UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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.

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

At April 30, 2004, there were 3,761,196 shares of Registrant’s $0.10 par value Common Stock outstanding.

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 INCOME 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 NINE MONTHS ENDED APRIL 30, 2004 AND 2003
(Unaudited)

(1)		PRINCIPLES OF PREPARATION
		The financial statements subsequent to July 31, 2003 and with respect to the interim three and nine month periods ended April 30, 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 nine months ended April 30, 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 April 30, 2003 financial statements to conform to the classifications used for the period ended April 30, 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 $83,000 at April 30, 2004 as compared to $156,000 at July 31, 2003. Inventory on hand at April 30, 2004 for products the Company discontinued during fiscal 2004 was $30,000 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 nine-month reporting period.

(4)		LONG-TERM DEBT AND REVOLVING CREDIT LINE
		Long-term debt and revolving credit line are summarized below:

		At April 30, 2004, the Company’s financing facility consisted of a $26.5 million revolving credit line and initial term loans of $7.4 million with a remaining balance of $611,000. 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 April 30, 2004. Effective May 1, 2004, the interest rate was lowered to prime plus .25%. The Company had $10.6 million available under the revolving credit line at April 30, 2004.
		The Company was in compliance with all debt covenants at April 30, 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 has one reportable segment 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
		Basic and diluted earnings per share is calculated as follows:

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(7)

SUBSEQUENT EVENT

On May 12, 2004, the Company’s Board of Directors declared a special dividend of $0.25 per common share payable on May 26, 2004 to shareholders of record on May 24, 2004.

Executive Summary

During the quarter and nine months ended April 30, 2004, we noted:

	•		Sales for the quarter were $46.3 million, a 42.8% increase from the same period last year. Sales for the nine months were $84.8 million, a 30.3% increase from the same period last year.
	•		Fully diluted net income per share for the quarter was $1.68, as compared to $1.13 for the same period last year. Fully diluted net income per share for the nine months was $1.70, as compared to $0.93 for the same period last year.
	•		Gross profit margin for the quarter increased by $4.5 million, a 28.2% increase from the same period last year. Gross profit margin for the nine months increased $7.8 million, a 27.9% increase from 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 four additional research and development personnel for the quarter and seven for the nine months as compared to the average for the same periods last year.

Results of Operations

Three months ended April 30, 2004 compared to three months ended April 30, 2003

Financial Highlights

The following tables set forth selected amounts, ratios and relationships calculated from the condensed consolidated statements of income and comprehensive income for the three months ended April 30, 2004 and 2003:

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Sales and Margin

Total net sales increased by $13.9 million, or 42.8%, for the three months ended April 30, 2004 as compared to the same period last year, on a 44.1% increase in unit sales. This year over year increase in sales is due to:

	•		New SONAR and SONAR/GPS navigation products at new price points which began to ship in the third quarter of 2004. These new price points were at the upper end of our price point range;
	•		New GPS handhelds which began to ship in the third quarter of 2004;
	•		Two new Aviation GPS products introduced in fiscal 2004 which began to ship in the first and second quarters; and
	•		Increased sales from new product introductions at previously existing price points.

The gross profit margin increased by $4.5 million, or 28.2%, for the three months ended April 30, 2004 as compared to the same period last year. The gross margin increase is due to the same factors noted above in the discussion of the sales increase. The gross profit margin percentage decreased to 44.6% as compared to 49.7% last year. The gross profit margin percentage decreased due to price point reductions on certain higher end products compared to the price points in the prior year.

Operating Expenses and Income

Operating expenses increased by $1.7 million, or 19.0%, during the three months ended April 30, 2004 compared to the same period last year. Operating expenses as a percentage of sales decreased to 22.6% from 27.2% during the three months ended April 30, 2004 and 2003, respectively.

During the three months ended April 30, 2004, selling and administrative expenses increased by $1.4 million, or 17.6%, over the previous year due to variable selling costs such as freight, accrued warranty costs and cash discounts which increased as a result of increased sales and also to increased selling, advertising and marketing efforts focused on new products.

Research and development expenses increased by $302,000 during the three months ended April 30, 2004 compared to the same period last year due primarily to staffing increases. For the three months ended April 30, 2004 we had an average of four additional research and development personnel compared to the same period last year.

Interest Expense

Interest expense for the three months ended April 30, 2004 decreased by $50,000, or 21.1%, as compared to the previous year and decreased as a percentage of sales to 0.4% from 0.7% year over year. The interest rate on our primary credit facility was 4.5% for the three months ended April 30, 2004 as compared to 4.75% for the same period last year. The prime rate was 4.0% for the three months ended April 30, 2004 as compared to 4.25% for the three months ended April 30, 2003.

Income Taxes.

The effective tax rates were 32.6% and 37.4%, respectively, for the three months ended April 30, 2004 and 2003. The effective tax rates differ from the statutory rates due to the impact of foreign taxes, the United States treatment of foreign operations, state taxes, tax credits and permanent differences in the treatment of items from an income tax versus financial reporting perspective. The change in effective tax rates is due to the impact of additional tax credits and foreign taxes that do not fluctuate in direct proportion to our consolidated income.

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Nine months ended April 30, 2004 compared to nine months ended April 30, 2003

Financial Highlights

The following tables set forth selected amounts, ratios and relationships calculated from the condensed consolidated statements of income and comprehensive Income for the nine months ended April 30, 2004 and 2003:

Sales and Margin

Total net sales increased by $19.7 million, or 30.3%, for the nine months ended April 30, 2004 as compared to the same period last year, on a 25.9% increase in unit sales. This year over year increase in sales is due to:

	•		New SONAR and SONAR/GPS navigation products at new price points which began to ship in the third quarter of 2004. These new price points were at the upper end of our price point range;
	•		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 nine months ended April 30, 2004;
	•		New GPS handhelds which began to ship in the third quarter of 2004;
	•		Two new Aviation GPS products introduced in fiscal 2004 which began to ship in the first and second quarters; and
	•		Increased sales from new product introductions at previously existing price points.

The gross profit margin increased by $7.8 million, or 27.9%, for the nine months ended April 30, 2004 as compared to the same period last year. The gross margin increase is due to the same factors noted above in the discussion of the sales increase. The gross profit margin percentage decreased to 42.2% as compared to 43.0% last year. The gross profit margin percentage decreased due to price point reductions on certain higher end products compared to the price points in the prior year.

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Operating Expenses and Income

Operating expenses increased by $3.5 million, or 16.4%, during the nine months ended April 30, 2004 compared to the same period last year. Operating expenses as a percentage of sales decreased to 29.4% from 32.9% during the nine months ended April 30, 2004 and 2003, respectively.

During the nine months ended April 30, 2004, selling and administrative expenses increased by $2.8 million, or 15.1%, over the previous year due to variable selling costs such as freight, accrued warranty costs and cash discounts which increased as a result of increased sales and also to increased selling, advertising and marketing efforts focused on new products.

Research and development expenses increased by $735,000, or 24.3% during the nine months ended April 30, 2004 compared to the same period last year due primarily to staffing increases. For the nine months ended April 30, 2004 we had an average of seven additional research and development personnel compared to the same period last year.

Interest Expense

Interest expense for the nine months ended April 30, 2004 decreased by $199,000, or 26.3%, as compared to the previous year and decreased as a percentage of sales to 0.7% from 1.2% year over year. The first nine months of fiscal 2003 included non-recurring fees and expenses of approximately $100,000 related to our credit facility and certain lease financings. Also, for the nine months ended April 30, 2004 we carried on average, $800,000 in lower debt balances as compared to the same period in the previous year. The interest rate on our primary credit facility was 4.5% for the nine months ended April 30, 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 nine months ended April 30, 2004 as compared to a range of 4.75% to 4.25% for the nine months ended April 30, 2003.

Income Taxes

The effective tax rates were 32.6% and 37.2%, respectively, for the nine months ended April 30, 2004 and 2003. The effective tax rates differ from the statutory rates due to the impact of foreign taxes, the United States treatment of foreign operations, state taxes, tax credits and permanent differences in the treatment of items from an income tax versus financial reporting perspective. The change in effective tax rates is due to the impact of additional tax credits and foreign taxes that do not fluctuate in direct proportion to our consolidated income.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as described in Section 13(j) of the Securities Exchange Act of 1934.

Liquidity and Capital Resources

General

We require capital principally for capital expenditures, working capital and interest payments. Our capital expenditures relate primarily to new product tooling and our manufacturing facility. Working capital is required principally to fund inventory through payments to suppliers and manufacturing payroll costs until the inventory is sold and the receivables are collected. Our working capital requirements are seasonal and vary from period to period depending on manufacturing volumes, timing of shipments and the payment cycles of our customers and suppliers.

Sources of Capital

Our primary sources of liquidity are cash flows from operations, our credit facility and lease financing. Our credit facility consists of a $26.5 million revolving credit line and initial term loans of $7.4 million with an April 30, 2004, remaining balance of $611,000 requiring monthly payments of $23,000 plus interest. The line of

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credit includes a borrowing base of 85% of qualifying accounts receivable, 30% of qualifying raw material inventory and 60% of qualifying finished goods inventory with borrowings from inventories limited to $13 million. At April 30, 2004, we had $10.6 million available under the revolving credit line.

We were in compliance with all loan covenants at April 30, 2004.

Cash flows

Cash flows used in operations were $2.1 million for the nine months ended April 30, 2004 as compared to $6.6 million for the same period last year. The decrease was primarily due to higher net income during the first nine months of fiscal 2004 as compared to the same period last year. Cash used for capital expenditures was $2.9 million. An additional $1.2 million in capital expenditures was funded by capital lease borrowings. The capital expenditures primarily related to new product tooling projects, manufacturing equipment and computer equipment.

Discontinued finished goods inventory attributable to fiscal 2003 product decisions was approximately $83,000 at April 30, 2004 as compared to $156,000 at July 31, 2003. Inventory on hand at April 30, 2004 for products we discontinued during fiscal 2004 was $30,000 as compared to $723,000 at July 31, 2003. All discontinued inventories are carried at cost, which management believes to be lower than expected realizable value. We expect the remaining inventory of discontinued products to be sold during fiscal 2004. Management monitors all inventories via various inventory control and review processes which include, but are not limited to, forecast review and inventory reduction meetings, graphical presentations and forecast versus inventory status reports. Management believes these processes are adequate.

Demand for our products is seasonal. We utilize the revolving credit line to address our seasonal liquidity needs. Management believes the sources of liquidity discussed above are adequate to satisfy our current working capital and capital equipment needs. However, if we decide to pursue future acquisitions or make capital expenditures not currently anticipated, we may need to raise additional capital.

Subsequent Event

On May 12, 2004, the Company’s Board of Directors declared a special dividend of $0.25 per common share, payable on May 26, 2004 to shareholders of record on May 24, 2004.

Outlook and Uncertainties

Certain matters discussed in this report, excluding historical information, include certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, that involve risks and uncertainties. We and our representatives may from time to time make written or verbal forward-looking statements, including statements contained in filings with the Securities and Exchange Commission and in the report to stockholders. Statements that address our operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to sales and earnings growth, statements expressing general optimism about future operating results and statements relating to liquidity and future financing plans are forward-looking statements. Although we believe that such forward-looking statements are based on management’s then-current views and reasonable assumptions, no assurance can be given that every objective will be reached. Such statements are made in reliance on the “safe harbor” protections provided under the Private Securities Litigation Reform Act of 1995.

As required by the Private Securities Litigation Reform Act of 1995, we hereby identify the following factors that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted by us in forward-looking statements:

	•		Financial performance and cash flow from operations in fiscal 2004 are based on attaining current projections.
	•		Production delays due to raw material shortages or unforeseen competitive pressures could have a materially adverse effect on current projections.

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•

Because of the dynamic environment in which we operate, one or more key factors discussed in “Part I, Item 1. Business” of our most recent Form 10-K could have an adverse effect on expected results for fiscal 2004.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to cash flow and interest rate risk due to changes in interest rates with respect to our long-term debt. See Note 4 to the condensed consolidated financial statements for details on our long-term debt. A 0.5% increase in the prime rate for the nine months ended April 30, 2004 would have had a negative after-tax impact on earnings of approximately $26,000.

We are subject to foreign currency risk due to the location of our manufacturing facility in Mexico and sales from each of our distribution facilities in Canada and Australia, which are denominated in the local currencies. Sales to countries other than Canada and Australia are denominated in United States dollars. Although fluctuations have occurred in the Mexican peso, the Canadian dollar and the Australian dollar, such fluctuations have not historically had a significant impact on our financial statements taken as a whole. A 10% unfavorable change in the currency exchange rates would result in a foreign exchange loss of approximately $22,000 on intercompany balances recorded at April 30, 2004.

Item 4. CONTROLS AND PROCEDURES

The Principal Executive Officer and the Principal Financial Officer evaluated the Company’s disclosure controls and procedures in accordance with Rule 13a-15 of the Exchange Act and found those disclosure controls and procedures to be effective.

PART II — OTHER INFORMATION

(a.)

The exhibits listed on the following Exhibit Index are filed as part of this Report. Exhibits required by Item 601 of Regulation S-K, but which are not listed below, are inapplicable.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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