECURITIES
|
|
(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
|
1/1/08
to 1/31/08
|
401
|
$11.94
|
401
|
(1)
|
2/1/08
to 2/29/08
|
--
|
--
|
--
|
(1)
|
3/1/08
to 3/31/08
|
663
|
$13.12
|
663
|
(1)
|
Total
|
1,064
|
$12.69
|
1,064
|
(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, 2008 the Plan held 208,733 shares of the
Company.
|
ITEM
6. EXHIBITS
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a)
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Exhibits
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31.1
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Certification
of Principal Executive Officer required by Rule
13a-14(a)
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31.2
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Certification
of Principal Financial Officer required by Rule
13a-14(a)
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32.1
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Section
1350 Certification of Principal Executive Officer
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32.2
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Section
1350 Certification of Principal Financial
Officer
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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.
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LSI
Industries Inc.
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By:
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/s/ Robert
J. Ready |
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Robert
J. Ready |
|
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President
and Chief Executive Officer |
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(Principal
Executive Officer) |
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By:
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/s/Ronald
S. Stowell |
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Ronald
S. Stowell |
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Vice
President, Chief Financial Officer and Treasurer |
|
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(Principal
Financial and Accounting Officer) |
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April 29,
2008
Page 34