UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 MARCH 31, 2019 OR |
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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. |
(Exact name of registrant as specified in its charter) |
Ohio |
31-0888951 |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
10000 Alliance Road, Cincinnati, Ohio |
45242 |
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(Address of principal executive offices) |
(Zip Code) |
(513) 793-3200 |
Registrant’s telephone number, including area code) |
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 every Interactive Data File required to be submitted 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 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 [ ] |
Accelerated filer [ X ] |
Emerging growth company [ ] |
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Non-accelerated filer [ ] |
Smaller reporting company [ X ] |
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Common Stock, no par value |
LYTS |
NASDAQ Global Select Market |
As of April 30, 2019 there were 25,937,670 shares of the registrant's common stock, no par value per share, outstanding.
LSI INDUSTRIES INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 201 8
INDEX
PART I. Financial Information |
Begins on Page |
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ITEM 1. |
Financial Statements (Unaudited) |
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Condensed Consolidated Statements of Operations |
3 |
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Condensed Consolidated Balance Sheets |
4 |
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Condensed Consolidated Statements of Shareholders’ Equity | 6 | |||
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Condensed Consolidated Statements of Cash Flows |
7 |
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Notes to Condensed Consolidated Financial Statements |
8 |
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ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
19 |
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ITEM 3. |
Quantitative and Qualitative Disclosures About Market Risk |
27 |
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ITEM 4. |
Controls and Procedures |
27 |
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PART II. Other Information |
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ITEM 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
28 |
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ITEM 5. |
Other Information | 28 |
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ITEM 6. |
Exhibits |
28 |
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Signatures |
29 |
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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,” “targets,” “hopes,” “projects,” “plans,” “expects,” “intends,” “believes,” “seeks,” “may,” “will,” “see,” “should” and similar expressions and the negative versions of those words, 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. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to differ materially from those expressed or implied. Forward-looking statements include statements that address activities, events or developments that LSI expects, believes or anticipates will or may occur in the future, such as earnings estimates (including projections and guidance), other predictions of financial performance. Forward-looking statements are based on LSI’s experience and perception of current conditions, trends, expected future developments and other factors it believes are appropriate under the circumstances and are subject to numerous risks and uncertainties, many of which are beyond LSI’s control. These risks and uncertainties include, but are not limited to the following: the impact of competitive products and services; product and pricing demands, and market acceptance risks; potential costs associated with litigation and regulatory compliance; LSI’s ability to develop, produce and market quality products that meet customers’ needs; additional restructuring costs or a failure to realize anticipated savings or benefits from past or future cost reduction actions; failure to realize all of the anticipated benefits from initiatives to increase our productivity, efficiency and cash flow and to reduce costs; inventory management decisions and sourcing practices; compliance with financial and other restrictive covenants in debt agreements; information technology security threats and computer crime; 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; failure of an acquisition or acquired company to achieve its plans or objectives generally; unexpected difficulties in integrating acquired businesses; the ability to retain key employees, including key employees of acquired businesses; unfavorable economic and market conditions; the results of asset impairment assessments; the ability to maintain an effective system of internal control over financial reporting; the ability to remediate any material weakness in internal control over financial reporting; and the other risk factors LSI describes from time to time in SEC filings, such as reliance on third party manufacturers and suppliers, litigation or other proceedings, government regulation, and stock price volatility. You are cautioned to not place undue reliance on these forward-looking statements. LSI does not guarantee any forward-looking statement, and actual results may differ materially from those projected. In addition to the factors described in this paragraph, the risk factors identified in our Form 10-K and other filings LSI may make with the SEC constitute risks and uncertainties that may affect the financial performance of the Company and are incorporated herein by reference. LSI 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)
Three Months Ended |
Nine Months Ended |
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March 31 |
March 31 |
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(In thousands, except per share data) |
2019 |
2018 |
2019 |
2018 |
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Net sales |
$ | 72,832 | $ | 78,843 | $ | 247,330 | $ | 258,614 | ||||||||
Cost of products and services sold |
57,180 | 58,925 | 190,207 | 189,686 | ||||||||||||
Restructuring costs |
261 | -- | 792 | -- | ||||||||||||
Severance costs |
54 | -- | 77 | -- | ||||||||||||
Gross profit |
15,337 | 19,918 | 56,254 | 68,928 | ||||||||||||
Selling and administrative expenses |
17,515 | 19,175 | 54,990 | 60,452 | ||||||||||||
Impairment of goodwill |
-- | -- | 20,165 | 28,000 | ||||||||||||
Severance (gain) costs |
(12 |
) |
-- | 457 | -- | |||||||||||
Transition and realignment costs |
-- | -- | 120 | -- | ||||||||||||
Restructuring costs |
107 | -- | 132 | -- | ||||||||||||
Operating (loss) income |
(2,273 |
) |
743 | (19,610 |
) |
(19,524 |
) |
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Interest (income) |
(6 |
) |
(8 |
) |
(37 |
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(24 |
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Interest expense |
585 | 408 | 1,749 | 1,244 | ||||||||||||
Other expense |
183 | -- | 183 | -- | ||||||||||||
(Loss) income before income taxes |
(3,035 |
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343 | (21,505 |
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(20,744 |
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Income tax expense (benefit) |
133 | 123 | (4,304 |
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(3,867 |
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Net (loss) income |
$ | (3,168 |
) |
$ | 220 | $ | (17,201 |
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$ | (16,877 |
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(Loss) Earnings per common share (see Note 4) |
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Basic |
$ | (0.12 |
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$ | 0.01 | $ | (0.66 |
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$ | (0.65 |
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Diluted |
$ | (0.12 |
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$ | 0.01 | $ | (0.66 |
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$ | (0.65 |
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Weighted average common shares outstanding |
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Basic |
26,132 | 25,875 | 26,083 | 25,835 | ||||||||||||
Diluted |
26,132 | 26,437 | 26,083 | 25,835 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except shares) |
March 31, |
June 30, |
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2019 |
2018 |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
$ | 1,686 | $ | 3,178 | ||||
Accounts receivable, less allowance for doubtful accounts of $568 and $409, respectively |
52,137 | 50,609 | ||||||
Inventories |
51,621 | 50,994 | ||||||
Refundable income tax |
1,461 | 1,784 | ||||||
Other current assets |
4,155 | 3,516 | ||||||
Total current assets |
111,060 | 110,081 | ||||||
Property, Plant and Equipment, at cost |
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Land |
6,770 | 6,470 | ||||||
Buildings |
35,618 | 35,961 | ||||||
Machinery and equipment |
76,677 | 77,108 | ||||||
Construction in progress |
1,311 | 1,340 | ||||||
120,376 | 120,879 | |||||||
Less accumulated depreciation |
(80,258 |
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(77,176 |
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Net property, plant and equipment |
40,118 | 43,703 | ||||||
Goodwill |
10,373 | 30,538 | ||||||
Other Intangible Assets, net |
33,337 | 35,409 | ||||||
Other Long-Term Assets, net |
13,807 | 9,786 | ||||||
Total assets |
$ | 208,695 | $ | 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)
March 31, |
June 30, |
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(In thousands, except share s ) |
2019 |
2018 |
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LIABILITIES & SHAREHOLDERS’ EQUITY |
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Current Liabilities |
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Accounts payable |
$ | 20,631 | $ | 17,927 | ||||
Accrued expenses |
22,169 | 24,272 | ||||||
Total current liabilities |
42,800 | 42,199 | ||||||
Long-Term Debt |
43,812 | 45,360 | ||||||
Other Long-Term Liabilities |
1,844 | 2,707 | ||||||
Commitments and Contingencies (Note 11) |
-- | -- | ||||||
Shareholders’ Equity |
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Preferred shares, without par value; Authorized 1,000,000 shares, none issued |
-- | -- | ||||||
Common shares, without par value; Authorized 40,000,000 shares; Outstanding 25,894,306 and 25,641,913 shares, respectively |
125,577 | 124,104 | ||||||
Treasury shares, without par value |
(1,629 |
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(2,110 |
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Deferred compensation plan |
1,659 | 2,133 | ||||||
Retained (loss) earnings |
(5,368 |
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15,124 | |||||
Total shareholders’ equity |
120,239 | 139,251 | ||||||
Total liabilities & shareholders’ equity |
$ | 208,695 | $ | 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 SHAREHOLDERS’ EQUITY
(Unaudited)
(In thousands, except per share data)
Common Shares | Treasury Shares |
Deferred Compensation |
Retained |
Total |
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Number of Shares |
Amount |
Number of Shares |
Amount |
Plan Amount |
(Loss) Earnings |
Shareholders' Equity |
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Balance at June 30, 2017 |
25,687 | $ | 120,059 | (258 |
) |
$ | (2,457 |
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$ | 2,657 | $ | 39,819 | $ | 160,078 | ||||||||||||||
Net (loss) |
— | — | — | — | — | (16,877 |
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(16,877 |
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Stock compensation awards |
31 | 234 | — | — | — | — | 234 | |||||||||||||||||||||
Restricted stock units issued |
39 | — | — | — | — | — | — | |||||||||||||||||||||
Shares issued for deferred compensation |
54 | 354 | — | — | — | — | 354 | |||||||||||||||||||||
Activity of treasury shares, net |
— | — | 28 | 412 | — | — | 412 | |||||||||||||||||||||
Deferred stock compensation |
— | — | — | — | (543 |
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— | (543 |
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Stock-based compensation expense |
— | 1,754 | — | — | — | — | 1,754 | |||||||||||||||||||||
Stock options exercised, net |
43 | 262 | — | — | — | — | 262 | |||||||||||||||||||||
Dividends — $0.20 per share |
— | — | — | — | — | (3,845 |
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(3,845 |
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Balance at March 31, 2018 |
25,854 | $ | 122,663 | (230 |
) |
$ | (2,045 |
) |
$ | 2,114 | $ | 19,097 | $ | 141,829 | ||||||||||||||
Balance at June 30, 2018 |
25,884 | $ | 124,104 | (242 |
) |
$ | (2,110 |
) |
$ | 2,133 | $ | 15,124 | $ | 139,251 | ||||||||||||||
Net (loss) |
— | — | — | — | — | (17,201 |
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(17,201 |
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Stock compensation awards |
70 | 265 | — | — | — | — | 265 | |||||||||||||||||||||
Restricted stock units issued |
98 | — | — | — | — | — | — | |||||||||||||||||||||
Shares issued for deferred compensation |
65 | 257 | — | — | — | — | 257 | |||||||||||||||||||||
Activity of treasury shares, net |
— | — | 19 | 481 | — | — | 481 | |||||||||||||||||||||
Deferred stock compensation |
— | — | — | — | (474 |
) |
— | (474 |
) |
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Stock-based compensation expense |
— | 951 | — | — | — | — | 951 | |||||||||||||||||||||
Dividends — $0.20 per share |
— | — | — | — | — | (3,882 |
) |
(3,882 |
) |
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Cumulative effect of adoption of accounting guidance (Note 2) | — | — | — | — | — | 591 | 591 | |||||||||||||||||||||
Balance at March 31, 2019 |
26,117 | $ | 125,577 | (223 |
) |
$ | (1,629 |
) |
$ | 1,659 | $ | (5,368 |
) |
$ | 120,239 |
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)
(In thousands) |
Nine Months Ended |
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March 31 |
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2019 |
2018 |
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Cash Flows from Operating Activities |
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Net (loss) |
$ | (17,201 |
) |
$ | (16,877 |
) |
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Non-cash items included in net income |
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Depreciation and amortization |
7,787 | 7,640 | ||||||
Deferred income taxes |
(4,077 |
) |
(5,650 |
) |
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Impairment of goodwill |
20,165 | 28,000 | ||||||
Deferred compensation plan |
264 | 332 | ||||||
Stock compensation expense |
951 | 1,754 | ||||||
Issuance of common shares as compensation |
265 | 234 | ||||||
Gain on disposition of fixed assets |
(22 |
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(28 |
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Allowance for doubtful accounts |
505 | 144 | ||||||
Inventory obsolescence reserve |
2,574 | 1,762 | ||||||
Changes in certain assets and liabilities: |
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Accounts receivable |
2,902 | (793 |
) |
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Inventories |
(7,368 |
) |
(3,441 |
) |
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Refundable income taxes |
323 | 435 | ||||||
Accounts payable |
2,705 | (3,077 |
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Accrued expenses and other |
(4,373 |
) |
(3,121 |
) |
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Customer prepayments |
985 | 575 | ||||||
Net cash flows provided by operating activities |
6,385 | 7,889 | ||||||
Cash Flows from Investing Activities |
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Purchases of property, plant and equipment |
(2,348 |
) |
(2,178 |
) |
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Proceeds from sale of fixed assets |
-- | 1,526 | ||||||
Net cash (used in) investing activities |
(2,348 |
) |
(652 |
) |
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Cash Flows from Financing Activities |
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Payments of long-term debt |
(89,489 |
) |
(77,817 |
) |
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Borrowings of long-term debt |
87,941 | 73,408 | ||||||
Cash dividends paid |
(3,882 |
) |
(3,845 |
) |
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Exercise of stock options |
-- | 262 | ||||||
Purchase of treasury shares |
-- | (107 |
) |
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Shares withheld for employee taxes |
(99 |
) |
(122 |
) |
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Net cash (used in) financing activities |
(5,529 |
) |
(8,221 |
) |
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Decrease in cash and cash equivalents |
(1,492 |
) |
(984 |
) |
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Cash and cash equivalents at beginning of period |
3,178 | 3,039 | ||||||
Cash and cash equivalents at end of period |
$ | 1,686 | $ | 2,055 |
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 March 31, 2019 the results of its operations for the three and nine month periods ended March 31, 2019 and 2018, and its cash flows for the nine month periods ended March 31, 2019 and 2018. 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
Consolidation:
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 branded print graphics |
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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 the Company believes 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.
Three Months Ended |
Nine Months Ended |
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( In thousands) |
March 31, 2019 |
March 31, 2019 |
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Lighting Segment |
Graphics Segment |
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 |
$ | 46,364 | $ | 10,339 | $ | 157,931 | $ | 42,790 | ||||||||
Products and services transferred over time |
6,421 | 9,708 | 19,940 | 26,669 | ||||||||||||
$ | 52,785 | $ | 20,047 | $ | 177,871 | $ | 69,459 | |||||||||
Type of Product and Services |
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Current technology products |
$ | 46,195 | $ | 4,427 | $ | 153,771 | $ | 9,178 | ||||||||
Legacy products |
6,133 | 11,160 | 22,156 | 45,346 | ||||||||||||
Turnkey services and other |
457 | 4,460 | 1,944 | 14,935 | ||||||||||||
$ | 52,785 | $ | 20,047 | $ | 177,871 | $ | 69,459 |
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
● |
The Company’s contracts with customers have an expected duration of one year or less, as such the Company applies the practical expedient to expense sales commissions as incurred, and have omitted disclosures on the amount of remaining performance obligations. |
● |
Shipping costs that are not material in context of the delivery of products are expensed as incurred. |
● |
The Company’s accounts receivable balance represents the Company’s unconditional right to receive payment from its customers with contracts. Payments are generally due within 30 to 90 days of completion of the performance obligation and invoicing, therefore, payments do not contain significant financing components. |
● |
The Company collects sales tax and other taxes concurrent with revenue-producing activities which 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. |
Foreign Exchange :
Assets and liabilities of foreign operations are translated using period end exchange rates. Revenue and expenses are translated using average exchange rates during each period reported.
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.
( In thousands) |
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 | ||||||
Inventories, net |
$ | 50,994 | $ | (4,167 |
) |
$ | 46,827 | |||||
Other long-term assets, net |
$ | 9,786 | $ | (177 |
) |
$ | 9,609 | |||||
Shareholders' 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 has an implementation team tasked with reviewing our lease obligations and determining the impact of the new standard to its financial statements. The Company will continue to evaluate the new standard’s impact to 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.
In April 2019, the Company announced that it entered into a definitive agreement to sell its manufacturing facility in New Windsor, New York. Under the terms of the agreement, the Company will receive approximately $12 million of gross proceeds related to the sale and expects to report a gain between $3 million to $5.5 million. The transaction is expected to close on or before June 30, 2019 subject to the final approval from the New Windsor town officials.
On April 9, 2019, Howard E. Japlon, Executive Vice President, Human Resources & General Counsel of LSI, notified LSI of his resignation from his position with LSI to pursue opportunities in the Chicago, Illinois area. Also, effective April 12, 2019 Jeffrey Croskey, Chief Commercial Officer, resigned from his position with LSI to pursue other opportunities.
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 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 services 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.
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 and nine months ended March 31, 2019 and 2018. There was no concentration of accounts receivable at March 31, 2019 or June 30, 2018.
Summarized financial information for the Company’s operating segments is provided for the indicated periods and as of March 31, 2019 and March 31, 2018:
Three Months Ended |
Nine Months Ended |
|||||||||||||||
( In thousands) |
March 31 |
March 31 |
||||||||||||||
2019 |
2018 |
2019 |
2018 |
|||||||||||||
Net Sales: |
||||||||||||||||
Lighting Segment |
$ | 52,785 | $ | 61,554 | $ | 177,871 | $ | 199,156 | ||||||||
Graphics Segment |
20,047 | 17,289 | 69,459 | 59,458 | ||||||||||||
$ | 72,832 | $ | 78,843 | $ | 247,330 | $ | 258,614 | |||||||||
Operating (Loss) Income : |
||||||||||||||||
Lighting Segment |
$ | 691 | $ | 2,982 | $ | (13,911 |
) |
$ | (14,673 |
) |
||||||
Graphics Segment |
(898 |
) |
415 | 2,350 | 4,146 | |||||||||||
Corporate and Eliminations |
(2,066 |
) |
(2,654 |
) |
(8,049 |
) |
(8,997 |
) |
||||||||
$ | (2,273 |
) |
$ | 743 | $ | (19,610 |
) |
$ | (19,524 |
) |
||||||
Capital Expenditures: |
||||||||||||||||
Lighting Segment |
$ | 769 | $ | 671 | $ | 1,633 | $ | 1,431 | ||||||||
Graphics Segment |
-- | 300 | 515 | 639 | ||||||||||||
Corporate and Eliminations |
-- | 17 | 200 | 108 | ||||||||||||
$ | 769 | $ | 988 | $ | 2,348 | $ | 2,178 | |||||||||
Depreciation and Amortization: |
||||||||||||||||
Lighting Segment |
$ | 1,925 | $ | 1,865 | $ | 5,867 | $ | 5,651 | ||||||||
Graphics Segment |
391 | 378 | 1,183 | 1,141 | ||||||||||||
Corporate and Eliminations |
236 | 273 | 737 | 848 | ||||||||||||
$ | 2,552 | $ | 2,516 | $ | 7,787 | $ | 7,640 |
March 31, 2019 |
June 30, 2018 |
|||||||
Identifiable Assets: |
||||||||
Lighting Segment |
$ | 143,729 | $ | 172,799 | ||||
Graphics Segment |
43,674 | 39,881 | ||||||
Corporate and Eliminations |
21,292 | 16,837 | ||||||
$ | 208,695 | $ | 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:
Three Months Ended |
Nine Months Ended |
|||||||||||||||
March 31 |
March 31 |
|||||||||||||||
(In thousands) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
Lighting Segment inter-segment net sales |
$ | 479 | $ | 443 | $ | 1,758 | $ | 2,150 | ||||||||
Graphics Segment inter-segment net sales |
$ | 96 | $ | 133 | $ | 171 | $ | 1,204 |
The Company’s operations are located solely within North America. As a result, the geographic distribution of the Company’s net sales and long-lived assets originate within North America.
NOTE 4 - EARNINGS PER COMMON SHARE
The following table presents the amounts used to compute basic and diluted earnings per common share, as well as the effect of dilutive potential common shares on weighted average shares outstanding (in thousands, except per share data):
Three Months Ended |
Nine Months Ended |
|||||||||||||||
March 31 |
March 31 |
|||||||||||||||
2019 |
2018 |
2019 |
2018 |
|||||||||||||
BASIC EARNINGS PER SHARE |
||||||||||||||||
Net (loss) income |
$ | (3,168 |
) |
$ | 220 | $ | (17,201 |
) |
$ | (16,877 |
) |
|||||
Weighted average shares outstanding during the period, net of treasury shares (a) |
25,893 | 25,581 | 25,828 | 25,546 | ||||||||||||
Weighted average vested restricted stock units outstanding |
33 | 49 | 40 | 44 | ||||||||||||
Weighted average shares outstanding in the Deferred Compensation Plan during the period |
206 | 245 | 215 | 245 | ||||||||||||
Weighted average shares outstanding |
26,132 | 25,875 | 26,083 | 25,835 | ||||||||||||
Basic (loss) earnings per share |
$ | (0.12 |
) |
$ | 0.01 | $ | (0.66 |
) |
$ | (0.65 |
) |
|||||
DILUTED EARNINGS PER SHARE |
||||||||||||||||
Net (loss) income |
$ | (3,168 |
) |
$ | 220 | $ | (17,201 |
) |
$ | (16,877 |
) |
|||||
Weighted average shares outstanding |
||||||||||||||||
Basic |
26,132 | 25,875 | 26,083 | 25,835 | ||||||||||||
Effect of dilutive securities (b): | ||||||||||||||||
Impact of common shares to be issued under stock option plans, and contingently issuable shares, if any |
-- | 562 | -- | -- | ||||||||||||
Weighted average shares outstanding (c) |
26,132 | 26,437 | 26,083 | 25,835 | ||||||||||||
Diluted (loss) earnings per share |
$ | (0.12 |
) |
$ | 0.01 | $ | (0.66 |
) |
$ | (0.65 |
) |
(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 3,787,519 common shares and 1,945,348 common shares for the three months ended March 31, 2019 and 2018, respectively, were not included in the computation of the three month diluted loss per share because the exercise price was greater than the average fair market value of the common shares. Additionally, options to purchase 3,702,031 common shares and 3,086,121 common shares for the nine months ended at March 31, 2019 and 2018, respectively, were not included in the computation of the nine month diluted loss per share because the exercise price was greater than the average fair market value of the common shares. For the three months ended in March 31, 2019 and the nine months ended March 31, 2019 and 2018, the effect of dilutive securities was not included in the calculation of diluted loss per share because there was a net loss for the period. |
NOTE 5 - INVENTORIES
The following information is provided as of the dates indicated:
March 31, |
June 30, |
|||||||
(In thousands) |
2019 |
2018 |
||||||
Inventories: |
||||||||
Raw materials |
$ | 32,669 | $ | 31,795 | ||||
Work-in-process |
2,363 | 3,833 | ||||||
Finished goods |
16,589 | 15,366 | ||||||
Total Inventories |
$ | 51,621 | $ | 50,994 |
NOTE 6 - ACCRUED EXPENSES
The following information is provided as of the dates indicated:
March 31, |
June 30, |
|||||||
(In thousands) |
2019 |
2018 |
||||||
Accrued Expenses: |
||||||||
Compensation and benefits |
$ | 4,756 | $ | 9,394 | ||||
Customer prepayments |
2,055 | 1,070 | ||||||
Accrued sales commissions |
2,176 | 2,274 | ||||||
Accrued warranty |
7,372 | 6,876 | ||||||
Other accrued expenses |
5,810 | 4,658 | ||||||
Total Accrued Expenses |
$ | 22,169 | $ | 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 fair value measurements of the reporting units are based on significant inputs not observable in the market and thus represent Level 3 measurements as defined by ASC 820 “Fair Value Measurements.” 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.
A sustained and significant decline in the Company’s stock price in the second quarter of fiscal 2019 led management to believe that a triggering event occurred and that an interim goodwill impairment test was required for one of the reporting units in the Lighting Segment that contains goodwill, as of December 31, 2018. In accordance with ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which was adopted in a prior period, the requirement to perform step 2 in the impairment test was not required. The result of the impairment test on the reporting unit in the Lighting Segment indicated that goodwill was impaired by $20,165,000. The Company will continue to monitor market conditions and other events that may result in a sustained and significant drop in its stock price which would require an interim goodwill impairment test.
The Company identified its reporting units in conjunction with its annual goodwill impairment testing. The Company has two reporting units that contain goodwill. There is one reporting unit 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.
As of March 1, 2019, the Company performed its annual goodwill impairment test on the two reporting units that contain goodwill. The preliminary goodwill impairment test on one reporting unit in the Lighting Segment passed with a business enterprise value that was $38.9 million or 54% above the carrying value of this reporting unit including goodwill. The preliminary goodwill impairment test of the reporting unit with goodwill in the Graphics Segment passed with an estimated business enterprise value that was $3.0 million or 297% above the carrying value of the reporting unit including goodwill. The definitive impairment test is expected to be completed in the fourth quarter of fiscal 2019. It is anticipated that the results of the test will not change when the test is complete.
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 | ||||||
Goodwill Impairment |
$ | (20,165 |
) |
$ | -- | $ | (20,165 | ) | ||||
Balance as of March 31, 2019 |
||||||||||||
Goodwill |
$ | 94,564 | $ | 28,690 | $ | 123,254 | ||||||
Accumulated impairment losses |
(85,356 |
) |
(27,525 |
) |
(112,881 |
) |
||||||
Goodwill, net as of March 31, 2019 |
$ | 9,208 | $ | 1,165 | $ | 10,373 |
The Company performed its annual review of indefinite-lived intangible assets as of March 1, 2019 and determined there was no impairment. The preliminary indefinite-lived intangible impairment test passed with a fair market value that was $19.2 million or 462% above its carrying value. The definitive indefinite-lived impairment test is expected to be completed in the fourth quarter of fiscal 2019. It is anticipated that the results of the test will not change when the test is complete.
The following table presents the gross carrying amount and accumulated amortization by each major asset class:
March 31, 2019 |
||||||||||||
Other Intangible Assets |
Gross |
|||||||||||
(In thousands) |
Carrying |
Accumulated |
Net |
|||||||||
Amount |
Amortization |
Amount |
||||||||||
Amortized Intangible Assets |
||||||||||||
Customer relationships |
$ | 35,563 | $ | 11,556 | $ | 24,007 | ||||||
Patents |
338 | 239 | 99 | |||||||||
LED technology firmware, software |
16,066 | 12,223 | 3,843 | |||||||||
Trade name |
2,658 | 692 | 1,966 | |||||||||
Total Amortized Intangible Assets |
54,625 | 24,710 | 29,915 | |||||||||
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 | $ | 24,710 | $ | 33,337 |
|
|
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 |
|
Amortization expense (in thousands) for intangible assets was $691 and $691 for the three months ended March 31, 2019 and 2018, respectively, and $2,071 and $2,071 for the nine months ended March 31, 2019 and 2018, respectively. Future amortization expense (in thousands) associated with these intangible assets is expected to be $2,761 in 2019, $2,687 in 2020, $2,682 in 2021, $2,460 in 2022, $2,412 in 2023, and $18,985 after 2023.
NOTE 8 - REVOLVING LINE OF CREDIT
In February 2019, the Company amended its secured line of credit to a $75 million facility from a $100 million facility in order to better match its financing needs with an appropriate borrowing capacity. 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 be 200 basis points for the fourth quarter of fiscal 2019. The fee on the unused balance of the $75 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 March 31, 2019, there was $43.8 million borrowed against the line of credit, and $31.2 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 March 31, 2019.
NOTE 9 - CASH DIVIDENDS
The Company paid cash dividends of $3,882,000 and $3,845,000 in the nine months ended March 31, 2019 and 2018, respectively. Dividends on restricted stock units in the amount of $40,798 and $44,946 were accrued as of March 31, 2019 and 2018, respectively. These dividends will be paid upon the vesting of the restricted stock units when shares are issued to the award recipients. In April 2019, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable May 14, 2019 to shareholders of record as of May 6, 2019. The indicated annual cash dividend rate is $0.20 per share.
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
(In thousands) |
Nine Months Ended March 31 |
|||||||
2019 |
2018 |
|||||||
Cash payments: |
||||||||
Interest |
$ | 1,669 | $ | 1,213 | ||||
Income taxes |
$ | 3 | $ | 1,556 | ||||
Non-cash investing and finance activities: |
||||||||
Issuance of common shares as compensation |
$ | 265 | $ | 234 | ||||
Issuance of common shares to fund deferred compensation plan |
$ | 257 | $ | 354 |
NOTE 1 1 - 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 March 31, 2019, there were no standby letter of credit agreements.
NOTE 1 2 – SEVERANCE COSTS
The Company recorded severance expense of $534,000 and $91,000 in the nine months ended March 31, 2019 and 2018, respectively. This severance expense was related to reductions in staffing not related to plant restructuring. See further discussion of restructuring expenses in Note 13.
The activity in the Company’s accrued severance liability is as follows for the periods indicated:
Nine |
Nine |
Fiscal |
||||||||||
Months Ended |
Months Ended |
Year Ended |
||||||||||
(In thousands) |
March 31, |
March 31, |
June 30, |
|||||||||
2019 |
2018 |
2018 |
||||||||||
Balance at beginning of the period |
$ | 1,772 | $ | 235 | $ | 235 | ||||||
Accrual of expense |
534 | 91 | 1,900 | |||||||||
Payments |
(956 |
) |
(312 |
) |
(363 |
) |
||||||
Adjustments |
-- | (14 |
) |
-- | ||||||||
Balance at end of the period |
$ | 1,350 | $ | -- | $ | 1,772 |
Of the total $1,350,000 severance reserve reported as of March 31, 2019, $644,000 has been classified as a current liability and will be paid out over the next twelve months. The remaining $706,000 has been classified as a long-term liability.
NOTE 1 3 – RESTRUCTURING COSTS
On October 29, 2018, the Company announced plans to close its lighting manufacturing facility in New Windsor, New York. 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 Company will move production to its other existing facilities. The closure will allow the Company to improve utilization of existing manufacturing capacity and will generate annual savings of approximately $4.0 million. The Company will record an estimated range of restructuring costs of $0.2 million to $0.6 million mostly next quarter and up until the time the facility is ultimately sold. Further, the Company has announced that it entered into a definitive agreement to sell the New Windsor, New York manufacturing facility for approximately $12 million in the fourth quarter which is expected to generate a book gain. The transfer of production is expected to be completed by June 30, 2019. As of March 31, 2019, the Company has incurred restructuring costs of $769,000 related to the closure of the New Windsor facility. The Company also incurred $919,000 of expense to write-down inventory which is not included in the tables below.
In the first quarter of fiscal 2019, 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 has moved 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. As of March 31, 2019, the Company has incurred restructuring costs of $155,000 related to the closure of the Hawthorne facility. The Company also incurred $148,000 of expense to write-down inventory which is a re-valuation of the previous estimate and which is not included in the tables below.
The following table presents information about restructuring costs for the periods indicated:
Three |
Nine Months |
Three |
Nine Months |
|||||||||||||
Months Ended |
Ended |
Months Ended |
Ended |
|||||||||||||
(In thousands) |
March 31, |
March 31, |
March 31, |
March 31, |
||||||||||||
2019 |
2019 |
2018 |
2018 |
|||||||||||||
Severance and other termination benefits |
$ | 263 | $ | 484 | $ | -- | $ | -- | ||||||||
Facility repairs |
52 | 99 | -- | -- | ||||||||||||
Impairment of fixed assets and accelerated depreciation |
-- | 228 | -- | -- | ||||||||||||
Other restructuring costs |
53 | 113 | -- | -- | ||||||||||||
Total |
$ | 368 | $ | 924 | $ | -- | $ | -- |
The following table presents restructuring costs incurred by line item in the consolidated statement of operations in which the costs are included:
Three Months Ended |
Nine Months Ended |
|||||||
(In thousands) |
March 31 |
March 31 |
||||||
2019 |
2019 |
|||||||
Cost of Goods Sold |
261 | 792 | ||||||
Operating Expenses |
107 | 132 | ||||||
Total |
368 | 924 |
Additionally, the above tables do not include expense of $1,067,000 recorded during the nine months ended March 31, 2019 related to the write-down of inventory included as cost of sales as part of facility closures.
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 March 31, 2019 |
||||||||||||||||
Severance and termination benefits |
$ | -- | $ | 484 | $ | (22 |
) |
$ | -- | $ | 462 | |||||||||
Facility Repairs |
-- | 99 | (62 |
) |
-- | 37 | ||||||||||||||
Other restructuring costs |
-- | 113 | (74 |
) |
-- | 39 | ||||||||||||||
Total |
$ | -- | $ | 696 | $ | (158 |
) |
$ | -- | $ | 538 |
The above table does not include fixed asset impairment and accelerated depreciation expense of $228,000 recorded in the first nine months of fiscal 2019.
Refer to Note 12 for information regarding additional severance expenses that are not included in the restructuring costs identified in this footnote.
NOTE 14 – 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. The Company has announced that it has entered into a definitive agreement to sell its New Windsor, New York facility. The closing of the sale is expected in the fourth quarter and is expected to generate a gain. This gain will be offset by a capital loss carryforward resulting in a tax benefit. This event was part of the calculation of the estimated annual income tax rate.
In the second quarter of fiscal 2019, a deferred tax asset of $4.8 million was created as a result of the impairment of goodwill in the Lighting reporting unit. 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 |
Nine Months Ended |
|||||||||||||||
March 31 |
March 31 |
|||||||||||||||
2019 |
2018 |
2019 |
2018 |
|||||||||||||
Reconciliation to effective tax rate: |
||||||||||||||||
Provision for income taxes at the anticipated annual tax rate |
(0.7 |
)% |
28.9 |
% |
13.6 | % | 28.9 |
% |
||||||||
Enactment of tax law changes |
-- | -- | -- | (22.8 |
) |
|||||||||||
Uncertain tax positions |
(0.1 |
) |
5.4 | 0.6 | 0.7 | |||||||||||
Difference between deferred and current tax rate related to the impairment of goodwill |
-- | -- | 6.7 | 12.3 | ||||||||||||
Other |
-- | -- | -- | -- | ||||||||||||
Tax impact related to share based compensation |
(3.6 |
) |
1.6 | (0.9 |
) |
(0.5 |
) |
|||||||||
Effective tax rate |
(4.4 |
)% |
35.9 |
% |
20.0 | % | 18.6 |
% |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company’s condensed consolidated financial statements, accompanying notes and the “Safe Harbor” Statement, each as appearing earlier in this report, should be referred to in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Net Sales by Business Segment |
||||||||||||||||
(In thousands) |
Three Months Ended |
Nine Months Ended |
||||||||||||||
March 31 |
March 31 |
|||||||||||||||
2019 |
2018 |
2019 |
2018 |
|||||||||||||
Lighting Segment |
$ | 52,785 | $ | 61,554 | $ | 177,871 | $ | 199,156 | ||||||||
Graphics Segment |
20,047 | 17,289 | 69,459 | 59,458 | ||||||||||||
$ | 72,832 | $ | 78,843 | $ | 247,330 | $ | 258,614 |
Summary Comments
We are in the business of designing, manufacturing and marketing lighting, graphics and technology solutions for both indoor and outdoor applications. Historically, sales of our products have been subject to cyclical variations caused by competitive pressures that affect selling prices, changes in general economic conditions, and other factors. Our operating results in the fiscal 2019 third quarter reflect the continued competitiveness in both our project and stock and flow markets, a shift in focus to pursue higher value-add customer opportunities, a mix of new larger customers, a shift in project mix, and pricing below prior year levels for the quarter driven by select price moves in key vertical markets. This combination of factors resulted in lower gross margins and operating earnings compared to prior year. The cyclical nature of our business could continue to adversely affect our liquidity and financial results.
Fiscal 2019 third quarter net sales of $72,832,000 decreased $6.0 million or 8% as compared to third quarter fiscal 2018 net sales of $78,843,000. Net sales were favorably influenced by increased net sales of the Graphics Segment (up $2.8 million or 16%) more than offset by decreased net sales of the Lighting Segment (down $8.8 million or 14%).
Fiscal 2019 first nine months net sales of $247,330,000 decreased $11.3 million or 4% as compared to first nine months fiscal 2018 net sales of $258,614,000. Net sales were favorably influenced by increased net sales of the Graphics Segment (up $10.0 million or 17%) more than offset by decreased net sales of the Lighting Segment (down $21.3 million or 11%).
Fiscal 2019 third quarter operating loss of $(2,273,000) represents a $3.0 million change from operating income of $0.7 million in the third quarter of fiscal 2018. The $3.0 million change from operating income in fiscal 2018 to an operating loss in fiscal 2019 was primarily the result of decreased net sales and decreased gross profit offset by a decrease in selling and administrative expenses.
Fiscal 2019 first nine months operating loss of $(19,610,000) represents a $0.1 million increase in operating loss from an operating loss of $(19,524,000) in the nine months of fiscal 2018. Both fiscal years recorded goodwill impairment charges in the Lighting Segment. There was a $20.2 million goodwill impairment charge in fiscal 2019 and a $28.0 million goodwill impairment charge in fiscal 2018. Adjusted operating income for the first nine months of fiscal 2019 of $3.2 million decreased $5.4 million from adjusted fiscal 2018 operating income of $8.6 million. Refer to “Non-GAAP Financial Measures” below. The decrease in adjusted operating income was the result of decreased net sales and decreased gross profit 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.
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, severance costs, the tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes, transition and re-alignment costs, 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) |
Third Quarter |
|||||||
FY 2019 |
FY 2018 |
|||||||
Reconciliation of operating (loss) income to adjusted operating income: |
||||||||
Operating (loss) income as reported |
$ | (2,273 |
) |
$ | 743 | |||
Adjustment for severance cost |
42 | 8 | ||||||
Adjustment for restructuring, plant closure costs, and related inventory write-downs |
368 | -- | ||||||
Adjusted operating (loss) income |
$ | (1,863 |
) |
$ | 751 |
(in thousands, except per share data; unaudited) |
Third Quarter |
|||||||||||||||
FY 2019 |
Diluted EPS |
FY 2018 |
Diluted EPS |
|||||||||||||
Reconciliation of net loss to adjusted net income: |
||||||||||||||||
Net (loss) income and (loss) income per share as reported |
$ | (3,168 |
) |
$ | (0.12 |
) |
$ | 220 | $ | 0.01 | ||||||
Adjustment for severance costs, inclusive of the income tax effect |
(14 |
) (1 ) |
-- | 6 | ( 4 ) | -- | ||||||||||
Tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes |
897 | (2 ) | 0.03 | -- | -- | |||||||||||
Tax impact from the reduction of the deferred tax assets |
-- | -- | -- | -- | ||||||||||||
Adjustment for restructuring, plant closure costs, and related inventory write-downs inclusive of the income tax effect |
115 | (3 ) | -- | -- | -- | |||||||||||
Adjusted net (loss) income and (loss) earnings per share |
$ | (2,170 |
) |
$ | (0.08 |
) |
$ | 226 | $ | 0.01 |
The reconciliation of reported earnings per share to adjusted earnings per share may not produce identical amounts due to rounding differences and due to the difference between basic and dilutive weighted average shares outstanding in the computation of earnings per share.
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) 56
(2) 0
(3) 253
(4) 2
(in thousands, unaudited) |
Nine Months |
|||||||
FY 2019 |
FY 2018 |
|||||||
Reconciliation of operating (loss) to adjusted operating income: |
||||||||
Operating (loss) as reported |
$ | (19,610 |
) |
$ | (19,524 |
) |
||
Adjustment for goodwill impairment |
20,165 | 28,000 | ||||||
Adjustment for severance costs |
534 | 91 | ||||||
Adjustment for transition and re-alignment costs |
120 | -- | ||||||
Adjustment for restructuring, plant closure costs, and related inventory write-downs |
1,991 | -- | ||||||
Adjusted operating income |
$ | 3,200 | $ | 8,567 |
(in thousands, except per share data; unaudited) |
|
Nine Months |
|
|||||||||||||
|
|
FY 2019 |
|
|
Diluted EPS |
|
|
FY 2018 |
|
|
Diluted EPS |
|
||||
Reconciliation of net loss to adjusted net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss per share as reported |
|
$ |
(17,201 |
) |
|
$ |
(0.66 |
) |
|
$ |
(16,877 |
) |
|
$ |
(0.65 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Adjustment for goodwill impairment, inclusive of the income tax effect |
|
|
15,361 |
(1) |
|
|
0.59 |
|
|
17,361 |
(6 ) |
|
|
0.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Adjustment for severance costs, inclusive of the income tax effect |
372 |
(2) |
0.01 |
67 |
(7 ) |
-- |
||||||||||
Adjustment for transition and re-alignment costs, inclusive of the income tax effect |
94 |
(3) |
-- |
-- |
-- |
|||||||||||
Tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes |
897 |
(4) |
0.03 |
|||||||||||||
Tax impact from the reduction of the deferred tax assets |
-- |
-- |
4,676 |
(8) |
0.18 |
|||||||||||
Adjustment for restructuring, plant closure costs, and related inventory write-downs inclusive of the income tax effect |
|
|
1,386 |
(5 ) |
|
|
0.05 |
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Adjusted net income and earnings per share |
|
$ |
908 |
|
$ |
0.03 |
|
$ |
5,227 |
|
|
$ |
0.20 |
|
The reconciliation of reported earnings per share to adjusted earnings per share may not produce identical amounts due to rounding differences and due to the difference between basic and dilutive weighted average shares outstanding in the computation of earnings per share.
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) 4,804
(2) 162
(3) 26
(4) 0
(5) 605
(6 ) 10,639
(7 ) 24
(8) 0
Results of Operations
THREE MONTHS ENDED MARCH 31, 2019 COMPARED TO THREE MONTHS ENDED MARCH 31, 201 8
Lighting Segment |
||||||||
(In thousands) |
Three Months Ended |
|||||||
March 31 |
||||||||
2019 |
2018 |
|||||||
Net Sales |
$ | 52,785 | $ | 61,554 | ||||
Gross Profit |
$ | 12,331 | $ | 15,944 | ||||
Operating Income |
$ | 691 | $ | 2,982 |
Lighting Segment net sales of $52,785,000 in the third quarter of fiscal 2019 decreased $8.8 million or 14% from fiscal 2018 same period net sales of $61,554,000. The 14% drop in sales is attributed to continued competitiveness in the Company’s project and stock and flow markets. The Company also elected not to run any quarter-end promotional programs in the third quarter of fiscal 2019 as compared to several promotional programs which were conducted at the end of the third quarter of fiscal 2018. In addition, the Company’s realignment of its sales organization and focus on market priorities were disruptive and contributed to the decline in third quarter sales.
Gross profit of $12,331,000 in the third quarter of fiscal 2019 decreased $3.6 million or 23% from the same period of fiscal 2018 and decreased from 25.7% to 23.2% 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 New Windsor, New York facility of $261,000 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 $11,640,000 in the third quarter of fiscal year 2019 decreased $1.3 million or 10% from the same period of fiscal 2018 selling and administrative expenses of $12,962,000. The reduction in selling and administrative expenses is driven by lower commission expense due to lower sales volume along with a reduction in spending to match lower sales.
The Lighting Segment third quarter fiscal 2019 operating income of $691,000 decreased $2.3 million from operating income of $2,982,000 in the same period of fiscal 2018 mostly due to the reduction in sales volume and gross profit partially offset by lower selling and administrative expenses.
Graphics Segment
Graphics Segment |
||||||||
(In thousands) |
Three Months Ended |
|||||||
March 31 |
||||||||
2019 |
2018 |
|||||||
Net Sales |
$ | 20,047 | $ | 17,289 | ||||
Gross Profit |
$ | 3,018 | $ | 3,977 | ||||
Operating (Loss) Income |
$ | (898 |
) |
$ | 415 |
Graphics Segment net sales of $20,047,000 in the third quarter of fiscal 2019 increased $2.7 million or 16% from fiscal 2018 same period net sales of $17,289,000. Most of the increase in sales is from growth in sales to the petroleum market.
Gross profit of $3,018,000 in the third quarter of fiscal 2019 decreased $1.0 million or 24% from the same period of fiscal 2018. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 22.8% in the third quarter of fiscal 2018 to 15.0% in the third quarter of fiscal 2019. The reduction in gross profit on higher sales is partially due to a mix shift to large customers in both the print and digital technology applications. These large projects including hundreds and potentially thousands of individual locations, with lengthy project life cycles, are competitive and initially generate lower margins. The business will work to improve the margins on these projects over their life cycle.
Selling and administrative expenses of $3,916,000 in the third quarter of fiscal 2019 increased $0.4 million or 10% from the same period of fiscal 2018 primarily as a result of an increase in outside service expense and bad debt expense.
The Graphics Segment third quarter fiscal 2019 operating loss of $(898,000) decreased $1.3 million from operating income of $415,000 in the same period of fiscal 2018. The decrease of $1.3 million was primarily the net result of a shift in customer mix on higher sales and an increase in selling and administrative expenses.
Corporate and Eliminations |
||||||||
(In thousands) |
Three Months Ended |
|||||||
March 31 |
||||||||
2019 |
2018 |
|||||||
Gross (Loss) |
$ | (12 |
) |
$ | (3 |
) |
||
Operating (Loss) |
$ | (2,066 |
) |
$ | (2,654 |
) |
The gross (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $2,054,000 in the third quarter of fiscal 2019 decreased $0.6 million or 23% from the same period of the prior year. The change is primarily the result of a reduction in both outside service expense and research and development expense.
Consolidated Results
The Company reported $579,000 net interest expense in the third quarter of fiscal 2019 compared to $400,000 net interest expense in the third quarter of fiscal 2018. The change in interest expense from fiscal 2018 to fiscal 2019 is the result of higher interest rates on the Company’s line of credit. The Company also recorded other expense of $183,000 in the third quarter related to net foreign currency transaction losses from transactions with its customers and suppliers through its Mexican subsidiary.
The $133,000 income tax expense in the third quarter of fiscal 2019 compared to a pre-tax loss is the result of a cumulative change to the Company’s estimated annual tax rate. The Company has announced that it has entered into a definitive agreement to sell its New Windsor, New York facility. The closing of the sale is expected in the fourth quarter and is expected to generate a gain resulting from the sale. This gain will be offset by a capital loss carryforward resulting in a tax benefit. This event was part of the calculation of the estimated annual income tax rate. The $123,000 income tax expense in the third quarter of fiscal 2018 represents a consolidated effective tax rate of 35.9%. This is the net result of adjusting the Company’s year-to-date tax expense to an overall income tax rate of 28.9% influenced by the first quarter goodwill impairment and by certain permanent book-tax differences and adjustments related to uncertain income tax positions.
The Company reported a net loss of $(3,168,000) in the third quarter of fiscal 2019 compared to net income of $220,000 in the same period of the prior year. The change from net income in fiscal 2018 to a net loss in the third quarter of fiscal 2019 is the net result of decreased net sales, decreased gross profit, decreased selling and administrative expenses, and increased interest expense. Also impacting the period-over-period comparison is $368,000 of restructuring charges and $183,000 of net foreign currency transactions losses of which there were no comparable events in fiscal 2018. Diluted loss per share of $(0.12) was reported in the third quarter of fiscal 2019 as compared to $ 0.01 diluted earnings 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 third quarter of fiscal 2019 were 26,132,000 shares as compared to 26,437,000 shares in the same period last year.
N INE MONTHS ENDED MARCH 31, 201 9 COMPARED TO NINE MONTHS ENDED MARCH 31, 201 8
Lighting Segment |
||||||||
(In thousands) |
Nine Months Ended |
|||||||
March 31 |
||||||||
2019 |
2018 |
|||||||
Net Sales |
$ | 177,871 | $ | 199,156 | ||||
Gross Profit |
$ | 42,548 | $ | 53,876 | ||||
Operating (Loss) |
$ | (13,911 |
) |
$ | (14,673 |
) |
Lighting Segment net sales of $177,871,000 in the first nine months of fiscal 2019 decreased 11% from fiscal 2018 same period net sales of $199,156,000. The 11% drop in sales is attributed to continued competitiveness in the Company’s project and stock and flow markets. In addition, the Company’s realignment of its sales organization and is focus on market priorities were disruptive and contributed to the decline in year-over-year sales.
Gross profit of $42,548,000 in the first nine months of fiscal 2019 decreased $11.3 million or 21% from the same period of fiscal 2018 and decreased from 26.8% to 23.7% 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 and New Windsor, New York facilities of $1,859,000 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 $56,459,000 in the first nine months of fiscal year 2019 decreased $12.1 million or 21% from the same period of fiscal 2018 selling and administrative expenses of $68,549,000, primarily due to the $20.2 million and $28.0 million goodwill impairment charges in the first nine months of fiscal 2019 and fiscal 2018 respectively. When the goodwill impairment charges are removed from both fiscal year results, there was a $4.3 million or 12% 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 along with a reduction in spending to match lower sales.
The Lighting Segment first nine month fiscal 2019 operating loss of $(13,911,000) decreased $0.8 million from an operating loss of $(14,673,000) in the same period of fiscal 2018 primarily due to a $20.2 million pre-tax goodwill impairment charge in fiscal 2019 compared to a $28.0 million pre-tax goodwill impairment charge in fiscal 2018. When the goodwill impairment charges are removed from both fiscal years along with the restructuring charges of $1,991,000 ($1,859,000 in cost of sales and $132,000 in selling and administrative expenses) and severance expense ($77,000 in cost of sales and $160,000 in selling and administrative expense) from the current fiscal year, fiscal 2019 adjusted operating income of $8,482,000 was $4.9 million lower than fiscal 2018 adjusted operating income of $13,335,000. The reduction in sales volume and gross profit was partially offset by lower selling and administrative expenses.
Graphics Segment |
||||||||
(In thousands) |
Nine Months Ended |
|||||||
March 31 |
||||||||
2019 |
2018 |
|||||||
Net Sales |
$ | 69,459 | $ | 59,458 | ||||
Gross Profit |
$ | 13,727 | $ | 15,086 | ||||
Operating Income |
$ | 2,350 | $ | 4,146 |
Graphics Segment net sales of $69,459,000 in the first nine months of fiscal 2019 increased $10.0 million or 17% from fiscal 2018 same period net sales of $59,458,000. 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 $13,727,000 in the first nine months of fiscal 2019 decreased $1.4 million or 9% from the same period of fiscal 2018. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 24.9% in the first nine months of fiscal 2018 to 19.7% in the first nine of fiscal 2019. The reduction in gross profit on higher sales is partially due to a mix shift to large customers in both the print and digital technology applications. These large projects, with lengthy life cycles, are competitive and initially generate lower margins. The business will work to improve the margins on these projects over its life cycle.
Selling and administrative expenses of $11,377,000 in the first nine months of fiscal 2019 increased $0.4 million or 4% from the same period of fiscal 2018. A reduction in wage and benefit was more than offset by an increase in bad debt expense and outside service expense.
The Graphics Segment first nine months fiscal 2019 operating income of $2,350,000 decreased $1.8 million or 43% from operating income of $4,146,000 in the same period of fiscal 2018. The decrease of $1.8 million was primarily the net result of lower gross margin on higher sales and an increase in selling and administrative expenses.
Corporate and Eliminations |
||||||||
(In thousands) |
Nine Months Ended |
|||||||
March 31 |
||||||||
2019 |
2018 |
|||||||
Gross (Loss) |
$ | (21 |
) |
$ | (34 |
) |
||
Operating (Loss) |
$ | (8,049 |
) |
$ | (8,997 |
) |
The gross (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $8,028,000 in the first nine months of fiscal 2019 decreased $0.9 million from the same period of the prior year. The change is primarily the result of a reduction in wage and benefit expense and research and development cost partially offset by an increase in legal and professional fees.
Consolidated Results
The Company reported $1,712,000 net interest expense in the first nine months of fiscal 2019 compared to $1,220,000 net interest expense in the first nine months of fiscal 2019. The change in interest expense from fiscal 2018 to fiscal 2019 is the result of higher interest rates on the Company’s line of credit. The Company also recorded other expense of $183,000 in the third quarter related to net foreign currency transaction losses from transactions with its customers and suppliers through its Mexican subsidiary.
The $4,304,000 income tax benefit in the first nine months of fiscal 2019 represents a consolidated effective tax rate of 20.0%, which is inclusive of a cumulative change to the estimated annual tax rate mostly due to the tax treatment related to the fourth quarter sale of its New Windsor, New York facility. The Company has announced that it has entered into a definitive agreement to sell its New Windsor, New York facility. The closing of the sale is expected in the fourth quarter and is expected to generate a gain resulting from the sale. This gain will be offset by a capital loss carryforward resulting in a tax benefit. Also impacting the consolidated tax benefit is the second quarter goodwill impairment charge and a 30% tax rate on taxable income from pre-tax profits recognized by the Company’s Mexican subsidiary. The $3,867,000 tax benefit in the first nine months of fiscal 2018 represents a consolidated effective rate of 18.6%. This is the net result of an overall income tax rate of 28.9% influenced by the first quarter goodwill impairment, by the second quarter $4.7 million tax adjustment related to the revaluation of the Company’s deferred tax assets, and by certain permanent book-tax differences and adjustments related to uncertain income tax positions.
The Company reported a net loss of $(17,201,000) in the first nine months of fiscal 2019 compared to net loss of $(16,877,000) in the same period of the prior year. The increase in the net loss from fiscal 2018 to the net loss in the first nine months of fiscal 2019 is mostly driven by decreased net sales, decreased gross profit, decreased selling and administrative expenses, increased interest expense, and a larger tax benefit. Diluted loss per share of $(0.66) was reported in the first nine months of fiscal 2019 as compared to $(0.65) 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 nine months of fiscal 2019 were 26,083,000 shares as compared to 25,835,000 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 March 31, 2019 the Company had working capital of $68.3 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 $0.4 million increase in working capital from June 30, 2018 to March 31, 2019 was primarily related to the net effect of decreased cash and cash equivalents ($1.5 million), increased net accounts receivable ($1.5 million), increased net inventory ($0.6 million), a decrease in accrued expenses ($2.1 million), a decrease in refundable income taxes ($0.3 million), an increase on other current assets ($0.6 million), and an increase in accounts payable ($2.7 million). Of the $1.5 million increase in accounts receivable, $4.6 million of the total increase is attributed to the adoption of the new revenue guidance. The Company proactively manages its 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 $6.4 million of cash from operating activities in the first nine months of fiscal 2019 as compared to a source of cash of $7.9 million in the same period of the prior year. This $1.5 million decrease 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 $5.8 million), a decrease rather than an increase in net accounts receivable (favorable change of $3.7 million), a greater increase in net inventory (unfavorable change of $4.0 million), a greater decrease in accrued expenses and other (unfavorable change of $1.3 million), and an increase in net loss from fiscal 2018 to fiscal 2019 along with unfavorable change of non-cash add-backs to the change in net loss (unfavorable change of $6.1 million).
Net accounts receivable were $52.1 million and $50.6 million at March 31, 2019 and June 30, 2018, respectively. DSO was 60 days at March 31, 2019 compared to DSO of 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 $51.6 million at March 31, 2019 increased $0.6 million from $51.0 million at June 30, 2018. The increase of $0.6 million is the result of an increase in gross inventory of $1.5 million and an increase in obsolescence reserves of $0.9 million. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory increased $3.7 million in the first nine months of fiscal 2019 in the Graphics Segment which was partially offset by a decrease in net inventory in the Lighting Segment of $3.0 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 $75 million revolving line of credit with its bank, with $30.6 million of the credit line available as of April 14, 2019. (The Company amended its revolving line of credit in the third quarter of fiscal 2019 and reduced its available line of credit from $100 million to $75 million in order to better match its financing needs with an appropriate borrowing capacity.) This line of credit is a $75 million five-year credit line expiring in the third quarter of fiscal 2022. The Company believes that its $75 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 $2.3 million related to investing activities in the first nine months of fiscal 2019 as compared to a use of $0.7 million in the same period of the prior year, resulting in an unfavorable change of $1.6 million. Capital expenditures for the first nine months of fiscal 2019 increased $0.1 million to $2.3 million from the same period in fiscal 2018. The Company sold its Woonsocket manufacturing facility for $1.5 million in fiscal 2018 which contributed to the change in cash flow from investing activities from fiscal 2018 to fiscal 2019.
In April 2019, the Company announced that it entered into a definitive agreement to sell its manufacturing facility in New Windsor, New York. Under the terms of the agreement, the Company will receive approximately $12 million of gross proceeds related to the sale. The transaction is expected to close on or before June 30, 2019 subject to the final approval from the New Windsor town officials.
The Company had a $5.5 million use of cash related to financing activities in the nine months of fiscal 2019 compared to a use of cash of $8.2 million in the first nine months of fiscal 2018. The $2.7 million favorable change in cash flow was primarily the net result of a reduction in net payments against the Company’s revolving line of credit.
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 April 2019, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable May 14, 2019 to shareholders of record as of May 6, 2019. 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 an implementation team tasked with reviewing our lease obligations and determining the impact of the new standard to its financial statements. The Company will continue to evaluate the new standard’s impact 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, 2018. 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 March 31, 2019, 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 first nine months ended March 31, 2019, 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 March 31, 2019, 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 5. OTHER INFORMATION
On February 28, 2019 the company entered into a Fourth Amendment to Loan Documents with its bank, PNC Bank, National Association (“Fourth Amendment”). The Fourth Amendment decreases the company’s revolving line of credit from $100 million to $75 million and modifies the covenant requiring the company to maintain a Leverage Ratio (as defined in the Loan Documents) of 3.50 to 1.00. The foregoing description of the Fourth Amendment does not purport to be complete. The Fourth Amendment is filed with this report as Exhibit 10.1 and is incorporated by reference into this report in its entirety
ITEM 6. EXHIBITS
Exhibits:
10.1 |
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10.2 | Fourth Amendment to Loan Documents dated February 28, 2019 between PNC Bank, National Association and LSI Industries Inc. |
31.1 |
Certification of Principal Executive Officer required by Rule 13a-14(a) |
31.2 |
Certification of Principal Financial Officer required by Rule 13a-14(a) |
32.1 |
32.2 |
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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/s/ James A. Clark |
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James A. Clark |
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Chief Executive Officer and President |
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(Principal Executive Officer) |
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/s/ James E. Galeese |
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James E. Galeese |
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Executive President and Chief Financial Officer |
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(Principal Financial Officer) |
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May 8, 2019 |
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Page 29
Exhibit 10.2
Fourth Amendment to Loan Documents |
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THIS FOURTH AMENDMENT TO LOAN DOCUMENTS (this “Amendment” ), dated as of February 28, 2019 ( “Effective Date” ), by and between LSI INDUSTRIES INC. , an Ohio corporation (the “Borrower” ), and PNC BANK, NATIONAL ASSOCIATION , a national banking association (the “Bank” ).
BACKGROUND
A. The Borrower has executed and delivered to the Bank one or more promissory notes, loan agreements, security agreements, mortgages, pledge agreements, collateral assignments, and other agreements, instruments, certificates and documents, some or all of which are more fully described on the attached Exhibit A, which is made a part of this Amendment (collectively as amended from time to time, the “Loan Documents” ) which evidence or secure some or all of the Borrower’s obligations to the Bank for one or more loans or other extensions of credit (the “Obligations” ).
B. The Borrower and the Bank desire to amend the Loan Documents as provided for in this Amendment.
NOW, THEREFORE , in consideration of the mutual covenants herein contained and intending to be legally bound hereby, the parties hereto agree as follows:
1. Certain of the Loan Documents are amended as set forth in Exhibit A. Any and all references to any Loan Document in any other Loan Document shall be deemed to refer to such Loan Document as amended by this Amendment. This Amendment is deemed incorporated into each of the Loan Documents. Any initially capitalized terms used in this Amendment without definition shall have the meanings assigned to those terms in the Loan Documents. To the extent that any term or provision of this Amendment is or may be inconsistent with any term or provision in any Loan Document, the terms and provisions of this Amendment shall control.
2. The Borrower hereby certifies that: (a) all of its representations and warranties in the Loan Documents, as amended by this Amendment, are, except as may otherwise be stated in this Amendment: (i) true and correct as of the date of this Amendment, (ii) ratified and confirmed without condition as if made anew, and
(iii) incorporated into this Amendment by reference, (b) no Event of Default or event which, with the passage of time or the giving of notice or both, would constitute an Event of Default, exists under any Loan Document which will not be cured by the execution and effectiveness of this Amendment, (c) no consent, approval, order or authorization of, or registration or filing with, any third party is required in connection with the execution, delivery and carrying out of this Amendment or, if required, has been obtained, and (d) this Amendment has been duly authorized, executed and delivered so that it constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. The Borrower confirms that the Obligations remain outstanding without defense, set off, counterclaim, discount or charge of any kind as of the date of this Amendment.
3. The Borrower hereby confirms that any collateral for the Obligations, including liens, security interests, mortgages, and pledges granted by the Borrower or third parties (if applicable), shall continue unimpaired and in full force and effect, and shall cover and secure all of the Borrower’s existing and future Obligations to the Bank, as modified by this Amendment.
4. As a condition precedent to the effectiveness of this Amendment, the Borrower shall comply with the terms and conditions (if any) specified in Exhibit A.
5. To induce the Bank to enter into this Amendment, the Borrower waives and releases and forever discharges the Bank and its officers, directors, attorneys, agents, and employees from any liability, damage, claim, loss or expense of any kind that it may have against the Bank or any of them arising out of or relating to the Obligations. The Borrower further agrees to indemnify and hold the Bank and its officers, directors, attorneys, agents and employees harmless from any loss, damage, judgment, liability or expense (including reasonable attorneys’ fees) suffered by or rendered against the Bank or any of the other indemnified parties on account of any claims arising out of or relating to the Obligations. The Borrower further states that it has carefully read the foregoing release and indemnity, knows the contents thereof, and grants the same as its own free act and deed.
6. This Amendment may be signed in any number of counterpart copies and by the parties to this Amendment on separate counterparts, but all such copies shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart. Upon written request by the other party (which may be made by electronic mail), any party so executing this Amendment by facsimile transmission shall promptly deliver a manually executed counterpart, provided that any failure to do so shall not affect the validity of the counterpart executed by facsimile transmission.
7. Notwithstanding any other provision herein or in the other Loan Documents, the Borrower agrees that this Amendment, the Note, the other Loan Documents, any other amendments thereto and any other information, notice, signature card, agreement or authorization related thereto (each, a “ Communication ”) may, at the Bank’s option, be in the form of an electronic record. Any Communication may, at the Bank’s option, be signed or executed using electronic signatures. For the avoidance of doubt, the authorization under this paragraph may include, without limitation, use or acceptance by the Bank of a manually signed paper Communication which has been converted into electronic form (such as scanned into PDF format) for transmission, delivery and/or retention. The Borrower and the Bank acknowledge and agree that the methods for delivering Communications, including notices, under the Loan Documents include electronic transmittal to any electronic address provided by either party to the other party from time to time.
8. This Amendment will be binding upon and inure to the benefit of the Borrower and the Bank and their respective heirs, executors, administrators, successors and assigns.
9. This Amendment has been delivered to and accepted by the Bank and will be deemed to be made in Cincinnati, Ohio. This Amendment will be interpreted and the rights and liabilities of the parties hereto determined in accordance with the laws of the State of Ohio, excluding its conflict of laws rules, including without limitation the Electronic Transactions Act (or equivalent) in such State (or, to the extent controlling, the laws of the United States of America, including without limitation the Electronic Signatures in Global and National Commerce Act).
10. Except as amended hereby, the terms and provisions of the Loan Documents remain unchanged, are and shall remain in full force and effect unless and until modified or amended in writing in accordance with their terms, and are hereby ratified and confirmed. Except as expressly provided herein, this Amendment shall not constitute an amendment, waiver, consent or release with respect to any provision of any Loan Document, a waiver of any default or Event of Default under any Loan Document, or a waiver or release of any of the Bank’s rights and remedies (all of which are hereby reserved). The Borrower expressly ratifies and confirms the waiver of jury trial provisions contained in the Loan Documents.
[signature page follows]
WITNESS the due execution of this Amendment as a document under seal as of the date first written above.
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LSI INDUSTRIES INC. |
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By: |
James E Galeese |
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Title: | ||||
PNC BANK, NATIONAL ASSOCIATION | ||||
By: | Jeffrey L. Stein | |||
Print Name: | ||||
Title: |
EXHIBIT A TO
FOURTH AMENDMENT TO LOAN DOCUMENTS DATED AS OF FEBRUARY 28, 2019
(LSI Industries Inc.)
A. |
The “Loan Documents” that are the subject of this Amendment include the following (as any of the following have previously been amended, supplemented or otherwise modified): |
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Amended and Restated Loan Agreement dated as of June 19, 2014 (the “Loan Agreement” ) between the Borrower and the Bank; |
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$100,000,000 Third Amended and Restated Committed Line of Credit Note dated as of February 21, 2017 (the “Revolving Note” ) made by the Borrower in favor of the Bank; |
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Second Amended and Restated Guaranty Agreement dated as of June 19, 2014 (the “Guaranty” ) made by the guarantors party thereto in favor of the Bank with respect to the obligations of the Borrower to the Bank; and |
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All other documents, instruments, agreements, and certificates executed and delivered in connection with the Loan Documents listed in this Section A. |
B. |
The Loan Agreement is amended as follows: |
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Section 1.1 of the Loan Agreement is hereby deleted and replaced with the following: |
1.1. Loans . The Bank has made or may make one or more loans (collectively, the “Loans” ) to the Borrower subject to the terms and conditions and in reliance upon the representations and warranties of the Borrower set forth in this Agreement. The Loans shall be used by the Borrower for general corporate purposes including acquisitions permitted hereunder. As of February 28, 2019, the Loans include a revolving credit loan (the “Revolving Loan” ) in the principal amount of up to
$75,000,000. The Loans are or will be evidenced by a promissory note or notes of the Borrower and all renewals, extensions, amendments and restatements thereof (if one or more, collectively, the “Note” ) acceptable to the Bank, which may set forth the interest rate, repayment and other provisions, the terms of which are incorporated into this Agreement by reference.
1.1.1. The Revolving Loan will include an investment and borrowing sweep feature on the terms and conditions of a Working Cash®, Line of Credit, Investment Sweep Rider (the “Sweep Rider” ) to be executed and delivered by the Borrower to the Bank in form and substance satisfactory to the Bank, the terms of which are hereby incorporated herein by reference. The Sweep Rider will remain in effect until such time (if any) as it is terminated in accordance with its terms.
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Section 4.11(b) of the Loan Agreement is hereby deleted and replaced with the following: |
(b) Leverage Ratio . The Borrower shall maintain a Leverage Ratio of not more than the following for the following periods:
C. |
Conditions to Effectiveness of Amendment: The Bank’s willingness to agree to the amendments set forth in this Amendment is subject to the prior satisfaction of the following conditions: |
1. |
Amendment and Related Documents . The Bank shall have received from the Borrower and each Guarantor, as applicable, a duly executed counterpart of this Amendment (including the attached Consent), the Fourth Amended and Restated Committed Line of Credit Note in the principal amount of $75,000,000 of even date herewith made by the Borrower in favor of the Bank, and such other certificates, documents, instruments and agreements as the Bank shall reasonably request. |
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Legal Fees . The Borrower shall have paid, or reimbursed the Bank for, the reasonable fees and expenses of the Bank’s counsel in connection with the preparation, negotiation, execution and delivery of this Amendment and the related documents. |
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Costs and Expenses . The Borrower shall have paid, or reimbursed the Bank for, all other costs and expenses incurred by the Bank in connection with the structuring of the transactions contemplated by this Amendment and the negotiation, execution and delivery of this Amendment and the related documents. |
CONSENT OF GUARANTOR
Each of the undersigned guarantors (individually and collectively, the “ Guarantor ”) consents to the provisions of the foregoing Amendment and all prior amendments (if any) and confirms and agrees that: (a) the Guarantor’s obligations under its Second Amended and Restated Guaranty Agreement dated as of June 19, 2014 (the “ Guaranty ”) relating to the Obligations mentioned in the Amendment shall be unimpaired by the Amendment; (b) the Guarantor has no defenses, set offs, counterclaims, discounts or charges of any kind against the Bank, its officers, directors, employees, agents or attorneys with respect to the Guaranty; and (c) all of the terms, conditions and covenants in the Guaranty remain unaltered and in full force and effect and are hereby ratified and confirmed and apply to the Obligations, as modified by the Amendment. The Guarantor certifies that all representations and warranties made in the Guaranty are true and correct.
The Guarantor hereby confirms that any collateral for the Obligations, including liens, security interests, mortgages, and pledges granted by the Guarantor or third parties (if applicable), shall continue unimpaired and in full force and effect, shall cover and secure all of the Guarantor’s existing and future Obligations to the Bank, as modified by the Amendment.
The Guarantor ratifies and confirms the indemnification and waiver of jury trial provisions contained in the Guaranty.
WITNESS the due execution of this Consent as a document under seal as of the date of the Amendment, intending to be legally bound hereby.
LSI MIDWEST LIGHTING INC. LSI ADAPT INC. GRADY McCAULEY INC. LSI INTEGRATED GRAPHICS LLC LSI KENTUCKY, LLC LSI LIGHTRON INC. LSI RETAIL GRAPHICS LLC LSI ADL TECHNOLOGY LLC LSI CONTROLS INC. |
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Title: |
Fourth Amended and Restated Committed Line Of Credit Note |
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$75,000,000 | February 28, 2019 |
FOR VALUE RECEIVED, LSI INDUSTRIES INC. (the “Borrower” ), with an address at 10000 Alliance Road, Cincinnati, Ohio 45242, Attn: Chief Financial Officer, promises to pay to the order of PNC BANK, NATIONAL ASSOCIATION (the “Bank” ), in lawful money of the United States of America in immediately available funds at its offices located at 201 East Fifth Street, Cincinnati, Ohio 45202, Attn: Corporate Banking, or at such other location as the Bank may designate from time to time, the principal sum of SEVENTY FIVE MILLION DOLLARS ( $75,000,000 ) (the “Facility” ) or such lesser amount as may be advanced to or for the benefit of the Borrower hereunder, together with interest accruing on the outstanding principal balance from the date hereof, all as provided below.
1. Advances . The Borrower may request advances, repay and request additional advances hereunder until the Expiration Date, subject to the terms and conditions of this Note and the Loan Documents (as hereinafter defined). The “Expiration Date” shall mean February 21, 2022, or such later date as may be designated by the Bank by written notice from the Bank to the Borrower. The Borrower acknowledges and agrees that in no event will the Bank be under any obligation to extend or renew the Facility or this Note beyond the Expiration Date. The Borrower may request advances hereunder upon giving oral or written notice to the Bank by 11:00 a.m. Cincinnati, Ohio time (a) on the day of the proposed advance, in the case of advances to bear interest under the Base Rate Option (as hereinafter defined) and (b) three (3) Business Days prior to the proposed advance, in the case of advances to bear interest under the LIBOR Option (as hereinafter defined), followed promptly thereafter by the Borrower’s written confirmation to the Bank of any oral notice. The aggregate unpaid principal amount of advances under this Note shall not exceed the face amount of this Note.
2. Rate of Interest . Each advance outstanding under this Note will bear interest at a rate or rates per annum as may be selected by the Borrower from the interest rate options set forth below (each, an “ Option ”):
(i) Base Rate Option . A rate of interest per annum which is at all times equal to the Base Rate plus the Base Rate Applicable Margin (as set forth in Section 1.4(a) of the Loan Agreement, as hereinafter defined). If and when the Base Rate (or any component thereof) changes, the rate of interest with respect to any advance to which the Base Rate Option applies will change automatically without notice to the Borrower, effective on the date of any such change. There are no required minimum interest periods for advances bearing interest under the Base Rate Option.
(ii) LIBOR Option . A rate per annum equal to (A) LIBOR plus (B) the LIBOR Applicable Margin (as set forth in Section 1.4(a) of the Loan Agreement) for the applicable LIBOR Interest Period.
For purposes of this Note, the following terms shall have the following meanings:
“Base Rate” shall mean the highest of (A) the Prime Rate, and (B) the sum of the Overnight Bank Funding Rate plus fifty (50) basis points (0.50%), and (C) the sum of the Daily LIBOR Rate plus one hundred (100) basis points (1.0%), so long as a Daily LIBOR Rate is offered, ascertainable and not unlawful.
“ Business Day” shall mean any day other than a Saturday or Sunday or a legal holiday on which commercial banks are authorized or required by law to be closed for business in Cincinnati, Ohio.
“Change of Control” shall mean, within a period of twelve (12) consecutive calendar months, (i) individuals who were directors of the Borrower on the first day of such period shall cease to constitute a majority of the board of directors of the Borrower, or (ii) a Person or group of Persons acting in concert and who is not (a) an affiliate of shareholders of the Borrower on the first day of such period or (b) a Person who is eligible to report their ownership of capital stock of the Borrower on Form 13G filed with the Securities and Exchange Commission shall acquire twenty percent (20%) or more of the issued and outstanding capital stock of the Borrower.
“Daily LIBOR Rate” shall mean, for any day, the rate per annum determined by the Bank by dividing (x) the Published Rate by (y) a number equal to 1.00 minus the LIBOR Reserve Percentage; provided , however , if the Daily LIBOR Rate, determined as provided above, would be less than zero, then such rate shall be deemed to be zero.
“LIBOR” shall mean, with respect to any advance to which the LIBOR Option applies for the applicable LIBOR Interest Period, the interest rate per annum determined by the Bank by dividing (the resulting quotient rounded upwards, at the Bank’s discretion, to the nearest 1/100th of 1%) (i) the rate of interest determined by the Bank in accordance with its usual procedures (which determination shall be conclusive absent manifest error) to be the eurodollar rate two (2) Business Days prior to the first day of such LIBOR Interest Period for an amount comparable to such advance and having a borrowing date and a maturity comparable to such LIBOR Interest Period by (ii) a number equal to 1.00 minus the LIBOR Reserve Percentage; provided , however , if LIBOR, determined as provided above, would be less than zero, then LIBOR shall be deemed to be zero.
“LIBOR Interest Period” shall mean, as to any advance to which the LIBOR Option applies, the period of one (1), two (2), three (3) or six (6) months as selected by the Borrower in its notice of borrowing or notice of conversion, as the case may be, commencing on the date of disbursement of an advance (or the date of conversion of an advance to the LIBOR Option, as the case may be) and each successive period selected by the Borrower thereafter; provided that , (i) if a LIBOR Interest Period would end on a day which is not a Business Day, it shall end on the next succeeding Business Day unless such day falls in the next succeeding calendar month in which case the LIBOR Interest Period shall end on the next preceding Business Day, (ii) the Borrower may not select a LIBOR Interest Period that would end on a day after the Expiration Date, and (iii) any LIBOR Interest Period that begins on the last Business Day of a calendar month (or a day for which there is no numerically corresponding day in the last calendar month of such LIBOR Interest Period) shall end on the last Business Day of the last calendar month of such LIBOR Interest Period.
“LIBOR Reserve Percentage” shall mean the maximum effective percentage in effect on such day as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the reserve requirements (including, without limitation, supplemental, marginal and emergency reserve requirements) with respect to eurocurrency funding (currently referred to as “Eurocurrency liabilities”).
“Overnight Bank Funding Rate” shall mean, for any day, the rate comprised of both overnight federal funds and overnight Eurocurrency borrowings by U.S.-managed banking offices of depository institutions, as such composite rate shall be determined by the Federal Reserve Bank of New York ( “NYFRB” ), as set forth on its public website from time to time, and as published on the next succeeding Business Day as the overnight bank funding rate by the NYFRB (or by such other recognized electronic source (such as Bloomberg) selected by the Bank for the purpose of displaying such rate); provided, that if such day is not a Business Day, the Overnight Bank Funding Rate for such day shall be such rate on the immediately preceding Business Day; provided, further, that if such rate shall at any time, for any reason, no longer exist, a comparable replacement rate determined by the Bank at such time (which determination shall be conclusive absent manifest error). If the Overnight Bank Funding Rate determined as above would be less than zero, then such rate shall be deemed to be zero. The rate of interest charged shall be adjusted as of each Business Day based on changes in the Overnight Bank Funding Rate without notice to the Borrower.
“Prime Rate” shall mean the rate publicly announced by the Bank from time to time as its prime rate. The Prime Rate is determined from time to time by the Bank as a means of pricing some loans to its borrowers. The Prime Rate is not tied to any external rate of interest or index, and does not necessarily reflect the lowest rate of interest actually charged by the Bank to any particular class or category of customers.
“Published Rate” shall mean the rate of interest published each Business Day in the Wall Street Journal “Money Rates” listing under the caption “London Interbank Offered Rates” for a one month period (or, if no such rate is published therein for any reason, then the Published Rate shall be the eurodollar rate for a one month period as published in another publication selected by the Bank).
LIBOR and the Daily LIBOR Rate shall be adjusted with respect to any advance to which the LIBOR Option or Base Rate Option applies, as applicable, on and as of the effective date of any change in the LIBOR Reserve Percentage. The Bank shall give prompt notice to the Borrower of LIBOR or the Daily LIBOR Rate as determined or adjusted in accordance herewith, which determination shall be conclusive absent manifest error.
If the Bank determines (which determination shall be final and conclusive) that, by reason of circumstances affecting the eurodollar market generally, deposits in dollars (in the applicable amounts) are not being offered to banks in the eurodollar market for the selected term, or adequate means do not exist for ascertaining LIBOR, then the Bank shall give notice thereof to the Borrower. Thereafter, until the Bank notifies the Borrower that the circumstances giving rise to such suspension no longer exist, (a) the availability of the LIBOR Option shall be suspended, and (b) the interest rate for all advances then bearing interest under the LIBOR Option shall be converted at the expiration of the then current LIBOR Interest Period(s) to the Base Rate Option.
In addition, if, after the date of this Note, the Bank shall determine (which determination shall be final and conclusive) that any enactment, promulgation or adoption of or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by a governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank with any guideline, request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for the Bank to make or maintain or fund loans based on LIBOR, the Bank shall notify the Borrower. Upon receipt of such notice, until the Bank notifies the Borrower that the circumstances giving rise to such determination no longer apply, (a) the availability of the LIBOR Option shall be suspended, and (b) the interest rate on all advances then bearing interest under the LIBOR Option shall be converted to the Base Rate Option either (i) on the last day of the then current LIBOR Interest Period(s) if the Bank may lawfully continue to maintain advances based on LIBOR to such day, or (ii) immediately if the Bank may not lawfully continue to maintain advances based on LIBOR.
The foregoing notwithstanding, it is understood that the Borrower may select different Options to apply simultaneously to different portions of the advances and may select up to three (3) different interest periods to apply simultaneously to different portions of the advances bearing interest under the LIBOR Option. Interest hereunder will be calculated based on the actual number of days that principal is outstanding over a year of 360 days in the case of the LIBOR Option and over a year of 365 or 366 days (as applicable) in the case of the Base Rate Option. In no event will the rate of interest hereunder exceed the maximum rate allowed by law.
3. Interest Rate Election . Subject to the terms and conditions of this Note, at the end of each interest period applicable to any advance, the Borrower may renew the Option applicable to such advance or convert such advance to a different Option; provided that , during any period in which any Event of Default (as hereinafter defined) has occurred and is continuing, any advances bearing interest under the LIBOR Option shall, at the Bank’s sole discretion, be converted at the end of the applicable LIBOR Interest Period to the Base Rate Option and the LIBOR Option will not be available to the Borrower with respect to any new advances (or with respect to the conversion or renewal of any existing advances) until such Event of Default has been cured by the Borrower or waived by the Bank. The Borrower shall notify the Bank of each election of an Option, each conversion from one Option to another, the amount of the advances then outstanding to be allocated to each Option and where relevant the interest periods therefor. In the case of converting to the LIBOR Option, such notice shall be given at least three (3) Business Days prior to the commencement of any LIBOR Interest Period. If no interest period is specified in any such notice for which the resulting advance is to bear interest under the LIBOR Option, the Borrower shall be deemed to have selected a LIBOR Interest Period of one month’s duration. If no notice of election, conversion or renewal is timely received by the Bank with respect to any advance, the Borrower shall be deemed to have elected the LIBOR Option having a LIBOR Interest Period of one month’s duration. Any such election shall be promptly confirmed in writing by such method as the Bank may require.
4. Advance Procedures . If permitted by the Bank, a request for advance may be made by telephone or electronic mail, with such confirmation or verification (if any) as the Bank may require in its discretion from time to time. A request for advance by the Borrower shall be binding upon the Borrower. The Borrower authorizes the Bank to accept telephonic and electronic requests for advances, and the Bank shall be entitled to rely upon the authority of any person providing such instructions. The Borrower hereby indemnifies and holds the Bank harmless from and against any and all damages, losses, liabilities, costs and expenses (including reasonable attorneys’ fees and expenses) which may arise or be created by the acceptance of such telephonic and electronic requests or by the making of such advances. The Bank will enter on its books and records, which entry when made will be presumed correct, the date and amount of each advance, as well as the date and amount of each payment made by the Borrower.
5. Payment Terms . The Borrower shall pay accrued interest on the unpaid principal balance of this Note in arrears: (a) for the portion of advances bearing interest under the Base Rate Option, on the last day of each March, June, September and December during the term hereof, (b) for the portion of advances bearing interest under the LIBOR Option, on the last day of the respective LIBOR Interest Period for such advance, (c) if any LIBOR Interest Period is longer than three (3) months, then also on the three (3) month anniversary of such interest period and every three (3) months thereafter, and (d) for all advances, at maturity, whether by acceleration of this Note or otherwise, and after maturity, on demand until paid in full. All outstanding principal and accrued interest hereunder shall be due and payable in full on the Expiration Date.
If any payment under this Note shall become due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in computing interest in connection with such payment. The Borrower hereby authorizes the Bank to charge the Borrower’s deposit account at the Bank for any payment when due hereunder. Payments received will be applied to charges, fees and expenses (including attorneys’ fees), accrued interest and principal in the order determined by the Bank.
6. Late Payments; Default Rate . If the Borrower fails to make any payment of principal, interest or other amount coming due pursuant to the provisions of this Note within fifteen (15) calendar days of the date due and payable, the Borrower also shall pay to the Bank a late charge equal to the lesser of five percent (5%) of the amount of such payment or $100.00 (the “Late Charge” ). Such fifteen (15) day period shall not be construed in any way to extend the due date of any such payment. Upon maturity, whether by acceleration, demand or otherwise, and at the Bank’s option upon the occurrence of any Event of Default (as hereinafter defined) and during the continuance thereof, each advance outstanding under this Note shall bear interest at a rate per annum (based on the actual number of days that principal is outstanding over a year of 360 days) which shall be two percentage points (2%) in excess of the Base Rate plus the Base Rate Applicable Margin, but not more than the maximum rate allowed by law (the “Default Rate” ). The Default Rate shall continue to apply whether or not judgment shall be entered on this Note. Both the Late Charge and the Default Rate are imposed as liquidated damages for the purpose of defraying the Bank’s expenses incident to the handling of delinquent payments, but are in addition to, and not in lieu of, the Bank’s exercise of any rights and remedies hereunder, under the other Loan Documents or under applicable law, and any fees and expenses of any agents or attorneys which the Bank may employ. In addition, the Default Rate reflects the increased credit risk to the Bank of carrying a loan that is in default. The Borrower agrees that the Late Charge and Default Rate are reasonable forecasts of just compensation for anticipated and actual harm incurred by the Bank, and that the actual harm incurred by the Bank cannot be estimated with certainty and without difficulty.
7. Prepayment . The Borrower shall have the right to prepay any advance hereunder at any time and from time to time, in whole or in part; subject, however, to payment of any break funding indemnification amounts owing pursuant to paragraph 9 below.
8. Increased Costs; Yield Protection . On written demand by the Bank (acting reasonably and in good faith), together with written evidence of the justification therefor, the Borrower agrees to pay the Bank all direct costs incurred, any losses suffered or payments made by the Bank as a result of any Change in Law (as hereinafter defined), imposing any reserve, deposit, allocation of capital or similar requirement (including without limitation, Regulation D of the Board of Governors of the Federal Reserve System) on the Bank, its holding company or any of their respective assets relative to the Facility. “Change in Law” means the occurrence, after the date of this Note, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation, implementation or application thereof by any governmental authority or (c) the making or issuance of any request, rule, guideline or directive (whether or not having the force of law) by any governmental authority; provided that , notwithstanding anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith and (y) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a “Change in Law”, regardless of the date enacted, adopted or issued.
9. Break Funding Indemnification . The Borrower agrees to indemnify the Bank against any liabilities, losses or expenses (including, without limitation, loss of margin, any loss or expense sustained or incurred in liquidating or employing deposits from third parties, and any loss or expense incurred in connection with funds acquired to effect, fund or maintain any amounts hereunder (or any part thereof) bearing interest based on LIBOR) which the Bank sustains or incurs as a consequence of either (i) the Borrower’s failure to make a payment on the due date thereof, (ii) the Borrower’s revocation (expressly, by later inconsistent notices or otherwise) in whole or in part of any notice given to the Bank to request, convert, renew or prepay any amounts bearing interest based on LIBOR, or (iii) the Borrower’s payment or prepayment (whether voluntary, after acceleration of the maturity of this Note or otherwise) or conversion of any amounts bearing interest based on LIBOR on a day other than the regularly scheduled due date therefor. A notice as to any amounts payable pursuant to this paragraph given to the Borrower by the Bank shall, in the absence of manifest error, be conclusive and shall be payable upon demand. The Borrower’s indemnification obligations hereunder shall survive the payment in full of all amounts payable hereunder.
10. Other Loan Documents . This Note is issued in connection with the Amended and Restated Loan Agreement dated as of June 19, 2014 (as amended, modified or renewed from time to time, the “Loan Agreement” ) between the Borrower and the Bank, and the other agreements and documents executed and/or delivered in connection therewith or referred to therein, the terms of which are incorporated herein by reference (each as amended, modified or renewed from time to time, collectively, the “Loan Documents” ), and is secured by the property described in the Loan Documents and by such other collateral as previously may have been or may in the future be granted to the Bank to secure this Note.
11. Events of Default . The occurrence of any of the following events will be deemed to be an “Event of Default” under this Note: (i) the non-payment of any principal amount of this Note when due, whether by acceleration or otherwise, or the nonpayment of any interest upon this Note or any other amount due the Bank pursuant to this Note or the Loan Agreement, in each case within five (5) Business Days of when the same is due; (ii) the occurrence of any event of default or any default and the lapse of any notice or cure period, or the Borrower’s failure to observe or perform any covenant or other agreement, under or contained in any Loan Document or any other document now or in the future evidencing or securing any debt, liability or obligation of the Borrower to the Bank; (iii) the filing by or against any Obligor (as hereinafter defined) of any proceeding in bankruptcy, receivership, insolvency, reorganization, liquidation, conservatorship or similar proceeding (and, in the case of any such proceeding instituted against such Obligor, such proceeding is not dismissed or stayed within 60 days after the commencement thereof, provided that the Bank shall not be obligated to advance additional funds hereunder during such period); (iv) any assignment by any Obligor for the benefit of creditors, or any levy, garnishment, attachment or similar proceeding is instituted against any property of the Borrower or any other Obligor; (v) a default with respect to any other indebtedness of any Obligor for borrowed money in excess of $1,000,000 if the effect of such default is to cause or permit the acceleration of such indebtedness; (vi) the entry of a final judgment against any Obligor involving more than $2,000,000 and the failure of such Obligor to discharge the judgment within thirty (30) days after the entry thereof; (vii) any Obligor ceases doing business as a going concern (except as expressly permitted by the Loan Agreement); (viii) any Change of Control; (ix) the revocation or attempted revocation, in whole or in part, of any guarantee by any Obligor; or (x) any representation or warranty made by the Borrower or any other Obligor to the Bank in any Loan Document or any other document now or in the future evidencing or securing the obligations of the Borrower or any other Obligor to the Bank, is false, erroneous or misleading in any material respect. As used herein, the term “Obligor” means the Borrower and any guarantor of, or any pledgor or other person or entity providing collateral support for, the Borrower’s obligations to the Bank existing on the date of this Note or arising in the future.
Upon the occurrence of an Event of Default: (a) the Bank shall be under no further obligation to make advances hereunder; (b) if an Event of Default specified in clause (iii) or (iv) above shall occur, the outstanding principal balance and accrued interest hereunder together with any additional amounts payable hereunder shall be immediately due and payable without demand or notice of any kind; (c) if any other Event of Default shall occur, the outstanding principal balance and accrued interest hereunder together with any additional amounts payable hereunder, at the Bank’s option and without demand or notice of any kind, may be accelerated and become immediately due and payable; (d) at the Bank’s option, this Note will bear interest at the Default Rate from the date of the occurrence of the Event of Default; and (e) the Bank may exercise from time to time any of the rights and remedies available under the Loan Documents or under applicable law.
12. Right of Setoff . In addition to all liens upon and rights of setoff against the Borrower’s money, securities or other property given to the Bank by law, the Bank shall have, with respect to the Borrower’s obligations to the Bank under this Note and to the extent permitted by law, a contractual possessory security interest in and a contractual right of setoff against, and the Borrower hereby grants the Bank a security interest in, and hereby assigns, conveys, delivers, pledges and transfers to the Bank, all of the Borrower’s right, title and interest in and to, all of the Borrower’s deposits, moneys, securities and other property now or hereafter in the possession of or on deposit with, or in transit to, the Bank or any other direct or indirect subsidiary of The PNC Financial Services Group, Inc., whether held in a general or special account or deposit, whether held jointly with someone else, or whether held for safekeeping or otherwise, excluding, however, all IRA, Keogh, and trust accounts. Every such security interest and right of setoff may be exercised without demand upon or notice to the Borrower. Every such right of setoff shall be deemed to have been exercised immediately upon the occurrence of an Event of Default hereunder without any action of the Bank, although the Bank may enter such setoff on its books and records at a later time.
13. Anti-Money Laundering/International Trade Law Compliance . The Borrower represents and warrants to the Bank, as of the date of this Note, the date of each advance of proceeds under the Facility, the date of any renewal, extension or modification of the Facility, and at all times until the Facility has been terminated and all amounts thereunder have been indefeasibly paid in full, that: (a) no Covered Entity (i) is a Sanctioned Person; (ii) has any of its assets in a Sanctioned Country or in the possession, custody or control of a Sanctioned Person; or (iii) does business in or with, or derives any of its operating income from investments in or transactions with, any Sanctioned Country or Sanctioned Person in violation of any law, regulation, order or directive enforced by any Compliance Authority; (b) the proceeds of the Facility will not be used to fund any operations in, finance any investments or activities in, or, make any payments to, a Sanctioned Country or Sanctioned Person in violation of any law, regulation, order or directive enforced by any Compliance Authority; (c) the funds used to repay the Facility are not derived from any unlawful activity; and (d) each Covered Entity is in compliance with, and no Covered Entity engages in any dealings or transactions prohibited by, any laws of the United States, including but not limited to any Anti-Terrorism Laws. The Borrower covenants and agrees that it shall immediately notify the Bank in writing upon the occurrence of any Reportable Compliance Event.
As used herein: “ Anti-Terrorism Laws ” means any laws relating to terrorism, trade sanctions programs and embargoes, import/export licensing, money laundering, or bribery, all as amended, supplemented or replaced from time to time; “ Compliance Authority ” means each and all of the (a) U.S. Treasury Department/Office of Foreign Assets Control, (b) U.S. Treasury Department/Financial Crimes Enforcement Network, (c) U.S. State Department/Directorate of Defense Trade Controls, (d) U.S. Commerce Department/Bureau of Industry and Security, (e) U.S. Internal Revenue Service, (f) U.S. Justice Department, and (g) U.S. Securities and Exchange Commission; “ Covered Entity ” means the Borrower, its affiliates and subsidiaries, all guarantors, pledgors of collateral, all owners of the foregoing, and all brokers or other agents of the Borrower acting in any capacity in connection with the Facility; “ Reportable Compliance Event ” means that any Covered Entity becomes a Sanctioned Person, or is indicted, arraigned, investigated or custodially detained, or receives an inquiry from regulatory or law enforcement officials, in connection with any Anti-Terrorism Law or any predicate crime to any Anti-Terrorism Law, or self-discovers facts or circumstances implicating any aspect of its operations with the actual or possible violation of any Anti-Terrorism Law; “ Sanctioned Country ” means a country subject to a sanctions program maintained by any Compliance Authority; and “ Sanctioned Person ” means any individual person, group, regime, entity or thing listed or otherwise recognized as a specially designated, prohibited, sanctioned or debarred person or entity, or subject to any limitations or prohibitions (including but not limited to the blocking of property or rejection of transactions), under any order or directive of any Compliance Authority or otherwise subject to, or specially designated under, any sanctions program maintained by any Compliance Authority.
14. Indemnity . The Borrower agrees to indemnify the Bank, each legal entity, if any, who controls, is controlled by or is under common control with the Bank, and each of their respective directors, officers and employees (the “Indemnified Parties” ), and to defend and hold each Indemnified Party harmless from and against any and all claims, damages, losses, liabilities and expenses (including all fees and charges of internal or external counsel with whom any Indemnified Party may consult and all expenses of litigation and preparation therefor) which any Indemnified Party may incur or which may be asserted against any Indemnified Party by any person, entity or governmental authority (including any person or entity claiming derivatively on behalf of the Borrower), in connection with or arising out of or relating to the matters referred to in this Note or in the other Loan Documents or the use of any advance hereunder, whether (a) arising from or incurred in connection with any breach of a representation, warranty or covenant by the Borrower, or (b) arising out of or resulting from any suit, action, claim, proceeding or governmental investigation, pending or threatened, whether based on statute, regulation or order, or tort, or contract or otherwise, before any court or governmental authority; provided , however , that the foregoing indemnity agreement shall not apply to any claims, damages, losses, liabilities and expenses solely attributable to an Indemnified Party’s gross negligence or willful misconduct. The indemnity agreement contained in this Section shall survive the termination of this Note, payment of any advance hereunder and the assignment of any rights hereunder. The Borrower may participate at its expense in the defense of any such action or claim.
15. Miscellaneous . All notices, demands, requests, consents, approvals and other communications required or permitted hereunder ( “Notices” ) must be in writing (except as may be agreed otherwise above with respect to borrowing requests) and will be effective upon receipt. Notices may be given in any manner to which the parties may separately agree, including electronic mail. Without limiting the foregoing, first-class mail, facsimile transmission and commercial courier service are hereby agreed to as acceptable methods for giving Notices. Regardless of the manner in which provided, Notices may be sent to a party’s address as set forth above or to such other address as any party may give to the other for such purpose in accordance with this paragraph. No delay or omission on the Bank’s part to exercise any right or power arising hereunder will impair any such right or power or be considered a waiver of any such right or power, nor will the Bank’s action or inaction impair any such right or power. The Bank’s rights and remedies hereunder are cumulative and not exclusive of any other rights or remedies which the Bank may have under other agreements, at law or in equity. No modification, amendment or waiver of, or consent to any departure by the Borrower from, any provision of this Note will be effective unless made in a writing signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Notwithstanding the foregoing, the Bank may modify this Note for the purposes of completing missing content or correcting erroneous content, without the need for a written amendment, provided that the Bank shall send a copy of any such modification to the Borrower (which notice may be given by electronic mail). The Borrower agrees to pay on demand, to the extent permitted by law, all costs and expenses incurred by the Bank in the enforcement of its rights in this Note and in any security therefor, including without limitation reasonable fees and expenses of the Bank’s counsel. If any provision of this Note is found to be invalid, illegal or unenforceable in any respect by a court, all the other provisions of this Note will remain in full force and effect. The Borrower and all other makers and indorsers of this Note hereby forever waive presentment, protest, notice of dishonor and notice of non-payment. The Borrower also waives all defenses based on suretyship or impairment of collateral. This Note shall bind the Borrower and its successors and assigns, and the benefits hereof shall inure to the benefit of the Bank and its successors and assigns; provided , however , that the Borrower may not assign this Note in whole or in part without the Bank’s written consent and the Bank at any time may assign this Note in whole or in part.
This Note has been delivered to and accepted by the Bank and will be deemed to be made in Cincinnati, Hamilton County, Ohio. T HIS N OTE WILL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE B ANK AND THE B ORROWER DETERMINED IN ACCORDANCE WITH THE LAWS OF THE S TATE OF O HIO , EXCLUDING ITS CONFLICT OF LAWS RULES , INCLUDING WITHOUT LIMITATION THE E LECTRONIC T RANSACTIONS A CT ( OR EQUIVALENT ) IN EFFECT IN THE STATE WHERE THE B ANK ’ S OFFICE INDICATED ABOVE IS LOCATED ( OR , TO THE EXTENT CONTROLLING , THE LAWS OF THE U NITED S TATES O F A MERICA , INCLUDING WITHOUT LIMITATION THE E LECTRONIC S IGNATURES IN G LOBAL AND N ATIONAL C OMMERCE A CT ). The Borrower hereby irrevocably consents to the exclusive jurisdiction of any state or federal court located in Hamilton County, Ohio; provided that nothing contained in this Note will prevent the Bank from bringing any action, enforcing any award or judgment, or exercising any rights against the Borrower individually, against any security, or against any property of the Borrower within any other county, state or other foreign or domestic jurisdiction. The Borrower acknowledges and agrees that the venue provided above is the most convenient forum for both the Bank and the Borrower. The Borrower waives any objection to venue and any objection based on a more convenient forum in any action instituted under this Note.
16. Commercial Purpose . The Borrower represents that the indebtedness evidenced by this Note is being incurred by the Borrower solely for the purpose of acquiring or carrying on a business, professional or commercial activity, and not for personal, family or household purposes.
17. USA PATRIOT Act Notice . To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify and record information that identifies each Borrower that opens an account. What this means: when the Borrower opens an account, the Bank will ask for the business name, business address, taxpayer identifying number and other information that will allow the Bank to identify the Borrower, such as organizational documents. For some businesses and organizations, the Bank may also need to ask for identifying information and documentation relating to certain individuals associated with the business or organization.
18. Amendment and Restatement . This Note amends and restates, and is in substitution for, that certain Third Amended and Restated Committed Line Of Credit Note in the original principal amount of $100,000,000 payable to the order of the Bank and dated February 21, 2017 (the “Existing Note” ). However, without duplication, this Note shall in no way extinguish, cancel or satisfy the Borrower’s unconditional obligation to repay all indebtedness evidenced by the Existing Note or constitute a novation of the Existing Note. Nothing herein is intended to extinguish, cancel or impair the lien priority or effect of any security agreement, pledge agreement or mortgage with respect to any Obligor’s obligations hereunder and under any other document relating hereto.
19. Electronic Signatures and Records . Notwithstanding any other provision herein, the Borrower agrees that this Note, the Loan Documents, any amendments thereto, and any other information, notice, signature card, agreement or authorization related thereto (each, a “Communication” ) may, at the Bank’s option, be in the form of an electronic record. Any Communication may, at the Bank’s option, be signed or executed using electronic signatures. For the avoidance of doubt, the authorization under this paragraph may include, without limitation, use or acceptance by the Bank of a manually signed paper Communication which has been converted into electronic form (such as scanned into PDF format) for transmission, delivery and/or retention.
20. WAIVER OF JURY TRIAL . T HE B ORROWER IRREVOCABLY WAIVES ANY AND ALL RIGHTS THE B ORROWER MAY HAVE TO A TRIAL BY JURY IN ANY ACTION , PROCEEDING OR CLAIM OF ANY NATURE RELATING TO THIS N OTE , ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS N OTE OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS . T HE B ORROWER ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY .
The Borrower acknowledges that it has read and understood all the provisions of this Note, including the waiver of jury trial, and has been advised by counsel as necessary or appropriate.
WITNESS the due execution hereof as a document under seal, as of the date first written above, with the intent to be legally bound hereby.
LSI INDUSTRIES INC. | |||||
By: | James E Galeese | ||||
Print Name: | |||||
Title: |
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EXHIBIT 31.1
Certification of Principal Executive Officer
Pursuant to Rule 13a-14(a)
I, James A. Clark, 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.
Date: May 8, 2019 |
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/s/ James A. Clark |
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Principal Executive Officer |
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EXHIBIT 31.2
Certification of 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.
Date: May 8, 2019 |
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/s/ James E. Galeese |
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Principal Financial Officer |
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EXHIBIT 32.1
CERTIFICATION OF JAMES A. CLARK
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 March 31, 2019 (the “Report”), I, James A. Clark, Principal Executive 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:
(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ James A. Clark |
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James A. Clark |
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Chief Executive Officer and President |
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Date: May 8, 2019 |
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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.
EXHIBIT 32.2
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 March 31, 2019 (the “Report”), I, James E. Galeese, 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:
(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/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: May 8, 2019 |
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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.