lyts_10q-033113.htm
 
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q
 
X
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2013.
 
       
   
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 (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  YES    X     NO ____

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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 May 1, 2013 there were 24,031,897 shares of the Registrant's common stock, no par value per share, outstanding.
 
 
 

 
 
LSI INDUSTRIES INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2013

INDEX
 
   
Begins on Page
PART I.  Financial Information
   
         
 
ITEM 1.
Financial Statements
   
         
   
Condensed Consolidated Statements of Operations
 
3
   
Condensed Consolidated Balance Sheets
 
4
   
Condensed Consolidated Statements of Cash Flows
 
6
         
   
Notes to Condensed Consolidated Financial Statements
 
7
         
  ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
20
         
  ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
 
34
         
 
ITEM 4.
Controls and Procedures
 
34
         
PART II.  Other Information
   
         
  ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
34
         
 
ITEM 6.
Exhibits
 
35
         
Signatures
 
36
 
“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 over which the Company may have no control.  These risks and uncertainties include, but are not limited to, the impact of competitive products and services, product demand and market acceptance risks, potential costs associated with litigation and regulatory compliance, reliance on key customers, financial difficulties experienced by customers, the cyclical and seasonal nature of our business, the adequacy of reserves and allowances for doubtful accounts, fluctuations in operating results or costs whether as a result of uncertainties inherent in tax and accounting matters or otherwise, unexpected difficulties in integrating acquired businesses, the ability to retain key employees of acquired businesses, unfavorable economic and market conditions, the results of asset impairment assessments and the other risk factors that are identified herein.  You are cautioned to not place undue reliance on these forward-looking statements.  In addition to the factors described in this paragraph, the risk factors identified in our Form 10-K and other filings the Company may make with the SEC constitute risks and uncertainties that may affect the financial performance of the Company and are incorporated herein by reference.  The Company does not undertake and hereby disclaims any duty to update any forward-looking statements to reflect subsequent events or circumstances.
 
 
Page 2

 
 
PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

LSI INDUSTRIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
   
Three Months Ended
March 31
   
Nine Months Ended
March 31
 
(In thousands, except per share data)
 
2013
   
2012
   
2013
   
2012
 
                                 
Net sales
 
$
66,152
   
$
62,937
   
$
211,953
   
$
197,206
 
                                 
Cost of products and services sold
   
52,231
     
49,621
     
166,279
     
153,500
 
                                 
Gross profit
   
13,921
     
13,316
     
45,674
     
43,706
 
                                 
Selling and administrative expenses
   
14,155
     
13,222
     
43,449
     
39,957
 
                                 
Goodwill impairments
   
272
     
--
     
2,413
     
258
 
                                 
Operating income (loss)
   
(506
)
   
94
     
(188
)
   
3,491
 
 
                               
Interest (income)
   
(9
)
   
(6
)
   
(40
)
   
(18
)
                                 
Interest expense
   
30
     
37
     
63
     
126
 
                                 
Income (loss) before income taxes
   
(527
)
   
63
     
(211
)
   
3,383
 
                                 
Income tax expense (benefit)
   
(212
)
   
440
     
724
     
1,664
 
 
                               
Net income (loss)
 
$
(315
)
 
$
(377
)
 
$
(935
)
 
$
1,719
 
 
                               
                                 
Earnings (loss) per common share (see Note 4)
                               
Basic
 
$
(0.01
)
 
$
(0.02
)
 
$
(0.04
)
 
$
0.07
 
Diluted
 
$
(0.01
)
 
$
(0.02
)
 
$
(0.04
)
 
$
0.07
 
                                 
                                 
Weighted average common shares outstanding
                               
Basic
   
24,312
     
24,300
     
24,308
     
24,297
 
Diluted
   
24,410
     
24,360
     
24,372
     
24,352
 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
 
 
Page 3

 
 
LSI INDUSTRIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 

(In thousands, except shares)
 
March 31,
2013
   
June 30,
2012
 
                 
ASSETS
               
                 
Current Assets
               
                 
Cash and cash equivalents
 
$
13,850
   
$
15,255
 
                 
Accounts receivable, less allowance for doubtful accounts of $344 and $385, respectively
   
38,706
     
44,412
 
                 
Inventories
   
41,430
     
41,276
 
                 
Refundable income taxes
   
1,685
     
227
 
                 
Other current assets
   
6,236
     
5,453
 
             
Total current assets
   
101,907
     
106,623
 
                 
Property, Plant and Equipment, at cost
               
Land
   
7,015
     
6,947
 
Buildings
   
37,843
     
37,660
 
Machinery and equipment
   
71,940
     
68,964
 
Construction in progress
   
2,777
     
531
 
     
119,575
     
114,102
 
Less accumulated depreciation
   
(74,903
)
   
(71,576
)
Net property, plant and equipment
   
44,672
     
42,526
 
                 
Goodwill, net
   
10,508
     
12,921
 
                 
Other Intangible Assets, net
   
9,157
     
11,074
 
                 
Other Long-Term Assets, net
   
2,122
     
2,082
 
             
Total assets
 
$
168,366
   
$
175,226
 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
 
 
Page 4

 
 
LSI INDUSTRIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 


(In thousands, except shares)
 
March 31,
2013
   
June 30,
2012
 
                 
LIABILITIES & SHAREHOLDERS’ EQUITY
               
                 
Current Liabilities
               
Accounts payable
 
$
11,148
   
$
11,512
 
Accrued expenses
   
13,088
     
11,409
 
             
Total current liabilities
   
24,236
     
22,921
 
                 
Other Long-Term Liabilities (Note 12)
   
2,084
     
2,937
 
                 
Commitments and Contingencies (Note 12)
   
     
 
                 
Shareholders’ Equity
               
                 
Preferred shares, without par value; Authorized 1,000,000 shares, none issued
   
     
 
Common shares, without par value; Authorized 40,000,000 shares; Outstanding 24,030,781 and 24,035,564 shares, respectively
   
102,219
     
101,399
 
Retained earnings
   
39,827
     
47,969
 
             
Total shareholders’ equity
   
142,046
     
149,368
 
             
Total liabilities & shareholders’ equity
 
$
168,366
   
$
175,226
 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
 
 
Page 5

 
 
LSI INDUSTRIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


(In thousands)
 
 
Nine Months Ended
March 31
 
   
2013
   
2012
 
Cash Flows from Operating Activities
           
Net income (loss)
 
$
(935
)
 
$
1,719
 
Non-cash items included in net income (loss)
               
Depreciation and amortization
   
5,414
     
5,852
 
Goodwill impairments
   
2,413
     
258
 
Deferred income taxes
   
57
     
134
 
Deferred compensation plan
   
121
     
92
 
Stock option expense
   
740
     
317
 
Issuance of common shares as compensation
   
44
     
36
 
(Gain)/Loss on disposition of fixed assets
   
(5
)
   
9
 
Allowance for doubtful accounts
   
(41
)
   
(473
)
Inventory obsolescence reserve
   
1,811
     
515
 
                 
Changes in certain assets and liabilities
               
Accounts receivable
   
5,747
     
8,312
 
Inventories
   
(1,965
)
   
7,788
 
Refundable income taxes
   
(1,458
)
   
1,470
 
Accounts payable
   
(364
)
   
1,787
 
Accrued expenses and other
   
187
     
(2,406
)
Customer prepayments
   
(241
)
   
(96
)
Net cash flows provided by operating activities
   
11,525
     
25,314
 
                 
Cash Flows from Investing Activities
               
Purchases of property, plant and equipment
   
(5,677
)
   
(2,546
)
Proceeds from sale of fixed assets
   
39
     
3
 
Acquisition of business, net of cash received
   
     
(2,973
)
Net cash flows (used in) investing activities
   
(5,638
)
   
(5,516
)
                 
Cash Flows from Financing Activities
               
Payment of long-term debt
   
     
(1,099
)
Cash dividends paid
   
(7,207
)
   
(4,087
)
Exercise of stock options
   
47
     
10
 
Purchase of treasury shares
   
(157
)
   
(144
)
Issuance of treasury shares
   
25
     
13
 
Net cash flows (used in) financing activities
   
(7,292
)
   
(5,307
)
                 
Increase (decrease) in cash and cash equivalents
   
(1,405
)
   
14,491
 
                 
Cash and cash equivalents at beginning of period
   
15,255
     
4,056
 
                 
Cash and cash equivalents at end of period
 
$
13,850
   
$
18,547
 
 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
 
 
Page 6

 
 
LSI INDUSTRIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1  -  INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The interim condensed consolidated financial statements are unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.  In the opinion of Management, the interim financial statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of March 31, 2013, the results of its operations for the three and nine month periods ended March 31, 2013 and 2012, and its cash flows for the nine month periods ended March 31, 2013 and 2012. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2012 Annual Report on Form 10-K.  Financial information as of June 30, 2012 has been derived from the Company’s audited consolidated financial statements.

NOTE 2  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation:

The condensed consolidated financial statements include the accounts of LSI Industries Inc. (an Ohio corporation) and its subsidiaries (collectively, the “Company”), all of which are wholly owned.  All intercompany transactions and balances have been eliminated in consolidation.

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 collectability is reasonably assured.  Revenue from product sales is typically recognized at time of shipment.  In certain arrangements with customers, as is the case with the sale of some of our solid-state LED (light emitting diode) video screens, revenue is recognized upon customer acceptance of the video screen at the job site.  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.

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 upon passing of title and risk of loss, generally at time of shipment.  However, product revenue related to orders where the customer requires the Company to install the product is recognized when the product is installed.  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 when all products at each customer site have been installed.

Shipping and handling revenue coincides with the recognition of revenue from sale of the product.

The Company evaluates the appropriateness of revenue recognition in accordance with Accounting Standards Codification (“ASC”) Subtopic 605-25, “Revenue Recognition:  Multiple–Element Arrangements,” and ASC Subtopic 985-605, “Software:  Revenue Recognition.”  Our solid-state LED video screens, billboards and active digital signage contain software elements which the Company has determined are incidental and essential to the functionality of the tangible product and are thus excluded from the scope of ASC Subtopic 985-605.
 
 
Page 7

 

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 collectability problems of customers’ accounts, and then applying certain percentages against the various aging categories based on the due date 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, discounts, pricing and other possible customer deductions.  These allowances are based upon historical trends.

The following table presents the Company’s net accounts receivable at the dates indicated.
 
(In thousands)
 
 
March 31,
2013
   
June 30,
2012
 
             
Accounts receivable
 
$
39,050
   
$
44,797
 
less Allowance for doubtful accounts
   
(344
)
   
(385
)
Accounts receivable, net
 
$
38,706
   
$
44,412
 

Cash and Cash Equivalents:

The cash balance includes cash and cash equivalents which have original maturities of less than three months.  The Company maintains balances at financial institutions in the United States and Canada.  The balances at financial institutions in Canada are not covered by insurance.  As of January 1, 2013, the FDIC full insurance coverage on non-interest bearing accounts in the United States expired.  The new limit for coverage of non-interest bearing accounts is $250,000. As of March 31, 2013 and June 30, 2012, the Company had bank balances of $13,589,000 and $863,000, respectively, without insurance coverage.

Inventories:

Inventories are stated at the lower of cost or market.  Cost of inventories includes the cost of purchased raw materials and components, direct labor, as well as manufacturing overhead which is generally applied to inventory based on direct labor and on material content.  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 (years)
28 - 40  
Machinery and equipment (years)
3 - 10  
Computer software (years)
3 - 8  
 
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 ASC Subtopic 350-40, “Intangibles – Goodwill and Other:  Internal-Use Software.”  Leasehold improvements are amortized over the shorter of fifteen years or the remaining term of the lease.

The Company recorded $1,162,000 and $1,260,000 of depreciation expense in the third quarter of fiscal 2013 and 2012, respectively, and $3,497,000 and $3,912,000 of depreciation expense in the first nine months of fiscal 2013 and 2012, respectively.
 
 
Page 8

 
 
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 over periods ranging between two and twenty years.  The Company periodically evaluates definite-lived intangible assets for permanent impairment. Neither indefinite-lived intangible assets nor the excess of cost over fair value of assets acquired ("goodwill") are amortized, however they are subject to review for impairment.  See additional information about goodwill and intangibles in Note 7.

Fair Value:

The Company has financial instruments consisting primarily of cash and cash equivalents, revolving lines of credit, and long-term debt.  The fair value of these financial instruments approximates carrying value because of their short-term maturity and/or variable, market-driven interest rates.  The Company has no financial instruments with off-balance sheet risk.
 
Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in goodwill and other intangible asset impairment analyses, in the purchase price of acquired companies (if any), and in the valuation of the contingent earn-out. The fair value measurement of these nonfinancial assets and nonfinancial liabilities is based on significant inputs not observable in the market and thus represent Level 3 measurements as defined in ASC 820, “Fair Value Measurement.”

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 defective products returned within one to five years from the 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)
 
 
 
Nine
Months Ended
March 31,
2013
   
Nine
Months Ended
March 31, 
2012
   
Fiscal
Year Ended
June 30,
2012
 
                   
Balance at beginning of the period
 
$
1,121
   
$
662
   
$
662
 
Additions charged to expense
   
1,518
     
1,612
     
2,645
 
Deductions for repairs and replacements
   
(1,254
)
   
(1,388
)
   
(2,186
)
Balance at end of the period
 
$
1,385
   
$
886
   
$
1,121
 


Research and Development Costs:

Research and development expenses are costs directly attributable to new product development, including the development of new technology for both existing and new products, and consist of salaries, payroll taxes, employee benefits, materials, supplies, depreciation and other administrative costs.   The Company follows the requirements of ASC Subtopic 985-20, “Software:  Costs of Software to be Sold, Leased, or Marketed,” and expenses as research and development all costs associated with development of software used in solid-state LED products.  All costs are expensed as incurred and are included in selling and administrative expenses.  Research and development costs related to both product and software development totaled $1,688,000 and $1,529,000 for the three months ended March 31, 2013 and 2012, respectively, and $4,862,000 and $4,147,000 for the nine months ended March 31, 2013 and 2012, respectively.
 
 
Page 9

 
 
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 385,000 shares and 325,000 shares for the three months ended March 31, 2013 and 2012, respectively, and 347,000 shares and 316,000 shares for the nine months ended March 31, 2013 and 2012, respectively.   See further discussion in Note 4.

New Accounting Pronouncements:

In September 2011, the Financial Accounting Standards Board issued ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350).” This amended guidance is intended to simplify the test of goodwill for impairment by allowing companies to first assess qualitative factors to determine whether or not it is more likely than not that the fair value of a reporting unit is less than its carrying value as the basis for determining whether it is necessary to perform the two-step goodwill impairment test. Guidance requires companies to perform an annual goodwill impairment test. The amended guidance is applicable for annual reporting periods beginning on or after December 15, 2011, or the Company’s fiscal year 2013, with early adoption permissible. The Company followed this guidance with its fiscal year 2013 annual goodwill impairment test performed as of March 1, 2013.

Comprehensive Income:

The Company does not have any comprehensive income items other than net income (loss).  The functional currency of the Company’s Canadian operation is the U.S. dollar.

Subsequent Events:

The Company has evaluated subsequent events for potential recognition and disclosure through the date the condensed consolidated financial statements were filed.  No items were identified during this evaluation that required adjustment to or disclosure in the accompanying financial statements.

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  — BUSINESS SEGMENT INFORMATION

ASC Topic 280, “Segment Reporting,” 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 Chief Executive Officer) in making decisions on how to allocate resources and assess performance. While the Company has twelve operating segments, it has only three reportable operating business segments (Lighting, Graphics, and Electronic Components), an All Other Category, and Corporate and Eliminations.

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, the Company’s primary niche markets (petroleum / convenience store market, automotive dealership market, and quick service restaurant market), and LED solid state digital sports video screens.  LED video screens are designed and manufactured by the Company’s Lighting Segment and by LSI Saco in the All Other Category. The Lighting Segment includes the operations of LSI Ohio Operations, LSI Metal Fabrication, LSI MidWest Lighting and LSI Lightron.   These operations have been integrated, have similar economic characteristics and meet the other requirements for aggregation in segment reporting.    

The Graphics Segment designs, manufactures and installs exterior and interior visual image elements related to graphics. 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 each exhibit similar economic characteristics and meet the other requirements for aggregation in segment reporting.
 
 
Page 10

 

The Electronic Components Segment designs, engineers and manufactures custom designed electronic circuit boards, assemblies and sub-assemblies, and various products used in various applications including the control of solid-state LED lighting and metal halide lighting.  Products produced by this segment may have applications in the Company’s other LED product lines such as digital scoreboards, advertising ribbon boards and billboards.  The Electronic Components Segment includes the operations of LSI ADL Technology and LSI Virticus.

The All Other Category includes the Company’s operating segments that neither meet the aggregation criteria, nor the criteria to be a separate reportable segment.  The Operations of LSI Images (menu board systems), LSI Adapt (implementation, installation and program management services related to products of the Graphics and Lighting Segments) and LSI Saco Technologies (designs and produces high-performance light engines, large format video screens using solid-state LED technology, and certain specialty LED lighting) are combined in the All Other Category.

The Company’s corporate administration activities are reported in a line item titled Corporate and Eliminations.  This primarily includes intercompany profit in inventory eliminations, expense related to certain corporate officers and support staff, the Company’s internal audit staff, the Company’s Board of Directors, stock option expense, certain consulting expenses, investor relations activities, and a portion of the Company’s legal, auditing and professional fee expenses. Corporate identifiable assets primarily consist of cash, invested cash (if any), refundable income taxes (if applicable), and deferred income tax assets.

There was no concentration of consolidated net sales in the three or nine months ended March 31, 2013 or 2012.  The accounts receivable balance from Ahold U.S.A., Inc. at March 31, 2013 was $4,840,000 or 12.5% of consolidated net accounts receivable.  There was no concentration of accounts receivable at June 30, 2012.

Summarized financial information for the Company’s reportable business segments is provided for the indicated periods and as of March 31, 2013 and June 30, 2012:

(In thousands)
 
Three Months Ended
March 31
   
Nine Months Ended
March 31
 
   
2013
 
2012
   
2013
   
2012
 
Net Sales:
                           
Lighting Segment
 
$
47,372
   
$
46,714
   
$
156,906
   
$
149,411
 
Graphics Segment
   
13,110
     
8,940
     
34,387
     
29,519
 
Electronic Components Segment
   
4,395
     
4,609
     
15,108
     
13,228
 
All Other Category
   
1,275
     
2,674
     
5,552
     
5,048
 
   
$
66,152
   
$
62,937
   
$
211,953
   
$
197,206
 
                                 
Operating Income (Loss):
                               
Lighting Segment
 
$
1,650
   
$
2,555
   
$
8,640
   
$
8,691
 
Graphics Segment
   
5
     
(767
)
   
(1,490
)
   
(2,216
)
Electronic Components Segment
   
(372
)
   
1,057
     
(1,145
)
   
2,811
 
All Other Category
   
(186
)
   
(680
)
   
(1,617
)
   
(1,047
)
Corporate and Eliminations
   
(1,603
)
   
(2,071
)
   
(4,576
)
   
(4,748
)
   
$
(506
)
 
$
94
   
$
(188
)
 
$
3,491
 
                                 
Capital Expenditures:
                               
Lighting Segment
 
$
721
   
$
376
   
$
1,615
   
$
1,315
 
Graphics Segment
   
--
     
48
     
363
     
494
 
Electronic Components Segment
   
982
     
228
     
1,311
     
339
 
All Other Category
   
41
     
29
     
98
     
163
 
Corporate and Eliminations
   
800
     
188
     
2,290
     
235
 
   
$
2,544
   
$
869
   
$
5,677
   
$
2,546
 
                                 
Depreciation and Amortization:
                               
Lighting Segment
 
$
1,062
   
$
1,251
   
$
3,366
   
$
3,709
 
Graphics Segment
   
230
     
221
     
676
     
661
 
Electronic Components Segment
   
331
     
274
     
984
     
804
 
All Other Category
   
46
     
55
     
139
     
165
 
Corporate and Eliminations
   
69
     
107
     
249
     
513
 
    $
1,738
   
$
1,908
   
$
5,414
   
$
5,852
 
 
 
Page 11

 
 
   
March 31,
2013
   
June 30,
2012
 
Identifiable Assets:
           
Lighting Segment
  $ 87,038     $ 93,661  
Graphics Segment
    26,581       27,377  
Electronic Components Segment
    30,399       31,805  
All Other Category
    6,125       8,185  
Corporate and Eliminations
    18,223       14,198  
    $ 168,366     $ 175,226  

The segment net sales reported above represent sales to external customers.  Segment operating income, which is used in management’s evaluation of segment performance, represents net sales less all operating expenses including impairment of goodwill and intangible assets, but excluding interest expense and interest income.  Identifiable assets are those assets used by each segment in its operations.  Inter-segment revenues were eliminated in consolidation as follows:

   
Three Months Ended
March 31
   
Nine Months Ended
March 31
 
(In thousands)  
 
2013
   
2012
   
2013
   
2012
 
                             
Lighting Segment inter-segment net sales
 
$
583
   
$
522
   
$
2,095
   
$
1,690
 
                                 
Graphics Segment inter-segment net sales
 
$
318
   
$
576
   
$
1,604
   
$
901
 
                                 
Electronic Components inter-segment net sales
 
$
6,654
   
$
7,117
   
$
20,273
   
$
16,854
 
                                 
All Other Category inter-segment net sales
 
$
2,227
   
$
  783
   
$
4,481
   
$
4,274
 

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, with one operation in Canada.  The geographic distribution of the Company’s net sales and long-lived assets are as follows:
 
(In thousands)
 
Three Months Ended
March 31
   
Nine Months Ended
March 31
 
   
2013
   
2012
   
2013
   
2012
 
Net Sales (a):
                           
United States
 
$
66,085
   
$
62,457
   
$
211,738
   
$
196,057
 
Canada
   
67
     
480
     
215
     
1,149
 
   
$
66,152
   
$
62,937
   
$
211,953
   
$
197,206
 
 
 
Page 12

 

   
March 31,
2013
   
June 30,
2012
 
Long-lived Assets (b):
             
United States
 
$
46,442
   
$
44,286
 
Canada
   
352
     
322
 
   
$
46,794
   
$
44,608
 
 
a.
Net sales are attributed to geographic areas based upon the location of the operation making the sale.

b.
Long-lived assets include property, plant and equipment, and other long term assets.  Goodwill and intangible assets are not included in long-lived assets.
 

NOTE 4 — EARNINGS PER COMMON SHARE

The following table presents the amounts used to compute basic and diluted earnings per common share, as well as the effect of dilutive potential common shares on weighted average shares outstanding (in thousands, except per share data):

   
Three Months Ended
March 31
   
Nine Months Ended
March 31
 
   
2013
   
2012
   
2013
   
2012
 
                             
BASIC EARNINGS PER SHARE
                           
                             
Net income (loss)
 
$
(315
)
 
$
(377
)
 
$
(935
)
 
$
1,719
 
                                 
Weighted average shares outstanding during the period, net of treasury shares (a)
   
24,025
     
24,035
     
24,025
     
24,036
 
Weighted average shares outstanding in the Deferred Compensation Plan during the period
   
287
     
265
     
283
     
261
 
Weighted average shares outstanding
   
24,312
     
24,300
     
24,308
     
24,297
 
                                 
Basic earnings (loss) per share
 
$
(0.01
)
 
$
(0.02
)
 
$
(0.04
)
 
$
0.07
 
                                 
DILUTED EARNINGS PER SHARE
                               
                                 
Net income (loss)
 
$
(315
)
 
$
(377
)
 
$
(935
)
 
$
1,719
 
                                 
Weighted average shares outstanding
                               
                                 
Basic
   
24,312
     
24,300
     
24,308
     
24,297
 
                                 
Effect of dilutive securities (b): Impact of common shares to be issued under stock option plans, and contingently issuable shares, if any
   
 
98
     
 
60
     
64
     
55
 
                                 
Weighted average shares outstanding (c)
   
24,410
     
24,360
     
24,372
     
24,352
 
                                 
Diluted earnings (loss) per share
 
$
(0.01
)
 
$
(0.02
)
 
$
(0.04
)
 
$
0.07
 
 
 
Page 13

 

 
(a)
Includes shares accounted for like treasury stock in accordance with Accounting Standards Codification Topic 710, Compensation - General.

 
(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 1,842,075 common shares and 1,656,338 common shares at March 31, 2013 and 2012, respectively, and options to purchase 2,058,075 common shares and 1,792,849 common shares at March 31, 2013 and 2012, respectively, were not included in the computation of the three month and nine month, respectively, diluted earnings per share because the exercise price was greater than the average fair market value of the common shares.

NOTE 5 —  INVENTORIES

The following information is provided as of the dates indicated:
(In thousands)
 
March 31,
2013
   
June 30,
2012
 
             
Inventories:
           
Raw materials
  $ 26,757     $ 25,538  
Work-in-process
    4,865       6,623  
Finished goods
    9,808       9,115  
Total Inventories
  $ 41,430     $ 41,276  

NOTE 6 — ACCRUED EXPENSES

The following information is provided as of the dates indicated:
(In thousands)
 
March 31,
2013
   
June 30,
2012
 
             
Accrued Expenses:
           
Compensation and benefits
  $ 7,557     $ 5,102  
Customer prepayments
    741       982  
Accrued sales commissions
    1,484       1,409  
Accrued income taxes
          809  
Other accrued expenses
    3,306       3,107  
Total Accrued Expenses
  $ 13,088     $ 11,409  

NOTE 7 -  GOODWILL AND OTHER INTANGIBLE ASSETS

Carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment in accordance with ASC Topic 350, “Intangibles – Goodwill and Other.”  The Company may first assess qualitative factors in order to determine if goodwill is impaired in accordance with ASU 2011 – 08, “Intangible – Goodwill and Other (Topic 350).” If through the qualitative assessment it is determined that it is more likely than not that goodwill is not impaired, no further testing is required. If it is determined more likely than not that goodwill is impaired, or if the Company elects not to first assess qualitative factors,  the Company’s impairment testing continues with 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 identified its reporting units in conjunction with its annual goodwill impairment testing.  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 marketplace data, to name a few.  There are inherent uncertainties related to these factors and judgments in applying them to the analysis of goodwill impairment.
 
 
Page 14

 

The Company performed an interim goodwill impairment test as of September 30, 2011.  The continuing effects of the recession on some of the Company’s markets, the decline in discounted cash flows associated with these markets, and the decline in the Company’s stock price led management to believe that an other than annual goodwill impairment test was required for three of the four reporting units that contain goodwill. As a result of the test, it was determined that the goodwill associated with the Graphics Segment was fully impaired. It was also determined that the goodwill associated with the other reporting units tested was not impaired. Because the test was not complete, an estimate of the goodwill impairment was recorded in the first quarter of fiscal year 2012 totaling $258,000. This goodwill impairment test was completed in the second quarter of fiscal 2012 with no change to the impairment that was recorded.

As of March 1, 2012, the Company performed its annual goodwill impairment test on the three reporting units that contain goodwill. The goodwill impairment test in the Electronic Components Segment passed with an estimated business enterprise value that was $7.7 million or 33% above the carrying value of this reporting unit.  The goodwill impairment test in the All Other Category passed with an estimated business enterprise value that was $1.8 million or 155% above the carrying value of the reporting unit.  The goodwill impairment test in the Lighting Segment passed with a margin in excess of $28.8 million or 32% above the carrying value of this reporting unit.

The Company performed an interim goodwill impairment test as of December 31, 2012 on LSI Virticus, one of its reporting units that contains goodwill. Virticus was acquired March 19, 2012 and is part of the Electronic Components Segment. The reduction of the sales forecast that was originally used to value the Earn-Out liability related to the Virticus acquisition and which ultimately led to an adjustment to the earn-out liability in the second quarter of fiscal 2013 (see Note 12), led management to conclude that an interim goodwill impairment test was required on the LSI Virticus reporting unit. As a result of the test, it was determined that goodwill associated with this reporting unit was impaired. Of the original goodwill of $2,413,000, it was determined that $2,141,000 or 89% of the original goodwill value was impaired. A similar test was not performed on the three other reporting units that contain goodwill because the triggering events that indicate the potential impairment of goodwill did not exist.

As of March 1, 2013, the Company performed its annual goodwill impairment test on the four reporting units that contain goodwill. The goodwill impairment test of one of the reporting units in the Electronic Components Segment that contains goodwill passed with an estimated business enterprise value that was $10.5 million or 42% above the carrying value of this reporting unit. The goodwill impairment test in the All Other Category passed with an estimated business enterprise value that was $2.1 million or 182% above the carrying value of the reporting unit. The goodwill impairment test in the Lighting Segment passed with a margin in excess of $8.5 million or 10% above the carrying value of this reporting unit. The fourth reporting unit that contains goodwill that is also in the Electronic Components Segment, LSI Virticus, was found to be fully impaired. It was this same reporting unit that incurred an impairment loss of $2,141,000, or 89% of the original goodwill value, as of December 31, 2012. The remaining $272,000 of goodwill associated with LSI Virticus was found to be fully impaired, primarily as a result of a decline in the discounted cash flows related to this reporting unit.  Because the impairment test is not fully complete, an estimate of the goodwill impairment was recorded in the third quarter of fiscal 2013.  The impairment test is expected to be completed in the fourth quarter of fiscal 2013.

The following table presents information about the Company's goodwill on the dates or for the periods indicated.

Goodwill
             
Electronic
             
    (In thousands)    
 
Lighting
   
Graphics
   
Components
   
All Other
       
   
Segment
   
Segment
   
Segment
   
Category
   
Total
 
Balance as of June 30, 2012
                             
Goodwill
 
$
34,913
   
$
24,959
   
$
11,621
   
$
6,850
   
$
78,343
 
Accumulated impairment losses
   
(34,778
)
   
(24,959
)
   
--
     
(5,685
)
   
(65,422
)
Goodwill, net as of June 30, 2012
   
135
     
--
     
11,621
     
1,165
     
12,921
 
                                         
Fiscal 2013 Activity
                                       
   Goodwill acquired during year
   
--
     
--
     
    --
     
--
     
  --
 
   Impairment losses
   
--
     
  --
     
(2,413
)
   
--
     
(2,413
)
 
Balance as of March 31, 2013
                                       
Goodwill
   
34,913
     
24,959
     
11,621
     
6,850
     
78,343
 
Accumulated impairment losses
   
(34,778
)
   
(24,959
)
   
(2,413
)
   
(5,685
)
   
(67,835
)
 Goodwill, net as of March 31, 2013
 
$
135
   
$
  --
   
$
9,208
   
$
1,165
   
$
10,508
 
 
 
Page 15

 

 
The Company performed its annual review of indefinite-lived intangible assets as of March 1, 2013 and determined there was no impairment.

The gross carrying amount and accumulated amortization by major other intangible asset class is as follows:

   
March 31, 2013
 
Other Intangible Assets
(In thousands)
 
 
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
Amount
 
Amortized Intangible Assets
                 
Customer relationships
 
$
10,352
   
$
6,983
   
$
3,369
 
Patents
   
70
     
54
     
16
 
LED technology firmware, software
   
12,361
     
10,523
     
1,838
 
Trade name
   
460
     
339
     
121
 
Non-compete agreements
   
948
     
557
     
391
 
Total Amortized Intangible Assets
   
24,191
     
18,456
     
5,735
 
                         
Indefinite-lived Intangible Assets
                       
Trademarks and trade names
   
3,422
     
--
     
3,422
 
Total Indefinite-lived Intangible Assets
   
3,422
     
--
     
3,422
 
                         
Total Other Intangible Assets
 
$
27,613
   
$
18,456
   
$
9,157
 
 

 
 
June 30, 2012
 
(In thousands)
 
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
Amount
 
Amortized Intangible Assets
                 
Customer relationships
 
$
10,352
   
$
6,538
   
$
3,814
 
Patents
   
70
     
51
     
19
 
LED technology firmware, software
   
12,361
     
9,225
     
3,136
 
Trade name
   
460
     
270
     
190
 
Non-compete agreements
   
948
     
455
     
493
 
Total Amortized Intangible Assets
   
24,191
     
16,539
     
7,652
 
                         
Indefinite-lived Intangible Assets
                       
Trademarks and trade names
   
3,422
     
--
     
3,422
 
Total Indefinite-lived Intangible Assets
   
3,422
     
--
     
3,422
 
                         
Total Other Intangible Assets
 
$
27,613
   
$
16,539
   
$
11,074
 


(In thousands)                         
 
Amortization Expense of
Other Intangible Assets
 
             
             
 
March 31, 2013
   
March 31, 2012
 
             
Three Months Ended
 
$
576
   
$
648
 
Nine Months Ended
 
$
1,917
   
$
1,940
 
 
 
Page 16

 
 
The Company expects to record amortization expense as follows:
 
  (In thousands)          
             
 
2013
  $ 2,495    
 
2014
  $ 791    
 
2015
  $ 705    
 
2016
  $ 699    
 
2017
  $ 604    
 
After 2017
  $ 2,358    

NOTE 8  -  REVOLVING LINES OF CREDIT

The Company has a $30 million unsecured revolving line of credit with its bank group in the U.S., most of which, with the exception of a $0.3 million standby letter of credit secured by the revolving line of credit, was available as of March 31, 2013.  The line of credit expires in the third quarter of fiscal 2016.  Annually in the third quarter, the credit facility is renewable with respect to adding an additional year of commitment, if the bank group and the Company so choose, to replace the year just ended.  Interest on the revolving line of credit is charged based upon an increment over the LIBOR 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 175 and 215 basis points depending upon the ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA”), as defined in the credit facility.  The fee on the unused balance of the $30 million committed line of credit is 25 basis points.  Under the terms of this credit facility, the Company has agreed to a negative pledge of assets and is required to comply with financial covenants that limit the amount of debt obligations, require a minimum amount of tangible net worth, and limit the ratio of indebtedness to EBITDA. 
 
The Company also has a $5 million line of credit for its Canadian subsidiary.  The line of credit expires in the third quarter of fiscal 2015.  Interest on the Canadian subsidiary’s line of credit is charged based upon a 200 basis point increment over the LIBOR rate or based upon an increment over the United States base rate if funds borrowed are denominated in U.S. dollars or an increment over the Canadian prime rate if funds borrowed are denominated in Canadian dollars.  There are no borrowings against this line of credit as of March 31, 2013.

The Company is in compliance with all of its loan covenants as of March 31, 2013.

NOTE 9 -  CASH DIVIDENDS

The Company paid cash dividends of $7,207,000 and $4,087,000 in the nine months ended March 31, 2013 and 2012, respectively.  In April 2013, the Board of Directors declared a regular quarterly cash dividend of $0.06 per share payable May 14, 2013 to shareholders of record May 7, 2013.  The cash dividend indicated annual rate for fiscal 2013 is $0.24 per share.

NOTE 10 -  EQUITY COMPENSATION

Stock Options

The Company has an equity compensation plan that was approved by shareholders in November 2012 and that covers all of its full-time employees, outside directors and certain advisors.  This 2012 Stock Incentive Plan replaces all previous equity compensation plans.  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.  If a stock option holder’s employment with the Company terminates by reason of death, disability or retirement, as defined in the Plan, the Plan generally provides for acceleration of vesting.  The number of shares reserved for issuance is 1,079,499 shares (includes 282,223 shares transferred in from the previous plan), all of which were available for future grant or award as of March 31, 2013.  This plan allows for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted and unrestricted stock awards, performance stock awards, and other stock awards.  As of March 31, 2013, a total of 2,392,775 options for common shares were outstanding from this Plan as well as two previous stock option plans (each of which had also been approved by shareholders), and of these, a total of 1,682,300 options for common shares were vested and exercisable.  As of March 31, 2013, the unvested stock option expense that will be recorded as expense in future periods is $561,460.  The weighted average time over which this expense will be recorded is approximately 30 months.
 
 
Page 17

 

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
March 31
   
Nine Months Ended
March 31
 
     
2013
     
2012
   
2013
   
2012
 
                             
Dividend yield
   
--
     
3.11%
     
3.60%
     
3.07%
 
Expected volatility
   
--
     
55%
     
51%
     
55%
 
Risk-free interest rate
   
--
     
1.02%
     
0.64%
     
1.00%
 
Expected life (yrs.)
   
--
     
4.7
   
4.7 .
   
4.7
 

At March 31, 2013, the 414,750 options granted during the first nine months of fiscal 2013 to both employees and non-employee directors had exercise prices ranging from $6.28 to $6.58 per share, fair values ranging from $2.00 to $2.11 per share, and remaining contractual lives of between nine years five months and nine years eight months.

At March 31, 2012, the 36,000 options granted during the first nine months of fiscal 2012 to both employees and non-employee directors had exercise prices ranging from $6.68 to $7.22 per share, fair values ranging from $2.45 to $2.60 per share, and remaining contractual lives of between nine years eight months and nine years eleven months.

The Company calculates stock option expense using the Black-Scholes model.  Stock option expense is recorded on a straight line basis, or sooner if the grantee is retirement eligible as defined in the equity compensation plan, with an estimated 2.3% forfeiture rate effective January 1, 2013, with the previous estimated forfeiture rates having been a 3.4% forfeiture rate effective October 1, 2012, a 4.1% forfeiture rate effective April 1, 2012, a 3.6% forfeiture rate effective April 1, 2011, a 3.0% effective July 1, 2010 and a 6.55% prior to July 1, 2010.  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 $102,348 and $89,174 of expense related to stock options in the three months ended March 31, 2013 and 2012, respectively, and $740,395 and $317,373 of expense related to stock options in the nine months ended March 31, 2013 and 2012, respectively.  As of March 31, 2013, the Company had 2,381,320 stock options that were vested and that were expected to vest, with a weighted average exercise price of $9.92 per share, an aggregate intrinsic value of $755,074 and weighted average remaining contractual terms of 5.8 years.

Information related to all stock options for the periods ended March 31, 2013 and 2012 is shown in the table below:
 
   
Nine Months Ended March 31, 2013
 
   
Shares
   
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual Term
(years)
 
Aggregate
Intrinsic
Value
 
                     
Outstanding at 6/30/12
   
2,006,250
   
$
10.64
 
5.8
 
$
654,747
 
                           
Granted
   
414,750
   
$
6.58
           
Forfeitures/expiration
   
(19,425
)
 
$
16.57
           
Expirations
   
(300
)
 
$
12.58
           
Exercised
   
(8,500
)
   
5.53
           
                           
Outstanding at 3/31/13
   
2,392,775
   
$
9.91
 
5.9
 
$
761,064
 
                           
Exercisable at 3/31/13
   
1,682,300
   
$
11.28
 
4.8
 
$
339,741
 
 
 
Page 18

 

   
Nine Months Ended March 31, 2012
 
   
Shares
   
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual Term
(years)
 
Aggregate
Intrinsic
Value
 
                     
Outstanding at 6/30/11
   
2,123,939
   
$
10.80
 
6.3
 
$
955,401
 
                           
Granted
   
36,000
   
$
  7.13
           
Forfeitures/expiration
   
(138,814
)
 
$
12.30
           
Expirations
   
(3,000
)
 
$
7.56
           
Exercised
   
(2,000
)
 
$
5.21
           
                           
Outstanding at 3/31/12
   
2,016,125
   
$
10.64
 
6.1
 
$
737,757
 
                           
Exercisable at 3/31/12
   
1,403,525
   
$
12.15
 
5.4
 
$
241,272
 
 
The aggregate intrinsic value of options exercised during the nine months ended March 31, 2013 and 2012 was $12,987 and $1,960, respectively.  The Company received $47,025 and $10,420 of cash from employees who exercised options in the nine months ended March 31, 2013 and 2012, respectively.

Stock Compensation Awards

The Company awarded a total of 6,204 and 5,468 common shares, respectively, in the nine months ended March 31, 2013 and 2012 as stock compensation awards.  These common shares were valued at their approximate $44,000 and $39,700 fair market values on their dates of issuance, respectively, pursuant to the compensation programs for non-employee directors who receive a portion of their compensation as an award of Company stock.  Stock compensation awards are made in the form of newly issued common shares of the Company.

Deferred Compensation Plan

The Company has a non-qualified deferred compensation plan providing for both Company contributions and participant deferrals of compensation.  The Plan is fully funded in a Rabbi Trust.  All Plan investments are in common shares of the Company.  As of March 31, 2013 there were 28 participants, all with fully vested account balances.  A total of 286,102 common shares with a cost of $2,772,600, and 266,615 common shares with a cost of $2,641,000 were held in the Plan as of March 31, 2013 and June 30, 2012, 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 Accounting Standards Codification Topic 710, Compensation – General.  For fiscal year 2013, the Company estimates the Rabbi Trust for the Nonqualified Deferred Compensation Plan will make net repurchases in the range of 25,000 to 26,000 common shares of the Company.  During the nine months ended March 31, 2013 and 2012, the Company used approximately $156,700 and $145,200, 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.
 
 
Page 19

 
 
NOTE 11  -  SUPPLEMENTAL CASH FLOW INFORMATION
 
(In thousands)
 
Nine Months Ended
March 31
 
   
2013
   
2012
 
Cash payments:
           
Interest
 
$
57
   
$
113
 
Income taxes
 
$
3,227
   
$
303
 
                 
Issuance of common shares as compensation
 
$
44
   
$
36
 

NOTE 12 – COMMITMENTS AND CONTINGENCIES

As part of the acquisition of Virticus Corporation on March 19, 2012, a contingent earn-out liability of $877,000 was recorded based on the fair value of estimated earn-out payments. This liability is to be paid over a five year period, contingent upon reaching certain sales in each year over the five year period (fiscal year 2013 through fiscal year 2017). In December 2012, as a result of modified sales forecasts for LSI Virticus, the fair value of the earn-out liability was adjusted to $218,000. In addition to the $659,000 adjustment to the earn-out liability, which was recorded within selling and administrative expenses in Corporate and Eliminations, $46,000 of accrued interest expense was also reversed. The earn-out liability, including related accrued interest expense, is $241,000 as of March 31, 2013.

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.  The Company does not disclose a range of potential loss because the likelihood of such a loss is remote.  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.

The Company may occasionally issue a standby letter of credit in favor of third parties.  As of March 31, 2013, standby letter of credit agreements totaled $0.3 million.

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company’s condensed consolidated financial statements, accompanying notes and the “Safe Harbor” Statement, each as appearing earlier in this report, should be referred to in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Net Sales by Business Segment
                         
(In thousands)
 
Three Months Ended
   
Nine Months Ended
 
   
March 31
   
March 31
 
   
2013
   
2012
     
2013
   
2012
 
                               
Lighting Segment
 
$
47,372
   
$
46,714
   
$
156,906
   
$
149,411
 
Graphics Segment
   
13,110
     
8,940
     
34,387
     
29,519
 
Electronic Components Segment
   
4,395
     
4,609
     
15,108
     
13,228
 
All Other Category
   
1,275
     
2,674
     
5,552
     
5,048
 
   
$
66,152
   
$
62,937
   
$
211,953
   
$
197,206
 
 
 
Page 20

 
 
Operating Income (Loss) by Business Segment
         
(In thousands)
 
 
Three Months Ended
March 31
 
Nine Months Ended
March 31
 
   
2013
   
2012
   
2013
   
2012
 
Lighting Segment
 
$
1,650
   
$
2,555
   
$
8,640
   
$
8,691
 
Graphics Segment
   
5
     
(767
)
   
(1,490
)
   
(2,216
)
Electronic Components Segment
   
(372
)
   
1,057
     
(1,145
)
   
2,811
 
All Other Category
   
(186
)
   
(680
)
   
(1,617
)
   
(1,047
)
Corporate and Eliminations
   
(1,603
)
   
(2,071
)
   
(4,576
)
   
(4,748
)
   
$
(506
)
 
$
94
   
$
(188
)
 
$
3,491
 
 
Summary Comments

Fiscal 2013 third quarter net sales of $66,152,000 increased $3.2 million or 5.1% as compared to third quarter fiscal 2012. Net sales were favorably influenced by increased net sales of the Lighting Segment (up $0.7 million or 1.4%) and increased net sales of the Graphics Segment (up $4.2 million or 46.6%). Net sales were unfavorably influenced by decreased net sales of the Electronic Components Segment (down $0.2 million or 4.6%) and decreased net sales of the All Other Category (down $1.4 million or 52.3%). Net sales to the petroleum / convenience store market, the Company’s largest niche market, were $17,415,000 or 26% of total net sales and $15,085,000 or 24% of total net sales in the third quarter of fiscal 2013 and 2012, respectively.

Fiscal 2013 nine month net sales of $211,953,000 increased $14.7 million or 7.5% as compared to the same period of fiscal 2012. Net sales were favorably influenced by increased net sales of the Lighting Segment (up $7.5 million or 5.0%), increased net sales of the Graphics Segment (up $4.9 million or 16.5%), increased net sales of the Electronic Components Segment (up $1.9 million or 14.2%) and increased net sales of the All Other Category (up $0.5 million or 10.0%). Net sales to the petroleum / convenience store market, the Company’s largest niche market, were $58,957,000 or 28% of total net sales and $52,654,000 or 27% of total net sales in the first nine months of fiscal 2013 and 2012, respectively.

The Company’s total net sales of products and services related to solid-state LED technology in light fixtures and video screens for sports, advertising and entertainment markets have been recorded as indicated in the table below.  In addition, the Company sells certain elements of graphic identification programs that contain solid-state LED light sources.
 
                                                                                                    
  LED Net Sales  
(In thousands)
 
FY 2013
   
FY 2012
    % Change  
                   
First Quarter
  $ 23,809     $ 15,842       50.3 %
Second Quarter
    18,724       20,471       (8.5 )%
First Half
    42,533       36,313       17.1 %
Third Quarter
    18,794       17,285       8.7 %
Nine Months
    61,327       53,598       14.4 %
Fourth Quarter
            19,802          
Full Year
          $ 73,400          
 
LED net sales include sales of LED lighting products, certain graphics products containing LEDs, and LED video and sports screens.  Third quarter fiscal 2013 LED net sales of $18,794,000 were up $1.5 million or 8.7% from the same period of the prior year.  The $18,794,000 total LED net sales and the $1.5 million increase are primarily the result of Lighting Segment LED net sales of $18.4 million (up $1.7 million or 10.1%), which is comprised of $17.6 million of light fixtures having solid-state LED technology and $0.8 million related to video screens and Graphics Segment LED net sales of $0.4 million (up $0.3 million or 404%). First nine month fiscal 2013 total LED net sales of $61,327,000 were $7.7 million or 14.4% higher than the same period of the prior year.  The $61,327,000 total LED net sales and the $7.7 million increase are primarily the net result of Lighting Segment LED net sales of $60.3 million (up $8.6 million or 16.6%), which is comprised of $54.5 million of light fixtures having solid-state LED technology and $5.8 million related to video screens, Graphics Segment LED net sales of $0.9 million up slightly from fiscal 2013, and All Other Category LED net sales of $0.2 million (down $0.9 million or 85.4%).
 
 
Page 21

 

Non-GAAP Financial Measures

The Company believes it is appropriate to evaluate its performance after making adjustments to the as reported U.S. GAAP net income (loss).  Adjusted net income (loss) and earnings (loss) per share, which exclude the impact of the reduction of a contingent earn-out liability and goodwill impairments, are non-GAAP financial measures.  We believe that these adjusted supplemental measures are useful in assessing the operating performance of our business.  These supplemental measures are used by our management, including our chief operating decision maker, to evaluate business results.  We exclude these items because they are not representative of the ongoing results of operations of our business.  Below is a reconciliation of this non-GAAP measure to net income (loss) for the periods indicated.

(In thousands, except per share data; unaudited)
 
   
Third Quarter FY 2013
   
Third Quarter FY 2012
 
         
Diluted
         
Diluted
 
   
Amount
   
EPS
   
Amount
   
EPS
 
Reconciliation of net (loss) to adjusted net (loss):
                       
                         
Net (loss) and (loss) per share as reported
 
$
(315
)
 
$
(0.01
 
$
(377
)
 
$
(0.02
                                 
Adjustment for the acquisition deal costs and related expenses,                                
inclusive of income tax effect
   
--
     
--
     
376
(3)
  $
0.02
 
                                 
Adjustment for the reduction of a contingent Earn-Out liability,                                
inclusive of the income tax effect
   
(40
)(1)
   
--
     
--
     
--
 
                                 
Adjustment for goodwill impairment, inclusive of the income tax                                
 effect
   
334
(2)
   
0.01
     
--
     
--
 
                                 
Adjusted net income (loss) and earnings (loss) per share
 
$
(21
)
 
$
0.00
   
$
  (1
)
 
$
0.00
 

 

 
 
The income tax effects of the adjustments in the tables above were calculated using the estimated U.S. effective income tax rate for the period indicated.  The income tax effects were as follows (in thousands):

   
(1)  $(40)
   
(2)  $62
   
(3)  $208
 
 
Page 22

 
 
(In thousands, except per share data; unaudited)
 
   
Nine Months FY 2013
   
Nine Months FY 2012
 
         
Diluted
         
Diluted
 
   
Amount
   
EPS
   
Amount
   
EPS
 
Reconciliation of net income (loss) to adjusted net income (loss):
                       
                         
Net income (loss) and earnings (loss) per share as reported
 
$
(935
)
 
$
(0.04
)
 
$
1,719
   
$
0.07
 
                                 
Adjustment for the acquisition deal costs and related expenses,                                
inclusive of income tax effect
   
--
     
--
     
376
(4)
   
0.02
 
                                 
Adjustment for the reduction of a contingent Earn-Out liability,                                
 inclusive of the income tax effect
   
(551
)(1)
   
(0.02
)
   
--
     
--
 
                                 
Adjustment for goodwill impairment, inclusive of the income tax                                
 effect
   
1,886
(2)
   
0.08
     
258
(3)
   
0.01
 
                                 
Adjusted net income and earnings per share
 
$
400
   
$
0.02
   
$
2,353
   
$
0.10
 

 
The income tax effects of the adjustments in the tables above were calculated using the estimated U.S. effective income tax rate for the period indicated.  The income tax effects were as follows (in thousands):

   
(1)  $151
   
(2)  $(527)
   
(3)  $0
   
(4)  $208


Results of Operations

THREE MONTHS ENDED MARCH 31, 2013 COMPARED TO THREE MONTHS ENDED MARCH 31, 2012
 
Lighting Segment
           
(In thousands)
 
 
Three Months Ended
March 31
 
   
2013
    2012  
             
Net Sales
  $ 47,372     $ 46,714  
Gross Profit
  $ 10,563     $ 10,660  
Operating Income
  $ 1,650     $ 2,555  
 
Lighting Segment net sales of $47,372,000 in the third quarter of fiscal 2013 increased 1.4% from fiscal 2012 same period net sales of $46,714,000.  The $0.7 million increase in Lighting Segment net sales is primarily the net result of a $1.0 million or 4.3% net decrease in lighting sales to our niche and national accounts markets (petroleum / convenience store sales were up 26%, retail national net sales were down 56%, quick-service restaurant market sales were up 89%, and automotive market net sales were down 6%), a $0.1 million or 3.5% decrease in lighting sales to the international markets, a $0.6 million or 246.9% increase in LED video screens, and a $1.2 million or 6.1% increase in commissioned net sales to the commercial / industrial lighting market.  Sales of lighting to the petroleum / convenience store market represented 29% and 23% of Lighting Segment net sales in the third quarter of fiscal years 2013 and 2012, respectively.  Lighting Segment net sales of lighting to this, the Company’s largest niche market, were up 26.1% from last year to $13,762,000. The petroleum / convenience store market has been, and will continue to be, a very important niche market for the Company. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $17.6 million in the third quarter of fiscal 2013, representing a 6.7% increase from fiscal 2012 third quarter net sales of solid-state LED light fixtures of $16.5 million. The Lighting Segment’s net sales related to LED video screens totaled $0.8 million in the third quarter of fiscal 2013, representing a $0.6 million or 290% increase from fiscal 2012 third quarter net sales of $0.2 million.
 
 
Page 23

 

Gross profit of $10,563,000 in the third quarter of fiscal 2013 decreased $0.1 million or 0.9% from the same period of fiscal 2012, and decreased from 22.6% to 22.0% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales).  The decrease in amount of gross profit is due to the net effect of increased net product sales, increased installation sales at margins lower than traditional product sales, increased overhead absorption, increased employee compensation and wage expense ($0.7 million), decreased customer relations expense ($0.1 million), and decreased warranty expense ($0.1 million).

Selling and administrative expenses of $8,913,000 in the third quarter of fiscal year 2013 increased $0.8 million from the same period of fiscal 2012 primarily as the net result of increased employee compensation and benefits expense ($0.2 million), increased research and development expense ($0.1 million), increased sales commission ($0.6 million), decreased amortization expense ($0.1 million) and decreased bad debt expense ($0.1 million).

The Lighting Segment third quarter fiscal 2013 operating income of $1,650,000 decreased $0.9 million or 35.4% from operating income of $2,555,000 in the same period of fiscal 2012.  This decrease of $0.9 million was primarily the net result of increased net sales, lower gross margin and a lower gross margin as a percentage of sales, and increased selling and administrative expenses.
 
Graphics Segment
           
(In thousands)
 
 
Three Months Ended
March 31
 
   
2013
    2012  
             
Net Sales
  $ 13,110     $ 8,940  
Gross Profit
  $ 2,230     $ 1,246  
Operating Income (Loss)
  $ 5     $ (767 )

Graphics Segment net sales of $13,110,000 in the third quarter of fiscal 2013 increased 46.6% from fiscal 2012 same period net sales of $8,940,000.  The $4.2 million increase in Graphics Segment net sales is primarily the net result of image conversion programs and sales to several petroleum / convenience store customers ($0.3 million net decrease), two grocery retailers ($5.3 million increase), and two national drug store retailers ($0.8 million decrease).  Sales of graphics products and services to the petroleum / convenience store market represented 28% and 47% of Graphics Segment net sales in the third quarter of fiscal years 2013 and 2012, respectively.  Graphics Segment net sales of graphics to this, the Company’s largest niche market, were down 12.5% from last year to $3,653,000.  The petroleum / convenience store market has been, and will continue to be, a very important niche market for the Company.  The Graphics Segment net sales of graphic identification products that contain solid-state LED light sources and LED lighting for signage totaled $0.4 million in the third quarter of fiscal 2013 compared $0.1 million in fiscal 2012.

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.  Some of these image and brand programs can be relatively large and are significant to the Company’s operating results when comparing period-over-period results. The Company may not always be able to replace net sales immediately when a large image conversion program has concluded. Further, during periods where customers remain hesitant to initiate large image programs due to economic constraints, the period of time between such programs is lengthened. In the current economy, many of the Company’s customers have held off on image and brand programs, thereby providing limited opportunities to replace completed programs with new programs. Sales related to a customer’s image or brand program are reported in either the Lighting Segment, Graphics Segment, or the All Other Category depending upon the product and/or service provided.

Gross profit of $2,230,000 in the third quarter of fiscal 2013 increased $1.0 million or 79.0% from the same period of fiscal 2012. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) increased from 13.1% in the third quarter of fiscal 2012 to 16.6% in the third quarter of fiscal 2013. The change in amount of gross profit is due to the net effect of increased net sales, increased overhead absorption, increased warranty expense ($0.2 million), increased customer relations expense ($0.2 million), increased supplies ($0.2 million) and increased employee compensation and benefit expense ($0.1 million).
 
 
Page 24

 

Selling and administrative expenses of $2,225,000 in the third quarter of fiscal 2013 increased $0.2 million from the same period of fiscal 2012 primarily as a result of increased employee compensation and benefits ($0.2 million).

The Graphics Segment third quarter fiscal 2013 operating income of $5,000 increased $0.8 million from an operating loss of $(767,000) in the same period of fiscal 2012.  The $0.8 million change from an operating loss in fiscal 2012 to an operating profit in fiscal 2013 was primarily the net result of increased net sales, increased gross margin, and increased selling and administrative expenses.
 
Electronic Components Segment
           
(In thousands)
 
 
Three Months Ended
March 31
 
   
2013
    2012  
             
Net Sales
  $ 4,395     $ 4,609  
Gross Profit
  $ 895     $ 1,643  
Operating Income (Loss)
  $ (372 )   $ 1,057  
 
Electronic Components Segment net sales of $4,395,000 in the third quarter of fiscal 2013 decreased 4.6% from fiscal 2012 same period net sales of $4,609,000. The $0.2 million decrease in Electronic Components Segment net sales is primarily the result of a $0.3 million increase in sales to the transportation market, a $0.4 million decrease in sale to the telecommunications market, and a $0.2 million decrease in sales to various other markets. In addition to the drop in net customer sales, its inter-segment sales also decreased $0.5 million or 6.5%.

Gross profit of $895,000 in the third quarter of fiscal 2013 decreased $0.7 million or 45.5% from the same period in fiscal 2012, and decreased from 14.0% to 8.1% as a percentage of net sales (customer plus inter-segment net sales).The $0.7 million decrease in amount of gross profit is due partially to the net effect of decreased customer and intersegment net sales, competitive pricing pressures, increased material costs, increased employee compensation and wage expense ($0.3 million), and a net decrease in warranty expense ($0.1 million). The largest impact affecting the drop in gross profit is the Company’s new lighting controls business, LSI Virticus. Current sales of lighting controls have not been enough to cover fixed overhead expenses invested in this recently acquired company. Besides traditional manufacturing expenses, the company also incurred warranty charges related to the first generation control systems.

Selling and administrative expenses of $995,000 in the third quarter of fiscal 2013 increased $0.4 million from the same period in fiscal 2012 primarily as the result of increased employee compensation and benefit expense ($0.1 million), increased outside service expense ($0.1 million), and increased research and development expense related to lighting controls ($0.2 million).  In the third quarter of fiscal 2013, the Electronic Components Segment recorded a goodwill impairment expense of $0.3 million with no comparable expense in fiscal 2012.

The Electronic Components Segment third quarter fiscal 2013 operating loss of $(372,000) decreased $1.4 million from operating income of $1,057,000 in the same period of fiscal 2012.  The $1.4 million decrease in operating income from income in fiscal 2012 to an operating loss in fiscal 2013 was the net result of decreased net customer and inter-segment sales, increased material costs, decreased gross profit (mostly due to the Company’s new lighting controls business, LSI Virticus), increased selling and administrative expenses (most notably the increase in research and development costs associated with LSI Virticus, as the Company invests in new product offerings), and a goodwill impairment charge of $0.3 million.

All Other Category
           
(In thousands)
 
 
Three Months Ended
March 31
 
   
2013
    2012  
             
Net Sales
  $ 1,275     $ 2,674  
Gross Profit
  $ 367     $ 63  
Operating (Loss)
  $ (186 )   $ (680 )

All Other Category net sales of $1,275,000 in the third quarter of fiscal 2013 decreased 52.3% from fiscal 2012 net sales of $2,674,000.  The $1.4 million decrease in the All Other Category net sales is the result of decreased sales of menu board systems ($0.5 million), decreased project management net sales ($0.5 million), and decreased video screen sales related to the Company’s Montreal facility ($0.5 million).
 
 
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Gross profit of $367,000 in the third quarter of fiscal 2013 increased $0.3 million compared to the gross profit of $63,000 in the same period of fiscal 2012.  The $0.3 million increase in gross profit is the net result of decreased customer net sales more than offset by an increase inter-segment net sales, improved gross margin as the result of a change in the mix of product and service revenue, and increased overhead absorption, and a reserve against inventory deemed obsolete at our Canadian operation in fiscal year 2012 with no corresponding expense in fiscal year 2013.

Selling and administrative expenses of $553,000 in the third quarter of fiscal 2013 decreased $0.2 million from the same period in fiscal year 2012.  The decrease of $0.2 million is primarily the result of decreased research and development expense ($0.2 million).

The All Other Category third quarter fiscal 2013 operating loss of $(186,000) compares to an operating loss of $(680,000) in the same period of fiscal 2012.  This $0.5 million decrease in operating loss was the net result of decreased customer net sales more than offset by increased inter-segment net sales, an increase in gross margin, and decreased selling and administrative expenses.


Corporate and Eliminations
           
(In thousands)
 
 
Three Months Ended
March 31
 
   
2013
    2012  
             
Gross (Loss)
  $ (134 )   $ (296 )
Operating (Loss)
  $ (1,603 )   $ (2,071 )

The gross loss relates to the intercompany profit in inventory elimination.

Administrative expenses of $1,469,000 in the third quarter of fiscal 2013 decreased $0.3 million or 17.2% from the same period of the prior year.  The decrease in expense is primarily the result of acquisition deal costs of $0.4 million in the third quarter of fiscal 2012 with no comparable expense in fiscal 2013.


Consolidated Results

The Company reported net interest expense of $21,000 in the third quarter of fiscal 2013 as compared to net interest expense of $31,000 in the same period of fiscal 2012.  Commitment fees related to the unused portions of the Company’s lines of credit and interest income on invested cash are included in both fiscal years. In fiscal 2012, there was interest expense related to the mortgage on the LSI ADL facility in Columbus, Ohio with no corresponding interest expense in fiscal 2013, as the mortgage was paid off in fiscal 2012.

The $212,000 income tax benefit in the third quarter of fiscal 2013 represents a consolidated effective tax rate of 40.2%.  This is the net result of an income tax rate of 45.1% for the Company’s U.S. operations influenced by certain permanent book-tax differences that were significant relative to the amount of taxable income, Canadian income tax credits, by a benefit related to uncertain income tax positions, and by a full valuation reserve on the Company’s Canadian tax position. The Company recorded $440,000 of income tax expense in the third quarter of fiscal 2012.  This is the net result of an income tax rate of 35.6% for the Company’s U.S. operations influenced by certain temporary and permanent book-tax differences that were significant relative to the amount of taxable income, by an increase in a valuation reserve on a state income tax net operating loss carryover, by a benefit related to uncertain income tax positions, and by a full valuation reserve on the Company’s Canadian tax position.

The Company reported a net loss of $(315,000) in the third quarter of fiscal 2013 as compared to net loss of $(377,000) in the same period of the prior year.  The slight reduction in the net loss in the third quarter of fiscal 2013 as compared to fiscal 2012 is primarily the net result of increased net sales, increased gross profit, increased operating expenses, a 2013 goodwill impairment, and an income tax benefit in fiscal 2013 compared to income tax expense in fiscal 2012.  A diluted loss per share of $(0.01) was reported in the third quarter of fiscal 2013 as compared to diluted loss per share of $(0.02) in the same period of fiscal 2012. The weighted average common shares outstanding for purposes of computing diluted loss per share in the third quarter of fiscal 2013 were 24,410,000 shares as compared to 24,360,000 shares in the same period last year when computing earnings per share.
 
 
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NINE MONTHS ENDED MARCH 31, 2013 COMPARED TO NINE MONTHS ENDED MARCH 31, 2012
 
Lighting Segment
           
(In thousands)
 
Nine Months Ended
 
   
March 31
 
   
2013
   
2012
 
             
Net Sales
 
$
156,906
   
$
149,411
 
Gross Profit
 
$
36,562
   
$
34,208
 
Operating Income
 
$
8,640
   
$
8,691
 
 
Lighting Segment net sales of $156,906,000 in the first nine months of fiscal 2013 increased 5.0% from fiscal 2012 same period net sales of $149,411,000.  The $7.5 million increase in Lighting Segment net sales is primarily the net result of a $3.1 million or 4.4% net increase in lighting sales to our niche markets (petroleum / convenience store market net sales were up 12%, net sales to the automotive market were up 55%, net sales to the quick service restaurant market were up 109%, and retail national net sales were down 50%), a $1.6 million or 15.6% increase in sales to the international markets, a $4.2 million or 268.9% increase in LED video screens (consisting largely of the sale of a large LED sports video screen), and a $1.5 million or 2.2% decrease in commissioned net sales to the commercial / industrial lighting market.  Sales of lighting to the petroleum / convenience store market represented 30% of Lighting Segment net sales in the first nine months of fiscal year 2013 compared to 28% of Lighting Segment net sales in fiscal 2012.  Lighting Segment net sales of lighting to this, the Company’s largest niche market, were up 12% from last year to $46,530,000.  The petroleum / convenience store market has been, and will continue to be, a very important niche market for the Company. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $54.5 million in the first nine months of fiscal 2013, representing an 8% increase from the first nine months of fiscal 2012 net sales of solid-state LED light fixtures of $50.3 million. The Lighting Segment's net sales related to LED video screens totaled $5.8 million in the first nine months of fiscal 2013, representing a 307% increase from the first nine months of fiscal 2012 net sales of $1.4 million.

Gross profit of $36,562,000 in the first nine months of fiscal 2013 increased $2.4 million or 6.9% from the same period of fiscal 2012, and increased from 22.6% to 23.0% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales).  The increase in amount of gross profit is due to the net effect of increased net sales at increased margins, increased overhead absorption, an increase in inventory reserves against inventory deemed obsolete and no longer useable ($0.2 million), increased benefits and compensation ($1.5 million), decreased warranty costs ($0.5 million), increased supplies ($0.3 million), decreased outside services ($0.2 million), decreased depreciation expense ($0.2 million), and increased customer relations expense ($0.5 million).

Selling and administrative expenses of $27,922,000 in the first nine months of fiscal 2013 increased $2.4 million or 9.4% from the same period of fiscal 2012 primarily as the net result of increased benefit and compensation expense ($0.9 million), increased sales commission expense ($1.6 million), increased research and development expense ($0.6 million), decreased amortization expenses ($0.2 million), and decreased customer relations expense ($0.2 million).

The Lighting Segment fiscal 2013 nine month operating income of $8,640,000 decreased slightly from operating income of $8,691,000 in the same period of fiscal 2012.  This slight decrease in operating income was the net result of increased net sales, increased gross profit, and increased selling and administrative expenses.

Graphics Segment