FORM
10-Q
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON,
D.C. 20549
X
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008.
|
______
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE TRANSITION PERIOD FROM ________________ TO
________________.
|
Commission
File No. 0-13375
LSI
Industries Inc.
State of
Incorporation - Ohio IRS Employer I.D. No.
31-0888951
10000
Alliance Road
Cincinnati,
Ohio 45242
(513)
793-3200
Indicate by checkmark whether the
Registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months, and (2)
has been subject to such filing requirements for the past 90
days. YES
X
NO
____
Indicate by checkmark whether the
Registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Large
accelerated filer [ ]
|
Accelerated
filer [ X ]
|
|
|
Non-accelerated
filer [ ]
|
Smaller
reporting company
[ ]
|
Indicate by checkmark whether the
Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ____ No
X
As of October 24, 2008 there were
21,570,188 shares of the Registrant's common stock outstanding.
LSI INDUSTRIES
INC.
FORM
10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 2008
INDEX
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Begins
on
Page
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PART
I. Financial Information
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ITEM
1.
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Financial Statements
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Condensed
Consolidated Income
Statements........................................................................................................................
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3
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Condensed
Consolidated Balance
Sheets................................................................................................................................
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4
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Condensed
Consolidated Statements of Cash
Flows.............................................................................................................
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5
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Notes
to Condensed Consolidated Financial
Statements......................................................................................................
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6
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ITEM
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
...............................
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23
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ITEM
3.
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Quantitative
and Qualitative Disclosures About Market
Risk..............................................................................................
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32
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ITEM
4.
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Controls
and
Procedures..............................................................................................................................................................
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32
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PART
II. Other Information
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ITEM
2.
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Unregistered
Sales of Equity Securities and Use of
Proceeds..............................................................................................
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32
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ITEM
6.
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Exhibits...........................................................................................................................................................................................
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33
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Signatures
..........................................................................................................................................................................................................................................................
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33
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“Safe
Harbor” Statement under the Private Securities Litigation Reform Act of
1995
This
Form 10-Q contains certain forward-looking statements that are subject to
numerous assumptions, risks or uncertainties. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. Forward-looking statements may be identified by words
such as “estimates,” “anticipates,” “projects,” “plans,” “expects,” “intends,”
“believes,” “seeks,” “may,” “will,” “should” or the negative versions of those
words and similar expressions, and by the context in which they are
used. Such statements, whether expressed or implied, are based upon
current expectations of the Company and speak only as of the date
made. Actual results could differ materially from those contained in
or implied by such forward-looking statements as a result of a variety of risks
and uncertainties. These risks and uncertainties include, but are not
limited to, the impact of competitive products and services, product demand and
market acceptance risks, reliance on key customers, financial difficulties
experienced by customers, the adequacy of reserves and allowances for doubtful
accounts, fluctuations in operating results or costs, unexpected difficulties in
integrating acquired businesses, the ability to retain key employees of acquired
businesses and the other risk factors that are identified herein. In
addition to the factors described in this paragraph, the risk factors identified
in our Form 10-K constitute risks and uncertainties that may affect the
financial performance of the Company. The Company has no obligation
to update any forward-looking statements to reflect subsequent events or
circumstances.
PART I. FINANCIAL
INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
LSI
INDUSTRIES INC.
CONDENSED
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
|
|
Three
Months Ended
September 30
|
|
(in
thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
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|
Net
sales
|
|
$
|
75,838
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$
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90,001
|
|
|
|
|
|
|
|
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Cost
of products and services sold
|
|
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57,659
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|
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64,250
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|
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Gross profit
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18,179
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|
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|
25,751
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Selling
and administrative expenses
|
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13,963
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15,025
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Operating income
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4,216
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10,726
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|
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|
|
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Interest
(income)
|
|
|
(38
|
)
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|
|
(152
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)
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|
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Interest
expense
|
|
|
43
|
|
|
|
20
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|
Income before income
taxes
|
|
|
4,211
|
|
|
|
10,858
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|
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|
|
|
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Income
tax expense
|
|
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1,524
|
|
|
|
3,905
|
|
|
|
|
|
|
|
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Net income
|
|
$
|
2,687
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|
|
$
|
6,953
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|
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|
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|
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Earnings
per common share (see Note 5)
|
|
|
|
|
|
|
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Basic
|
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$
|
0.12
|
|
|
$
|
0.32
|
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Diluted
|
|
$
|
0.12
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
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Weighted
average common shares
|
|
|
|
|
|
|
|
|
outstanding
|
|
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|
|
|
|
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|
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|
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Basic
|
|
|
21,796
|
|
|
|
21,715
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|
Diluted
|
|
|
21,805
|
|
|
|
22,005
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|
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)
|
|
September
30, 2008
|
|
|
June
30,
2008
|
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|
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|
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|
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ASSETS
|
|
|
|
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|
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Current
Assets
|
|
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Cash and cash
equivalents
|
|
$
|
1,183
|
|
|
$
|
6,992
|
|
Accounts receivable,
net
|
|
|
47,500
|
|
|
|
38,857
|
|
Inventories
|
|
|
47,520
|
|
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|
50,509
|
|
Refundable income
taxes
|
|
|
592
|
|
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|
1,834
|
|
Other current
assets
|
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|
6,587
|
|
|
|
6,111
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|
Total current
assets
|
|
|
103,382
|
|
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|
104,303
|
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Property,
Plant and Equipment, net
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43,757
|
|
|
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44,754
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|
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|
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|
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Goodwill,
net
|
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15,051
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|
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15,051
|
|
|
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Other
Intangible Assets, net
|
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14,541
|
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15,060
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Other
Assets, net
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4,310
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4,372
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TOTAL
ASSETS
|
|
$
|
181,041
|
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$
|
183,540
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LIABILITIES & SHAREHOLDERS’
EQUITY
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Current
Liabilities
|
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Accounts payable
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$
|
15,182
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$
|
15,452
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|
Accrued expenses
|
|
|
12,764
|
|
|
|
15,988
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Total current
liabilities
|
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|
27,946
|
|
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|
31,440
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Long-Term
Debt
|
|
|
1,282
|
|
|
|
--
|
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Other
Long-Term Liabilities
|
|
|
3,592
|
|
|
|
3,584
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Shareholders’
Equity
|
|
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|
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Preferred shares, without par
value;
|
|
|
|
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|
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Authorized 1,000,000 shares; none
issued
|
|
|
--
|
|
|
|
--
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|
Common shares, without par
value;
|
|
|
|
|
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Authorized 30,000,000
shares;
|
|
|
|
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Outstanding 21,570,188 and
21,585,390
|
|
|
|
|
|
|
|
|
shares,
respectively
|
|
|
81,919
|
|
|
|
81,665
|
|
Retained earnings
|
|
|
66,302
|
|
|
|
66,851
|
|
Total shareholders’
equity
|
|
|
148,221
|
|
|
|
148,516
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES & SHAREHOLDERS’ EQUITY
|
|
$
|
181,041
|
|
|
$
|
183,540
|
|
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)
|
|
Three
Months Ended
|
|
|
|
September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
Net income
|
|
$
|
2,687
|
|
|
$
|
6,953
|
|
Non-cash items included in net
income
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
1,990
|
|
|
|
2,222
|
|
Deferred income
taxes
|
|
|
90
|
|
|
|
19
|
|
Deferred compensation
plan
|
|
|
38
|
|
|
|
75
|
|
Stock option
expense
|
|
|
350
|
|
|
|
271
|
|
Issuance of common shares as
compensation
|
|
|
10
|
|
|
|
10
|
|
Loss on disposition of fixed
assets
|
|
|
1
|
|
|
|
--
|
|
Allowance for doubtful
accounts
|
|
|
29
|
|
|
|
20
|
|
Inventory obsolescence
reserve
|
|
|
261
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
Changes in
|
|
|
|
|
|
|
|
|
Accounts receivable,
gross
|
|
|
(8,672
|
)
|
|
|
2,777
|
|
Inventories,
gross
|
|
|
2,728
|
|
|
|
(1,928
|
)
|
Accounts payable and
other
|
|
|
(1,648
|
)
|
|
|
(1,186
|
)
|
Reserve for uncertain tax
positions
|
|
|
25
|
|
|
|
2,681
|
|
Reserve for uncertain tax
positions charged
against
retained earnings
|
|
|
--
|
|
|
|
(2,582
|
)
|
Customer
prepayments
|
|
|
(1,125
|
)
|
|
|
(7,615
|
)
|
Net cash flows from (used in)
operating activities
|
|
|
(3,236
|
)
|
|
|
1,959
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchases of property, plant and
equipment
|
|
|
(475
|
)
|
|
|
(683
|
)
|
Proceeds from sale of short-term
investments
|
|
|
--
|
|
|
|
3,500
|
|
Net cash flows from (used in)
investing activities
|
|
|
(475
|
)
|
|
|
2,817
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Payment of long-term
debt
|
|
|
--
|
|
|
|
(958
|
)
|
Proceeds from issuance of
long-term debt
|
|
|
1,282
|
|
|
|
958
|
|
Cash dividends
paid
|
|
|
(3,236
|
)
|
|
|
(3,875
|
)
|
Exercise of stock
options
|
|
|
--
|
|
|
|
490
|
|
Purchase of treasury
shares
|
|
|
(144
|
)
|
|
|
(207
|
)
|
Issuance of treasury
shares
|
|
|
--
|
|
|
|
15
|
|
Net cash flows (used in)
financing activities
|
|
|
(2,098
|
)
|
|
|
(3,577
|
)
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease) in cash and cash equivalents
|
|
|
(5,809
|
)
|
|
|
1,199
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
6,992
|
|
|
|
2,731
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,183
|
|
|
$
|
3,930
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
43
|
|
|
$
|
16
|
|
Income taxes paid
|
|
$
|
84
|
|
|
$
|
1,793
|
|
Issuance of common shares as
compensation
|
|
$
|
10
|
|
|
$
|
10
|
|
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 September 30, 2008, and the results of its
operations for the periods ended September 30, 2008 and 2007, and its cash
flows for the periods ended September 30, 2008 and 2007. These statements
should be read in conjunction with the financial statements and footnotes
included in the fiscal 2008 annual report. Financial
information as of June 30, 2008 has been derived from the Company’s
audited consolidated financial
statements.
|
NOTE
2: SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation:
The
consolidated financial statements include the accounts of LSI Industries Inc.
(an Ohio corporation) and its subsidiaries, all of which are wholly
owned. All intercompany transactions and balances have been
eliminated.
Revenue
Recognition:
The
Company recognizes revenue in accordance with Securities Exchange Commission
Staff Accounting Bulletin No. 104, “Revenue Recognition." Revenue is
recognized when title to goods and risk of loss have passed to the customer,
there is persuasive evidence of a purchase arrangement, delivery has occurred or
services have been rendered, and collectibility is reasonably
assured. Revenue is typically recognized at time of shipment. Sales
are recorded net of estimated returns, rebates and discounts. 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,” or AICPA Statement of
Position 97-2 (SOP 97-2), “Software Revenue Recognition,” as
appropriate.
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, support and maintenance of certain solid
state LED video screens, billboards, or active digital signage 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)
|
|
September
30,
|
|
|
June
30,
|
|
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
48,114
|
|
|
$
|
39,442
|
|
|
less
Allowance for doubtful accounts
|
|
|
(614
|
)
|
|
|
(585
|
)
|
|
Accounts receivable,
net
|
|
$
|
47,500
|
|
|
$
|
38,857
|
|
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 the first half of
fiscal 2008. There were no such investments in the first quarter of
FY 2009.
Cash
and Cash Equivalents:
The cash
balance includes cash and cash equivalents which have original maturities of
less than three months. At September 30, 2008 and June 30, 2008, the
bank balances included $1,324,000 and $3,376,000, 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)
|
|
September
30,
|
|
|
June
30,
|
|
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, at cost
|
|
$
|
102,564
|
|
|
$
|
102,132
|
|
|
less
Accumulated depreciation
|
|
|
(58,807
|
)
|
|
|
(57,378
|
)
|
|
Property, plant and equipment,
net
|
|
$
|
43,757
|
|
|
$
|
44,754
|
|
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. The definite-lived intangible assets are
being amortized to expense on a straight line basis 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)
|
|
September
30,
|
|
|
June
30,
|
|
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of the period
|
|
$
|
257
|
|
|
$
|
314
|
|
|
Additions
charged to expense
|
|
|
183
|
|
|
|
1,141
|
|
|
Deductions
for repairs and replacements
|
|
|
(229
|
)
|
|
|
(1,198
|
)
|
|
Balance
at end of the period
|
|
$
|
211
|
|
|
$
|
257
|
|
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 $1,031,000
and $844,000 for the three month periods ended September 30, 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 and common shares to be issued under
a deferred compensation plan, all of which totaled 9,000 shares and 290,000
shares for the three months ended September 30, 2008 and 2007,
respectively. See also Note 5.
Stock
Options:
There
were no disqualifying dispositions of shares from stock option exercises in the
first three months of fiscal 2009. The Company recorded $139,670 in
the first three months of fiscal 2008 as a reduction of federal income taxes
payable, $137,530 as an increase in additional paid in capital, and $2,140 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
$137,530. See further discussion in Note 11.
New
Accounting Pronouncements:
In July
2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48
(FIN 48), “Accounting for Uncertainty in Income Taxes – an interpretation of
FASB Statement No. 109.” FIN 48 provides guidance for the
recognition, measurement, classification and disclosure of the financial
statement effects of a position taken or expected to be taken in a tax return
(“tax position”). The financial statement effects of a tax position
must be recognized when there is a likelihood of more than 50 percent that based
on the technical merits, the position will be sustained upon examination and
resolution of the related appeals or litigation processes, if any. A
tax position that meets the recognition threshold must be measured initially and
subsequently as the largest amount of tax benefit that is greater than 50
percent likely of being realized upon
ultimate
settlement with a taxing authority. In addition, FIN 48 specifies
certain annual disclosures that are required to be made once the interpretation
has taken effect. The Interpretation was effective for fiscal years beginning
after December 15, 2006. The Company adopted the provisions of FIN 48
on July 1, 2007. As a result of adoption, the Company recognized a
$2,582,000 increase to reserves for uncertain tax positions and recorded a
charge of $2,582,000 to the July 1, 2007 retained earnings
balance. For additional information, see Note 9 to the Consolidated
Financial Statements.
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 adopted SFAS No. 157 on
July 1, 2008, and the adoption did not have any significant impact on its
consolidated results of operations, cash flows or financial
position. The Company determined that it does not have any financial
assets or liabilities subject to the disclosure requirements of SFAS No. 157,
and is evaluating the disclosure impact on its non-financial assets and
liabilities.
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 has not made any fair value
elections under SFAS No. 159 and did not have any 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:
Immaterial
reclassifications may have been made to prior year amounts in order to be
consistent with the presentation for the current year.
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 20% and 31% of total net sales concentrated in this market
for the three months ended September 30, 2008 and 2007,
respectively.
|
|
The
Company’s net sales to major customers in the Graphics Segment, Dairy
Queen International and 7-Eleven, Inc., represented approximately
$10,721,000, or 12% and $9,076,000 or 10%, respectively, of consolidated
net sales in the three months ended September 30, 2007. The
Company had a balance of accounts receivable from 7-Eleven, Inc. as of
September 30, 2007 of approximately $6,234,000 or 12% of net accounts
receivable.
|
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
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 and meet the other
requirements outlined in paragraph 17 of SFAS No. 131. The Graphics Segment also
includes LSI Images, which manufactures three-dimensional menu board systems,
LSI Adapt, which provides customers with surveying, permitting, engineering and
installation services related to products of the Graphics Segment, the
solid-state LED billboards and sports video boards, and the Smartvision video
screens for the entertainment market.
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.
|
Summarized
financial information for the Company’s reportable business segments for
the three months ended September 30, 2008 and 2007, and as of September
30, 2008 and June 30, 2008 is as
follows:
|
|
|
|
Three
Months Ended
|
|
|
|
|
September 30
|
|
|
(
In
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
Lighting
Segment
|
|
$
|
50,760
|
|
|
$
|
47,914
|
|
|
Graphics
Segment
|
|
|
25,078
|
|
|
|
42,087
|
|
|
|
|
$
|
75,838
|
|
|
$
|
90,001
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
Lighting
Segment
|
|
$
|
2,650
|
|
|
$
|
3,767
|
|
|
Graphics
Segment
|
|
|
1,566
|
|
|
|
6,959
|
|
|
|
|
$
|
4,216
|
|
|
$
|
10,726
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
|
Lighting
Segment
|
|
$
|
372
|
|
|
$
|
547
|
|
|
Graphics
Segment
|
|
|
103
|
|
|
|
136
|
|
|
|
|
$
|
475
|
|
|
$
|
683
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
Lighting
Segment
|
|
$
|
1,121
|
|
|
$
|
1,344
|
|
|
Graphics
Segment
|
|
|
869
|
|
|
|
878
|
|
|
|
|
$
|
1,990
|
|
|
$
|
2,222
|
|
|
|
|
September
30,
|
|
|
June
30,
|
|
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets:
|
|
|
|
|
|
|
|
Lighting
Segment
|
|
$
|
108,253
|
|
|
$
|
107,627
|
|
|
Graphics
Segment
|
|
|
59,381
|
|
|
|
55,529
|
|
|
|
|
|
167,634
|
|
|
|
163,156
|
|
|
Corporate
|
|
|
13,407
|
|
|
|
20,384
|
|
|
|
|
$
|
181,041
|
|
|
$
|
183,540
|
|
|
Segment
net sales represent sales to external customers. Intersegment
revenues were eliminated in consolidation as
follows:
|
|
|
|
Three
Months Ended
|
|
|
|
|
September 30
|
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Lighting
Segment net sales to
|
|
|
|
|
|
|
|
the
Graphics Segment
|
|
$
|
3,445
|
|
|
$
|
1,422
|
|
|
|
|
|
|
|
|
|
|
|
|
Graphics
Segment net sales to
|
|
|
|
|
|
|
|
|
|
the
Lighting Segment
|
|
$
|
1,909
|
|
|
$
|
755
|
|
|
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:
|
|
|
Three
Months Ended
|
|
|
|
|
September 30
|
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
Net
sales (a):
|
|
|
|
|
|
|
|
United
States
|
|
$
|
73,020
|
|
|
$
|
86,929
|
|
|
Canada
|
|
|
2,818
|
|
|
|
3,072
|
|
|
|
|
$
|
75,838
|
|
|
$
|
90,001
|
|
|
|
|
September 30, 2008
|
|
|
June 30,
2008
|
|
|
Long-lived
assets (b):
|
|
|
|
|
|
|
|
United
States
|
|
$
|
47,245
|
|
|
$
|
48,228
|
|
|
Canada
|
|
|
822
|
|
|
|
898
|
|
|
|
|
$
|
48,067
|
|
|
$
|
49,126
|
|
(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, and other long term
assets.
|
NOTE
5:
|
EARNINGS
PER COMMON SHARE
|
|
The
following table presents the amounts used to compute earnings per common
share and the effect of dilutive potential common shares on net income and
weighted average shares outstanding (in thousands, except per share
data):
|
|
|
Three
Months Ended
|
|
|
|
September 30
|
|
|
|
2008
|
|
|
2007
|
|
BASIC EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,687
|
|
|
$
|
6,953
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding
|
|
|
|
|
|
|
|
|
during the period,
net
|
|
|
|
|
|
|
|
|
of treasury shares
(a)
|
|
|
21,578
|
|
|
|
21,508
|
|
Weighted average shares
outstanding
|
|
|
|
|
|
|
|
|
in the Deferred Compensation
Plan
|
|
|
|
|
|
|
|
|
during the period
|
|
|
218
|
|
|
|
207
|
|
Weighted average shares
outstanding
|
|
|
21,796
|
|
|
|
21,715
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share
|
|
$
|
0.12
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,687
|
|
|
$
|
6,953
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
21,796
|
|
|
|
21,715
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
(b):
|
|
|
|
|
|
|
|
|
Impact
of common shares to be
issued
under stock option plans,
and
contingently issuable shares,
if
any
|
|
|
9
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares
|
|
|
|
|
|
|
|
|
outstanding (c)
|
|
|
21,805
|
|
|
|
22,005
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.12
|
|
|
$
|
0.32
|
|
|
(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 1,216,949 common shares and 330,938 common shares during the
three month periods ending September 30, 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):
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
24,998
|
|
|
$
|
25,150
|
|
|
Work-in-process
|
|
|
6,602
|
|
|
|
7,955
|
|
|
Finished goods
|
|
|
15,920
|
|
|
|
17,404
|
|
|
|
|
$
|
47,520
|
|
|
$
|
50,509
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
Expenses
|
|
|
|
|
|
|
|
|
|
Compensation and
benefits
|
|
$
|
4,843
|
|
|
$
|
7,060
|
|
|
Customer
prepayments
|
|
|
695
|
|
|
|
1,820
|
|
|
Accrued
Commissions
|
|
|
1,318
|
|
|
|
1,552
|
|
|
Accrued income
taxes
|
|
|
207
|
|
|
|
--
|
|
|
Legal settlement
|
|
|
2,800
|
|
|
|
2,800
|
|
|
Other accrued
expenses
|
|
|
2,901
|
|
|
|
2,756
|
|
|
|
|
$
|
12,764
|
|
|
$
|
15,988
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Long-Term Liabilities
|
|
|
|
|
|
|
|
|
|
Reserve for uncertain tax
positions
|
|
$
|
3,250
|
|
|
$
|
3,225
|
|
|
Other long-term
liabilities
|
|
|
342
|
|
|
|
359
|
|
|
|
|
$
|
3,592
|
|
|
$
|
3,584
|
|
NOTE
7: GOODWILL
AND OTHER INTANGIBLE ASSETS
The
Company performed its annual goodwill impairment test as of July 1,
2008. However, because the conditions of impairment were present at
June 30, 2008, the resulting estimated impairment was recorded in the fourth
quarter of fiscal year 2008. No impairment charge was recorded in the
first quarter of fiscal year 2009. For purposes of this test, the
company determined that it had six reporting units of which four have
goodwill. Based upon the Company’s preliminary analysis, it was
determined that the goodwill associated with two reporting units, totaling
$27,149,000, was fully impaired. It was also determined that other
intangible assets associated with three reporting units was either fully or
partially impaired. The total amount of impairment associated with
other intangible assets was $1,780,000. Total impairment for both
goodwill and other intangible assets was $28,929,000. The majority of
impairment charges occurred within the Graphics Segment and totaled
$27,832,000. The remaining impairment charge of $1,097,000 occurred
within the Lighting Segment. The majority of the impairment charge in
the Lighting Segment occurred as a result of the fiscal 2008 review of
long-lived assets in connection with Statement of Financial
Accounting
Standard
(SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-lived
Assets.” It was determined that a certain trade name was fully impaired because
it was no longer used in the Company’s marketing efforts. An impairment charge
of $746,000 was recorded as of June 30, 2008 related to this trade name. The
remaining impairment charge of $28,183,000 was primarily comprised of goodwill
and was a direct result of the SFAS No. 142 testing. This impairment
charge was due primarily to the combination of a decline in the market
capitalization of the Company at June 30, 2008 and the decline in the estimated
forecasted discounted cash flows expected by the Company. This
impairment charge was recorded in the fourth quarter of fiscal 2008 rather than
in the first quarter of fiscal 2009 due to the decline in the company’s stock
price as of June 30, 2008. Because step two of the goodwill
impairment testing was not complete, an estimate of the impairment charge was
recorded as of June 30, 2008. A similar analysis was performed in
fiscal 2008 as of July 1, 2007 and there was no impairment of
goodwill.
The
impairment test was completed in the first quarter of fiscal 2009 at which time
it was determined that no further adjustment to the estimate, recorded at June
30, 2008, was needed. Further, management did not identify any
triggering events in the first quarter of fiscal 2009 that would have required
further impairment testing.
|
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)
|
|
As of September 30, 2008
|
|
|
As of June 30, 2008
|
|
|
|
|
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
15,427
|
|
|
$
|
376
|
|
|
$
|
15,051
|
|
|
$
|
15,427
|
|
|
$
|
376
|
|
|
$
|
15,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Intangible
Assets
|
|
$
|
22,219
|
|
|
$
|
7,678
|
|
|
$
|
14,541
|
|
|
$
|
22,219
|
|
|
$
|
7,159
|
|
|
$
|
15,060
|
|
|
|
|
Amortization Expense of Other Intangible
Assets
|
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
$
|
519
|
|
|
$
|
581
|
|
|
The
Company expects to record amortization expense over each of the next five
years as follows: 2009 -- $2,087,000; 2010 through 2013 --
$2,079,000.
|
The
carrying amounts of goodwill for both June 30, 2008 and September 30, 2008 are
as follows: Lighting Segment $11,320,000 and Graphics Segment
$3,731,000; total Company $15,051,000.
The gross
carrying amount and accumulated amortization by major other intangible asset
class is as follows:
|
|
|
September
30, 2008
|
|
|
June
30, 2008
|
|
|
(in
thousands)
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carry Amount
|
|
|
Accumulated
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Intangible
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
7,472
|
|
|
$
|
3,759
|
|
|
$
|
7,472
|
|
|
$
|
3,620
|
|
|
Patents
|
|
|
110
|
|
|
|
54
|
|
|
|
110
|
|
|
|
52
|
|
|
LED Technology
firmware,
software
|
|
|
10,448
|
|
|
|
3,358
|
|
|
|
10,448
|
|
|
|
2,985
|
|
|
Non-compete
agreements
|
|
|
630
|
|
|
|
507
|
|
|
|
630
|
|
|
|
502
|
|
|
|
|
|
18,660
|
|
|
|
7
,678
|
|
|
|
18,660
|
|
|
|
7
,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived Intangible
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade
names
|
|
|
3,559
|
|
|
|
--
|
|
|
|
3,559
|
|
|
|
--
|
|
|
|
|
|
3,559
|
|
|
|
--
|
|
|
|
3,559
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Intangible Assets
|
|
$
|
22,219
|
|
|
$
|
7,678
|
|
|
$
|
22,219
|
|
|
$
|
7,159
|
|
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 September 30, 2008, the Company has borrowed
$1.3 million and $48.7 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 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 activity in this line of
credit during the first three months of fiscal 2009, there are no borrowings
against this line of credit as of September 30, 2008.
The
Company is in compliance with all of its loan covenants as of September 30,
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. At June 30, 2008, tax and interest, net of
potential federal tax benefits, were $2,098,000 and $534,000, respectively, of
the total reserves of $3,225,000. Additionally, penalties were
$593,000 of the reserve at June 30, 2008. Of the $3,225,000 reserve
for uncertain tax positions, $2,632,000 would have an unfavorable impact on the
effective tax rate if recognized.
For the
three months ended September 30, 2008, the Company recognized an additional
$25,000 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. The reserve for uncertain tax
positions is expected to decrease in the next 12 months approximately $400,000
due to incremental Company activity and an income tax filing under a voluntary
disclosure agreement.
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, 2006. The Internal Revenue Service has
completed its audit of the Company’s fiscal year 2006 Federal Income Tax Return
and has not required any changes to the return as filed.
The
Company paid cash dividends of $3,236,000 and $3,875,000 in the three month
periods ended September 30, 2008 and 2007, respectively. In October,
2008, the Company’s Board of Directors declared a $0.05 per share regular
quarterly cash dividend (approximately $1,079,000) payable on November 10, 2008
to shareholders of record as of November 3, 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 932,460 shares were
available for future grant or award as of September 30, 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 September 30,
2008, a total of 1,515,782
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 739,157 options for common shares were vested and
exercisable. The approximate unvested stock option expense as of
September 30, 2008 that will be recorded as expense in future periods is
$2,830,500. The weighted average time over which this expense will be
recorded is approximately 23 months.
The fair
value of each option on the date of grant was estimated using the Black-Scholes
option pricing model. The below listed weighted average assumptions
were used for grants in the periods indicated.
|
|
|
Three
Months Ended
|
|
|
|
|
September
30, 2008
|
|
|
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
4.72
|
%
|
|
|
3.20
|
%
|
|
Expected
volatility
|
|
|
41
|
%
|
|
|
39
|
%
|
|
Risk-free
interest rate
|
|
|
3.1
|
%
|
|
|
4.3
|
%
|
|
Expected
life
|
|
4.3
yrs.
|
|
|
4.2
yrs.
|
|
At
September 30, 2008, the 332,300 options granted in the first three months of
fiscal 2009 to both employees and non-employee directors had exercise prices of
$8.98, fair values of $2.21, and remaining contractual lives of between four
years and eleven months and nine years and eleven months.
At
September 30, 2007, the 318,400 options granted in the first three months of
fiscal 2008 to employees and non-employee directors had exercise prices of
$19.76, fair values of $5.70 per option, and remaining contractual lives of
between four years and eleven months and nine years and eleven
months.
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. The Company
recorded $349,500 and $272,200 of expense related to stock options in the three
months ended September 30, 2008 and 2007, respectively. As of
September 30, 2008, the Company expects that approximately 733,300 outstanding
stock options having a weighted average exercise price of $13.80, no aggregate
intrinsic value, and weighted average remaining contractual terms of 8.6 years
will vest in the future.
Information
related to all stock options for the periods ended September 30, 2008 and 2007
is shown in the table below:
|
|
|
|
|
|
Three
Months Ended
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at 6/30/08
|
|
|
1,197,482
|
|
|
$
|
14.44
|
|
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
332,300
|
|
|
|
8.98
|
|
|
|
|
|
|
Forfeitures
|
|
|
(14,000
|
)
|
|
|
13.42
|
|
|
|
|
|
|
Exercised
|
|
|
--
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at 9/30/08
|
|
|
1,515,782
|
|
|
|
13.25
|
|
7.1 years
|
|
$
|
4,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at 9/30/08
|
|
|
739,157
|
|
|
|
12.76
|
|
5.3 years
|
|
$
|
4,300
|
|
|
|
|
|
|
Three
Months Ended
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at 6/30/07
|
|
|
983,788
|
|
|
$
|
12.16
|
|
|
|
$
|
5,642,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
318,400
|
|
|
$
|
19.76
|
|
|
|
|
|
|
Forfeitures
|
|
|
(2,400
|
)
|
|
$
|
15.21
|
|
|
|
|
|
|
Exercised
|
|
|
(50,481
|
)
|
|
$
|
8.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at 9/30/07
|
|
|
1,249,307
|
|
|
$
|
14.24
|
|
7.2 years
|
|
$
|
7,844,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at 9/30/07
|
|
|
549,369
|
|
|
$
|
11.28
|
|
5.1 years
|
|
$
|
5,078,600
|
The
aggregate intrinsic value of options exercised during the three months ended
September 30, 2007 was $584,100. No options were exercised in the
three months ended September 30, 2008.
The
Company received $352,700 of cash and 3,776 common shares of the Company’s stock
from employees who exercised 50,481 options during the three months ended
September 30, 2007. Additionally, the Company recorded $139,670 in
the three months ended September 30, 2007 as a reduction of federal income taxes
payable, $137,530 as an increase in common stock, and $2,140 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 three months ended September 30, 2008
is shown in the table below:
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
unvested
stock
options at 6/30/08
|
|
|
582,000
|
|
|
$
|
17.62
|
|
8.2 years
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(132,925
|
)
|
|
$
|
18.88
|
|
|
|
|
|
|
|
Forfeitures
|
|
|
(4,750
|
)
|
|
$
|
16.50
|
|
|
|
|
|
|
|
Granted
|
|
|
332,300
|
|
|
$
|
8.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
unvested
stock
options at 9/30/08
|
|
|
776,625
|
|
|
$
|
13.71
|
|
8.7 years
|
|
$
|
--
|
|
Stock Compensation
Awards
The
Company awarded a total of 1,280 common shares in the three months ended
September 30, 2008, valued at their approximate $10,000 fair market value on the
date of issuance pursuant to the compensation programs for non-employee
Directors who receive a portion of their compensation as an award of Company
stock. Stock compensation awards are made in the form of newly issued
common shares of the Company.
Deferred Compensation
Plan
The
Company has a non-qualified deferred compensation plan providing for both
Company contributions and participant deferrals of compensation. The
Plan is fully funded in a Rabbi Trust. All Plan investments are in
common shares of the Company. As of September 30, 2008 there were 35
participants and all but one had fully vested account balances. A
total of 227,633 common shares with a cost of $2,570,500, and 211,151 common
shares with a cost of $2,426,800 were held in the Plan as of September 30, 2008
and June 30, 2008, 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. The Company accounts
for assets held in the non-qualified deferred compensation plan in accordance
with Emerging Issues Task Force 97-14, “Accounting for Deferred Compensation
Arrangements where amounts earned are held in a Rabbi Trust and
invested.” For fiscal year 2009, the Company estimates the Rabbi
Trust for the Nonqualified Deferred Compensation Plan will make net repurchases
in the range of 21,000 to 25,000 common shares of the Company. During
the three months ended September 30, 2008 and 2007, the Company used
approximately $143,700 and $192,500, respectively, 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 defended 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. The plaintiffs responded with 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 in the trial. 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. Pursuant
to settlement discussions initiated by the plaintiffs, the Company made a
$2,800,000 offer to settle this matter and, accordingly, recorded a loss
contingency reserve in the fourth quarter of fiscal 2008. The
plaintiffs have not yet responded to the Company’s offer to
settle. While the Company believes its menu board designs did not
infringe upon the plaintiffs’ patents, management believes it is in the best
interest of the Company to make this offer to settle. However, if the
Company and the plaintiffs are unable to agree upon the terms of a settlement,
the Company intends to continue to contest this matter vigorously.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
Net
Sales by Business Segment
|
|
|
|
(In
thousands)
|
|
Three
Months Ended
September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Lighting Segment
|
|
$
|
50,760
|
|
|
$
|
47,914
|
|
|
|
|
|
|
|
|
|
|
Graphics Segment
|
|
|
25,078
|
|
|
|
42,087
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
75,838
|
|
|
$
|
90,001
|
|
The
Company’s “forward looking statements” as presented earlier in this Annual
Report in the “Safe Harbor” Statement should be referred to when reading
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Results of
Operations
THREE
MONTHS ENDED SEPTEMBER 20, 2008 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30,
2007
Net sales
of $75,838,000 in the first quarter of fiscal 2009 decreased 15.7% from fiscal
2008 first quarter net sales of $90,001,000. Lighting Segment net
sales increased 5.9% to $50,760,000 and Graphics Segment net sales decreased
40.4% to $25,078,000 as compared
to the
prior year. Sales to the petroleum / convenience store market
represented 20% and 31% of net sales in the first quarters of fiscal years 2009
and 2008, 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 45% from last year to
$15,199,000 as Lighting sales increased 12% and Graphics sales to this market
decreased 66%. Net sales of products and services related to solid
state LED technology in light fixtures and video screens for sports, advertising
and entertainment markets totaled $8.8 million in the three month period ended
September 30, 2008, representing approximately a 250% increase over the same
period last year. In addition, the Company sells certain elements of
graphic identification programs that contain solid state LED light
sources. 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. See Note 3 to these financial statements on
Major Customer Concentrations.
The $2.8 million or 5.9% increase in
Lighting Segment net sales is primarily the net result of a $4.3 million or
16.1% increase in commissioned net sales to the commercial / industrial lighting
market, offset by a $1.7 million net decrease in lighting sales to our niche
markets of petroleum / convenience stores, automotive dealerships, and national
retail accounts (one large national retailer represented a reduction of
approximately $2.5 million as its new store construction program
slowed).
The $17.0 million or 40.4% decrease in
Graphics Segment net sales is primarily the result of completion of programs for
certain graphics customers, including an image conversion program for a national
drug store retailer ($1.8 million decrease), two petroleum / convenience store
programs ($12.9 million decrease), a menu board replacement program ($10.6
million decrease), and changes in volume or completion of other graphics
programs. These decreases were partially offset by increased net
sales to certain other customers, including a reimaging program for a grocery
customer ($4.3 million), and sales of solid state LED video screens for the
sports markets ($3.6 million increase) and for the entertainment market ($2.5
million increase).
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 $18,179,000 in the
first quarter of fiscal 2009 decreased 29% from the same period last year, and
decreased from 28.6% to 24.0% as a percentage of net sales. The
decrease in amount of gross profit is primarily due to decreased Graphics net
sales and margins, both product and installation, partially offset by increased
gross profit margin on increased lighting net sales. The following
items also influenced the Company’s gross profit margin on a consolidated
basis: competitive pricing pressures, increased cost of
materials,
decreased
direct labor reflective of less sales volume, and other manufacturing expenses
in support of production requirements ($1.0 million of decreased wage,
compensation and benefits costs; $0.1 million of decreased depreciation; $0.1
million decreased outside services; $0.1 million decreased repairs and
maintenance; and $0.1 million decreased utilities and property
taxes).
Selling and administrative expenses of
$13,963,000 in the first quarter of fiscal year 2009 decreased $1.1 million, and
increased to 18.4% as a percentage of net sales from 16.7% in the same period
last year. Employee compensation and benefits expense decreased $0.5
million in the first quarter of fiscal 2009 as compared to the same period last
year. Other changes of expense between years include decreased
warranty expense ($0.3 million), increased sales commission expense ($0.2
million), increased research & development expense ($0.2 million, primarily
associated with research and development spending related to solid-state LED
technology), reduced customer rebates and accommodations ($0.1 million),
decreased intangible asset amortization expense ($0.1 million) and decreased
advertising and literature ($0.1 million).
The Company reported net interest
expense of $5,000 in the first quarter of fiscal 2009 as compared to net
interest income of $132,000 in the same period last year. The Company
was in a positive cash position and was debt free for substantially all of
fiscal 2008 and generated interest income on invested cash. The
Company was occasionally in a borrowing position the first quarter of fiscal
2009.
The
effective tax rate in the first quarter of fiscal 2009 was 36.2%, resulting in
an income tax expense of $1,524,000. The effective tax rate in the
first quarter of fiscal 2008 was 36.0%, resulting in an income tax expense of
$3,905,000. Income tax expense in the first quarter of fiscal 2009
reflects partial utilization of the net operating loss carryover in Canada and
deferred tax expense of $90,000 to reflect the expected rate at which the
Company’s deferred tax assets are expected to roll out. The U.S.
research and development tax credit was reinstated retroactively back to
December 31, 2007 just three days after the end of the Company’s fiscal 2009
first quarter. Therefore, the Company will record the effect of these
tax credits as well as an expected net reduction in the liability for uncertain
income tax positions in the second quarter of fiscal 2009, thereby significantly
reducing the expected effective tax rate for the second quarter. The
Company expects an effective income tax rate for the full fiscal year 2009 of
approximately 33%.
The
Company reported net income of $2,687,000 in the first quarter of fiscal 2009 as
compared to $6,953,000 in the same period last year, a 61%
reduction. The decrease is primarily the result of decreased gross
profit on decreased net sales and net interest expense as compared to net
interest income last year, partially offset by decreased operating expenses and
decreased income tax expense. Diluted earnings per share was $0.12 in
the first quarter of fiscal 2009, as compared to $0.32 in the same period last
year. The weighted average common shares outstanding for purposes of computing
diluted earnings per share in the first quarter of fiscal 2009 were 21,805,000
shares as compared to 22,005,000 shares for the same period 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 September 30, 2008 the Company had
working capital of $75.4 million, compared to $72.9 million at June 30,
2008. The ratio of current assets to current liabilities was 3.70 to
1 as compared to a ratio of 3.32 to 1 at June 30, 2008. The $2.6
million increase in working capital from June 30, 2008 to September 30, 2008 was
primarily related to increased accounts receivable ($8.6 million), increased
other current assets ($0.5 million), decreased accounts payable ($0.3 million),
decreased accrued expenses and customer prepayments ($2.1 million and $1.1
million, respectively) partially offset by decreased inventories ($3.0 million),
decreased refundable income taxes ($1.2 million), and decreased cash and
short-term investments ($5.8 million). The $5.8 million decrease in
cash in the three months ended September 30, 2008 is primarily due to the
seasonal increase in sales in the first quarter and the related $8.6 million
increase in accounts receivable.
The Company used $3.2 million of cash
from operating activities in the first quarter of fiscal 2009 as compared to a
generation of $2.0 million last year. This $5.2 million decrease in
net cash flows from operating activities is primarily the net result of less net
income ($4.3 million unfavorable), an increase rather than a decrease in
accounts receivable (unfavorable change of $11.4 million), less of a reduction
in customer prepayments (favorable change of $6.5 million), reserve for
uncertain income tax positions (unfavorable $0.1 million), a decrease rather
than an increase in refundable income taxes (favorable change of $1.2 million),
a decrease in inventories rather than an increase (favorable change of $4.7
million), a larger decrease in accounts payable and accrued expenses
(unfavorable change of $0.9 million), decreased depreciation and amortization
(unfavorable $0.2 million), and increased stock option expense (favorable $0.1
million). The fiscal 2008 significant reduction in customer
prepayments is related to the completion of a menu board replacement program in
the Graphics Segment.
Net accounts receivable were $47.5
million and $38.9 million at September 30, 2008 and June 30, 2008,
respectively. The increase of $8.7 million in gross receivables is
primarily due to a larger amount of net sales in the first quarter of fiscal
2009 as compared to the fourth quarter of fiscal 2008, plus the affect of
increased DSO (Days’ Sales Outstanding). The DSO increased from 54
days at June 30, 2008 to 56 days at September 30, 2008. 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 September 30, 2008
decreased $3.0 million from June 30, 2008 levels. Primarily in
response to customer programs and the timing of shipments, inventory increases
occurred in the Lighting Segment of approximately $0.5 million (some of this
inventory supports certain graphics programs) and inventory decreases occurred
in the Graphics Segment of approximately $3.5 million since June 30,
2008.
Cash generated from operations and
borrowing capacity under two line of credit facilities are the Company’s primary
source of liquidity. The Company has an unsecured $50 million
revolving line of credit with its bank group, with all $50 million of the credit
line available as of October 20, 2008. This line of credit consists
of a $30 million three year committed credit facility expiring in fiscal 2011
and a $20 million credit facility expiring in the third quarter of fiscal 2009.
Additionally, the Company has a separate $7 million line of credit, renewable
annually in the third fiscal quarter, for the working capital needs of its
Canadian subsidiary, LSI Saco Technologies. As of October 20, 2008,
all $7 million of this line of credit is available. The Company
believes that the total of available lines of credit plus cash flows from
operating activities is adequate for the Company’s fiscal 2009 operational and
capital expenditure needs. The Company is in compliance with all of its loan
covenants.
The Company used $0.5
million of cash related to investing activities in the first quarter of fiscal
2009 as compared to a generation of $2.8 million last year. The
primary change
between years relates to
the fiscal 2008 divestiture of of short-term investments ($3.5 million
unfavorable) and decreased purchase of fixed assets ($0.2 million
favorable). Capital expenditures of $0.5 million in the first quarter
of fiscal 2008 compared to $0.7 million in the same period last
year. Spending in both periods is primarily for tooling and
equipment. The Company expects fiscal 2009 capital expenditures to
approximate $5 million, exclusive of business acquisitions.
The Company used $2.1 million of cash
related to financing activities in the first quarter of fiscal 2009 as compared
to a use of $3.6 million in the same period last year. The $1.5
million change between periods is primarily the result activities with the
Company’s lines of credit ($1.3 million favorable). The first quarter
of fiscal 2008 was a period in which the debt that was borrowed was paid off
during the
quarter
, and the first quarter of
fiscal
2009 was a
period of borrowings at period end. Cash dividend payments of
$3,236,000 in the first quarter of fiscal 2009 were less than cash dividend
payments of $3,875,000 in the same period last year. The $0.6 million
reduction between years is the result of a special year-end dividend of
approximately $1.1 million paid in the first quarter of fiscal 2008, partially
offset by a higher per share dividend rate in the first quarter of fiscal
2009. Additionally, the Company had cash flow from the exercise of
stock options in the first quarter of fiscal 2008, while there were no exercises
in the first quarter of fiscal 2009 ($0.5 million unfavorable).
The Company has financial instruments
consisting primarily of cash and cash equivalents and 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 October 22, 2008 the Board of
Directors declared a regular quarterly cash dividend of $0.05 per share
(approximately $1,079,000) payable November 10, 2008 to shareholders of record
on November 3, 2008. The Company’s cash dividend policy is that the
indicated annual dividend rate will be set between 50% and 70% of the expected
net income for the current fiscal year. Consideration will also be
given by the Board to special year-end cash or stock dividends. The
declaration and amount of any cash and stock 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. Accordingly, the Board
established a new indicated annual cash dividend rate of $0.20 per share
beginning with the first quarter of fiscal 2009 consistent with the above
dividend policy.
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 or
AICPA Statement of Position 97-2 (SOP 97-2), “Software Revenue Recognition,” as
appropriate.
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, support and maintenance of certain solid
state LED video screens, billboards, or active digital signage, 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.
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 September 30, 2008 the Company
has recorded two deferred state income tax assets, one in the amount of $5,000
related to a state net operating loss carryover generated by the Company’s New
York subsidiary, and the other in the amount of $935,000, net of federal tax
benefits, related to non-refundable state tax credits. The Company
has determined that these deferred state income tax assets totaling $940,000 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. Additionally, as of September 30, 2008
the Company has recorded deferred tax assets for its Canadian subsidiary related
to net operating loss carryover and to research and development tax credits
totaling $1,819,000. In view of the impairment of the goodwill and
certain intangible assets on the financial statements of this subsidiary and two
consecutive loss years, the Company has determined these assets, more likely
than not, will not be realized. Accordingly, full valuation reserves
of $1,819,000 were recorded in the fourth quarter of fiscal 2008.
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. At June 30, 2008, tax and interest, net of potential federal
tax benefits, were $2,098,000 and $534,000, respectively, of the total reserves
of $3,225,000. Additionally, penalties were $593,000 of the reserve
at June 30, 2008. Of the $3,225,000 reserve for uncertain tax
positions, $2,632,000 would have an unfavorable impact on the effective tax rate
if recognized.
As of September 30, 2008, the Company
recognized an additional $25,000 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. The
reserve for uncertain tax positions is expected to decrease in the next 12
months approximately $400,000 due to incremental Company activity and an income
tax filing under a voluntary disclosure agreement.
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
combination of a market approach and an income (discounted cash flow) approach,
at the reporting unit level, that requires significant management judgment with
respect to revenue and expense growth rates, changes in working capital and the
selection and use of an appropriate discount rate. The estimates of
fair value of reporting units are based on
the best
information available as of the date of the assessment. The use of
different assumptions would increase or decrease estimated discounted future
operating cash flows and could increase or decrease an impairment
charge. Company management uses its judgment in assessing whether
assets may have become impaired between annual impairment
tests. Indicators such as adverse business conditions, economic
factors and technological change or competitive activities may signal that an
asset has become impaired. The Company has completed step one of its
annual analysis and test for impairment of goodwill and other intangible assets,
and as a result, it was determined that certain goodwill and other intangible
assets were impaired. As a result, a $28,183,000 estimated impairment
charge was recorded as of June 30, 2008. The impairment charge was
due primarily to the combination of a decline in the market capitalization of
the Company at June 30, 2008 and the decline in the estimated forecasted
discounted cash flows expected by the Company. This impairment charge
was recorded in the fourth quarter of fiscal 2008 rather than in the first
quarter of fiscal 2009 due to the decline in the Company’s stock price as of
June 30, 2008. Step two of the impairment test was completed in the
first quarter of fiscal 2009 at which time it was determined that no further
adjustment to the estimate was needed. Also see Note 7.
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. As a result of the
fiscal year 2008 review of long lived assets and definite-lived intangible
assets in connection with SFAS No. 144, it was determined that a certain trade
name within the Lighting Segment was deemed fully impaired because it was no
longer used in the Company’s marketing efforts. An impairment charge
of $746,000 was recorded as of June 30, 2008. There were no
impairment charges related to long-lived tangible assets or definite-lived
intangible assets recorded by the Company during the first quarter of fiscal
year 2009.
Credit
and Collections
The Company maintains allowances for
doubtful accounts receivable for probable estimated losses resulting from either
customer disputes or the inability of its customers to make required
payments. If the financial condition of the Company’s customers were
to deteriorate, resulting in their inability to make the required payments, the
Company may be required to record additional allowances or charges against
income. The Company determines its allowance for doubtful accounts by
first considering all known collectibility problems of customers’ accounts, and
then applying certain percentages against the various aging categories of the
remaining receivables. The resulting allowance for doubtful accounts
receivable is an estimate based upon the Company’s knowledge of its business and
customer base, and historical trends. The Company also establishes
allowances, at the time revenue is recognized, for returns and allowances,
discounts, pricing and other possible customer deductions. These
allowances are based upon historical trends.
New Accounting
Pronouncements
In July 2006, the Financial Accounting
Standards Board issued FASB Interpretation No. 48 (FIN 48), “Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No.
109.” FIN 48 provides guidance for the recognition, measurement,
classification and disclosure of the financial statement effects of a position
taken or expected to be taken in a tax return (“tax position”). The
financial statement effects of a tax position must be recognized when there is a
likelihood of more than 50 percent that based on the technical merits, the
position will be sustained upon examination and resolution of the related
appeals or litigation processes, if any. A tax position that meets
the recognition threshold must be measured initially and subsequently as the
largest amount of tax benefit that is greater than 50 percent likely of being
realized upon ultimate settlement with a taxing authority. In
addition, FIN 48 specifies certain annual disclosures that are required to be
made once the interpretation has taken effect. The Interpretation was effective
for fiscal years beginning after December 15, 2006. The Company
adopted the provisions of FIN 48 on July 1, 2007. As a result of
adoption, the Company recognized a $2,582,000 increase to reserves for uncertain
tax positions and recorded a charge of $2,582,000 to the July 1, 2007 retained
earnings balance. For additional information, see Note 9 to the
Consolidated Financial Statements.
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 adopted SFAS No. 157 on July 1, 2008, and the
adoption did not have any significant impact on its consolidated results of
operations, cash flows or financial position. The Company determined
that it does not have any financial assets or liabilities subject to the
disclosure requirements of SFAS No. 157, and is evaluating the disclosure impact
on its non-financial assets and liabilities.
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 has
not made
any fair value elections under SFAS No. 159 and did not have any 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,
2008. Additional information can be found in Item 7A, Quantitative
and Qualitative Disclosures About Market Risk, which appears on page 14 of the
Annual Report on Form 10-K for the fiscal year ended June 30, 2008.
ITEM 4. CONTROLS
AND PROCEDURES
An evaluation was performed as of
September 30, 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 September 30, 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
|
(c)
|
The
Company does not purchase into treasury its own common shares for general
purposes. However, the Company does purchase its own common
shares, through a Rabbi Trust, in connection with investments of
employee/participants of the LSI Industries Inc. Non-Qualified Deferred
Compensation Plan. Purchases of Company common shares for this
Plan in the first quarter of fiscal 2009 were as
follows:
|
|
ISSUER
PURCHASES OF EQUITY SECURITIES
|
Period
|
(a)
Total
Number
of
Shares
Purchased
|
(b)
Average
Price
Paid
per
Share
|
(c)
Total Number of
Shares
Purchased as Part of Publicly Announced Plans or Programs
|
(d)
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be
Purchased Under the Plans or Programs
|
7/1/08
to 7/31/08
|
1,347
|
$8.36
|
1,347
|
(1)
|
8/1/08
to 8/31/08
|
14,628
|
$8.74
|
14,628
|
(1)
|
9/1/08
to 9/30/08
|
507
|
$9.21
|
507
|
(1)
|
Total
|
16,482
|
$8.72
|
16,482
|
(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 September 30, 2008 the Plan held 227,633 shares of the
Company.
|
ITEM
6. EXHIBITS
a)
|
Exhibits
|
|
|
|
|
|
31.1
|
Certification
of Principal Executive Officer required by Rule
13a-14(a)
|
|
|
|
|
31.2
|
Certification
of Principal Financial Officer required by Rule
13a-14(a)
|
|
|
|
|
32.1
|
Section
1350 Certification of Principal Executive Officer
|
|
|
|
|
32.2
|
Section
1350 Certification of Principal Financial
Officer
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
LSI Industries Inc.
BY:
/s/ Robert J.
Ready
Robert
J. Ready
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|
BY:
/s/ Ronald S.
Stowell
Ronald
S. Stowell
Vice
President, Chief Financial Officer and Treasurer
(Principal
Financial and Accounting Officer)
|
October
31, 2008
|
|
Page 33
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