Net sales of $202,004,000 in the first nine months of fiscal 2002 increased 21% from fiscal 2001 nine month net sales of $167,383,000. Commercial / Industrial Lighting Segment net sales increased 16% and Image Segment net sales increased 23% in the first nine months of fiscal 2002 as compared to the prior year. The increase in Commercial / Industrial Lighting Segment is attributed primarily to the November 2000 acquisition of LSI Lightron (about 21% of net sales of this Segment in the first nine months of FY 2002 versus 11% in the same period of FY 2001). Excluding the effects of the acquisition of LSI Lightron, net sales in this segment increased approximately 3% year over year for the nine month period, primarily on the strength of a new store lighting program for a national retailer. The increase in Image Segment net sales is primarily attributed to three factors. First is the inclusion of the results of LSI Adapt, acquired in January 2001 and representing approximately 6% of Image Segment net sales in the first nine months of fiscal 2002 versus 1% in the same period last year. Second is the volume gain in menu board systems and related installation revenue resulting from the roll out program with Burger King Corporation. Net sales to Burger King and various of its franchisees represented the Company’s single largest program in the first nine months fiscal 2002. Third is an increase in graphics business and related installation revenue related to roll out image conversion programs for customers in the petroleum / convenience store market. Net sales of the Image Segment to the petroleum / convenience store market represented 35% of total net sales in the first nine months of fiscal 2002 as compared to 37% in the same period of fiscal 2001. Sales to this market increased 16% in the first nine months of fiscal 2002 as compared to the same period last year. While sales prices in some markets that the Company serves were increased, inflation did not have a significant impact on sales in the first half of fiscal 2002 as competitive pricing pressures held price increases to a minimum.
Gross profit of $56,721,000 in the first nine months of fiscal 2002 increased 22% from last year’s gross profit of $46,414,000. The increase in amount of gross profit is due primarily to the 21% increase in net sales and to cost efficiencies in manufacturing overhead. Selling and administrative expenses increased 10% to $38,475,000 from $34,868,000. The increase was caused primarily by the additions of LSI Lightron and LSI Adapt, by an increased provision for uncollectible accounts receivable, and by the increase in net sales, partially offset by the increased sales volume of menu board systems, which have lower selling costs than the Company’s other products and programs, and by the positive effects of cost containment programs. As a percentage of net sales, selling and administrative expenses were at 19.0% in the first nine months of fiscal 2002 as compared to 20.8% in the same period of the prior year. The Company continued the task of converting its business operating software and systems company-wide. Total implementation costs expensed were $510,000 ($0.02 per share, diluted) in the first nine months fiscal 2002 as compared to $971,000 ($0.04 per share, diluted) in the same period of fiscal 2001. Expenditures are expected to continue through calendar year 2004. See additional discussion in Liquidity and Capital Resources regarding depreciation of this business operating system.
The Company reported net interest expense of $446,000 in the first nine months of fiscal 2002 as compared to net interest income of $286,000 in the same period of fiscal 2001. The change between years is primarily reflective of the Company being in a net borrowing position since November 2000 and in a net cash investment position prior to that date, partially offset by reduced interest rates and fiscal 2002 capitalization of $43,000 of interest expense associated with construction of a manufacturing facility. The Company’s effective tax rate of 39.0% was slightly lower than the first nine months of last year (39.2%). The effective tax rate for fiscal year 2001 was 38.8%, and the fiscal 2002 effective tax rate is expected to be about 39%.
Net income of $10,858,000 ($0.68 per share) in the first nine months of fiscal 2002 increased 50% from last year’s nine month net income of $7,234,000 ($0.46 per share). The increase is primarily the result of increased gross profit from increased sales, partially offset by increased operating expenses, net interest expense and increased income taxes. Diluted earnings per share of $0.68 in the first nine months of fiscal 2002 increased 48% from $0.46 per share reported in the same period last year. The weighted average common shares outstanding for purposes of computing diluted earnings per share increased 2% in fiscal 2002 to 16,021,000 shares from 15,735,000 shares in 2001 as a result of common shares issued both for the exercise of stock options and for an acquisition during fiscal 2001.
Liquidity and Capital Resources The Company considers its level of cash on hand, its current ratio and working capital levels to be its most important measures of short-term liquidity. For long-term liquidity indicators, the Company believes its ratio of long-term debt to equity and its historical levels of net cash flows from operating activities to be the most important measures.
At March 31, 2002 the Company had working capital of $57.2 million, compared to $62.1 million at June 30, 2001. The ratio of current assets to current liabilities decreased to 2.90 to 1 from 3.09 to 1. The decreased working capital is primarily attributed to decreased accounts receivables, and increased accrued expenses, partially offset by increased inventories and other current assets, and decreased accounts payable. The reduction in accounts receivable is attributed to lower seasonal net sales in the Company’s third quarter and to a reduction in the days sales outstanding.
The Company generated $19.7 million of cash from operating activities in the first nine months of fiscal 2002 as compared to $3.0 million in the same period of fiscal 2001. The increase in net cash flows from operating activities in fiscal 2002 is primarily the net result of increased net income, more reduction in accounts receivable, increased accrued expenses, and increased depreciation and amortization expense, partially offset by decreased accounts payable and decreased payments of liabilities from discontinued operations.
As of March 31, 2002, the Company’s days sales outstanding were at approximately 69 days, decreased from 73 days at June 30, 2001. Net accounts and notes receivables were $42.5 million and $51.6 million at March 31, 2002 and June 30, 2001, respectively. Collection cycles from a few large customers in the Image Segment, as well as several other customers, have been very slow due to a combination of factors, including customer cash availability and economic conditions. The majority of one such open customer account (petroleum / convenience store customer) was converted into a collateralized note receivable during the second quarter, with the balance of the note down to $2.3 million and the unsecured receivable at $0.9 million as of March 31, 2002. This note has increasing semi-monthly scheduled payments and is to be paid in full by June 15, 2002. This customer continues to make payments on the note, but is behind as compared to scheduled payments. A second customer in the petroleum / convenience store market owes the Company approximately $3.6 million that is significantly past due. The Company expects this account to be paid to current status in the fourth fiscal quarter. The Company also has unsecured accounts receivable, as well as dedicated inventory, from Kmart, the large national retailer that filed Chapter 11 bankruptcy in January 2002. The Company’s total exposure is approximately $1.7 million. Subject to continual review, shipments to Kmart have resumed on a limited basis on open account. The three customers above represent approximately 17% of the Company’s total net accounts and notes receivable. The Company believes that the receivables and inventory discussed above are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.
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In addition to cash generated from operations, the Company’s primary source of liquidity continues to be its line of credit. The Company has an unsecured $50 million revolving line of credit with its bank group. This line of credit was renewed in the third quarter under the same terms and conditions. As of April 26, 2002 there was approximately $33.0 million available on this line of credit. This line of credit is composed of a $30 million three year committed credit facility expiring in fiscal 2005 and a $20 million credit facility with an annual renewal in the third quarter of fiscal 2003, at which time the Company intends to renew this line of credit. The Company believes that the total of available lines of credit plus cash flows from operating activities is adequate for the Company’s fiscal 2002 and 2003 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.
Capital expenditures of $10.7 million in the first nine months of fiscal 2002 compare to $5.0 million in the same period of fiscal 2001. The primary cause of the increased spending is the new 192,000 square foot manufacturing facility currently under construction in New Windsor, New York for LSI Lightron. Capital expenditures in fiscal 2002 are expected to be approximately $15 million, exclusive of business acquisitions.
The Company used $9.2 million in financing activities in the first half of fiscal 2002 as compared to a generation of $9.9 million in the same period of fiscal 2001. The change is the net result of a net $7.5 million pay down of funded debt in the first nine months of fiscal 2002 as compared to a net borrowing of $12.6 million of funded debt last year, and the difference between years in the amount of both dividend payments and stock options exercised.
The Company has been implementing a fully integrated enterprise resource planning / business operating system over the past three fiscal years, and will continue to do so into fiscal 2004. A certain portion of the $5.9 million software expenditures that are capitalized to date are being depreciated by the companies who are currently using the software to run their business. More of this capitalized asset will be depreciated as additional companies implement this software, with scheduled full write-off to occur in fiscal 2008. Some additional capitalization of software development is expected.
On April 22, 2002 the Board of Directors declared a regular quarterly cash dividend of $0.06 per share (approximately $946,000), payable May 14, 2002 to shareholders of record on May 7, 2002. During the first nine months of fiscal 2002, the Company paid cash dividends in the amount of $2.8 million, as compared to $3.1 million in the same period of fiscal 2001.
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 (SFAS No. 141), "Business Combinations," and issued Statement of Financial Accounting Standards No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations and requires that all business combinations be accounted for as purchases. In addition, SFAS No. 141 establishes new rules concerning recognition of intangible assets arising in a purchase business combination and requires enhanced disclosure of information in the period in which a business combination is completed. SFAS No. 142 establishes new rules on accounting for goodwill whereby goodwill will no longer be amortized to expense, but rather will be subject to impairment review. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001, and the Company had the option of adopting SFAS No. 142 either July 1, 2001 or July 1, 2002. Goodwill amortization expense will be reduced to zero in fiscal 2003 when SFAS No. 142 is adopted. The Company is currently evaluating the impact to its financial statements, financial position, results of operations and cash flows related to the implementation of SFAS No. 142, which will be adopted effective July 1, 2002, the beginning of fiscal 2003.
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In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143 (SFAS No. 143), "Accounting for Asset Retirement Obligations," and in August 2001 issued Statement of Financial Accounting Standards No. 144 (SFAS No. 144), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 143 establishes standards of accounting for asset retirement obligations (i.e., legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees) and the associated asset retirement costs. SFAS No. 144 replaces existing accounting pronouncements related to impairment or disposal of long-lived assets. Both SFAS No. 143 and No. 144 are effective beginning with the Company's fiscal 2003 year. The Company is currently evaluating the impact of these two statements, but does not expect any significant impact on its financial condition or results of operations when they are implemented.
The Company continues to seek opportunities to invest in new products and markets, and in acquisitions which fit its strategic growth plans in the lighting and graphics markets. The Company believes that adequate financing for any such investments or acquisitions will be available through future borrowings or through the issuance of common or preferred shares in payment for acquired businesses.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
b) | Reports on Form 8-K
None |
[All other items required in Part II have been omitted because they are not applicable or are not required.]
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SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| LSI Industries Inc.
BY: /s/ Robert J. Ready
Robert J. Ready
President and Chief Executive Officer
(Principal Executive Officer)
BY: /s/ Ronald s. Stowell
Ronald S. Stowell
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
|
May 2, 2002
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