UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018. |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO ________________. |
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Commission File No. 0-13375
LSI Industries Inc.
State of Incorporation - Ohio IRS Employer I.D. No. 31-0888951
10000 Alliance Road
Cincinnati, Ohio 45242
(513) 793-3200
Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES X NO ____
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer [ ] |
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Accelerated filer [ X ] |
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Non-accelerated filer [ ] |
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Smaller reporting company [ ] |
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Emerging growth company[ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ____ NO X
As of October 25, 2018 there were 26,025,256 shares of the registrant's common stock, no par value per share, outstanding.
LSI INDUSTRIES INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30 , 201 8
INDEX
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Begins on Page |
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PART I. Financial Information |
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ITEM 1. |
Financial Statements (Unaudited) |
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Condensed Consolidated Statements of Operations |
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3 |
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Condensed Consolidated Balance Sheets |
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4 |
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Condensed Consolidated Statements of Cash Flows |
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6 |
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Notes to Condensed Consolidated Financial Statements |
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7 |
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ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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18 |
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ITEM 3. |
Quantitative and Qualitative Disclosures About Market Risk |
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22 |
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ITEM 4. |
Controls and Procedures |
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23 |
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PART II. Other Information |
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ITEM 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
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24 |
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ITEM 6. |
Exhibits |
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24 |
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Signatures |
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24 |
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“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995
This Form 10-Q contains certain forward-looking statements that are subject to numerous assumptions, risks or uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Forward-looking statements may be identified by words such as “estimates,” “anticipates,” “projects,” “plans,” “expects,” “intends,” “believes,” “seeks,” “may,” “will,” “should” or the negative versions of those words and similar expressions, and by the context in which they are used. Such statements, whether expressed or implied, are based upon current expectations of the Company and speak only as of the date made. Actual results could differ materially from those contained in or implied by such forward-looking statements as a result of a variety of risks and uncertainties over which the Company may have no control. These risks and uncertainties include, but are not limited to, the impact of competitive products and services, product demand and market acceptance risks, potential costs associated with litigation and regulatory compliance, reliance on key customers, financial difficulties experienced by customers, the cyclical and seasonal nature of our business, the adequacy of reserves and allowances for doubtful accounts, fluctuations in operating results or costs whether as a result of uncertainties inherent in tax and accounting matters or otherwise, unexpected difficulties in integrating acquired businesses, the ability to retain key employees of acquired businesses, unfavorable economic and market conditions, the results of asset impairment assessments and the other risk factors that are identified herein. You are cautioned to not place undue reliance on these forward-looking statements. In addition to the factors described in this paragraph, the risk factors identified in our Form 10-K and other filings the Company may make with the SEC constitute risks and uncertainties that may affect the financial performance of the Company and are incorporated herein by reference. The Company does not undertake and hereby disclaims any duty to update any forward-looking statements to reflect subsequent events or circumstances.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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September 30 |
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(In thousands, except per share data) |
2018 |
2017 |
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Net sales |
$ | 84,957 | $ | 87,466 | ||||
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Cost of products and services sold |
63,541 | 63,763 | ||||||
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Restructuring costs |
155 | -- | ||||||
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Gross profit |
21,261 | 23,703 | ||||||
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Selling and administrative expenses |
18,327 | 20,517 | ||||||
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Impairment of goodwill |
-- | 28,000 | ||||||
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Operating income (loss) |
2,934 | (24,814 |
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Interest (income) |
(14 |
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(8 |
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Interest expense |
532 | 411 | ||||||
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Income (loss) before income taxes |
2,416 | (25,217 |
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Income tax expense (benefit) |
667 | (9,588 |
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Net income (loss) |
$ | 1,749 | $ | (15,629 |
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Earnings (Loss) per common share (see Note 4) |
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Basic |
$ | 0.07 | $ | (0.61 |
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Diluted |
$ | 0.07 | $ | (0.61 |
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Weighted average common shares outstanding |
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Basic |
26,032 | 25,791 | ||||||
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Diluted |
26,365 | 25,791 | ||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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(In thousands, except shares) |
September 30, |
June 30, |
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2018 |
2018 |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
$ | 4,162 | $ | 3,178 | ||||
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Accounts receivable, less allowance for doubtful accounts of $363 and $409, respectively |
59,781 | 50,609 | ||||||
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Inventories |
49,580 | 50,994 | ||||||
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Refundable income taxes |
1,197 | 1,784 | ||||||
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Other current assets |
3,625 | 3,516 | ||||||
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Total current assets |
118,345 | 110,081 | ||||||
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Property, Plant and Equipment, at cost |
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Land |
6,718 | 6,470 | ||||||
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Buildings |
35,984 | 35,961 | ||||||
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Machinery and equipment |
77,658 | 77,108 | ||||||
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Construction in progress |
1,261 | 1,340 | ||||||
| 121,621 | 120,879 | |||||||
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Less accumulated depreciation |
(79,098 |
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(77,176 |
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Net property, plant and equipment |
42.523 | 43,703 | ||||||
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Goodwill |
30,538 | 30,538 | ||||||
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Other Intangible Assets, net |
34,718 | 35,409 | ||||||
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Other Long-Term Assets, net |
9,420 | 9,786 | ||||||
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Total assets |
$ | 235,544 | $ | 229,517 | ||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 30, |
June 30, |
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(In thousands, except share s ) |
2018 |
2018 |
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LIABILITIES & SHAREHOLDERS’ EQUITY |
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Current Liabilities |
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Accounts payable |
$ | 23,774 | $ | 17,927 | ||||
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Accrued expenses |
21,949 | 24,272 | ||||||
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Total current liabilities |
45,723 | 42,199 | ||||||
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Long-Term Debt |
46,152 | 45,360 | ||||||
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Other Long-Term Liabilities |
2,606 | 2,707 | ||||||
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Commitments and Contingencies (Note 12) |
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Shareholders’ Equity |
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Preferred shares, without par value; Authorized 1,000,000 shares, none issued |
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Common shares, without par value; Authorized 40,000,000 shares; Outstanding 25,799,257 and 25,641,913 shares, respectively |
124,871 | 124,104 | ||||||
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Treasury shares, without par value; |
(1,845 |
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(2,110 |
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Deferred compensation plan |
1,869 | 2,133 | ||||||
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Retained earnings |
16,168 | 15,124 | ||||||
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Total shareholders’ equity |
141,063 | 139,251 | ||||||
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Total liabilities & shareholders’ equity |
$ | 235,544 | $ | 229,517 | ||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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(In thousands) |
Three Months Ended |
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September 30 |
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2018 |
2017 |
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Cash Flows from Operating Activities |
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Net income (loss) |
$ | 1,749 | $ | (15,629 |
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Non-cash items included in net income: |
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Depreciation and amortization |
2,643 | 2,572 | ||||||
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Deferred income taxes |
85 | (10,815 |
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Impairment of goodwill |
-- | 28,000 | ||||||
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Deferred compensation plan |
127 | 160 | ||||||
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Stock compensation expense |
551 | 984 | ||||||
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Issuance of common shares as compensation |
90 | 78 | ||||||
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Loss on disposition of fixed assets |
-- | (31 |
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Allowance for doubtful accounts |
(19 |
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49 | |||||
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Inventory obsolescence reserve |
766 | 143 | ||||||
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Changes in certain assets and liabilities |
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Accounts receivable |
(4,218 |
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(5,421 |
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Inventories |
(3,519 |
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683 | |||||
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Refundable income taxes |
587 | 775 | ||||||
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Accounts payable |
5,723 | (1,559 |
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Accrued expenses and other |
(3,172 |
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(3,133 |
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Customer prepayments |
795 | 419 | ||||||
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Net cash flows provided by (used in) operating activities |
2,188 | (2,725 |
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Cash Flows from Investing Activities |
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Proceeds from the sale of assets |
-- | 1,527 | ||||||
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Purchases of property, plant and equipment |
(648 |
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(498 |
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Net cash flows (used in) provided by investing activities |
(648 |
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1,029 | |||||
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Cash Flows from Financing Activities |
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Payments of long-term debt |
(23,039 |
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(22,247 |
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Borrowings of long-term debt |
23,831 | 24,411 | ||||||
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Cash dividends paid |
(1,296 |
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(1,286 |
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Shares withheld for employees taxes |
(52 |
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(110 |
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Purchase of treasury shares |
-- | (106 |
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Exercise of stock options |
-- | 115 | ||||||
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Net cash flows (used in) provided by financing activities |
(556 |
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777 | |||||
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Increase (Decrease) in cash and cash equivalents |
984 | (919 |
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Cash and cash equivalents at beginning of period |
3,178 | 3,039 | ||||||
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Cash and cash equivalents at end of period |
$ | 4,162 | $ | 2,120 | ||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
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 September 30, 2018, the results of its operations for the three month periods ended September 30, 2018 and 2017, and its cash flows for the three month periods ended September 30, 2018 and 2017. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2018 Annual Report on Form 10 -K. Financial information as of June 30, 2018 has been derived from the Company’s audited consolidated financial statements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2018 Annual Report on Form 10-K. Significant changes to our accounting policies as a result of adopting ASU-2014-09 “Revenue from Contracts with Customers” (Topic 606) are discussed below.
Revenue Recognition:
The Company recognizes revenue when it satisfies the performance obligation in its customer contracts or purchase orders. Most of the Company’s products have a single performance obligation which is satisfied at a point in time when control is transferred to the customer. Control is generally transferred at time of shipment when title and risk of ownership passes to the customer. For customer contracts with multiple performance obligations, the Company allocates the transaction price and any discounts to each performance obligation based on relative standalone selling prices. Payment terms are typically within 30 to 90 days from the shipping date, depending on our terms with the customer. The Company offers standard warranties that do not represent separate performance obligations.
Installation is a separate performance obligation, except for our digital signage products. For digital signage products, installation is not a separate performance obligation as the product and installation is the combined item promised in digital signage contracts. The Company is not always responsible for installation of products it sells and has no post-installation responsibilities other than standard warranties.
A number of the Company's products are highly customized. As a result, these customized products do not have an alternative use. For these products, the Company has a legal right to payment for performance to date and generally does not accept returns on these items. The measurement of performance is based upon cost plus a reasonable profit margin for work completed. Because there is no alternative use and there is a legal right to payment, the Company transfers control of the item as the item is being produced and therefore, recognizes revenue over time. The customized product types are as follows:
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Customer specific printed graphic branding |
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Electrical components based on customer specifications |
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Digital signage and related media content |
The Company also offers installation services. Installation revenue is recognized over time as our customer simultaneously receives and consumes the benefits provided through the installation process.
For these customized products and installation services, revenue is recognized using a cost-based input method: recognizing revenue and gross profit as work is performed based on the relationship between the actual cost incurred and the total estimated cost for the contract.
Disaggregation of Revenue
The Company disaggregates the revenue from contracts with customers by the timing of revenue recognition because we believe it best depicts the nature, amount, and timing of our revenue and cash flows. The table presents a reconciliation of the disaggregation by reportable segments.
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Three Months Ended September 30 |
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Lighting Segment |
Graphics Segment |
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Timing of revenue recognition |
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Products and services transferred at a point in time |
$ | 54,249 | $ | 17,694 | ||||
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Products and services transferred over time |
7,183 | 5,831 | ||||||
| $ | 61,432 | $ | 23,525 | |||||
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Three Months Ended September 30 |
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Lighting Segment |
Graphics Segment |
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Type of Product and Services |
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New Technology Products |
$ | 51,305 | $ | 2,402 | ||||
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Legacy Products |
9,076 | 15,964 | ||||||
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Turnkey Services and Other |
1,051 | 5,159 | ||||||
| $ | 61,432 | $ | 23,525 | |||||
New technology products include LED lighting and controls, electronic circuit boards, and digital signage solutions. Legacy products include lighting fixtures utilizing light sources other than LED technology and printed two and three dimensional graphic products. Turnkey services and other includes installation services along with shipping and handling charges.
Practical Expedients and Exemptions
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The Company’s contracts with customers have an expected duration of one year or less, as such we apply the practical expedient to expense sales commissions as incurred, and have omitted disclosures on the amount of remaining performance obligations. |
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Shipping costs that are not material in context of the delivery of products are expensed as incurred. |
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The Company’s accounts receivable balance represents the Company’s unconditional right to receive consideration from its customers with contracts. Payments are due within 30 to 90 days of completion of the performance obligation and invoicing, therefore, does not contain significant financing components. |
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The Company collects sales tax and other taxes concurrent with revenue-producing activities and are excluded from revenue. Shipping and handling costs are treated as fulfillment activities and included in cost of products and services sold on the Consolidated Statements of Operations. |
New Accounting Pronouncements:
On July 1, 2018, the Company adopted ASU 2014 - 09. “Revenue from Contracts with Customers,” (Topic 606 ) using the modified retrospective adoption method which requires a cumulative effect adjustment to the opening balance of retained earnings. This approach was applied to contracts that were not completed as of June 30, 2018. Results for reporting periods beginning July 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The Company recorded a net increase to beginning retained earnings of $591,000 on July 1, 2018 due to the cumulative impact of adopting Topic 606, as described below.
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Balance as of June 30, 2018 |
Adjustments |
Opening Balance as of July 1, 2018 |
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Assets: |
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Accounts receivable, net |
50,609 | 4,935 | 55,544 | |||||||||
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Inventories, net |
50,994 | (4,167 |
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46,827 | ||||||||
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Other long-term assets, net |
9,786
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(177 |
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9,609 | ||||||||
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S tockholders' Equity: |
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Retained earnings |
15,124 | 591 | 15,715 | |||||||||
In February 2016, the Financial Accounting Standards Board issued ASU 2016 - 02, “Leases.” The amended guidance requires an entity to recognize assets and liabilities that arise from leases. The amended guidance is effective for financial statements issued for fiscal years and interim periods within those years, beginning after December 15, 2018, or the Company’s fiscal year 2020, with early adoption permitted. The Company is currently evaluating the impact the amended guidance will have on its financial statements.
Subsequent Events:
The Company has evaluated subsequent events for potential recognition and disclosure through the date the consolidated financial statements were filed. No items were identified during this evaluation that required adjustment to or disclosure in the accompanying financial statements other than noted below.
On October 29, 2018, The Company announced that it will permanently close its New Windsor, New York manufacturing facility. The facility manufactures indoor lighting products and is included in the results of the Lighting Segment. Production will be transferred to the Company’s Erlanger, Kentucky and Blue Ash, Ohio facilities, also included in the Lighting Segment. The New Windsor facility has a workforce of 140 employees.
On October 15, 2018, the Board of Directors of the Company appointed James A. Clark as the Company’s Chief Executive Officer and President. Mr. Clark entered into an Employment Agreement as of October 16, 2018 which provides that his employment with the Company shall begin on November 1, 2018. The Employment Agreement also defines his compensation and benefit package.
Reclassifications:
Certain prior year amounts have been reclassified to conform to the current year presentation within the cash flows from operating activities section and cash flows from financing activities section of the statement of cash flows. These reclassifications have no impact on net income or earnings per share.
NOTE 3 - SEGMENT REPORTING INFORMATION
The accounting guidance on 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 financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (the Company’s Chief Executive Officer or “CODM”) in making decisions on how to allocate resources and assess performance. The Company’s two operating segments are Lighting and Graphics, with one executive team under the new organizational structure reporting directly to the CODM with responsibilities for managing each segment. Corporate and Eliminations, which captures the Company’s corporate administrative activities, is also reported in the segment information.
The Lighting Segment includes outdoor and indoor lighting utilizing both traditional and LED light sources that have been fabricated and assembled for the Company’s markets, primarily petroleum / convenience stores, automotive dealerships, quick-service restaurants, grocery and pharmacy store, and retail/national accounts. The Company also addresses lighting product customers through the commercial industrial, stock and flow, and renovation channels. The Lighting Segment also includes the design, engineering, and manufacturing of electronic circuit boards, assemblies and sub-assemblies used to manufacture certain LED light fixtures and sold directly to customers.
Segment also includes the design, engineering, and manufacturing of electronic circuit boards, assemblies and sub-assemblies used to manufacture certain LED light fixtures and sold directly to customers.
The Graphics Segment designs, manufactures and installs exterior and interior visual image elements such as traditional graphics, interior branding, electrical and architectural signage, active digital signage along with the management of media content related to digital signage, LED video screens, and menu board systems that are either digital or traditional by design. These products are used in visual image programs in several markets including, but not limited to the petroleum / convenience store market, multi-site retail operations, banking, and restaurants. The Graphics Segment implements, installs and provides program management services related to products sold by the Graphics Segment and by the Lighting Segment.
The Company’s corporate administration activities are reported in the Corporate and Eliminations line item. These activities primarily include intercompany profit in inventory eliminations, expense related to certain corporate officers and support staff, the Company’s internal audit staff, expense related to the Company’s Board of Directors, equity compensation expense for various equity awards granted to corporate administration employees, certain consulting expenses, investor relations activities, and a portion of the Company’s legal, auditing and professional fee expenses. Corporate identifiable assets primarily consist of cash, invested cash (if any), refundable income taxes (if any), and deferred income taxes.
There was no concentration of consolidated net sales in the three months ended September 30, 2018 or 2017. There was no concentration of accounts receivable at September 30, 2018 or June 30, 2018.
Summarized financial information for the Company’s operating segments is provided for the indicated periods and as of September 30, 2018 and September 30, 2017:
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Three Months Ended |
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( In thousands) |
September 30 |
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2018 |
2017 |
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Net Sales: |
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Lighting Segment |
$ | 61,432 | $ | 68,428 | ||||
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Graphics Segment |
23,525 | 19,038 | ||||||
| $ | 84,957 | $ | 87,466 | |||||
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Operating Income (Loss): |
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Lighting Segment |
$ | 3,850 | $ | (22,930 |
) |
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Graphics Segment |
2,387 | 1,476 | ||||||
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Corporate and Eliminations |
(3,303 |
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(3,360 |
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| $ | 2,934 | $ | (24,814 |
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Capital Expenditures: |
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Lighting Segment |
$ | 276 | $ | 261 | ||||
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Graphics Segment |
266 | 182 | ||||||
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Corporate and Eliminations |
106 | 55 | ||||||
| $ | 648 | $ | 498 | |||||
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Depreciation and Amortization: |
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Lighting Segment |
$ | 1,990 | $ | 1,901 | ||||
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Graphics Segment |
395 | 379 | ||||||
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Corporate and Eliminations |
258 | 292 | ||||||
| $ | 2643 | $ | 2,572 | |||||
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September 30, 2018 |
June 30, 2018 |
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Identifiable Assets: |
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Lighting Segment |
$ | 173,254 | $ | 172,799 | ||||
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Graphics Segment |
45,493 | 39,881 | ||||||
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Corporate and Eliminations |
16,797 | 16,837 | ||||||
| $ | 235,544 | $ | 229,517 | |||||
The segment net sales reported above represent sales to external customers. Segment operating income, which is used in management’s evaluation of segment performance, represents net sales less all operating expenses. Identifiable assets are those assets used by each segment in its operations.
The Company records a 10% mark-up on intersegment revenues. Any intersegment profit in inventory is eliminated in consolidation. Intersegment revenues were eliminated in consolidation as follows:
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Three Months Ended |
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September 30 |
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(In thousands) |
2018 |
2017 |
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Lighting Segment inter-segment net sales |
$ | 409 | $ | 715 | ||||
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Graphics Segment inter-segment net sales |
$ | 31 | $ | 31 | ||||
The Company’s operations are located solely within the United States. As a result, the geographic distribution of the Company’s net sales and long-lived assets originate within the United States.
NOTE 4 - EARNINGS PER COMMON SHARE
The following table presents the amounts used to compute basic and diluted earnings per common share, as well as the effect of dilutive potential common shares on weighted average shares outstanding (in thousands, except per share data):
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Three Months Ended |
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September 30 |
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2018 |
2017 |
|||||||
|
BASIC EARNINGS (LOSS) PER SHARE |
||||||||
|
Net income (loss) |
$ | 1,749 | $ | (15,629 |
) |
|||
|
Weighted average shares outstanding, net of treasury shares (a) |
25,752 | 25,505 | ||||||
|
Weighted average vested restricted stock units outstanding |
53 | 41 | ||||||
|
Weighted average shares outstanding in the Deferred Compensation Plan |
227 | 245 | ||||||
|
Weighted average shares outstanding |
26,032 | 25,791 | ||||||
|
Basic earnings (loss) per share |
$ | 0.07 | $ | (0.61 |
) |
|||
|
DILUTED EARNINGS (LOSS) PER SHARE |
||||||||
|
Net income (loss) |
$ | 1,749 | $ | (15,629 |
) |
|||
|
Weighted average shares outstanding |
||||||||
|
Basic |
26,032 | 25,791 | ||||||
|
Effect of dilutive securities (b): |
||||||||
|
Impact of common shares to be issued under stock option plans, and contingently issuable shares, if any |
333 | -- | ||||||
|
Weighted average shares outstanding (c) |
26,365 | 25,791 | ||||||
|
Diluted earnings (loss) per share |
$ | 0.07 | $ | (0.61 |
) |
|||
|
(a) |
Includes shares accounted for like treasury stock. |
|
(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 3,146,466 common shares and 3,791,936 common shares at September 30, 2018 and 2017, respectively, were not included in the computation of the three month period for diluted earnings (loss) per share, respectively, because the exercise price was greater than the average fair market value of the common shares. For the three months ended September 30, 2017, the effect of dilutive securities was not included in the calculation of diluted earnings (loss) per share because there was a net operating loss for the period. |
NOTE 5 - INVENTORIES
The following information is provided as of the dates indicated:
|
September 30, |
June 30, |
|||||||
|
(In thousands) |
2018 |
2018 |
||||||
|
Inventories: |
||||||||
|
Raw materials |
$ | 33,131 | $ | 31,795 | ||||
|
Work-in-process |
1,937 | 3,833 | ||||||
|
Finished goods |
14,512 | 15,366 | ||||||
|
Total Inventories |
$ | 49,580 | $ | 50,994 | ||||
NOTE 6 - ACCRUED EXPENSES
The following information is provided as of the dates indicated:
|
September 30, |
June 30, |
|||||||
|
(In thousands) |
2018 |
2018 |
||||||
|
Accrued Expenses: |
||||||||
|
Compensation and benefits |
$ | 5,668 | $ | 9,394 | ||||
|
Customer prepayments |
1,865 | 1,070 | ||||||
|
Accrued sales commissions |
1,776 | 2,274 | ||||||
|
Accrued warranty |
7,095 | 6,876 | ||||||
|
Other accrued expenses |
5,545 | 4,658 | ||||||
|
Total Accrued Expenses |
$ | 21,949 | $ | 24,272 | ||||
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment. The Company may first assess qualitative factors in order to determine if goodwill and indefinite-lived intangible assets are impaired. If through the qualitative assessment it is determined that it is more likely than not that goodwill and indefinite-lived assets are not impaired, no further testing is required. If it is determined more likely than not that goodwill and indefinite-lived assets are impaired, or if the Company elects not to first assess qualitative factors, the Company’s impairment testing continues with the estimation of the fair value of the reporting unit using a combination of a market approach and an income (discounted cash flow) approach, at the reporting unit level. The estimation of the fair value of reporting unit requires significant management judgment with respect to revenue and expense growth rates, changes in working capital and the selection and use of an appropriate discount rate. The estimates of the fair value of reporting units are based on the best information available as of the date of the assessment. The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease an impairment charge. Company management uses its judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as adverse business conditions, economic factors and technological change or competitive activities may signal that an asset has become impaired.
The Company identified its reporting units in conjunction with its annual goodwill impairment testing. The Company has a total of three reporting units that contain goodwill. There are two reporting units within the Lighting Segment and one reporting unit within the Graphics Segment. The Company relies upon a number of factors, judgments and estimates when conducting its impairment testing including, but not limited to, the Company’s stock price, operating results, forecasts, anticipated future cash flows and marketplace data. There are inherent uncertainties related to these factors and judgments in applying them to the analysis of goodwill impairment.
The following table presents information about the Company's goodwill on the dates or for the periods indicated:
|
Goodwill |
||||||||||||
|
(In thousands) |
Lighting |
Graphics |
||||||||||
|
Segment |
Segment |
Total |
||||||||||
|
Balance as of June 30, 2018 |
||||||||||||
|
Goodwill |
$ | 94,564 | $ | 28,690 | $ | 123,254 | ||||||
|
Accumulated impairment losses |
(65,191 |
) |
(27,525 |
) |
(92,716 |
) |
||||||
|
Goodwill, net as of June 30, 2018 |
$ | 29,373 | $ | 1,165 | $ | 30,538 | ||||||
|
Balance as of September 30, 2018 |
||||||||||||
|
Goodwill |
$ | 94,564 | 28,690 | 123,254 | ||||||||
|
Accumulated impairment losses |
(65,191 |
) |
(27,525 |
) |
(92,716 |
) |
||||||
|
Goodwill, net as of September 30, 2018 |
$ | 29,373 | $ | 1,165 | $ | 30,538 | ||||||
The gross carrying amount and accumulated amortization by major other intangible asset class is as follows:
|
September 30, 2018 |
||||||||||||
|
Other Intangible Assets |
Gross |
|||||||||||
|
(In thousands) |
Carrying |
Accumulated |
Net |
|||||||||
|
Amount |
Amortization |
Amount |
||||||||||
|
Amortized Intangible Assets |
||||||||||||
|
Customer relationships |
$ | 35,563 | $ | 10,525 | $ | 25,038 | ||||||
|
Patents |
338 | 226 | 112 | |||||||||
|
LED technology firmware, software |
16,066 | 11,941 | 4,125 | |||||||||
|
Trade name |
2,658 | 637 | 2,021 | |||||||||
|
Total Amortized Intangible Assets |
54,625 | 23,329 | 31,296 | |||||||||
|
Indefinite-lived Intangible Assets |
||||||||||||
|
Trademarks and trade names |
3,422 | -- | 3,422 | |||||||||
|
Total Indefinite-lived Intangible Assets |
3,422 | -- | 3,422 | |||||||||
|
Total Other Intangible Assets |
$ | 58,047 | $ | 23,329 | $ | 34,718 | ||||||
|
June 30, 2018 |
||||||||||||
|
Other Intangible Assets |
Gross |
|||||||||||
|
(In thousands) |
Carrying |
Accumulated |
Net |
|||||||||
|
Amount |
Amortization |
Amount |
||||||||||
|
Amortized Intangible Assets |
||||||||||||
|
Customer relationships |
$ | 35,563 | $ | 10,011 | $ | 25,552 | ||||||
|
Patents |
338 | 217 | 121 | |||||||||
|
LED technology firmware, software |
16,066 | 11,801 | 4,265 | |||||||||
|
Trade name |
2,658 | 609 | 2,049 | |||||||||
|
Total Amortized Intangible Assets |
54,625 | 22,638 | 31,987 | |||||||||
|
Indefinite-lived Intangible Assets |
||||||||||||
|
Trademarks and trade names |
3,422 | -- | 3,422 | |||||||||
|
Total Indefinite-lived Intangible Assets |
3,422 | -- | 3,422 | |||||||||
|
Total Other Intangible Assets |
$ | 58,047 | $ | 22,638 | $ | 35,409 | ||||||
|
(In thousands) |
Amortization Expense of Other Intangible Assets |
|||||||
|
September 30, 2018 |
September 30, 2017 |
|||||||
|
Three Months Ended |
$ | 691 | $ | 690 | ||||
The Company expects to record annual amortization expense as follows:
NOTE 8 - REVOLVING LINE OF CREDIT
In February 2017, the Company amended its secured line of credit to a $100 million facility. The line of credit expires in the third quarter of fiscal 2022. Interest on the revolving line of credit is charged based upon an increment over the LIBOR rate as periodically determined, or at the bank’s base lending rate, at the Company’s option. The increment over the LIBOR borrowing rate, as periodically determined, fluctuates between 125 and 250 basis points depending upon the ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA”), as defined in the line of credit agreement. The increment over LIBOR borrowing rate will remain at 175 basis points for the next twelve months. The fee on the unused balance of the $100 million committed line of credit is 20 basis points. Under the terms of this line of credit, the Company has agreed to a negative pledge of real estate assets and is required to comply with financial covenants that limit the ratio of indebtedness to EBITDA and require a minimum fixed charge coverage ratio. As of September 30, 2018, there was $46.2 million borrowed against the line of credit, and $53.8 million was available as of that date. Based on the terms of the line of credit and the maturity date, the debt has been classified as long term.
The Company is in compliance with all of its loan covenants as of September 30, 2018.
NOTE 9 - CASH DIVIDENDS
The Company paid cash dividends of $1,296,000 and $1,286,000 in the three months ended September 30, 2018 and 2017, respectively. Dividends on restricted stock units in the amount of $31,553 and $29,106 were accrued as of September 30, 2018 and 2017, respectively. These dividends will be paid upon the vesting of the restricted stock units when shares are issued to the award recipients. In November 2018, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable November 27, 2018 to shareholders of record as of November 16, 2018. The indicated annual cash dividend rate is $0.20 per share.
NOTE 10 - EQUITY COMPENSATION
The Company’s equity compensation plan, the 2012 Stock Incentive Plan (“the 2012 Plan”), was approved by shareholders in November 2012. The 2012 Plan covers all of the Company’s full-time employees, outside directors and certain advisors and replaced all previous equity compensation plans. In November 2016, the Company’s shareholders approved an amendment to the 2012 Plan that added 1,600,000 shares to the plan and implemented the use of a fungible share ratio that consumes 2.5 available shares for every full value share awarded by the Company as stock compensation. The 2012 Plan allows for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted and unrestricted stock awards, performance stock units, and other stock-based awards. Stock option grants or stock awards made pursuant to the 2012 Plan are granted at fair market value at the date of option grant or stock award.
Stock option grants may be service-based or performance-based. Service-based options granted during fiscal year 2017 and prior fiscal years generally have a four year ratable vesting period beginning one year after the date of grant. Service-based options granted during fiscal year 2018 have a three year ratable vesting period beginning one year after the date of grant. The maximum exercise period of stock options granted under the 2012 Plan is ten years. Restricted Stock Units (RSUs) granted prior to fiscal year 2018 have a four year ratable vesting period. RSUs granted during fiscal year 2018 have a three year ratable vesting period. The RSUs are non-voting, but accrue cash dividends at the same per share rate as those cash dividends declared and paid on LSI’s common stock. If a stock option or RSU holder’s employment with the Company terminates by reason of death, disability or retirement, as defined in the Plan, the Plan generally provides for acceleration of vesting.
In the first quarter of fiscal 2019, the Company granted Performance Stock Units (PSUs). PSUs are full value awards and consume the pool of available shares at the fungible rate of 2.5 for every full share awarded. The vesting of the PSUs is subject to the achievement of Return on Net Assets (RONA) and EBITDA objectives over a three year performance cycle. If certain one year performance objectives are met, one-third of the PSU’s will vest and be released. If the one year performance objectives are not met, the entire PSU awards may be earned over the remaining three-year performance cycle.
The Company has a non-qualified deferred compensation plan providing for both Company contributions and participant deferrals of compensation. This plan is fully funded in a Rabbi Trust. All plan investments are in shares of common stock of the Company. The Company also awards its directors shares of common stock as part of their compensation. Stock compensation awards are made in the form of newly issued common shares of the Company.
In the first quarter of fiscal 2019, the Company granted 422,900 serviced-based stock options with an exercise price of $4.94 and 134,350 PSUs at a fair value of $4.94. In the first quarter of fiscal 2018, the Company granted 724,037 service-based and performance-based stock options with an exercise price of $5.92 and 91,490 Restricted Stock Units with a fair value of $5.92. Stock compensation expense was $551,000 and $984,000 in the first quarter of fiscal 2019 and 2018, respectively.
NOTE 1 1 - SUPPLEMENTAL CASH FLOW INFORMATION
|
(In thousands) |
Three Months Ended September 30 |
|||||||
|
2018 |
2017 |
|||||||
|
Cash payments: |
||||||||
|
Interest |
$ | 518 | $ | 382 | ||||
|
Income taxes |
$ | (39 | ) | $ | -- | |||
|
Non-cash investing and financing activities: |
||||||||
|
Issuance of common shares as compensation |
$ | 90 | $ | 78 | ||||
|
Issuance of common shares to fund deferred compensation plan |
$ | 127 | $ | 191 | ||||
NOTE 1 2 - 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. The Company does not disclose a range of potential loss because the likelihood of such a loss is remote. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations, cash flows or liquidity.
The Company may occasionally issue a standby letter of credit in favor of third parties. As of September 30, 2018, there were no such standby letters of credit issued.
NOTE 1 3 – SEVERANCE COSTS
The activity in the Company’s Accrued Severance Liability is as follows for the periods indicated:
|
Three |
Three |
Fiscal |
||||||||||
|
Months Ended |
Months Ended |
Year Ended |
||||||||||
|
(In thousands) |
September 30, |
September 30, |
June 30, |
|||||||||
|
2018 |
2017 |
2018 |
||||||||||
|
Balance at beginning of the period |
$ | 1,772 | $ | 235 | $ | 235 | ||||||
|
Accrual of expense |
-- | -- | 1,900 | |||||||||
|
Payments |
(197 |
) |
(159 |
) |
(363 |
) |
||||||
|
Adjustments |
-- | -- | — | |||||||||
|
Balance at end of the period |
$ | 1,575 | $ | 76 | $ | 1,772 | ||||||
On April 23, 2018, the Company’s Board of Directors announced the appointment of an interim Chief Executive Officer (CEO) and Chief Operating Officer in connection with the departure of Dennis Wells, the Company’s former CEO. The $1,772,000 severance liability reported as of June 30, 2018 represents the severance benefits Mr. Wells is entitled to receive under his employment agreement. Of the total $1,575,000 reported as of September 30, 2018, $590,000 has been classified as a current liability and will be paid out over the next twelve months. The remaining $985,000 has been classified as a long-term liability.
NOTE 1 4 – RESTRUCTURING COSTS
In the first quarter of fiscal 2018, management approved the closure of its 12,000 square foot leased facility in Hawthorne, California. The facility was used as a warehouse and for light assembly of light fixtures. The Company will move the light assembly to its Blue Ash, Ohio facility. The restructuring charges consist primarily of transportation costs to move inventory to Blue Ash, the impairment of equipment, costs to restore the leased facility, and severance benefits. The Company also incurred $435,000 related to the write-down of inventory which is not included in the table below. All restructuring costs are reported in cost of sales in the Lighting Segment.
The following table presents information about restructuring costs for the periods indicated:
|
Three |
Three |
|||||||
|
Months Ended |
Months Ended |
|||||||
|
(In thousands) |
September 30, |
September 30, |
||||||
|
2018 |
2017 |
|||||||
|
Severance benefits |
$ | 19 | $ | -- | ||||
|
Moving Costs |
53 | -- | ||||||
|
Impairment of fixed assets and accelerated depreciation |
43 | -- | ||||||
|
Facility Repairs |
40 | -- | ||||||
|
Total |
$ | 155 | $ | -- | ||||
The following table presents a roll forward of the beginning and ending liability balances related to the restructuring costs:
|
(In thousands) |
||||||||||||||||||||
|
Balance as of June 30, 2018 |
Restructuring Expense |
Payments |
Adjustments |
Balance as of September 30, 2018 |
||||||||||||||||
|
Severance and termination benefits |
$ | -- | $ | 19 | $ | -- | $ | -- | $ | 19 | ||||||||||
|
Other |
-- | 93 | 9 | -- | 84 | |||||||||||||||
|
Total |
$ | -- | $ | 112 | $ | 9 | $ | -- | $ | 103 | ||||||||||
NOTE 15 – INCOME TAXES
The Company's effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year's taxable income as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions. In the first quarter of fiscal 2018, a deferred tax asset of $10.7 million was created as a result of the impairment of goodwill in the Lighting reporting unit.
The Tax Cuts and Jobs Act (the “Act”) was signed into law in December 2017 and makes numerous changes to the Internal Revenue Code. Among other changes, the Act reduces the U.S. corporate income tax rate to 21% effective January 1, 2018. Because the Act became effective mid-way through the Company’s fiscal 2018 tax year, the Company had a U.S. statutory income tax rate of 34% in the first quarter of fiscal 2018, before the new tax law was enacted, and will have a 21% U.S statutory income tax rate for fiscal years 2019 and after.
|
Three Months Ended |
||||||||
|
September 30 |
||||||||
|
2018 |
2017 |
|||||||
|
Reconciliation to effective tax rate: |
||||||||
|
Provision for income taxes at the anticipated annual tax rate |
23.0 |
% |
33.7 |
% |
||||
|
Uncertain tax positions |
1.3 | (0.2 |
) |
|||||
|
Difference between deferred and current tax rate related to the impairment of goodwill |
-- | 4.8 | ||||||
|
Shared based compensation |
3.3 | -- | ||||||
|
Other |
-- | (0.3 |
) |
|||||
|
Effective tax rate |
27.6 |
% |
38.0 |
% |
||||
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company’s condensed consolidated financial statements, accompanying notes and the “Safe Harbor” Statement, each as appearing earlier in this report, should be referred to in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Net Sales by Business Segment
|
(In thousands) |
Three Months Ended |
|||||||
|
September 30 |
||||||||
|
2018 |
2017 |
|||||||
|
Lighting Segment |
$ | 61,432 | $ | 68,428 | ||||
|
Graphics Segment |
23,525 | 19,038 | ||||||
| $ | 84,957 | $ | 87,466 | |||||
Operating Income (Loss) by Business Segment
|
(In thousands) |
Three Months Ended |
|||||||
|
September 30 |
||||||||
|
2018 |
2017 |
|||||||
|
Lighting Segment |
$ | 3,850 | $ | (22,930 | ) | |||
|
Graphics Segment |
2,387 | 1,476 | ||||||
|
Corporate and Eliminations |
(3,303 | ) | (3,360 | ) | ||||
| $ | 2,934 | $ | (24,814 | ) | ||||
Summary Comments
Fiscal 2019 first quarter net sales of $84,957,000 decreased $2.5 million or 2.9% as compared to first quarter fiscal 2018. Net sales were favorably influenced by increased net sales of the Graphics Segment (up $4.5 million or 23.6%) more than offset by decreased net sales of the Lighting Segment (down $7.0 million or 10.2%).
Fiscal 2019 first quarter operating income of $2.9 million increased $27.7 million from an operating loss of $(24,814,000) in the first quarter of fiscal 2018. The $27.7 million change from an operating loss in fiscal 2018 to operating income in fiscal 2019 was mostly the result of a pre-tax $28 million goodwill impairment charge in the Lighting Segment in fiscal 2018. Adjusted fiscal 2019 operating income of $3.5 million (which reflects the removal of plant closure costs) increased 10.6% from adjusted fiscal 2018 operating income of $3.2 (which reflects the removal of the goodwill impairment). Refer to “Non-GAAP Financial Measures” below. The increase in adjusted operating income was the result of decreased net sales and decreased gross profit more than offset by a decrease in selling and administrative expenses. Also contributing to the period-over-period results is a one-time adjustment to the Company’s paid-time-off policy in fiscal 2019 which resulted in a favorable pre-tax adjustment to earnings of $1.2 million.
On October 29, 2018, The Company announced that it will permanently close its New Windsor, New York manufacturing facility. The facility manufactures indoor lighting products and is included in the results of the Lighting Segment. Production will be transferred to the Company’s Erlanger, Kentucky and Blue Ash, Ohio facilities, also included in the Lighting Segment. The New Windsor facility has a workforce of 140 employees. The closure is part of ongoing actions to align the Company’s supply chain to more cost effectively serve the changing requirements of the lighting market. The closure will also allow the Company to improve utilization of existing manufacturing capacity. The transfer of production is expected to be completed by June 30, 2019.
Non-GAAP Financial Measures
The Company believes it is appropriate to evaluate its performance after making adjustments to the as-reported U.S. GAAP operating income, net income, and earnings per share. Adjusted operating income, net income and earnings per share, which exclude the impact of goodwill impairment and restructuring and plant closure costs, are non-GAAP financial measures. We believe that these adjusted supplemental measures are useful in assessing the operating performance of our business. These supplemental measures are used by our management, including our chief operating decision maker, to evaluate business results. We exclude these items because they are not representative of the ongoing results of operations of our business. Below is a reconciliation of these non-GAAP measures to operating income, net income, and earnings per share for the periods indicated.
|
(in thousands, unaudited) |
||||||||
|
FY 2019 |
FY 2018 |
|||||||
|
Reconciliation of operating income to adjusted operating income: |
||||||||
|
Operating income (loss) as reported |
$ | 2,934 | $ | (24,814 |
) |
|||
|
Adjustment for goodwill impairment |
-- | 28,000 | ||||||
|
Adjustment for restructuring, plant closure costs, and related inventory write-downs |
590 | -- | ||||||
|
Adjusted operating income |
$ | 3,524 | $ | 3,186 | ||||
|
(in thousands, except per share data; unaudited) |
First Quarter |
|||||||||||||||||
|
FY 2019 |
Diluted EPS |
FY 2018 |
Diluted EPS |
|||||||||||||||
|
Reconciliation of net income to adjusted net income: |
||||||||||||||||||
|
Net income (loss) and earnings (loss) per share as reported |
$ | 1,749 | $ | 0.07 | $ | (15,629 |
) |
$ | (0.61 |
) |
||||||||
|
Adjustment for goodwill impairment, inclusive of the income tax effect |
-- | -- | 17,363 | (2) | $ | 0.67 | ||||||||||||
|
Adjustment for restructuring, plant closure costs, and related inventory write-downs inclusive of the income tax effect |
454 | (1) | 0.01 | -- | -- | |||||||||||||
|
Adjusted net income and earnings per share |
$ | 2,203 | $ | 0.08 | $ | 1,734 | $ | 0.07 | ||||||||||
The income tax effects of the adjustments in the tables above were calculated using the estimated U.S. effective income tax rates for the periods indicated. The income tax effects were as follows (in thousands):
(1) 136
(2) 10,637
Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 2018 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2017
Lighting Segment
|
(In thousands) |
Three Months Ended |
|||||||
|
September 30 |
||||||||
|
2018 |
2017 |
|||||||
|
Net Sales |
$ | 61,432 | $ | 68,428 | ||||
|
Gross Profit |
$ | 15,475 | $ | 18,673 | ||||
|
Operating Income (loss) |
$ | 3,850 | $ | (22,930 | ) | |||
Lighting Segment net sales of $61,432,000 in the first quarter of fiscal 2019 decreased 10.2% from fiscal 2018 same period net sales of $68,428,000. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $49.7 million in the first quarter of fiscal 2019 which represent 91% of total lighting product net sales. There continues to be a reduction in the Company’s traditional lighting sales (metal halide and fluorescent light sources) as customers convert from traditional lighting to light fixtures having solid-state LED technology .
Gross profit of $15,475,000 in the first quarter of fiscal 2019 decreased $3.2 million or 17.1% from the same period of fiscal 2018, and decreased from 27.0% to 25.0% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The Company incurred restructuring and plant closure costs that were recorded in cost of sales related to the closure of its Hawthorne, California facility of $590,000 in fiscal 2019 with no comparable costs in fiscal 2018. The remaining decrease in amount of gross profit is due to the effect of reduced sales volume, competitive pricing pressures, and inflationary pressures of certain commodities, partially offset by manufacturing efficiencies as a result of the Company’s lean initiatives.
Selling and administrative expenses of $11,625,000 in the first quarter of fiscal year 2019 decreased $30 million from the same period of fiscal 2018 selling and administrative expenses of $41,603,000, primarily due to the $28 million goodwill impairment charge in fiscal 2018. When the goodwill impairment charge is removed from fiscal 2018 results, there was a $2.0 million or 14.4% reduction in selling and administrative expenses. The reduction in selling and administrative expenses is mostly driven by lower commission expense which is due to lower sales volume and a reduction of wage and benefit expense.
The Lighting Segment first quarter fiscal 2019 operating income of $3,850,000 increased $26.8 million from an operating loss of $(22,930,000) in the same period of fiscal 2018 primarily due to a $28 million pre-tax goodwill impairment charge. When the impact of the goodwill charge is removed from fiscal 2018 results and the restructuring and plant closure costs of $590,000 are removed from the fiscal 2019 results, fiscal 2019 adjusted operating income of $4,440,000 was $630,000 lower than fiscal 2018 adjusted operating income of $5,070,000. The reduction in sales volume and gross profit was partially offset by lower selling and administrative expenses.
Graphics Segment
|
(In thousands) |
Three Months Ended |
|||||||
|
September 30 |
||||||||
|
2018 |
2017 |
|||||||
|
Net Sales |
$ | 23,525 | $ | 19,038 | ||||
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Gross Profit |
$ | 5,782 | $ | 5,063 | ||||
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Operating Income |
$ | 2,387 | $ | 1,476 | ||||
Graphics Segment net sales of $23,525,000 in the first quarter of fiscal 2019 increased $4.5 million or 23.6% from fiscal 2018 same period net sales of $19,038,000. Most of the increase in sales is from growth in sales to the Petroleum and Quick Service Restaurant markets including digital technology.
Gross profit of $5,782,000 in the first quarter of fiscal 2019 increased $0.7 million or 14.2% from the same period of fiscal 2018. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 26.6% in the first quarter of fiscal 2018 to 24.5% in the first quarter of fiscal 2019. The change in amount of gross profit is due to the net effect of increased net sales (customer plus inter-segment net sales) partially offset by a change in product mix. Also contributing to the year-over-year change in gross profit was a $0.6 million increase in overhead spending mostly driven by an increase in wage expense.
Selling and administrative expenses of $3,395,000 in the first quarter of fiscal 2019 decreased $0.2 million or 5.4% from the same period of fiscal 2018 primarily as a result of decreased wage and benefit expense.
The Graphics Segment first quarter fiscal 2019 operating income of $2,387,000 increased $0.9 million or 61.7% from operating income of $1,476,000 in the same period of fiscal 2018. The net increase of $0.9 million was primarily the net result of increased net sales, increased gross profit, decreased gross profit margin as a percentage of sales, and decreased selling and administrative expenses.
Corporate and Eliminations
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Three Months Ended |
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September 30 |
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2018 |
2017 |
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Gross Profit (Loss) |
$ | 4 | $ | (33 | ) | |||
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Operating (Loss) |
$ | (3,303 | ) | $ | (3,360 | ) | ||
The gross profit or loss relates to the elimination of intercompany profit in inventory.
Administrative expenses of $3,307,000 in the first quarter of fiscal 2019 decreased slightly from the same period of the prior year. The change is primarily the result of a decrease in employee compensation and benefit expense ($0.6 million) offset by an equal an increase in outside service expense ($0.4 million), and a net increase in various other expense categories ($0.2 million).
Consolidated Results
The Company reported $518,000 net interest expense in the first quarter of fiscal 2019 compared to $403,000 net interest expense in the first quarter of fiscal 2019. The change from interest expense from fiscal 2018 to fiscal 2019 is the result of higher interest rates on the Company’s line of credit and higher commitment fees on its unused portion of the line of credit.
The $667,000 income tax expense in the first quarter of fiscal 2019 represents a consolidated effective tax rate of 27.6% influenced by certain permanent book-tax differences and by an expense related to uncertain income tax positions. The $9,588,000 income tax benefit in the first quarter of fiscal 2018 represents a consolidated effective tax rate of 38% influenced by the goodwill impairment.
The Company reported a net income of $1,749,000 in the first quarter of fiscal 2019 compared to a net loss of $(15,629,000) in the same period of the prior year. The change between a net loss in fiscal 2018 to net income in fiscal 2019 is mostly driven by the $28 million pre-tax goodwill impairment charge in fiscal 2018 with no comparable event in fiscal 2019. When the impact of the fiscal 2018 goodwill impairment charge and the fiscal 2019 restructuring and plant costs are removed from the reported results, the fiscal 2019 adjusted net income of $2,203,000 increased $0.5 million or 27% from fiscal 2018 adjusted net income of $1,734,000. The change in adjusted net income is primarily the net result of decreased net sales, decreased gross profit, decreased selling and administrative expenses, increased interest expense, and a lower tax rate. Diluted earnings per share of $0.07 was reported in the first quarter of fiscal 2019 as compared to $(0.61) diluted loss per share in the same period of fiscal 2018. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first quarter of fiscal 2019 were 26,365,000 shares as compared to 25,791,000 shares in the same period last year.
Liquidity and Capital Resources
The Company considers its level of cash on hand, borrowing capacity, current ratio and working capital levels to be its most important measures of short-term liquidity. For long-term liquidity indicators, the Company believes its ratio of long-term debt to equity and its historical levels of net cash flows from operating activities to be the most important measures.
At September 30, 2018, the Company had working capital of $72.6 million, compared to $67.9 million at June 30, 2018. The ratio of current assets to current liabilities was 2.59 to 1 as compared to a ratio of 2.61 to 1 at June 30, 2018. The $4.7 million increase in working capital from June 30, 2018 to September 30, 2018 was primarily related to the net effect of increased cash and cash equivalents ($1.0 million), increased net accounts receivable ($9.2 million), decreased net inventory ($1.4 million), an increase in accrued expenses ($2.3 million), a decrease in refundable income taxes ($0.6 million), and an increase in accounts payable ($5.8 million). The $4.1 million of the increase in accounts receivable is the result of the adoption of the new revenue guidance. The Company has a strategy of aggressively managing working capital, including reduction of the accounts receivable days sales outstanding (DSO) and reduction of inventory levels, without reducing service to its customers.
The Company generated $2.2 million of cash from operating activities in the first quarter of fiscal 2019 as compared to a use of cash of $2.7 million in the same period of the prior year. This $4.9 million increase in net cash flows from operating activities is primarily the net result of an increase rather than a decrease in accounts payable (favorable change of $7.3 million), a smaller increase in net accounts receivable (favorable change of $1.2 million), an increase rather than a decrease in net inventory (unfavorable change of $4.2 million), a smaller decrease in refundable income taxes (favorable change of $0.2 million), an increase in customer prepayments (favorable change of $0.4 million), and an increase in net income in fiscal 2019 from a net loss in fiscal 2018 offset by several non-cash add-backs (favorable change of $0.4 million).
Net accounts receivable were $59.8 million and $50.6 million at September 30, 2018 and June 30, 2018, respectively. DSO increased to 59 days at September 30, 2018 from 53 days at June 30, 2018. The Company believes that its receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.
Net inventories of $49.6 million at September 30, 2018 decreased $1.4 million from $51.0 million at June 30, 2018. The decrease of $1.4 million is the result of a decrease in gross inventory of $0.9 million and an increase in obsolescence reserves of $0.5 million. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory increased 1.8 million in the first quarter of fiscal 2019 in the Graphics Segment which was more than offset by a decrease in net inventory in the Lighting Segment of $3.2 million.
Cash generated from operations and borrowing capacity under the Company’s line of credit is the Company’s primary source of liquidity. The Company has a secured $100 million revolving line of credit with its bank, with $46.1 million of the credit line available as of October 29, 2018. This line of credit is a $100 million five year credit line expiring in the third quarter of fiscal 2022. The Company believes that its $100 million line of credit plus cash flows from operating activities are adequate for the Company’s fiscal 2019 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.
The Company used cash of $0.7 million related to investing activities in the first quarter of fiscal 2019 as compared to a source of $1.0 million in the same period of the prior year, resulting in an unfavorable change of $1.7 million. Capital expenditures for the first quarter of fiscal 2019 increased $0.2 million to $0.6 million from the same period in fiscal 2018. The Company sold its Woonsocket manufacturing facility for $1.5 million in the first quarter of fiscal 2018 which contributed to the change in cash flow from investing activities from fiscal 2018 to fiscal 2019.
The Company used $0.6 million of cash related to financing activities in the first quarter of fiscal 2019 compared to a source of cash of $0.8 million in the first quarter of fiscal 2018. The $1.3 million unfavorable change in cash flow was the net result of borrowings in excess of payments of long term debt of $1.4 million.
The Company has, or could have, on its balance sheet 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.
Off-Balance Sheet Arrangements
The Company has no financial instruments with off-balance sheet risk and has no off-balance sheet arrangements, except for various operating leases. However, none of these operating leases, individually or in the aggregate have or are reasonably likely to have a current effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material.
Cash Dividends
In November 2018, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable November 27, 2018 to shareholders of record as of November 16, 2018. The indicated annual cash dividend rate for fiscal 2019 is $0.20 per share. The Board of Directors has adopted a policy regarding dividends which indicates that dividends will be determined by the Board of Directors in its discretion based upon its evaluation of earnings, cash flow requirements, financial condition, debt levels, stock repurchases, future business developments and opportunities, and other factors deemed relevant.
Critical Accounting Policies and Estimates
A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2018 Annual Report on Form 10-K.
New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases.” The amended guidance requires an entity to recognize assets and liabilities that arise from leases. The amended guidance is effective for financial statements issued for fiscal and interim periods within those years, beginning after December 15, 2018, or the Company’s fiscal 2020, with early adoption permitted. The Company has not yet determined the impact the amended guidance will have on its financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company’s exposure to market risk since June 30, 2017. Additional information can be found in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, which appears on page 13 of the Annual Report on Form 10-K for the fiscal year ended June 30, 2018.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as such term is defined Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
We conducted, under the supervision of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2018, our disclosure controls and procedures were effective. Management believes that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly presented in all material respects in accordance with GAAP for interim financial statements, and the Company’s Chief Executive Officer and Chief Financial Officer have certified that, based on their knowledge, the condensed consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for each of the periods presented in this report.
Changes in Internal Control
During the quarter ended September 30, 2018, the Company enacted additional controls related to the adoption of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, except as otherwise described in this Item 4.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
NONE
ITEM 6. EXHIBITS
Exhibits:
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32.1 |
Section 1350 Certification of Principal Executive Officer and Principal Financial Officer |
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
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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LSI Industries Inc. |
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By: |
/s/ James E. Galeese |
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James E. Galeese |
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Executive Vice President and Chief Financial Officer |
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(Principal Executive Officer and Principal Financial Officer) |
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Page 24
Exhibit 10.1
LSI INDUSTRIES INC.
NONQUALIFIED STOCK OPTION
AGREEMENT
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INDUCEMENT AWARDS
Summary of Nonqualified Stock Option Grant
LSI Industries Inc., an Ohio corporation (the " Company "), grants to the Grantee named below, in accordance with the terms of this Nonqualified Stock Option Agreement (the " Agreement "), an option to purchase shares of common stock (“ Shares ”) of the Company at an exercise price per share as described below:
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Name of Grantee: |
James A. Clark |
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Number of Underlying Shares: |
500,000 |
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Exercise Price Per Share: |
$4.40 |
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Grant Date: |
November 1, 2018 |
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Expiration Date: |
November 1, 2028 |
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Terms of Agreement
1. Grant of Nonqualified Stock Option. Subject to and upon the terms, conditions, and restrictions set forth in this Agreement, the Company hereby grants to the Grantee as of the Grant Date, an option to purchase Shares at the exercise price per share as set forth above (the “ Option ”). It is the intent of the Company and the Grantee that the Option will not qualify as an “incentive stock option” under Section 422 of the Internal Revenue Code of 1986, as amended from time to time. Even though the Option is not granted pursuant to the LSI Industries Inc. Amended and Restated 2012 Stock Incentive Plan, as of November 17, 2016 (the " Plan "), the terms and conditions of the Plan apply to the Option to the same extent as if the Option was awarded pursuant to the Plan, except that the authorized number of Shares provision under Section 5(a) of the Plan and the award limitation provisions under Section 5(c) of the Plan shall not apply to the Option. The applicable terms of the Plan are incorporated by reference in this Agreement. In the event that any provision of this Agreement is inconsistent with the terms of the Plan, the terms of this Agreement will control. The Grantee acknowledges and agrees that, in addition to continued employment as Chief Executive Officer by the Company, the grant of the Option is additional consideration for, and conditioned upon, Grantee’s execution and delivery of the Restrictive Covenant and Confidentiality Agreement attached hereto as Exhibit I (the “ RCCA ”). In the event the Company determines that the Grantee has breached any of the covenants or agreements set forth in the RCCA, in addition to any other remedy under the RCCA, the Company shall be entitled, at its option, to cancel and cause the forfeiture of any outstanding unexercised portion of the Option (whether vested or unvested) and any other outstanding awards under the Plan, by written notice to the Grantee.
2. Vesting of Option.
(a) Except as otherwise provided in this Agreement, the Option shall vest as follows: (i) 250,000 Shares shall vest in full on November 1, 2021 if Grantee is employed by the Company as the Company’s Chief Executive Officer on such date; (ii) 125,000 Shares shall vest upon (A) satisfaction of the condition that the Grantee shall be employed by the Company as the Company’s Chief Executive Officer on November 1, 2021 (the “ CE O Employment Condition ”) and (B) the closing price per share of the Company’s common stock on the NASDAQ Global Select Market at any time prior to the Expiration Date shall be equal to or greater than $9.50 per share; and (iii) 125,000 Shares shall vest upon (A) satisfaction of the CEO Employment Condition, and (B) the closing price per share of the Company’s common stock on the NASDAQ Global Select Market at any time prior to the Expiration Date shall be equal to or greater than $15.00 per share. The portion of the Option described in Section 2(a)(i) shall be referred to herein as the “ Time Portion .” The portion of the Option described in Sections 2(a)(ii) and 2 (a)(iii) shall be referred to herein as the “ Performance Portion .”
(b) The Time Portion of the Option (but not the Performance Portion of the Option) shall vest in full prior to the date or satisfaction of the conditions in Section 2(a)(i) if: (i) the Grantee satisfies the requirements for Retirement, as defined in the Plan, including separation from employment with the Company; (ii) the Company terminates Grantee’s employment with the Company without Cause (as defined in Grantee’s Employment Agreement with the Company dated October 16, 2018 (the “ Employment Agreement ”); or (iii) Grantee terminates his employment with the Company for Good Reason (as defined in the Employment Agreement). The Time Portion of the Option shall be exercisable for ninety (90) days following the occurrence of the conditions described in this Section 2(b) or the remaining term of the Option, if shorter.
(c) The Time Portion of the Option (but not the Performance Portion of the Option) shall vest in full prior to the date or satisfaction of the conditions in Section 2(a)(i), Section 2(a)(ii) and Section 2(a)(iii) upon the occurrence of any of the following: (i) the Grantee dies while in the employ of the Company; (ii) the Grantee has a Disability, as defined in the Plan; or (iii) there is a Change in Control event described in Section 2(g) of the Plan. The Time Portion of the Option shall be exercisable for one year following the occurrence of the conditions described in Section 2(c)(i) and 2(c)(ii) or the remaining term of the Option, if shorter.
(d) The Committee may, in its sole discretion, accelerate the time at which the Option becomes vested and non-forfeitable to a time prior to the date or satisfaction of the conditions in Section 2(a) or to a time other than provided in Section 2(b) or Section 2(c)(i), (ii) or (iii) on such terms and conditions as it deems appropriate in accordance with the terms and conditions of the Plan.
3. Forfeiture of Option. Any portion of the Option that has not yet vested pursuant to Section 2 shall be forfeited automatically without further action or notice if the Grantee ceases to be employed by the Company for Cause (as defined in the Employment Agreement) or if such termination of employment is other than as provided in Section 2(b), 2(c) or 2(d) hereof. For the avoidance of doubt, except in connection with a Change of Control event described Section 2(g) of the Plan, the Performance Portion of the Option shall be forfeited automatically without further action or notice if the Grantee ceases to be employed by the Company at a time when neither of the per share closing price conditions set forth in Section 2(a)(ii) and Section 2(a)(iii) have been met.
4. Exercise and Payment.
(a) The Option granted under this Agreement shall be exercisable on the date or satisfaction of the conditions in Section 2(a). The Option granted under this Agreement may not be exercised as to less than one hundred (100) Shares at any time.
(b) The Option may be exercised for the number of Shares specified by Grantee’s delivery of instructions through and in accordance with the procedures maintained on behalf of the Company, accompanied by full payment in the manner and subject to the conditions set forth pursuant to the terms of the Plan for the number of Shares in respect of which it is exercised. If any applicable law or regulation requires the Company to take any action with respect to the Shares specified in such notice, or if any action remains to be taken under the Articles of Incorporation or Code of Regulations of the Company to effect due issuance of the Shares, then the Company shall take such action and the day for delivery of such stock shall be extended for the period necessary to take such action.
5. Transferability. The Option may not be transferred and shall not be subject in any manner to assignment, alienation, pledge, encumbrance or charge, unless otherwise provided under the Plan. Any purported transfer or encumbrance in violation of the provisions of this Section 5 shall be void, and the other party to any such purported transaction shall not obtain any rights to or interest in the Option.
6. Voting and Other Rights. The Grantee will not have any rights of a shareholder of the Company with respect to the Option until the delivery of the underlying Shares into which the Option is exercised.
7. Continuous Employment. Unless otherwise specified by the Plan, for purposes of this Agreement, the continuous employment of the Grantee with the Company shall not be deemed to have been interrupted, and the Grantee shall not be deemed to have ceased to be an employee of the Company, by reason of a leave of absence approved by the Committee.
8. No Employment Contract. Nothing contained in this Agreement shall confer upon the Grantee any right with respect to continuance of employment by the Company, nor limit or affect in any manner the right of the Company to terminate the employment or adjust the compensation of the Grantee.
9. Relation to Other Benefits. Any economic or other benefit to the Grantee under this Agreement or the Plan shall not be taken into account in determining any benefits to which the Grantee may be entitled under any profit-sharing, retirement, disability or other benefit or compensation plan maintained by the Company and shall not affect the amount of any life insurance coverage available to any beneficiary under any life insurance plan covering employees of the Company.
10. Taxes and Withholding. By his acceptance of this Agreement, the Grantee agrees to reimburse the Company for any taxes required by any government to be withheld or otherwise deducted and paid by the Company with respect to the issuance or disposition of the Shares subject to the Option. In lieu thereof, the Company shall have the right to withhold the amount of such taxes from any other sums due or to become due from the Company to the Grantee. The Company may, in its discretion, hold the stock certificate or certificates to which the Grantee is entitled upon the exercise of the Option as security for the payment of such withholding tax liability, until cash sufficient to pay that liability has been accumulated. In addition, at any time that the Company becomes subject to a withholding obligation under applicable law with respect to the exercise of the Option (the “ Tax Date ”), except as set forth below, the Grantee may elect to satisfy, in whole or in part, the Grantee’s related personal tax liabilities (an “ Election ”) by (a) directing the Company to withhold from the Shares issuable in the related exercise either a specified number of Shares or Shares having a specified value (in each case not in excess of the maximum required tax withholding amount), (b) tendering Shares previously issued pursuant to the exercise of an Award or other Shares owned by the Grantee or (c) combining any or all of the foregoing Elections in any fashion. An Election shall be irrevocable. The withheld Shares and other Shares tendered in payment shall be valued at their fair market value on the Tax Date. The Committee may disapprove of any Election, suspend or terminate the right to make Elections or provide that the right to make Elections shall not apply to particular Shares or exercises. The Committee may impose any additional conditions or restrictions on the right to make an Election as it shall deem appropriate, including any limitations necessary to comply with Section 16 of the Exchange Act.
11. Adjustments. The number and kind of Shares deliverable pursuant to the Option are subject to adjustment as provided in Section 8 of the Plan.
12. Compliance with Law. While the Company shall make reasonable efforts to comply with all applicable federal and state securities laws and listing requirements with respect to the Shares that may be delivered pursuant hereto, the Company shall not be obligated to deliver any Shares pursuant to this Agreement if the delivery thereof would result in a violation of any such law or listing requirement.
13. Amendments. Subject to the terms of the Plan, the Committee may modify this Agreement upon written notice to the Grantee. Any amendment to the Plan shall be deemed to be an amendment to this Agreement to the extent that the amendment is applicable hereto.
14. Severability. In the event that one or more of the provisions of this Agreement shall be invalidated for any reason by a court of competent jurisdiction, any provision so invalidated shall be deemed to be separable from the other provisions hereof, and the remaining provisions hereof shall continue to be valid and fully enforceable.
15. Relation to Plan and Employment Agreement. This Agreement is subject to the terms and conditions of the Plan as specified in Section 1. However, in the event that any provision of this Agreement is inconsistent with the terms of the Plan, the terms of this Agreement will control. Specifically, without limitation, Sections 2 and 3 of this Agreement shall supersede Section 10(a) of the Plan. This Agreement and the Plan contain the entire agreement and understanding of the parties with respect to the subject matter contained in this Agreement, and supersede all prior written or oral communications, representations and negotiations in respect thereto. For the avoidance of doubt, in the event of any inconsistency between the Employment Agreement and this Agreement, the terms of this Agreement shall govern. Capitalized terms used herein without definition shall have the meanings assigned to them in the Plan. The Committee acting pursuant to the Plan, as constituted from time to time, shall, except as expressly provided otherwise herein, have the right to determine any questions which arise in connection with the grant of the Option.
16. Successors and Assigns. Without limiting Section 5, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, administrators, heirs, legal representatives and assigns of the Grantee, and the successors and assigns of the Company.
17. No Advice Regarding Award. The Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding the acquisition or sale of the underlying securities. The Grantee is hereby advised to consult with the Grantee’s personal tax, legal or financial advisors regarding the decision to enter into this Agreement before taking any action related to this Agreement.
18. Governing Law.
(a) The interpretation, performance, and enforcement of this Agreement, including tort claims, shall be governed by the laws of the State of Ohio, without giving effect to the principles of conflict of laws thereof.
(b) Any party bringing a legal action or proceeding against another party arising out of or relating to this Agreement may bring the legal action or proceeding only in the United States District Court for the Southern District of Ohio and any of the courts of the State of Ohio, in each case sitting in Cincinnati, Ohio.
(c) Each of the Company and the Grantee waives, to the fullest extent permitted by law, (i) any objection which it may now or later have to the laying of venue of any legal action or proceeding arising out of or relating to this Agreement brought in any court of the State of Ohio sitting in Cincinnati, Ohio or the United States District Court for the Southern District of Ohio sitting in Cincinnati, Ohio, including, without limitation, a motion to dismiss on the grounds of forum non conveniens or lack of subject matter jurisdiction; and (ii) any claim that any action or proceeding brought in any such court has been brought in an inconvenient forum.
(d) Each of the Company and the Grantee submits to the exclusive jurisdiction (both personal and subject matter) of (i) the United States District Court for the Southern District of Ohio sitting in Cincinnati, Ohio and its appellate courts, and (ii) any court of the State of Ohio sitting in Cincinnati, Ohio and its appellate courts, for the purposes of all legal actions and proceedings arising out of or related to this Agreement.
19. Electronic Delivery. The Grantee hereby consents and agrees to electronic delivery of any documents that the Company may elect to deliver (including, but not limited to, prospectuses, prospectus supplements, grant or award notifications and agreements, account statements, annual and quarterly reports, and all other forms of communications) in connection with this Agreement. The Grantee understands that, unless earlier revoked by the Grantee by giving written notice to the Secretary of the Company, this consent shall be effective for the duration of the Agreement. The Grantee also understands that he or she shall have the right at any time to request that the Company deliver written copies of any and all materials referred to above at no charge. The Grantee hereby consents to any and all procedures the Company has established or may establish for an electronic signature system for delivery and acceptance of any such documents that the Company may elect to deliver, and agrees that his or her electronic signature is the same as, and shall have the same force and effect as, his or her manual signature. The Grantee consents and agrees that any such procedures and delivery may be affected by a third party engaged by the Company to provide administrative services related to the Plan. By accepting this award, Grantee acknowledges that a copy of the Plan, Plan Summary and Prospectus, and the Company's most recent Annual Report and Proxy Statement (the " Prospectus Information ") either have been received by Grantee or are available for viewing on the Company's intranet site or internet site at www.lsi-industries.com , and consents to receiving this Prospectus Information electronically, or, in the alternative, agrees to contact Debi Lauber at (513) 372-3008 to request a paper copy of the Prospectus Information at no charge. Grantee also represents that she or he is familiar with the terms and provisions of the Prospectus Information. These terms and conditions constitute a legal contract that will bind both Grantee and the Company as soon as Grantee accepts the Award as described above.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officer and the Grantee has also executed this Agreement, as of the Grant Date.
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LSI INDUSTRIES INC. |
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By: |
/S/ Howard E. Japlon |
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Name: Howard E. Japlon |
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Title: EVP, HR & Legal |
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GRANTEE |
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By: |
/S/ James A. Clark |
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Name: James A. Clark |
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Exhibit I
Restrictive Covenant and Confidentiality Agreement
- 7 -
Exhibit 10.2
RESTRICTIVE COVENANT and
confidentiality AGREEMENT
November 1, 2018
As a condition of my employment with LSI Industries Inc. (“ LSI ”), and in consideration of my employment with LSI and the inducement award of stock options by LSI to me, I, James A. Clark, agree to the following provisions of this Restrictive Covenant and Confidentiality Agreement concerning my employment with LSI (“ the Agreement ”):
1. AT-WILL EMPLOYMENT
I understand and acknowledge that my employment with LSI is for no specified term and constitutes “At Will” employment. I also understand that any representation to the contrary is unauthorized and not valid unless in writing and signed by the chief human resources officer of LSI. Accordingly, I acknowledge that my employment relationship may be terminated at any time, with or without good cause or for any or no cause, or for any reason or no reason at my option or at the option of LSI, with or without notice. I further acknowledge that LSI may modify job titles, salaries, and benefits from time to time as it deems appropriate or necessary.
2. CONFIDENTIALITY
A. “Confidential Information” means any data, information or material (whether in written, oral, graphic, electronic or other form) with respect to LSI’s past, current or anticipated business that is not generally known by the public or in the industry, including confidential or proprietary business information and trade secrets, whether or not such information is marked or otherwise designated as confidential or restricted. Confidential Information does not include any information that: (a) is or becomes part of the public domain or is or becomes publicly available without breach of this agreement by me; (b) I lawfully acquire from a source not under any non-use or confidentiality obligation regarding such information; (c) is disclosed to any third party by or with the permission of LSI without confidentiality restrictions; or, (d) is independently developed by a person who has not received, directly or indirectly, any Confidential Information from any source. Confidential Information does include, but is not limited to:
(i) Products and processes and their development and performance;
(ii) Any scientific, engineering, or technical information used during the course of my employment at LSI;
(iii) Computer software and firmware;
(iv) Business and financial information, including names of and contact information for customers, prospective customers and suppliers;
(v) Information relating to manufacturing, purchasing, sourcing, inventories, data processing, personnel, marketing, sales, pricing, costs and quotations; and
(vi) Information regarding third parties or provided by third parties and known to LSI which LSI is obligated by statute, regulation, license or other agreement not to disclose or to only use for limited purposes.
B. Nonuse and Nondisclosure . I agree that during and after my employment with LSI, I will hold in the strictest confidence, and take all reasonable precautions to prevent any unauthorized use or disclosure of Confidential Information, and I will not (i) use the Confidential Information for any purpose whatsoever other than for the benefit of LSI in the course of my employment, or (ii) disclose Confidential Information to any third party without the prior written authorization of my supervisor and in compliance with LSI policy regarding the transmittal of Confidential Information. Upon termination of my assignment, my employment, or as requested by my supervisor, I will promptly return all materials containing Confidential Information and copies thereof to LSI. If compelled to produce Confidential Information by applicable law, I shall provide prior written notice of at least seven business days to my supervisor. I agree that I obtain no license, copyright, title or any other ownership rights to any Confidential Information, and that as between LSI and me, LSI retains all Confidential Information as its sole property. I understand that my unauthorized use or disclosure of Confidential Information during my employment may lead to disciplinary action, up to and including immediate termination and legal action by LSI. I understand that my obligations under this section survive the termination of my employment.
C. Notice of Immunity from Liability for Confidential Disclosure of a Trade Secret to the Government or in a Court Filing . Notwithstanding anything herein to the contrary, pursuant to the Federal Defend Trade Secrets Act of 2016, an individual may not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that (A) is made (i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding if the individual files any document containing the trade secret under seal and does not disclose the trade secret except pursuant to court order. Nothing herein is intended, or should be construed, to affect the immunities created by the Defend Trade Secrets Act of 2016.
D. Former Employer . I agree that I will not, during my employment with LSI, improperly use or disclose any proprietary information of any former or concurrent employer or other person or entity, and that I will not bring onto the premises of LSI any unpublished document or proprietary information belonging to any such employer, person or entity unless consented to in writing by such employer, person or entity. I also represent and warrant that I am not subject to any agreements with any third person or entity that would limit or affect my ability to work for and on behalf of LSI; provided, however, that if I am subject to such an agreement, then I will strictly abide by such agreement.
3. NON-COMPETITION AND NON-SOLICITATION
In consideration for LSI’s agreement to employ and compensate me, and/or continue to employ and compensate me, and LSI’s granting of access to me to Confidential Information, and for other good and valuable consideration, the sufficiency of which I acknowledge, I agree as follows:
A. By virtue of my employment with LSI, I acquired Confidential Information, as defined by this Agreement, and but for my association with LSI, I would not have had access to the Confidential Information. The Confidential Information allows for LSI to have a competitive advantage. I acknowledge that if I disclose or use the Confidential Information, I will cause irreparable harm to LSI.
B. For purposes of this Agreement, the “Non-Compete and Non-Solicit Period” means a period of 12 months following the termination of my employment with LSI.
C. For purposes of this Agreement, “Competitor” means any person or entity with which LSI competes in the lighting and lighting controls industries (including but not limited to Acuity Brands, Eaton / Cooper Lighting, Hubbell Lighting, Philips Lighting, Cree, General Electric, H.E. Williams, Legrand, Leviton and Lutron) or graphics or digital signage industries (including but not limited to Federal Heath, YESCO, Blair, Everbrite, ICON, Vomeal, Miller Zell, Persona, Sign Resource, Stratacache, AVI, Whitlock, Diversified, Tech Innovations, CCS, HB Comm, Sicom and Four Winds) and each of their affiliates, subsidiaries and related businesses operating in such industries.
D. For purposes of this Agreement, “Customer” means any person or entity with which LSI has an ongoing business relationship or a prospective business relationship for the 12 months prior to the date of this Agreement, including vendors, representatives or suppliers.
E. For purposes of this Agreement, “Competitive Activity” means directly or indirectly, individually or in combination with others, engaging in any one or more of the following acts:
(i) accepting employment with a Competitor;
(ii) calling on, contacting, communicating with, or soliciting any Customer for the purpose of inducing them to divert their business to another entity or business;
(iii) interfering with any contract or other agreement that LSI may now or hereafter have, including, that would or could in any way be injurious or detrimental to LSI’s image, business relationships or its business; or
(iv) encouraging or soliciting any of LSI’s employees or agents to terminate or modify their relationships with LSI or hiring or engaging such persons for any purpose whatsoever. I acknowledge that this covenant is necessary to enable LSI to maintain a stable workforce.
F. I agree to refrain from directly or indirectly engaging in any Competitive Activity, including assisting another to engage in any Competitive Activity, at all times during my employment with LSI and during the Non-Compete and Non-Solicit Period.
G. Recognizing that irreparable injury will result to LSI, its business and property if I were to breach any of the foregoing covenants or my obligations as set forth in this Agreement, I agree that in the event of any such breach or threatened breach, LSI is entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation or continued violation of this Agreement by me. In the event any provision, restriction or part of this section of the Agreement shall be invalidated, the remainder thereof shall nevertheless continue to be valid and fully enforceable.
H. I understand and agree that this agreement is in addition to and does not limit my obligations under any LSI policy, or any statute, regulation or common law, regarding the matters covered above. I understand that a breach or violation of this agreement could subject me to disciplinary action, including termination or legal action, or both. I further understand that nothing in this agreement prevents me from giving truthful testimony or otherwise complying with applicable legal requirements.
I. In the event any provision, restriction or part of this section of the Agreement shall be invalidated, the remainder thereof shall nevertheless continue to be valid and fully enforceable, and in the event any claims of any invalidity or unenforceability shall be predicated upon the temporal and/or geographic area covered thereby, it is expressly agreed that such provision shall thereby be deemed modified to the maximum geographic area and the maximum temporal duration.
4. INTELLECTUAL PROPERTY
I acknowledge and agree that all plans, designs, processes, research and development, original works of authorship, product know-how and show-how, methodologies, techniques, inventions, discoveries, improvements, modifications, derivative works, computer programs, computer hardware and software, including source code and object code, algorithms and any other intellectual property, whether or not subject to patent or copyright protection, relating to the LSI’s business are the sole and exclusive property of LSI (“ LSI Intellectual Property ”). I shall promptly disclose all LSI Intellectual Property that I make, create, author, originate, conceive, develop or reduce to practice, either alone or jointly with others, at any time during my employment with LSI, which are within or in any way related to the existing or contemplated scope of LSI’s business (all of which LSI Intellectual Property shall be deemed made during the employment relationship if made or conceived within twelve (12) months following termination of my employment). I shall assign, without additional consideration, and hereby irrevocably assign to LSI any and all rights, title and interest that I may have or acquire in LSI Intellectual Property and all patents, copyrights, trademarks and other rights associated therewith.
I shall cooperate with and assist LSI, as is reasonably required, to protect its interests in LSI Intellectual Property, including but not limited to executing and filing any document requested by the LSI if it deems necessary to apply for any patent, copyright, trademark or other proprietary right in any and all countries, or to convey any rights, title or interest therein to any of its nominees, successors or assigns. Notwithstanding anything herein to the contrary, nothing is intended to assign any of my rights titles or interests in or to any patents, copyrights or trademarks, or applications therefor that was developed entirely outside of the employment relationship with LSI, unless the patents, copyrights or trademarks, or applications therefor, or any other intellectual property: (i) relates to the business of LSI or to LSI’s actual or demonstrably anticipated research and development; or (ii) results from any work performed by me for LSI.
5. RETURN OF LSI MATERIALS
Upon separation from employment with LSI, on LSI’s earlier request during my employment, or at any time subsequent to my employment upon demand from LSI, I will immediately deliver to LSI, and will not keep in my possession, recreate, or deliver to anyone else, any and all LSI property, including, but not limited to, Confidential Information, all devices and equipment belonging to LSI (including computers, handheld electronic devices, telephone equipment, and other electronic devices), all tangible embodiments of the Inventions, all electronically stored information and passwords to access such property, LSI credit cards, records, data, notes, notebooks, reports, files, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, photographs, charts, any other documents and property, and reproductions of any of the foregoing items. I also consent to an exit interview to confirm my compliance with the terms of this Agreement.
6. NOTIFICATION OF NEW EMPLOYER
In the event that I leave the employ of LSI, I hereby grant consent to notification by LSI to my new employer about my rights and obligations under this Agreement. I also agree to disclose the existence and terms of this Agreement to any subsequent potential employer or principal who competes in any way with LSI for business, customers and/or employees no later than fourteen (14) days prior to the commencement of employment with that employer.
7. MISCELLANEOUS
A. Governing Law; Consent to Personal Jurisdiction . This Agreement will be governed by the laws of the State of Ohio without regard to Ohio conflicts of law rules that may result in the application of the laws of any jurisdiction other than Ohio. To the extent that any lawsuit is permitted under this Agreement, I hereby expressly consent to the personal and exclusive jurisdiction and venue of the state and federal courts located in Hamilton County, Ohio for any lawsuit filed against me by LSI.
B. Assignability . This Agreement will be binding upon my heirs, executors, assigns, administrators, and other legal representatives, and will be for the benefit of LSI, its successors, and its assigns. There are no intended third-party beneficiaries to this Agreement, except as may be expressly otherwise stated. Notwithstanding anything to the contrary herein, LSI may assign this Agreement and its rights and obligations under this Agreement to any successor to all or substantially all of LSI’s relevant assets, whether by merger, consolidation, reorganization, reincorporation, conversion, sale of assets, sale of membership interests, stock or other equity interests, or otherwise.
C. Entire Agreement . This Agreement sets forth the entire agreement and understanding between LSI and me with respect to the subject matter herein and supersedes all prior written and oral agreements, discussions, or representations between us, including, but not limited to, any representations made during my interview(s). I represent and warrant that I am not relying on any statement or representation not contained in this Agreement. Any subsequent change or changes in my duties, salary, or compensation will not affect the validity or scope of this Agreement.
D. Headings . Headings are used in this Agreement for reference only and shall not be considered when interpreting this Agreement.
E. Severability . If a court or other body of competent jurisdiction finds, or the Parties mutually believe, any provision of this Agreement, or portion thereof, to be invalid or unenforceable, such provision will be enforced to the maximum extent permissible so as to affect the intent of the Parties, and the remainder of this Agreement will continue in full force and effect.
F. Modification, Waiver . No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in a writing signed by a manager or officer of LSI and me. Waiver by LSI of a particular breach of any provision of this Agreement will not operate as a waiver of any other provision or subsequent breach.
G. Survivorship . The rights and obligations of the parties to this Agreement will survive termination of my employment with LSI.
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/s/ James A. Clark |
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James A. Clark |
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November 1, 2018 | ||
| LSI INDUSTRIES INC. | |||
| /s/ Howard E. Japlon | |||
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Signature |
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| Howard E. Japlon | |||
| EVP, Human Resources & General Counsel | |||
| November 1, 2018 |
6
EXHIBIT 31. 1
Certification of Principal Executive Officer and Principal Financial Officer
Pursuant to Rule 13a-14(a)
I, James E. Galeese, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LSI Industries Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: November 7, 2018 |
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/s/ James E. Galeese |
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Principal Executive Officer and |
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Principal Financial Officer |
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Exhibit 32.1
CERTIFICATION OF JAMES E. GALEESE
Pursuant to Section 1350 of Chapter 63 of the
United States Code and Rule 13a-14b
In connection with the filing with the Securities and Exchange Commission of the Quarterly Report of LSI Industries Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2018 (the “Report”), I, James E. Galeese, Principal Executive Officer and Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
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The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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/s/ James E. Galeese |
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James E. Galeese |
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Executive Vice President and Chief Financial Officer |
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Date: November 7, 2018 |
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A signed original of this written statement required by Section 906 has been provided to LSI Industries Inc. and will be retained by LSI Industries Inc. and furnished to the Securities and Exchange Commission or its staff upon request.