form10q123109.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 DECEMBER 31, 2009.

 
   
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 o

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 o  NO o

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
o
Accelerated filer
x
     Non-accelerated filer
o
Smaller reporting company
o
 
Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x

 
As of February 1, 2010 there were 24,044,058 shares of the Registrant's common stock outstanding.

 
 
 

 

LSI INDUSTRIES INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2009

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
5
   
Notes to Condensed Consolidated Financial Statements
6
       
 
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and
  Results of Operations
24
       
 
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
42
       
 
ITEM 4.
Controls and Procedures
42
       
PART II.    Other Information
   
       
 
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 42
       
  ITEM 4. Submission of Matters to a Vote of Security Holders  43
       
 
ITEM 6.
Exhibits
44
       
Signatures
   
44

 “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995

This Form 10-Q contains certain forward-looking statements that are subject to numerous assumptions, risks or uncertainties.  The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements.  Forward-looking statements may be identified by words such as “estimates,” “anticipates,” “projects,” “plans,” “expects,” “intends,” “believes,” “seeks,” “may,” “will,” “should” or the negative versions of those words and similar expressions, and by the context in which they are used.  Such statements, whether expressed or implied, are based upon current expectations of the Company and speak only as of the date made.  Actual results could differ materially from those contained in or implied by such forward-looking statements as a result of a variety of risks and uncertainties.  These risks and uncertainties include, but are not limited to, the impact of competitive products and services, product demand and market acceptance risks, 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, 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.  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 has no obligation 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)


(in thousands, except per share data)
 
Three Months Ended
December 31
   
Six Months Ended
December 31
 
   
2009
   
2008
   
2009
   
2008
 
Net sales
  $ 69,374     $ 60,787     $ 137,050     $ 136,625  
                                 
Cost of products and services sold
    53,074       47,530       104,153       105,189  
                                 
Gross profit
    16,300       13,257       32,897       31,436  
                                 
Selling and administrative expenses
    13,367       14,014       27,467       27,977  
                                 
Goodwill impairment
    --       13,250       --       13,250  
                                 
Operating income (loss)
    2,933       (14,007 )     5,430       (9,791 )
                                 
Interest (income)
    (4 )     (45 )     (7 )     (83 )
                                 
Interest expense
    36       44       73       87  
                                 
Income (loss) before income taxes
    2,901       (14,006 )     5,364       (9,795 )
                                 
Income tax expense (benefit)
    1,309       (629 )     2,135       895  
                                 
Net income (loss)
  $ 1,592     $ (13,377 )   $ 3,229     $ (10,690 )
                                 
                                 
Earnings (loss) per common share (see Note 5)
                               
Basic
  $ 0.07     $ (0.61 )   $ 0.13     $ (0.49 )
Diluted
  $ 0.07     $ (0.61 )   $ 0.13     $ (0.49 )
                                 
Weighted average common shares outstanding
                               
                                 
Basic
    24,275       21,799       23,979       21,798  
Diluted
    24,284       21,799       23,986       21,798  



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 share amounts)
 
December 31,
2009
   
June 30,
2009
 
ASSETS
           
             
Current Assets
           
Cash and cash equivalents
  $ 14,347     $ 13,986  
Accounts and notes receivable, net
    31,657       29,681  
Inventories
    41,831       40,196  
Refundable income taxes
    1,695       3,619  
Other current assets
    3,952       4,635  
Total current assets
    93,482       92,117  
                 
Property, Plant and Equipment, net
    44,716       42,043  
                 
Goodwill
    10,766       1,558  
                 
Other Intangible Assets, net
    16,551       12,981  
                 
Other Assets
    2,173       4,419  
                 
TOTAL ASSETS
  $ 167,688     $ 153,118  
                 
LIABILITIES & SHAREHOLDERS’ EQUITY
               
                 
Current Liabilities
               
Current portion, long-term debt
  $ 31     $ --  
Accounts payable
    8,291       9,249  
Accrued expenses
    8,745       10,368  
Total current liabilities
    17,067       19,617  
                 
Long-Term Debt
    1,116       --  
Other Long-Term Liabilities
    3,040       3,028  
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 24,039,541 and 21,579,741 shares, respectively
    98,000       82,833  
Retained earnings
    48,465       47,640  
Total shareholders’ equity
    146,465       130,473  
                 
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY
  $ 167,688     $ 153,118  

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

Page 4
 
 

 

LSI INDUSTRIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 (In thousands)
 
Six Months Ended
December 31
 
   
2009
   
2008
 
Cash Flows from Operating Activities
           
Net income (loss)
  $ 3,229     $ (10,690 )
Non-cash items included in net income (loss)
               
Depreciation and amortization
    3,928       3,976  
Goodwill impairment
    --       13,250  
Deferred income taxes
    (207 )     (527 )
Deferred compensation plan
    57       76  
Stock option expense
    724       645  
Issuance of common shares as compensation
    20       20  
Loss on disposition of fixed assets
    28       1  
Allowance for doubtful accounts
    (83 )     234  
Inventory obsolescence reserve
    378       220  
                 
Changes in certain assets and liabilities, net of acquisition
               
Accounts receivable
    (213 )     3,402  
Inventories
    1,664       6,371  
Accounts payable and other
    (203 )     (9,443 )
Customer prepayments
    (1,303 )     (937 )
Net cash flows from operating activities
    8,019       6,598  
                 
Cash Flows from Investing Activities
               
Purchases of property, plant and equipment
    (2,280 )     (888 )
Proceeds from sale of fixed assets
    5       --  
Acquisition of business, net of cash received
    (675 )     --  
Net cash flows (used in) investing activities
    (2,950 )     (888 )
                 
Cash Flows from Financing Activities
               
Payment of long-term debt
    (2,222 )     (1,282 )
Proceeds from issuance of long-term debt
    --       1,282  
Cash dividends paid
    (2,404 )     (4,314 )
Purchase of treasury shares
    (93 )     (161 )
Issuance of treasury shares
    11       --  
Net cash flows (used in) financing activities
    (4,708 )     (4,475 )
                 
Increase in cash and cash equivalents
    361       1,235  
                 
Cash and cash equivalents at beginning of year
    13,986       6,992  
                 
Cash and cash equivalents at end of period
  $ 14,347     $ 8,227  
                 
Supplemental Cash Flow Information
               
Interest paid
  $ 69     $ 56  
Income taxes paid
  $ 421     $ 346  
Issuance of common shares as compensation
  $ 20     $ 20  
Issuance of common shares for acquisition
  $ 14,448     $ --  

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

Page 5
 
 

 

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 December 31, 2009, the results of its operations for the three and six month periods ended December 31, 2009 and 2008, and its cash flows for the six month periods ended December 31, 2009 and 2008. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2009 annual report.  Financial information as of June 30, 2009 has been derived from the Company’s audited consolidated financial statements.

NOTE 2:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    Consolidation:

The consolidated financial statements include the accounts of LSI Industries Inc. (an Ohio corporation) and its subsidiaries, all of which are wholly owned.  All intercompany transactions and balances have been eliminated 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 collectibility is reasonably assured.  Revenue 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.

Page 6
 
 

 


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 have been installed at each individual retail site of the customer on a proportional performance basis. 

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 excluded from the scope of ASC Subtopic 985-605.

Credit and Collections:

The Company maintains allowances for doubtful accounts receivable for probable estimated losses resulting from either customer disputes or the inability of its customers to make required payments.  If the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against income.  The Company determines its allowance for doubtful accounts by first considering all known collectibility problems of customers’ accounts, and then applying certain percentages against the various aging categories 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 and notes receivable at the dates indicated.
 

(In thousands)
 
December 31,
2009
   
June 30,
2009
 
Accounts and notes receivable
  $ 32,115     $ 30,213  
less Allowance for doubtful accounts
    (458 )     (532 )
  Accounts and notes receivable, net
  $ 31,657     $ 29,681  

Cash and Cash Equivalents:

The cash balance includes cash and cash equivalents which have original maturities of less than three months.  At December 31, 2009 and June 30, 2009, there were no bank balances in excess of FDIC insurance limits.

Page 7
 
 

 


Inventories:

Inventories are stated at the lower of cost or market.  Cost is determined on the first-in, first-out basis.

Property, Plant and Equipment and Related Depreciation:

Property, plant and equipment are stated at cost.  Major additions and betterments are capitalized while maintenance and repairs are expensed.  For financial reporting purposes, depreciation is computed on the straight-line method over the estimated useful lives of the assets as follows:
 

Buildings
28 - 40 years
Machinery and equipment
  3 - 10 years
Computer software
  3 -   8 years

Costs related to the purchase, internal development, and implementation of the Company’s fully integrated enterprise resource planning/business operating software system are either capitalized or expensed in accordance with ASC Subtopic 350-40, Intangibles – Goodwill and Other:  Internal-Use Software.  Leasehold improvements are depreciated over the shorter of fifteen years or the remaining term of the lease.

The following table presents the Company’s property, plant and equipment at the dates indicated.
 
(In thousands)
 
December 31,
2009
   
June 30,
2009
 
Property, plant and equipment, at cost
  $ 108,523     $ 103,280  
less Accumulated depreciation
    (63,807 )     (61,237 )
Property, plant and equipment, net
  $ 44,716     $ 42,043  

The Company recorded $1,338,000 and $1,466,000 of depreciation expense in the second quarter of fiscal 2010 and 2009, respectively, and $2,668,000 and $2,937,000 of depreciation expense in the first half of fiscal 2010 and 2009, respectively.

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 of Financial Instruments:

The Company has financial instruments consisting primarily of cash and cash equivalents, short-term investments, revolving lines of credit, and long-term debt.  The fair value of these financial instruments approximates carrying value because of their short-term maturity and/or variable, market-driven interest rates.  The Company has no financial instruments with off-balance sheet risk.

Page 8
 
 

 

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 product 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)
 
Six Months Ended
December 31, 2009
   
Twelve Months Ended
June 30, 2009
 
Balance at beginning of the period
  $ 223     $ 257  
Additions charged to expense
    650       557  
Addition from acquisition
    5       --  
Deductions for repairs and replacements
    (530 )     (591 )
Balance at end of the period
  $ 348     $ 223  

Research and Development Costs:

Research and development expenses are costs directly attributable to new product development and consist of salaries, payroll taxes, employee benefits, materials, supplies, depreciation and other administrative costs.  All costs are expensed as incurred and are classified as operating expenses.  The Company follows the requirements of ASC Subtopic 985-20, Software:  Costs of Software to be Sold, Leased, or Marketed, by expensing as research and development all costs associated with development of software used in solid-state LED products.  Research and development costs incurred related to both product and software development totaled $1,271,000 and $1,035,000 for the three month periods ended December 31, 2009 and 2008, respectively, and $2,453,000 and $2,066,000 for the six month periods ended December 31, 2009 and 2008, respectively.

Earnings Per Common Share:

The computation of basic earnings per common share is based on the weighted average common shares outstanding for the period net of treasury shares held in the Company’s non-qualified deferred compensation plan.  The computation of diluted earnings per share is based on the weighted average common shares outstanding for the period and includes common share equivalents.  Common share equivalents include the dilutive effect of stock options, contingently issuable shares and common shares to be issued under a deferred compensation plan, all of which totaled 243,000 shares and 228,000 shares for the three months ended December 31, 2009 and 2008, respectively, and 239,000 shares and 223,000 shares for the six months ended December 31, 2009 and 2008, respectively.  See also Note 5.

 
Page 9
 
 

 

Stock Options:

There were no disqualifying dispositions of shares from stock option exercises in the first six months of fiscal 2010 or 2009.  See further discussion regarding stock options in Note 11.

Comprehensive Income:

The Company does not have any comprehensive income items other than net income.

Subsequent Events:

For the quarter ended December 31, 2009, the Company has evaluated subsequent events for potential recognition and disclosure through February 4, 2010, the date of financial statement issuance.

Use of Estimates:

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

NOTE 3:  MAJOR CUSTOMER CONCENTRATIONS

The Company’s Lighting Segment and Graphics Segment net sales to 7-Eleven, Inc. represented approximately $18,054,000 or 26%, and $25,801,000 or 19% of consolidated net sales in the three and six months ended December 31, 2009, respectively.  The Company had a balance of accounts receivable from 7-Eleven, Inc. as of December 31, 2009 of approximately $4,699,000 or 15% of net accounts and notes receivable.  There were no concentrations of net sales or accounts receivable at or for the three or six months ended December 31, 2008.

NOTE 4:  BUSINESS SEGMENT INFORMATION

Accounting Standards Codification 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 President and Chief Executive Officer) in making decisions on how to allocate resources and assess performance. While the Company has thirteen operating segments, it has only four reportable operating business segments (Lighting, Graphics, Technology, and Electronic Components) and an All Other Category.

The Lighting Segment includes outdoor, indoor, and landscape lighting that has been fabricated and assembled for the commercial, industrial and multi-site retail lighting markets, including the petroleum/convenience store market. The Lighting Segment includes the operations of LSI Ohio Operations, LSI Metal Fabrication, LSI MidWest Lighting, LSI Lightron and LSI Greenlee Lighting. These operations have been integrated, have similar economic characteristics and meet the other requirements for aggregation in segment reporting.

Page 10
 
 

 


The Graphics Segment designs, manufactures and installs exterior and interior visual image elements related to image programs, solid state LED digital advertising billboards, and solid state LED digital sports video screens. These products are used in visual image programs in several markets, including the petroleum/convenience store market, multi-site retail operations, sports and advertising. The Graphics Segment includes the operations of Grady McCauley, LSI Retail Graphics and LSI Integrated Graphic Systems, which have been aggregated as such facilities manufacture two-dimensional graphics with the use of screen and digital printing, fabricate three-dimensional structural graphics sold in the multi-site retail and petroleum/convenience store markets, and exhibit each of the similar economic characteristics and meet the other requirements for aggregation in segment reporting.

The Technology Segment designs and produces high-performance light engines, large format video screens using solid-state LED technology, and certain specialty LED lighting.  The primary markets served with LED video screens are the entertainment market, outdoor advertising billboard and sports markets not served by our Graphics Segment.  The Technology Segment includes the operations of LSI Saco Technologies.

The Electronic Components Segment designs, engineers and manufactures custom designed electronic circuit boards, assemblies and sub-assemblies used in various applications including the control of solid-state LED lighting.  Capabilities of this Segment also 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, which was acquired by the Company on July 22, 2009.

The All Other Category includes the Company’s operating segments that do not meet the aggregation criteria, nor the criteria to be a separate reportable segment.  Operations of LSI Marcole (electrical wire harnesses), LSI Images (menu board systems), and LSI Adapt (surveying, permitting and installation management services related to products of the Graphics Segment) are combined in the All Other Category.  Additionally, the Company’s Corporate Administration expense is included in the All Other Category.
 
Summarized financial information for the Company’s reportable business segments for the three and six month periods ended December 31, 2009 and 2008, and as of December 31, 2009 and June 30, 2009 is as follows:


Page 11
 
 

 

 
(In thousands)
 
Three Months Ended
December 31
   
Six Months Ended
December 31
 
   
2009
   
2008
   
2009
   
2008
 
Net sales:
                       
  Lighting Segment
  $ 43,688     $ 43,291     $ 83,329     $ 92,927  
  Graphics Segment
    19,324       13,891       41,421       35,027  
  Technology Segment
    235       1,172       1,296       3,990  
  Electronic Components Segment
    4,409       --       7,647       --  
  All Other Category
    1,718       2,433       3,357       4,681  
    $ 69,374     $ 60,787     $ 137,050     $ 136,625  
                                 
Operating income (loss):
                               
  Lighting Segment
  $ 3,239     $ (9,945 )   $ 6,719     $ (5,482 )
  Graphics Segment
    1,984       507       3,525       1,670  
   Technology Segment
    (312 )     (253 )     111       372  
   Electronic Components Segment
    749       --       805       --  
  All Other Category
    (2,727 )     (4,316 )     (5,730 )     (6,351 )
    $ 2,933     $ (14,007 )   $ 5,430     $ (9,791 )
                                 
Capital expenditures:
                               
  Lighting Segment
  $ 834     $ 381     $ 1,105     $ 733  
  Graphics Segment
    192       15       356       96  
  Technology Segment
    1       2       10       18  
  Electronic Components Segment
    97       --       484       --  
  All Other Category
    23       15       325       41  
    $ 1,147     $ 413     $ 2,280     $ 888  
                                 
Depreciation and amortization:
                               
  Lighting Segment
  $ 796     $ 880     $ 1,605     $ 1,762  
  Graphics Segment
    263       329       527       667  
  Technology Segment
    79       111       180       221  
   Electronic Components Segment
    220       --       383       --  
   All Other Category
    624       666       1,233       1,326  
    $ 1,982     $ 1,986     $ 3,928     $ 3,976  


   
December 31,
2009
   
June 30,
2009
 
Identifiable assets:
           
  Lighting Segment
  $ 69,271     $ 72,222  
  Graphics Segment
    31,005       32,280  
  Technology Segment
    12,235       12,317  
  Electronic Components Segment
    23,395       --  
  All Other Category
    31,782       36,299  
    $ 167,688     $ 153,118  

 
Segment net sales represent sales to external customers.  Intersegment revenues were eliminated in consolidation as follows:


Page 12
 
 

 

 
(In thousands)
 
Three Months Ended
December 31
   
Six Months Ended
December 31
 
   
2009
   
2008
   
2009
   
2008
 
Lighting Segment intersegment net sales
  $ 164     $ 610     $ 5,099     $ 4,039  
                                 
Graphics Segment intersegment net sales
  $ 329     $ 392     $ 532     $ 748  
                                 
Technology Segment intersegment net sales
  $ 1,008     $ 310     $ 3,307     $ 3,716  
                                 
Electronic Components Segment intersegment net sales
  $ 1,668     $ --     $ 2,703     $ --  
                                 
All Other Category intersegment net sales
  $ 859     $ 1,077     $ 1,499     $ 2,952  

 
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.  Corporate assets, which consist primarily of cash and cash equivalents, refundable income taxes and certain intangible assets are included in the All Other Category.

The Company considers its geographic areas to be:  1) the United States, and 2) Canada. The majority of the Company’s operations are in the United States; one operation is in Canada.  The geographic distribution of the Company’s net sales and long-lived assets are as follows:
 
 (In thousands)
 
Three Months Ended
December 31
   
Six Months Ended
December 31
 
   
2009
   
2008
   
2009
   
2008
 
Net sales (a):
                       
United States
  $ 69,139     $ 59,615     $ 135,754     $ 132,635  
Canada
    235        1,172       1,296       3,990  
    $ 69,374     $ 60,787     $ 137,050     $ 136,625  
                                 
                                 
   
December 31,
2009
   
June 30,
2009
                 
Long-lived assets (b):
                               
United States
  $ 46,458     $ 45,898                  
Canada
    431       564                  
    $ 46,889     $ 46,462                  

(a)  
Net sales are attributed to geographic areas based upon the location of the operation making the sale.

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

Page 13
 
 

 

NOTE 5:  EARNINGS PER COMMON SHARE

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

   
Three Months Ended
December 31
   
Six Months Ended
December 31
 
   
2009
   
2008
   
2009
   
2008
 
BASIC EARNINGS (LOSS) PER SHARE
                       
                         
  Net income (loss)
  $ 1,592     $ (13,377 )   $ 3,229     $ (10,690 )
                                 
  Weighted average shares outstanding during the period, net of
    treasury shares (a)
    24,041       21,571       23,747       21,575  
  Weighted average shares outstanding in the Deferred Compensation
    Plan during the period
    234       228       232       223  
  Weighted average shares outstanding
    24,275       21,799       23,979       21,798  
                                 
  Basic earnings (loss) per share
  $ 0.07     $ (0.61 )   $ 0.13     $ (0.49 )
                                 
DILUTED EARNINGS (LOSS) PER SHARE
                               
                                 
  Net income (loss)
  $ 1,592     $ (13,377 )   $ 3,229     $ (10,690 )
                                 
  Weighted average shares outstanding
    - Basic
    24,275        21,799        23,979        21,798   
    Effect of dilutive securities (b): Impact of common shares
     to be issued under stock option plans, and contingently
     issuable shares, if any
    9       --       7       --  
                                 
    Weighted average shares outstanding (c)
    24,284       21,799       23,986       21,798  
                                 
  Diluted earnings (loss) per share
  $ 0.07     $ (0.61 )   $ 0.13     $ (0.49 )
                                 
 

 
(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 2,128,264 common shares and 1,513,335 common shares during the three month periods ending December 31, 2009 and 2008, respectively, and options to purchase 1,964,656 common shares and 1,422,031 common shares during the six month periods ending December 31, 2009 and 2008, respectively, were not included in the computation of diluted earnings per share because the exercise price was greater than the average fair market value of the common shares.

Page 14
 
 

 

 
 

NOTE 6:
BALANCE SHEET DATA

 
The following information is provided as of the dates indicated (in thousands):
 
   
December 31,
2009
   
June 30,
2009
 
Inventories
           
  Raw materials
  $ 20,112     $ 20,498  
  Work-in-process
    7,165       7,097  
  Finished goods
    14,554       12,601  
    $ 41,831     $ 40,196  
                 
Accrued Expenses
               
  Compensation and benefits
  $ 5,108     $ 5,788  
  Customer prepayments
    513       1,816  
  Accrued commissions
    847       919  
  Other accrued expenses
    2,277       1,845  
    $ 8,745     $ 10,368  
\
NOTE 7:  GOODWILL AND OTHER INTANGIBLE ASSETS

In accordance with Accounting Standards Codification (ASC) Topic 350, Intangibles – Goodwill and Other, the Company is required to perform an annual impairment test of its goodwill and indefinite-lived intangible assets. The Company performs this test as of July 1st of each fiscal year and on an interim basis when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company uses a combination of the market approach and the income (discounted cash flow) approach in determining the fair value of its reporting units. Under ASC Topic 350, the goodwill impairment test is a two-step process. Under the first step, the fair value of the Company’s reporting unit is compared to its respective carrying value. An indication that goodwill is impaired occurs when the fair value of a reporting unit is less than the carrying value. When there is an indication that goodwill is impaired, the Company is required to perform a second step. In step two, the actual impairment of goodwill is calculated by comparing the implied fair value of the goodwill with the carrying value of the goodwill.

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.

Due to economic conditions, the effects of the recession on the Company’s markets and the decline in the Company’s stock price since the previous goodwill impairment test, management believed that an additional goodwill impairment test was required as of June 30, 2009.  The impairment test performed as of June 30, 2009 was actually the Company’s annual goodwill impairment test that was to be performed as of July 1, 2009; however, because the conditions that resulted in goodwill impairment were present as of June 30, 2009, the estimated partial impairment charge of $260,000 was recorded in one reporting unit in the All Other Category as of that date.  The impairment charge was due to a decline in the estimated forecasted discounted cash flows since the previous goodwill impairment test was performed.  The impairment test was completed in the first quarter of fiscal 2010 at which time it was determined that no further adjustment to the estimate, recorded at June 30, 2009, was needed.

Page 15
 
 

 


Due to economic conditions, the effects of the recession on the Company’s markets and the decline in the Company’s stock price since the previous goodwill impairment test, management believed that an additional goodwill impairment test was required as of December 31, 2008.  Based upon the Company’s analysis, it was determined that the goodwill associated with three of the five remaining reporting units that contain goodwill was either fully or partially impaired. The total amount of the goodwill impairment was $13,250,000, of which $11,185,000 was impaired in the Lighting Segment, $716,000 was impaired in the Graphics Segment and $1,349,000 was impaired in the All Other Category.  The impairment charge was due to a combination of a decline in the market capitalization of the Company at December 31, 2008 and a decline in the estimated forecasted discounted cash flows since the annual goodwill impairment test was performed.  The impairment charge was recorded in the second quarter of fiscal 2009.

A similar analysis was performed in fiscal 2009 as of July 1, 2008 for the annual impairment test and there was no impairment of goodwill.

The following tables present information about the Company's goodwill and other intangible assets on the dates or for the periods indicated.
 

(In thousands)
 
Lighting Segment
   
 
Graphics Segment
   
Electronic
Components Segment
   
All Other Category
   
Total
 
Balance as of June 30, 2008
  $ 11,320     $ 974     $ --     $ 3,731     $ 16,025  
                                         
  Impairment
    (11,185 )     (716 )     --       (2,566 )     (14,467 )
                                         
Balance as of June 30, 2009
    135       258       --       1,165       1,558  
                                         
  Acquisition
    --       --       9,208       --       9,208  
                                         
Balance as of December 31, 2009
  $ 135     $ 258     $ 9,208     $ 1,165     $ 10,766  
                                         
 
The acquisition of LSI ADL Technology resulted in the following amortizable intangible assets being recorded on the Company’s balance sheet as of the July 22, 2009 acquisition date:  customer relationships $2,880,000; Technology $780,000; trade name $460,000 and non-compete agreements $710,000.

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


Page 16
 
 

 
 

   
December 31, 2009
 
(In thousands)
 
Gross Carrying Amount
   
Accumulated Amortization
   
Net
Amount
 
  Amortized Intangible Assets
                 
Customer relationships
  $ 10,352     $ 4,553     $ 5,799  
Patents
    110       62       48  
LED Technology firmware, software
    11,228       5,259       5,969  
Trade name
    460       40       420  
Non-compete agreements
    890       134       756  
      23,040       10,048       12,992  
                         
  Indefinite-lived Intangible Assets
                       
Trademarks and trade names
    3,559       --       3,559  
      3,559       --       3,559  
                         
Total Intangible Assets
  $ 26,599     $ 10,048     $ 16,551  
                         


   
June 30, 2009
 
(In thousands)
 
Gross Carrying Amount
   
Accumulated Amortization
   
Net
Amount
 
  Amortized Intangible Assets
                 
Customer relationships
  $ 7,472     $ 4,173     $ 3,299  
Patents
    110       59       51  
LED Technology firmware, software
    10,448       4,478       5,970  
Trade name
    --       --       --  
Non-compete agreements
    630       528       102  
      18,660       9,238       9,422  
                         
  Indefinite-lived Intangible Assets
                       
Trademarks and trade names
    3,559       --       3,559  
      3,559       --       3,559  
                         
Total Intangible Assets
  $ 22,219     $ 9,238     $ 12,981  

 
   
Amortization Expense of Other Intangible Assets
 
   
December 31, 2009
   
December 31, 2008
 
Three Months Ended
  $ 644     $ 520  
                 
Six Months Ended
  $ 1,260     $ 1,039  

 
The Company expects to record amortization expense through fiscal 2015 as follows:  2010 -- $2,559,000; 2011 through 2012 -- $2,590,000 per year; 2013 -- $2,327,000; 2014 -- $621,000; and 2015 -- $537,000.


Page 17
 
 

 

NOTE 8:  REVOLVING LINES OF CREDIT AND LONG-TERM DEBT

The Company has a $40 million unsecured revolving line of credit with its bank group in the U.S., all of which was available as of December 31, 2009.  A portion of this credit facility is a $10 million committed line of credit that expires in the third quarter of fiscal 2010.  The remainder of the credit facility is a $30 million two year committed line of credit that expires in the third quarter of fiscal 2011.  Annually in the third quarter, the credit facility is renewable with respect to adding an additional year of commitment, if the bank group so chooses, to replace the year just ended.  Interest on the revolving lines of credit is charged based upon an increment over the LIBOR rate as periodically determined, an increment over the Federal Funds Rate as periodically determined, or at the bank’s base lending rate, at the Company’s option.  For the $30 million line of credit, the increment over the LIBOR borrowing rate, as periodically determined, fluctuates between 50 and 75 basis points depending upon the ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (EBITDA), as defined in the credit facility.  The increment over the Federal Funds borrowing rate, as periodically determined, fluctuates between 150 and 200 basis points, and the commitment fee on the unused balance of the $30 million committed line of credit fluctuates between 15 and 25 basis points based upon the same leverage ratio.  For the $10 million line of credit, the increment over the LIBOR borrowing rate, as periodically determined, is 250 basis points, and the fee on the unused balance of the $10 million committed line of credit is 15 basis points.  Under terms of these agreements, the Company has agreed to a negative pledge of assets, to maintain minimum levels of profitability and net worth, and is subject to certain maximum levels of leverage.

The Company also has a $5 million line of credit for its Canadian subsidiary.  The line of credit expires in the third quarter of fiscal 2010.  Interest on the Canadian subsidiary’s line of credit is charged based upon a 250 basis point increment over the LIBOR rate or based upon an increment over the United States base rates if funds borrowed are denominated in U.S. dollars or an increment over the Canadian prime rate if funds borrowed are denominated in Canadian dollars.  There are no borrowings against this line of credit as of December 31, 2009.

The Company assumed a mortgage loan with the acquisition of AdL Technology in July 2009.  Monthly principal payments of approximately $10,000 are to be made through August, 2012 at an interest rate of 7.76%, at which time the balance is payable in full.  The real estate of LSI ADL Technology has been pledged as collateral for the mortgage.
 

(In thousands)
 
 
December 31, 2009
 
Total mortgage balance
  $ 1,147  
Less current maturities
    (31 )
Long-term debt
  $ 1,116  
 
NOTE 9:  RESERVE FOR UNCERTAIN TAX LIABILITIES
 
For the three and six month periods ended December 31, 2009, the Company recognized $22,000 and $44,000 of tax expense, respectively, related to the increase in reserves for uncertain tax positions.  For the three and six month periods ended December 31, 2008, the Company recognized $6,000 and $31,000 of tax expense, respectively, related to the increase in reserves for uncertain tax positions. As of December 31, 2009, the reserve for uncertain income tax liabilities is $2,779,000, net of potential federal tax benefits.  The Company is recording estimated interest and penalties related to potential underpayment of income taxes as a component of tax expense in the Condensed Consolidated Income Statements.  The reserve for uncertain tax positions is not expected to change significantly in the next 12 months.

Page 18
 
 

 
 
The Company files a consolidated federal income tax return in the United States, and files various combined and separate tax returns in several state and local jurisdictions. With limited exceptions, the Company is no longer subject to U.S. Federal, state and local tax examinations by tax authorities for fiscal years ending prior to June 30, 2006.  The Internal Revenue Service has completed its audit of the Company’s fiscal year 2006 Federal Income Tax Return and has not required any changes to the return as filed.

NOTE 10:
CASH DIVIDENDS

The Company paid cash dividends of $2,404,000 and $4,314,000 in the six month periods ended December 31, 2009 and 2008, respectively.  In January, 2010, the Company’s Board of Directors declared a $0.05 per share regular quarterly cash dividend (approximately $1,202,000) payable on February 9, 2010 to shareholders of record as of February 2, 2010.

NOTE 11:
EQUITY COMPENSATION

Stock Options

The Company has an equity compensation plan that was approved by shareholders which covers all of its full-time employees, outside directors and advisors.  The options granted or stock awards made pursuant to this plan are granted at fair market value at date of grant or award.  Options granted to non-employee directors become exercisable 25% each ninety days (cumulative) from date of grant and options granted to employees generally become exercisable 25% per year (cumulative) beginning one year after the date of grant.  If a stock option holder’s employment with the Company terminates by reason of death, disability or retirement, as defined in the Plan, any award shall be fully vested.  With the increase approved by shareholders in November 2009, the number of shares reserved for issuance is 2,800,000, of which 807,455 shares were available for future grant or award as of December 31, 2009.  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 December 31, 2009, a total of 2,170,836 options for common shares were outstanding from this plan as well as two previous stock option plans (both of which had also been approved by shareholders), and of these, a total of 1,048,361 options for common shares were vested and exercisable.  The approximate unvested stock option expense as of December 31, 2009 that will be recorded as expense in future periods is $2,984,300.  The weighted average time over which this expense will be recorded is approximately 21 months.

The fair value of each option on the date of grant was estimated using the Black-Scholes option pricing model.  The below listed weighted average assumptions were used for grants in the periods indicated.


Page 19
 
 

 


   
Three Months
Ended December 31
   
Six Months
Ended December 31
 
   
2009
   
2008
   
2009
   
2008
 
Dividend yield
    3.28 %     5.16 %     3.28 %     5.16 %
Expected volatility
    51 %     41 %     51 %     41 %
Risk-free interest rate
    2.61 %     2.16 %     2.40 %     3.1 %
Expected life
 
4.3 yrs.
   
4.3 yrs.
   
4.3 yrs.
   
4.3 yrs.
 
 
At December 31, 2009, the 641,500 options granted in the first six months of fiscal 2010 to both employees and non-employee directors had exercise prices ranging from $5.93 to $8.40, fair values ranging from $2.03 to $2.87 per option, and remaining contractual lives of between nine years and eleven months and ten years.

At December 31, 2008, the 339,300 options granted in the first six months of fiscal 2009 to both employees and non-employee directors had exercise prices ranging from $4.60 to $8.98, fair values ranging from $1.12 to $2.21 per option, and remaining contractual lives of between four years and eleven months and nine years and eleven months.

The Company calculates stock option expense using the Black-Scholes method, and records the expense on a straight line basis with an estimated 6.6% forfeiture rate.  The expected volatility of the Company’s stock was calculated based upon the historic monthly fluctuation in stock price for a period approximating the expected life of option grants.  The risk-free interest rate is the rate of a five year Treasury security at constant, fixed maturity on the approximate date of the stock option grant.  The expected life of outstanding options is determined to be less than the contractual term for a period equal to the aggregate group of option holders’ estimated weighted average time within which options will be exercised.  It is the Company’s policy that when stock options are exercised, new common shares shall be issued.  The Company recorded $378,000 and $295,700 of expense related to stock options in the three months ended December 31, 2009 and 2008, respectively, and $723,600 and $645,100 in the six month periods ended December 31, 2009 and 2008, respectively.  As of December 31, 2009, the Company expects that approximately 1,030,200 outstanding stock options having a weighted average exercise price of $10.54, intrinsic value of $145,200 and weighted average remaining contractual terms of 8.8 years will vest in the future.

Information related to all stock options for the periods ended December 31, 2009 and 2008 is shown in the table below:


Page 20
 
 

 
                                                             
   
Six Months Ended
December 31, 2009
 
 
   
Shares
   
Weighted Average Exercise Price
 
Weighted Average
Remaining
Contractual Term
 
Aggregate Intrinsic Value
 
Outstanding at 6/30/09
    1,537,212     $ 13.07  
6.4 years
  $ 33,800  
                           
  Granted
    641,500     $ 8.26            
  Forfeitures
    (7,876 )   $ 12.80            
  Exercised
    --       n/a            
                           
Outstanding at 12/31/09
    2,170,836     $ 11.65  
7.0 years
  $ 181,320  
                           
Exercisable at 12/31/09
    1,048,361     $ 12.99  
5.1 years
  $ 20,123  


      Six Months Ended
December 31, 2008
 
 
   
Shares
   
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
Outstanding at 6/30/08
    1,197,482     $ 14.44  
6.5 years
  $ --  
                           
  Granted
    339,300     $ 8.89            
  Forfeitures
    (19,082 )   $ 13.12            
  Exercised
    --       n/a            
                           
Outstanding at 12/31/08
    1,517,700     $ 13.21  
6.8 years
  $ 14,380  
                           
Exercisable at 12/31/08
    814,700     $ 12.52  
5.2 years
  $ --  
                       
No options were exercised in the six month periods ended December 31, 2009 and December 31, 2008.

Information related to unvested stock options for the six months ended December 31, 2009 is shown in the table below:                                                                                 
 
   
Shares
   
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
Outstanding unvested stock options at 6/30/09
    707,125     $ 13.72  
8.3 years
  $ 31,245  
                           
  Vested
    (224,650 )   $ 14.69            
  Forfeitures
    (1,500 )   $ 14.01            
  Granted
    641,500     $ 8.26            
                           
Outstanding unvested stock options at 12/31/09
    1,122,475     $ 10.40  
8.9 years
  $ 161,198  

Page 21
 
 

 


Stock Compensation Awards

The Company awarded a total of 3,228 and 2,552 common shares, respectively, in the six months ended December 31, 2009 and 2008, with the number of shares issued in each six month period valued at their approximate $20,000 fair market values on the dates of issuance pursuant to the compensation program 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’s Non-qualified Deferred Compensation Plan provides 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 December 31, 2009 there were 33 participants, all with fully vested account balances.  A total of 235,936 common shares with a cost of $2,537,900, and 222,832 common shares with a cost of $2,455,900 were held in the Plan as of December 31, 2009 and June 30, 2009, 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 2010, the Company estimates the Rabbi Trust for the Nonqualified Deferred Compensation Plan will make net repurchases in the range of 16,000 to 18,000 common shares of the Company.  During the six months ended December 31, 2009 and 2008, the Company used approximately $93,400 and $160,700, respectively, to purchase common shares of the Company in the open stock market for either employee salary deferrals or Company contributions into the non-qualified deferred compensation plan.  The Company does not currently repurchase its own common shares for any other purpose.

NOTE 12:  COMMITMENTS AND CONTINGENCIES

 
The Company is party to various negotiations, customer bankruptcies, and legal proceedings arising in the normal course of business.  The Company provides reserves for these matters when a loss is probable and reasonably estimable.  In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations, cash flows or liquidity.

NOTE 13:
ACQUISITION

On July 22, 2009, the Company completed the acquisition of certain net assets and 100% of the business of three related companies (AdL Technology, AdL Engineering and Kelmilfeen – collectively, “AdL” or “AdL Technology”), which were privately owned and based in Columbus, Ohio.  This new 100% owned subsidiary operates under the name of LSI ADL Technology Inc.  Consideration for the asset purchase of these businesses totaled $15,781,480, and consisted of 2,469,676 shares of LSI’s unregistered common stock (the fair value of which was determined based upon the closing market price of LSI’s common shares on the acquisition date) and cash of $1,333,875.  This purchase price exceeds the fair value of the net assets being acquired, and therefore goodwill in the amount of $9,208,000 was recorded with this acquisition.  Additionally,

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LSI assumed long-term debt of $3,368,874 in the purchase of substantially all net assets of these businesses.  The goodwill associated with this acquisition consists largely of the synergies expected from combining AdL and LSI Industries and the vertical integration of the design and manufacture of electronic circuit boards used in many of the Company’s products.  None of the goodwill will be deductible by the Company for tax purposes.  There were no contingent liabilities or assets associated with the purchase of AdL.  There were $513,000 of acquisition transaction costs included in the financial results for the six month period ending December 31, 2009 in selling and administrative expenses and $610,000 of expense in cost of products sold related to the roll out of the fair value inventory adjustment that was recorded at acquisition.  The operations of LSI ADL Technology are included in the Company’s operating results beginning July 23, 2009.  The results of LSI ADL Technology are reported in a separate reportable business segment named the Electronic Components Segment.

The recognized amounts of identifiable assets acquired and liabilities assumed with the acquisition of AdL Technology were as follows:
 
(In thousands)
     
Financial assets
  $ 2,398  
Inventory
    3,677  
Property, plant and equipment
    3,094  
Identifiable intangible assets
    4,830  
Financial liabilities
    (7,426 )
  Total identifiable net assets
    6,573  
Goodwill
    9,208  
  Total purchase consideration
  $ 15,781  

A liability of $5,000 has been recognized in the opening balance sheet (included in financial liabilities above) for expected warranty claims on products sold by AdL Technology prior to acquisition.

LSI ADL Technology Inc. will design, engineer, and manufacture custom designed circuit boards, assemblies, and sub-assemblies used in various applications including the control of solid-state LED lighting.  With the acquisition of AdL, we made a decision to further establish and advance our leadership position in LED lighting by vertically integrating our capabilities in connection with designing, engineering, and producing the solid-state electronics that control and power LEDs.  LSI ADL Technology will allow us to stay on the leading edge of product development, while at the same time providing opportunities to drive down manufacturing costs and control delivery of key components. LSI ADL’s capabilities will also have applications in our other LED product lines such as digital scoreboards, advertising ribbon boards and billboards. The management team and all employees of the acquired companies remain with LSI ADL Technology.

NOTE 14:
SUBSEQUENT EVENT - CLOSURE OF THE LSI MARCOLE FACILITY

On January 20, 2010, the Board of Directors approved a plan to close the LSI Marcole facility in Manchester, Tennessee.  This facility manufactures wire harnesses used in the manufacture of LSI’s light fixtures and also sells wire harness to select outside customers.  The Company expects to cease production at the facility by April 2, 2010.  Subsequent to the closing of the LSI Marcole facility, the Company will purchase wire harnesses from unrelated wire harness suppliers.  The Company plans to sell specific assets of LSI Marcole.  A value has not been placed on the assets that will be held for sale so the fair market value of those assets is not known at this time.  The Company decided to close this facility primarily due to low cost competition of wire harnesses produced outside the United States.  The operating results of LSI Marcole are reported under the All Other Category.

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The assets and liabilities of LSI Marcole are comprised of the following at December 31, 2009 and June 30, 2009:
(In thousands)
 
December 31,
2009
   
June 30,
2009
 
Accounts Receivable, net
  $ 349     $ 316  
Inventory
    1,520       1,491  
Other Current Assets
    143       160  
Property, Plant and Equipment, net
    978       1,024  
Other Assets
    1        2  
  Total Assets
  $ 2,991     $ 2,993  
                 
Accounts Payable
  $ 172     $ 133  
Accrued Expenses
    (5 )     60  
  Total Liabilities
  $ 167     $ 193  
 
 
The net sales and operating (loss) of LSI Marcole for the periods indicated were as follows:
 
(In thousands)
 
Three Months Ended
December 31
   
Six Months Ended
December 31
 
   
2009
   
2008
   
2009
   
2008
 
Net Sales
  $ 942     $ 1,284     $ 1,798     $ 2,452  
                                 
Operating (Loss)
  $ (166 )   $ (149 )   $ (218 )   $ (161 )
 

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

The Company’s “forward looking statements” and disclosures as presented earlier in this Form 10-Q in the “Safe Harbor” Statement should be referred to when reading Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Net Sales by Business Segment
 
(In thousands)
 
Three Months Ended
December 31
   
Six Months Ended
December 31
 
   
2009
   
2008
   
2009
   
2008
 
Lighting Segment
  $ 43,688     $ 43,291     $ 83,329     $ 92,927  
Graphics Segment
    19,324       13,891       41,421       35,027  
Technology Segment
    235       1,172       1,296       3,990  
Electronic Components Segment
    4,409       --       7,647       --  
All Other Category
    1,718       2,433       3,357       4,681  
    $ 69,374     $ 60,787     $ 137,050     $ 136,625  

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Operating Income (Loss) by Business Segment
 
(In thousands)
 
Three Months Ended
December 31
   
Six Months Ended
December 31
 
   
2009
   
2008
   
2009
   
2008
 
Lighting Segment
  $ 3,239     $ (9,945 )   $ 6,719     $ (5,482 )
Graphics Segment
    1,984       507       3,525       1,670  
Technology Segment
    (312 )     (253 )     111       372  
Electronic Components Segment
    749       --       805       --  
All Other Category
    (2,727 )     (4,316 )     (5,730 )     (6,351 )
    $ 2,933     $ (14,007 )   $