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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended January 31, 2004

For the transition period from _______to_______

Commission File Number: 0-15240

LOWRANCE ELECTRONICS, INC.

12000 East Skelly Drive
Tulsa, Oklahoma 74128

Registrant’s telephone number, including area code: (918) 437-6881

Indicate by check mark 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 check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES  o   NO  x

At January 31, 2004, there were 3,761,196 shares of Registrant’s $0.10 par value Common Stock outstanding.

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LOWRANCE ELECTRONICS, INC.

FORM 10-Q

INDEX

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LOWRANCE ELECTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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LOWRANCE ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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LOWRANCE ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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LOWRANCE ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND SIX MONTHS ENDED JANUARY 31, 2004 AND 2003
(Unaudited)

(1)

PRINCIPLES OF PREPARATION

			The financial statements subsequent to July 31, 2003 and with respect to the interim three and six month periods ended January 31, 2004 and 2003 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. Accounting policies for the three and six months ended January 31, 2004, are the same as those outlined in the Annual Report on Form 10-K filed relative to the year ended July 31, 2003. In the opinion of management, all adjustments necessary for a fair presentation of interim results of operations have been made to the interim statements. All such adjustments were of a normal, recurring nature. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report for the year ended July 31, 2003 filed with the Securities and Exchange Commission on Form 10-K.
			Certain reclassifications have been made to the January 31, 2003 financial statements to conform to the classifications used for the period ended January 31, 2004.

(2)

BALANCE SHEET DETAIL

			Inventories -
			Inventories are priced at the lower of cost (first-in, first-out) or market and consist of the following:

Discontinued finished goods inventory attributable to fiscal 2003 product decisions was approximately $39,000 at January 31, 2004 as compared to $156,000 at July 31, 2003. Inventory on hand at January 31, 2004 for products the Company discontinued during fiscal 2004 was $31,000 as compared to $723,000 at July 31, 2003. All discontinued finished goods inventories are carried at cost, which management believes to be lower than expected realizable value. The Company expects the remaining inventory of discontinued products to be sold during fiscal 2004.

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(3)

PRODUCT WARRANTIES

The following represents a tabular presentation of the changes in the Company’s aggregate product warranty liability for the six-month reporting period.

(4)

LONG-TERM DEBT AND REVOLVING CREDIT LINE

Long-term debt and the revolving credit line are summarized below:

			At January 31, 2004, the Company’s financing facility consisted of $7.4 million in term loans and a $26.5 million revolving credit line. At January 31, 2004 the term loans had a remaining balance of $680,000. The revolving credit line provides for borrowings up to $26.5 million based on varying percentages of qualifying categories of receivables and inventories. Borrowing against inventories is limited to $13 million in total. The interest rate on the financing facility is prime plus .5%, which was 4.5% as of January 31, 2004. The Company had $1.1 million available under the revolving credit line at January 31, 2004.
			The Company was in compliance with all debt covenants at January 31, 2004.
			The terms of the foregoing agreement include a commitment fee of .25% based on the unused portion of the revolving credit line in lieu of compensating balances.
			The Company’s indebtedness is collateralized by substantially all of the Company’s assets.

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(5)

OPERATING SEGMENTS

			The Company is not required to reflect segment disclosures as the CEO and President, the Company’s Chief Decision Maker, provides oversight and review based upon financial statements and financial information presented at the consolidated level.
			The Company markets its products internationally through foreign distributors, except in Canada and Australia where it has established its own distribution operations. The majority of foreign sales are concentrated in Canada, Australia and Europe.
			Long-lived assets in foreign countries are disclosed in Note 2 to the Consolidated Financial Statements, Property, Plant and Equipment, in the Company’s 2003 Annual Report on Form 10-K. There are no significant long-lived assets in any foreign country other than Mexico.

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(6)	EARNINGS PER SHARE

(a)

The effect of the 2001 Stock Option Plan options are not included as they are anti-dilutive.

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Part I, Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For a description of the Company’s critical accounting policies and an understanding of the significant factors that have influenced the Company’s performance during the three and six months ended January 31, 2004 and 2003, this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the condensed consolidated financial statements, including the related notes, appearing in Item 1 of this Form 10-Q, as well as our Annual Report on Form 10-K for the year ended July 31, 2003.

Company Overview

We design, manufacture, market, and sell a comprehensive range of high-quality SONAR and Global Positioning System (“GPS”) mapping instruments under two different trade names for use in outdoor recreation and aviation. Our SONAR products graphically display underwater information and are used mainly by sport fishermen as fishfinders and by recreational boaters as navigational and safety devices. Boaters, hunters, backpackers, RV enthusiasts, pilots and others use our GPS mapping products to precisely locate their positions and to record up to 1,000 of their favorite spots for future return. Currently, we list approximately 56 different marine, outdoor, aviation, and original equipment manufacturer products on our website, www.lowrance.com.

We market our products to our customers (dealers, distributors, mass merchants, and original equipment manufacturers) who in turn sell our products in the consumer marketplace. Demand for our products has historically been seasonal with the lowest sales occurring in the first quarter (Aug. – Oct.) and the highest sales occurring in the third quarter (Feb.-Apr.). The Company focuses on developing product lines that address most major price points in the market place in order to provide a high range of features to the consumers. We have increased the number of new products that we have introduced in each of the last three fiscal years, including the current fiscal year. For the fiscal year 2004, we have announced over 30 new products. The introduction of new products has resulted in the increase in sales and gross margin discussed below in both the three month and six month periods.

Our successful operations and strong competitive position are dependent to a great extent upon our ability to anticipate and react to the technological innovations inherent within our industry. To augment our continued investment in product research and development, we utilize several manufacturing and design technologies, such as Surface Mount Technology (SMT) production equipment, Computer Aided Design (CAD) systems, Application Specific Integrated Circuits (ASICS), Tape Automated Bonding (TAB), Tab-On-Glass (TOG), Components-On-Glass (COG) and Liquid Crystal Display (LCD) assembly. These advanced technologies, which have been essential to the development of our breakthrough SONAR and GPS products, have allowed us to reduce our material and manufacturing costs and to provide even greater product performance.

Executive Summary

During the quarter and six months ended January 31, 2004, we noted:

	-		Sales for the quarter were $24,468,000, a 13.7% increase from the same period last year. Sales for the six months were $38,504,000, a 17.9% increase from the same period last year.
	-		Fully diluted net income per share for the quarter was $0.41, as compared to $0.16 for the same period last year. Fully diluted net income per share for the six months was $0.02 as compared to a loss of ($0.22) for the same period last year.
	-		Gross profit margin increased by $2.3 million for the quarter as compared to the same period last year, and gross profit margin increased by $3.3 million for the six months as compared to the same period last year.
	-		As part of an on-going commitment to develop new technology and improve existing technology, there was an average of eight additional research and development personnel for the quarter and the six months as compared to the average for the same periods last year.

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Three Months Ended January 31, 2004

Financial Highlights

The following tables set forth selected amounts, ratios and relationships calculated from the Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended January 31, 2004 and 2003:

Expressed as a percent of net sales:

Results of Operations

Sales and Margin

Our total net sales increased by $3.0 million, or 13.7%, for the three months ended January 31, 2004, as compared to the same period last year, on a 3.4% increase in unit sales. This year over year increase in sales is due primarily to new high end SONAR/GPS navigation products introduced in fiscal 2003 at the end of the second quarter and during the third quarter which were selling throughout the three months ended January 31, 2004.

The gross profit margin increased by $2.3 million, or 30.2%, for the three months ended January 31, 2004 as compared to the same period last year. The gross margin percentage increased to 41.1% as compared to 35.9% last year. The gross margin increased at a higher rate than sales as a result of the expansion of the Company’s high end SONAR/GPS navigation price points introduced in fiscal 2003 at the end of the second quarter and during the third quarter which were selling throughout the three months ended January 31, 2004 and a new avionics model introduced during the second quarter of fiscal 2004.

Operating Expenses and Income

Operating expenses increased by $993,000, or 15.5%, during the three months ended January 31, 2004 compared to the same period last year. Operating expenses as a percentage of sales increased to 30.4% from 29.9% during the three months ended January 31, 2004 and 2003, respectively.

During the three months ended January 31, 2004, selling and administrative expenses increased by $740,000, or 13.5%, over the previous year due to variable selling costs which increased as a result of increased sales and also to increased selling, advertising and marketing efforts focused on new products.

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Research and development expenses increased by $253,000, or 26.3%, for the three months ended January 31, 2004 as compared to the same period last year due primarily to staffing increases. For the three months ended January 31, 2004, the Company had an average of eight additional research and development personnel as compared to the average for the same period last year.

Interest Expense

Interest expense for the three months ended January 31, 2004 decreased by $154,000, or 48.3%, as compared to the previous year and decreased as a percentage of sales to .7% from 1.5% year over year. During the second quarter of fiscal 2003, interest expense included non-recurring fees and expenses related to the Company’s financing facility and certain lease financings of approximately $100,000. Also, for the three months ended January 31, 2004, the Company carried, on average, $1.2 million in lower debt balances as compared to the previous year. The interest rate on the Company’s primary financing facility was 4.5% for the three months ended January 31, 2004 as compared to a range of 5.75% to 4.75% for the same period last year. The prime rate was 4.0% for the three months ended January 31, 2004 as compared to a range of 4.75% to 4.25% for the three months ended January 31, 2003.

Income Taxes

The effective tax rates were 33.8% and 38.7%, respectively, for the three months ended January 31, 2004 and 2003. The effective tax rates differ from the statutory rates due to the impact of foreign taxes, the U.S. treatment of foreign operations, state taxes and permanent differences in the treatment of items from an income tax versus financial reporting perspective. The change in effective tax rates is primarily due to foreign taxes that do not fluctuate in direct proportion to the consolidated income of the Company.

Six Months Ended January 31, 2004

Financial Highlights

The following tables set forth selected amounts, ratios and relationships calculated from the Condensed Consolidated Statements of Operations and Comprehensive Income for the six months ended January 31, 2004 and 2003: