UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2019 OR |
|
|
|
|
|
☐ |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO ________________. |
|
Commission File No. 0-13375
LSI Industries Inc. |
(Exact name of registrant as specified in its charter) |
Ohio |
31-0888951 |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
10000 Alliance Road, Cincinnati, Ohio |
45242 |
|
(Address of principal executive offices) |
(Zip Code) |
|
(513) 793-3200 |
||
Registrant’s telephone number, including area code) |
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 |
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 ☒ 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 ☒ 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.
Large accelerated filer ☐ |
Accelerated filer ☒ |
Emerging growth company ☐ |
Non-accelerated filer ☐ |
Smaller reporting company ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ NO ☒
As of January 27, 2020, there were 26,136,418 shares of the registrant's common stock, no par value per share, outstanding.
LSI INDUSTRIES INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2019
INDEX
|
|
Begins on Page |
||
PART I. Financial Information |
|
|
||
|
|
|
|
|
|
ITEM 1. |
Financial Statements (Unaudited) |
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Operations |
|
3 |
Condensed Consolidated Statements of Comprehensive Income (Loss) |
4 |
|||
|
|
Condensed Consolidated Balance Sheets |
|
5 |
Condensed Consolidated Statements of Shareholders’ Equity |
7 |
|||
|
|
Condensed Consolidated Statements of Cash Flows |
|
8 |
|
|
|
|
|
|
|
Notes to Condensed Consolidated Financial Statements |
|
9 |
|
|
|
|
|
|
ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
21 |
|
|
|
|
|
|
ITEM 3. |
Quantitative and Qualitative Disclosures About Market Risk |
|
31 |
|
|
|
|
|
|
ITEM 4. |
Controls and Procedures |
|
31 |
|
|
|
|
|
PART II. Other Information |
|
|
||
|
|
|
|
|
|
ITEM 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
|
32 |
|
|
|
|
|
|
ITEM 6. |
Exhibits |
|
32 |
|
|
|
|
|
Signatures |
|
32 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended |
Six Months Ended |
|||||||||||||||
December 31 |
December 31 |
|||||||||||||||
(In thousands, except per share data) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
Net Sales |
$ | 82,377 | $ | 89,541 | $ | 171,078 | $ | 174,498 | ||||||||
Cost of products and services sold |
62,136 | 69,486 | 128,724 | 133,027 | ||||||||||||
Restructuring costs |
277 | 376 | 535 | 531 | ||||||||||||
Severance costs |
- | 23 | - | 23 | ||||||||||||
Gross profit |
19,964 | 19,656 | 41,819 | 40,917 | ||||||||||||
Selling and administrative expenses |
18,151 | 19,148 | 38,013 | 37,475 | ||||||||||||
Restructuring (gain) costs |
(1 | ) | 25 | (4,847 | ) | 25 | ||||||||||
Severance costs |
54 | 469 | 54 | 469 | ||||||||||||
Impairment of goodwill |
- | 20,165 | - | 20,165 | ||||||||||||
Transition and realignment costs |
- | 120 | - | 120 | ||||||||||||
Operating income (loss) |
1,760 | (20,271 | ) | 8,599 | (17,337 | ) | ||||||||||
Interest (income) |
(1 | ) | (17 | ) | (2 | ) | (31 | ) | ||||||||
Interest expense |
234 | 632 | 666 | 1,164 | ||||||||||||
Other (income) |
(91 | ) | - | (9 | ) | - | ||||||||||
Income (loss) before income taxes |
1,618 | (20,886 | ) | 7,944 | (18,470 | ) | ||||||||||
Income tax (benefit) expense |
(125 | ) | (5,104 | ) | 1,726 | (4,437 | ) | |||||||||
Net income (loss) |
$ | 1,743 | $ | (15,782 | ) | $ | 6,218 | $ | (14,033 | ) | ||||||
Earnings (loss) per common share (see Note 4) |
||||||||||||||||
Basic |
$ | 0.07 | $ | (0.61 | ) | $ | 0.24 | $ | (0.54 | ) | ||||||
Diluted |
$ | 0.07 | $ | (0.61 | ) | $ | 0.24 | $ | (0.54 | ) | ||||||
Weighted average common shares outstanding |
||||||||||||||||
Basic |
26,280 | 26,083 | 26,257 | 26,058 | ||||||||||||
Diluted |
26,534 | 26,083 | 26,364 | 26,058 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended |
Six Months Ended |
|||||||||||||||
December 31 |
December 31 |
|||||||||||||||
(In thousands) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
Net Income (Loss) |
$ | 1,743 | $ | (15,782 | ) | $ | 6,218 | $ | (14,033 | ) | ||||||
Foreign currency translation adjustment |
29 | - | 6 | - | ||||||||||||
Comprehensive Income (Loss) |
$ | 1,772 | $ | (15,782 | ) | $ | 6,224 | $ | (14,033 | ) |
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, |
June 30, |
|||||||
(In thousands, except shares) |
2019 |
2019 |
||||||
ASSETS |
||||||||
Current assets |
||||||||
$ | 1,248 | $ | 966 | |||||
Cash and cash equivalents |
||||||||
Accounts receivable, less allowance for doubtful accounts of $523 and $879, respectively |
44,532 | 54,728 | ||||||
Inventories |
43,311 | 43,512 | ||||||
Refundable income tax |
994 | 882 | ||||||
Asset held for sale |
- | 7,512 | ||||||
Other current assets |
3,214 | 3,380 | ||||||
Total current assets |
93,299 | 110,980 | ||||||
Property, Plant and Equipment, at cost |
||||||||
Land |
4,602 | 4,576 | ||||||
Buildings |
27,363 | 27,015 | ||||||
Machinery and equipment |
70,558 | 73,185 | ||||||
Construction in progress |
808 | 455 | ||||||
103,331 | 105,231 | |||||||
Less accumulated depreciation |
(73,480 | ) | (73,255 | ) | ||||
Net property, plant and equipment |
29,851 | 31,976 | ||||||
Goodwill |
10,373 | 10,373 | ||||||
Other Intangible Assets, net |
31,301 | 32,647 | ||||||
Other Long-Term Assets, net |
22,537 | 15,124 | ||||||
Total assets |
$ | 187,361 | $ | 201,100 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, |
June 30, |
|||||||
(In thousands, except shares) |
2019 |
2019 |
||||||
LIABILITIES & SHAREHOLDERS' EQUITY |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 20,528 | $ | 18,664 | ||||
Accrued expenses |
21,173 | 21,211 | ||||||
Total current liabilities |
41,701 | 39,875 | ||||||
Long-Term Debt |
10,437 | 39,541 | ||||||
Other Long-Term Liabilities |
11,310 | 1,747 | ||||||
Commitments and Contingencies (Note 12) |
- | - | ||||||
Shareholders' Equity |
||||||||
Preferred shares, without par value; Authorized 1,000,000 shares, none issued |
- | - | ||||||
Common shares, without par value; Authorized 40,000,000 shares; Outstanding 26,124,103 and 25,967,275 shares, respectively |
126,552 | 125,729 | ||||||
Treasury shares, without par value |
(808 | ) | (1,468 | ) | ||||
Deferred compensation plan |
808 | 1,468 | ||||||
Retained (loss) |
(2,661 | ) | (5,808 | ) | ||||
Accumulated other comprehensive income |
22 | 16 | ||||||
Total shareholders' equity |
123,913 | 119,937 | ||||||
Total liabilities & shareholders' equity |
$ | 187,361 | $ | 201,100 |
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)
Common Shares |
Treasury Shares |
Key Executive |
Accumulated Other |
Total |
||||||||||||||||||||||||||||
Number Of |
Number Of |
Compensation |
Comprehensive |
Retained |
Shareholders' |
|||||||||||||||||||||||||||
(In thousands, except per share data) |
Shares |
Amount |
Shares |
Amount |
Amount |
Income |
Earnings |
Equity |
||||||||||||||||||||||||
Balance at June 30, 2018 |
25,884 | $ | 124,104 | (242 | ) | $ | (2,110 | ) | $ | 2,133 | - | $ | 15,124 | $ | 139,251 | |||||||||||||||||
Net Loss |
- | - | - | - | - | - | (14,033 | ) | (14,033 | ) | ||||||||||||||||||||||
Other comprehensive income |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Stock compensation awards |
37 | 180 | - | - | - | - | - | 180 | ||||||||||||||||||||||||
Restricted stock units issued |
97 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Shares issued for deferred compensation |
43 | 189 | - | - | - | - | - | 189 | ||||||||||||||||||||||||
Activity of treasury shares, net |
- | - | 42 | 549 | - | - | - | 549 | ||||||||||||||||||||||||
Deferred stock compensation |
- | - | - | - | (542 | ) | - | - | (542 | ) | ||||||||||||||||||||||
Stock-based compensation expense |
- | 727 | - | - | - | - | - | 727 | ||||||||||||||||||||||||
Dividends — $0.20 per share |
- | - | - | - | - | - | (2,587 | ) | (2,587 | ) | ||||||||||||||||||||||
Cumulative effect of adoption of accounting guidance | - | - | - | - | - | - | 591 | 591 | ||||||||||||||||||||||||
Balance at December 31, 2018 |
26,061 | $ | 125,200 | (200 | ) | $ | (1,561 | ) | $ | 1,591 | $ | - | $ | (905 | ) | $ | 124,325 |
Common Shares |
Treasury Shares |
Key Executive |
Accumulated Other |
Total |
||||||||||||||||||||||||||||
Number Of |
Number Of |
Compensation |
Comprehensive |
Retained |
Shareholders' |
|||||||||||||||||||||||||||
Shares |
Amount |
Shares |
Amount |
Amount |
Income |
Earnings |
Equity |
|||||||||||||||||||||||||
Balance at June 30, 2019 |
26,176 | $ | 125,729 | (209 | ) | $ | (1,468 | ) | $ | 1,468 | 16 | $ | (5,808 | ) | $ | 119,937 | ||||||||||||||||
Net Income |
- | - | - | - | - | - | 6,218 | 6,218 | ||||||||||||||||||||||||
Other comprehensive income |
- | - | - | - | - | 6 | - | 6 | ||||||||||||||||||||||||
Stock compensation awards |
36 | 150 | - | - | - | - | - | 150 | ||||||||||||||||||||||||
Restricted stock units issued |
18 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Shares issued for deferred compensation |
10 | 47 | - | - | - | - | - | 47 | ||||||||||||||||||||||||
Activity of treasury shares, net |
- | - | 87 | 660 | - | - | - | 660 | ||||||||||||||||||||||||
Deferred stock compensation |
- | - | - | - | (660 | ) | - | - | (660 | ) | ||||||||||||||||||||||
Stock-based compensation expense |
- | 597 | - | - | - | - | - | 597 | ||||||||||||||||||||||||
Stock options exercised, net |
6 | 29 | - | - | - | - | - | 29 | ||||||||||||||||||||||||
Dividends — $0.20 per share |
- | - | - | - | - | - | (2,643 | ) | (2,643 | ) | ||||||||||||||||||||||
Cumulative effect of adoption of accounting guidance | - | - | - | - | - | - | (428 | ) | (428 | ) | ||||||||||||||||||||||
Balance at December 31, 2019 |
26,246 | $ | 126,552 | (122 | ) | $ | (808 | ) | $ | 808 | $ | 22 | $ | (2,661 | ) | $ | 123,913 |
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)
Six Months Ended |
||||||||
December 31 |
||||||||
(In thousands) |
2019 |
2018 |
||||||
Cash Flows from Operating Activities |
||||||||
Net income (loss) |
$ | 6,218 | $ | (14,033 | ) | |||
Non-cash items included in net income |
||||||||
Depreciation and amortization |
4,551 | 5,235 | ||||||
Deferred income taxes |
1,893 | (4,701 | ) | |||||
Impairment of goodwill |
- | 20,165 | ||||||
Deferred compensation plan |
47 | 196 | ||||||
Stock compensation expense |
597 | 727 | ||||||
Issuance of common shares as compensation |
150 | 180 | ||||||
(Gain) loss on disposition of fixed assets |
(4,753 | ) | (10 | ) | ||||
Allowance for doubtful accounts |
(356 | ) | 256 | |||||
Inventory obsolescence reserve |
(212 | ) | 2,043 | |||||
Changes in certain assets and liabilities |
||||||||
Accounts receivable |
10,552 | (1,142 | ) | |||||
Inventories |
413 | (9,309 | ) | |||||
Refundable income taxes |
(112 | ) | 784 | |||||
Accounts payable |
1,864 | 8,704 | ||||||
Accrued expenses and other |
406 | (1,873 | ) | |||||
Customer prepayments |
(355 | ) | 406 | |||||
Net cash flows provided by operating activities |
20,903 | 7,628 | ||||||
Cash Flows from Investing Activities |
||||||||
Proceeds from the sale of assets |
12,340 | 10 | ||||||
Purchases of property, plant and equipment |
(1,119 | ) | (1,579 | ) | ||||
Net cash flows provided by (used in) investing activities |
11,221 | (1,569 | ) | |||||
Cash Flows from Financing Activities |
||||||||
Payments of long-term debt |
(99,746 | ) | (52,066 | ) | ||||
Borrowings of long-term debt |
70,642 | 55,078 | ||||||
Cash dividends paid |
(2,643 | ) | (2,587 | ) | ||||
Shares withheld for employees' taxes |
(124 | ) | (99 | ) | ||||
Proceeds from stock option exercises |
29 | - | ||||||
Net cash flows (used in) provided by financing activities |
(31,842 | ) | 326 | |||||
Increase in cash and cash equivalents |
282 | 6,385 | ||||||
Cash and cash equivalents at beginning of period |
966 | 3,178 | ||||||
Cash and cash equivalents at end of period |
$ | 1,248 | $ | 9,563 |
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 December 31, 2019, the results of its operations for the three and six month periods ended December 31, 2019 and 2018, and its cash flows for the six month periods ended December 31, 2019 and 2018. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2019 Annual Report on Form 10-K. Financial information as of June 30, 2019 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 2019 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) in the first quarter of fiscal 2019 and adopting ASU 2016-02, “Leases” in the first quarter of fiscal 2020 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 the terms with the customer. The Company offers standard warranties that do not represent separate performance obligations.
Installation is a separate performance obligation, except for the Company’s 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:
● |
Customer specific print graphics branding |
● |
Electrical components based on customer specifications |
● |
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 its revenue and cash flows. The table presents a reconciliation of the disaggregation by reportable segments.
Three Months Ended |
Six Months Ended |
|||||||||||||||
(In thousands) |
December 31, 2019 |
December 31, 2019 |
||||||||||||||
Lighting Segment |
Graphics Segment |
Lighting Segment |
Graphics Segment |
|||||||||||||
Timing of revenue recognition |
||||||||||||||||
Products and services transferred at a point in time |
$ | 47,513 | $ | 17,521 | $ | 104,038 | $ | 35,246 | ||||||||
Products and services transferred over time |
5,923 | 11,420 | 12,589 | 19,205 | ||||||||||||
$ | 53,436 | $ | 28,941 | $ | 116,627 | $ | 54,451 |
Three Months Ended |
Six Months Ended |
|||||||||||||||
December 31, 2019 |
December 31, 2019 |
|||||||||||||||
Lighting Segment |
Graphics Segment |
Lighting Segment |
Graphics Segment |
|||||||||||||
Type of Product and Services |
||||||||||||||||
LED lighting, digital signage solutions, electronic circuit boards |
$ | 46,596 | $ | 7,407 | $ | 101,079 | $ | 11,281 | ||||||||
Legacy products |
6,265 | 16,011 | 14,303 | 32,711 | ||||||||||||
Turnkey services and other |
575 | 5,523 | 1,245 | 10,459 | ||||||||||||
$ | 53,436 | $ | 28,941 | $ | 116,627 | $ | 54,451 |
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 project management and 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. |
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.
Opening |
||||||||||||
Balance as of |
Balance as of |
|||||||||||
June 30, 2018 |
Adjustments |
June 30, 2018 |
||||||||||
Assets: |
||||||||||||
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 | |||||
Shareholder's Equity: |
||||||||||||
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 and interim periods within those years, beginning after December 15, 2018, or the Company’s fiscal 2020, with early adoption permitted. The Company adopted this guidance effective July 1, 2019 using a modified-retrospective transition method, under which it elected not to adjust comparative periods. The Company elected the package of practical expedients permitted under the new guidance to not reassess prior conclusions related to contracts containing leases, lease classification, and initial direct costs. In addition, the Company elected the practical expedient to not separate lease and non-lease component and the accounting policy election to not present leases with an initial term of twelve months or less on the balance sheet.
The Company’s most significant leases are those relating to its two manufacturing facilities along with a small office space. Besides these three real estate leases, most other leases are insignificant and consist of leases related to a vehicle, forklifts, small tooling, and various office equipment. All of the Company’s leases are operating leases and are included in other long-term assets with the corresponding liability in other long-term liabilities. Lease expense is recognized on a straight-line basis over the lease term. The Company used its incremental borrowing rate when determining the present value of lease payments. The adoption of the new lease standard resulted in the recognition of right-of-use assets (ROU assets) of $10.4 million and lease liabilities of $10.8 million which includes the impact of existing deferred rents and tenant improvement allowances on the consolidated balance sheets as of July 1, 2019 for the Company’s real estate leases. The adoption of the standard resulted in no material impact to consolidated statements of operations or consolidated statements of cash flow. (Refer to Note 15)
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 consolidated financial statements other than noted below.
In December 2019, the Company signed a definitive agreement to sell a graphics manufacturing facility in North Canton, Ohio. Advancements in graphics technology and the Company’s improved operating productivity coupled with better utilization of the manufacturing footprint in the graphics segment have reduced the quantity of floor space required by the business. Upon consummation of the sale, production at the existing facility will be relocated to a smaller, leased facility in the North Canton area during the second half of fiscal 2020. Under the terms of the agreement, the Company will receive approximately $8 million in gross cash proceeds. The Company expects to record a gain on the sale of the facility. The transaction is expected to close by March 31, 2020.
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 addresses lighting product customers through the commercial industrial, stock and flow, and renovation channels. The Lighting Segment also includes the design, engineering, and manufacturing of electronic circuit boards, assemblies and sub-assemblies used to manufacture certain LED light fixtures and sold directly to customers.
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 expenses, 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 six months ended December 31, 2019 or 2018. There was no concentration of accounts receivable at December 31, 2019 or June 30, 2019.
Summarized financial information for the Company’s operating segments is provided for the indicated periods and as of December 31, 2019 and December 31, 2018:
Three Months Ended |
Six Months Ended |
|||||||||||||||
(In thousands) |
December 31 |
December 31 |
||||||||||||||
2019 |
2018 |
2019 |
2018 |
|||||||||||||
Net Sales: |
||||||||||||||||
Lighting Segment |
$ | 53,436 | $ | 63,654 | $ | 116,627 | $ | 125,086 | ||||||||
Graphics Segment |
28,941 | 25,887 | 54,451 | 49,412 | ||||||||||||
$ | 82,377 | $ | 89,541 | $ | 171,078 | $ | 174,498 | |||||||||
Operating Income (Loss): |
||||||||||||||||
Lighting Segment |
$ | 3,150 | $ | (18,452 | ) | $ | 12,309 | $ | (14,602 | ) | ||||||
Graphics Segment |
1,362 | 861 | 2,379 | 3,248 | ||||||||||||
Corporate and Eliminations |
(2,752 | ) | (2,680 | ) | (6,089 | ) | (5,983 | ) | ||||||||
$ | 1,760 | $ | (20,271 | ) | $ | 8,599 | $ | (17,337 | ) | |||||||
Capital Expenditures: |
||||||||||||||||
Lighting Segment |
$ | 557 | $ | 588 | $ | 887 | $ | 864 | ||||||||
Graphics Segment |
45 | 249 | 45 | 515 | ||||||||||||
Corporate and Eliminations |
162 | 94 | 187 | 200 | ||||||||||||
$ | 764 | $ | 931 | $ | 1,119 | $ | 1,579 | |||||||||
Depreciation and Amortization: |
||||||||||||||||
Lighting Segment |
$ | 1,661 | $ | 1,952 | $ | 3,439 | $ | 3,942 | ||||||||
Graphics Segment |
374 | 397 | 760 | 792 | ||||||||||||
Corporate and Eliminations |
117 | 243 | 352 | 501 | ||||||||||||
$ | 2,152 | $ | 2,592 | $ | 4,551 | $ | 5,235 |
December 31,
|
June 30,
|
|||||||
Identifiable Assets: |
||||||||
Lighting Segment |
$ | 130,446 | $ | 142,105 | ||||
Graphics Segment |
39,826 | 40,914 | ||||||
Corporate and Eliminations |
17,089 | 18,081 | ||||||
$ | 187,361 | $ | 201,100 |
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:
Inter-segment sales |
||||||||||||||||
Three Months Ended |
Six Months Ended |
|||||||||||||||
(In thousands) |
December 31 |
December 31 |
||||||||||||||
2019 |
2018 |
2019 |
2018 |
|||||||||||||
Lighting Segment inter-segment net sales |
$ | 860 | $ | 870 | $ | 1,671 | $ | 1,279 | ||||||||
Graphics Segment inter-segment net sales |
$ | 74 | $ | 44 | $ | 98 | $ | 75 |
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):
(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) |
Anti-dilutive securities were excluded from the computation of diluted net income per share for the three and six months ended December 31, 2019 because the exercise price was greater than the average fair market price of the common shares or because the assumed proceeds from the award’s exercise or vesting was greater than the average fair market price of the common shares. For the three and six months ended December 31, 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:
December 31, |
June 30, |
|||||||
(In thousands) |
2019 |
2019 |
||||||
Inventories: |
||||||||
Raw materials |
$ | 29,685 | $ | 27,927 | ||||
Work-in-progress |
1,742 | 2,193 | ||||||
Finished goods |
11,884 | 13,392 | ||||||
Total Inventories |
$ | 43,311 | $ | 43,512 |
NOTE 6 - ACCRUED EXPENSES
The following information is provided as of the dates indicated:
December 31, |
June 30, |
|||||||
(In thousands) |
2019 |
2019 |
||||||
Accrued Expenses: |
||||||||
Compensation and benefits |
$ | 5,493 | $ | 5,319 | ||||
Customer prepayments |
1,413 | 1,768 | ||||||
Accrued sales commissions |
1,198 | 1,301 | ||||||
Accrued warranty |
7,601 | 7,687 | ||||||
Other accrued expenses |
5,468 | 5,136 | ||||||
Total Accrued Expenses |
$ | 21,173 | $ | 21,211 |
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.
The Company identified its reporting units in conjunction with its annual goodwill impairment testing. The Company has a total of 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.
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, 2019 |
||||||||||||
Goodwill |
$ | 94,564 | $ | 28,690 | $ | 123,254 | ||||||
Accumulated impairment losses |
(85,356 | ) | (27,525 | ) | (112,881 | ) | ||||||
Goodwill, net as of June 30, 2019 |
$ | 9,208 | $ | 1,165 | $ | 10,373 | ||||||
Balance as of December 31, 2019 |
||||||||||||
Goodwill |
$ | 94,564 | $ | 28,690 | $ | 123,254 | ||||||
Accumulated impairment losses |
(85,356 | ) | (27,525 | ) | (112,881 | ) | ||||||
Goodwill, net as of December 31, 2019 |
$ | 9,208 | $ | 1,165 | $ | 10,373 |
The following table presents the gross carrying amount and accumulated amortization by each major asset class:
Other Intangible Assets |
December 31, 2019 |
|||||||||||
(In thousands) |
Gross |
|||||||||||
Carrying |
Accumulated |
Net |
||||||||||
Amount |
Amortization |
Amount |
||||||||||
Amortized Intangible Assets |
||||||||||||
Customer relationships |
$ | 35,563 | $ | 13,100 | $ | 22,463 | ||||||
Patents |
338 | 262 | 76 | |||||||||
LED technology firmware, software |
16,066 | 12,610 | 3,456 | |||||||||
Trade name |
2,658 | 774 | 1,884 | |||||||||
Total Amortized Intangible Assets |
54,625 | 26,746 | 27,879 | |||||||||
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 | $ | 26,746 | $ | 31,301 |
Other Intangible Assets |
June 30, 2019 |
|||||||||||
(In thousands) |
Gross |
|||||||||||
Carrying |
Accumulated |
Net |
||||||||||
Amount |
Amortization |
Amount |
||||||||||
Amortized Intangible Assets |
||||||||||||
Customer relationships |
$ | 35,563 | $ | 12,070 | $ | 23,493 | ||||||
Patents |
338 | 247 | 91 | |||||||||
LED technology firmware, software |
16,066 | 12,364 | 3,702 | |||||||||
Trade name |
2,658 | 719 | 1,939 | |||||||||
Total Amortized Intangible Assets |
54,625 | 25,400 | 29,225 | |||||||||
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 | $ | 25,400 | $ | 32,647 |
Three Months Ended |
Six Months Ended |
|||||||||||||||
December 31 |
December 31 |
|||||||||||||||
(In thousands) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
Amortization Expense of Other Intangible Assets |
$ | 671 | $ | 689 | $ | 1,346 | $ | 1,380 |
The Company expects to record annual amortization expense as follows:
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 175 basis points for the third quarter of fiscal 2020. 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 December 31, 2019, there was $10.4 million borrowed against the line of credit, and $64.6 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 December 31, 2019.
NOTE 9 - CASH DIVIDENDS
The Company paid cash dividends of $2,643,000 and $2,587,000 in the six months ended December 31, 2019 and 2018, respectively. Dividends on restricted stock units in the amount of $52,383 and $34,631 were accrued as of December 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 February 2020, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable February 26, 2020 to shareholders of record as of February 18, 2020. The indicated annual cash dividend rate is $0.20 per share.
NOTE 10 – EQUITY COMPENSATION
In November 2019, the Company’s shareholders approved the 2019 Omnibus Award Plan (“2019 Omnibus Plan”). The purpose of the 2019 Omnibus Plan is to provide a means through which the Company may attract and retain key personnel and to provide a means by which directors, officers, and employees can acquire and maintain an equity interest in the Company. The 2019 Omnibus Plan replaced the 2012 Stock Incentive Plan (“2012 Stock Plan”). The number of shares of common stock authorized for issuance under the 2019 Omnibus Plan is 2,650,000 which were combined with the remaining shares available under the 2012 Stock Plan. The number of shares reserved for issuance under the 2019 Omnibus Plan is 3,802,363, all of which are available for future grant or award as of December 31, 2019. The 2019 Omnibus Plan implements the use of a fungible share ratio that consumes 2.5 available shares for every full value share awarded by the Company as stock compensation. The 2019 Omnibus Plan allows for the grant of non-qualified stock options, stock appreciation rights, restricted stock awards, performance stock units, and other stock-based awards.
In the first quarter of fiscal 2020, the Company granted 455,429 non-qualified serviced-based stock options with an exercise price of $3.83 and 199,310 Performance Stock Units and 81,917 Restricted Stock Units at a fair value of $3.83. Stock compensation expense was $199,000 and $176,000 for the three months ended December 31, 2019 and 2018, respectively and $597,000 and $727,000 for the six months ended December 31, 2019 and 2018, respectively.
NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION
Six Months Ended |
||||||||
(In thousands) |
December 31 |
|||||||
2019 |
2018 |
|||||||
Cash Payments: |
||||||||
Interest |
$ | 742 | $ | 1,133 | ||||
Income taxes |
$ | - | $ | 3 | ||||
Non-cash investing and financing activities |
||||||||
Issuance of common shares as compensation |
$ | 150 | $ | 180 | ||||
Issuance of common shares to fund deferred compensation plan |
$ | 47 | $ | 189 |
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company is party to various negotiations, customer bankruptcies, and legal proceedings arising in the normal course of business. The Company provides reserves for these matters when a loss is probable and reasonably estimable. 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 December 31, 2019, there were no such standby letters of credit issued.
NOTE 13 – SEVERANCE COSTS
The activity in the Company’s accrued severance liability is as follows for the periods indicated:
Six Months |
Six Months |
Fiscal Year |
||||||||||
Ended |
Ended |
Ended |
||||||||||
December 31, |
December 31, |
June 30, |
||||||||||
(In thousands) |
2019 |
2018 |
2019 |
|||||||||
Balance at beginning of period |
$ | 1,134 | $ | 1,772 | $ | 1,772 | ||||||
Accrual of expense |
46 | 492 | 560 | |||||||||
Payments |
(319 | ) | (549 | ) | (1,198 | ) | ||||||
Balance at end of period |
$ | 861 | $ | 1,715 | $ | 1,134 |
Of the total $861,000 severance reserve reported as of December 31, 2019, $601,000 has been classified as a current liability and will be paid out over the next twelve months. The remaining $260,000 has been classified as a long-term liability.
NOTE 14 – RESTRUCTURING COSTS
In the first quarter of fiscal 2020, the Company sold its New Windsor, New York facility. The net proceeds from the sale was $12.3 million resulting in a gain of $4.8 million. Restructuring costs incurred in the first quarter of fiscal 2020 related to the closure of the New Windsor facility, which impacted both the Lighting and Graphics segment. Restructuring costs incurred in the second quarter of fiscal 2020 related to the realignment of the Company’s manufacturing footprint at its Houston, Texas facility, which impacted the Graphics segment. The realignment occurred as the result of the movement of equipment related to the closure of the New Windsor facility along with preparations to receive additional equipment resulting from the relocation of the North Canton, Ohio facility. Total restructuring costs were $276,000 and $509,000 for the three and six months ended December 31, 2019, respectively.
The following table presents information about restructuring costs for the periods indicated:
Three Months Ended |
Six Months Ended |
|||||||||||||||
December 31 |
December 31 |
|||||||||||||||
(In thousands) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
Severance benefits |
$ | - | $ | 202 | $ | - | $ | 221 | ||||||||
Impairment of fixed assets and accelerated depreciation |
- | 185 | 49 | 228 | ||||||||||||
Facility repairs |
- | 7 | - | 47 | ||||||||||||
Gain on sale of facility |
- | - | (4,821 | ) | - | |||||||||||
Exit costs |
- | 7 | 184 | 60 | ||||||||||||
Manufacturing realignment costs |
276 | - | 276 | - | ||||||||||||
Total |
$ | 276 | $ | 401 | $ | (4,312 | ) | $ | 556 |
The following table presents a roll forward of the beginning and ending liability balances related to the restructuring costs:
Balance as of |
Balance as of |
|||||||||||||||||||
June 30, |
Restructuring |
December 31, |
||||||||||||||||||
(In thousands) |
2019 |
Expense |
Payments |
Adjustments |
2019 |
|||||||||||||||
Severance and termination benefits |
$ | 236 | $ | - | $ | (186 | ) | $ | - | $ | 50 | |||||||||
Other restructuring costs |
- | 460 | (460 | ) | - | $ | - | |||||||||||||
Total |
$ | 236 | $ | 460 | $ | (646 | ) | $ | - | $ | 50 |
NOTE 15 - LEASES
The Company leases two of its manufacturing facilities along with a small office space, a company vehicle, several forklifts, several small tooling items, and various items of office equipment. All of the Company’s leases are operating leases and are included in other long-term assets with the corresponding liability in other long-term liabilities. Leases have a remaining term of 1 to 5 years some of which have an option to renew. The Company does not assume renewals in determining the lease term unless the renewals are deemed reasonably certain. The lease agreements do not contain any material residual guarantees or material variable lease payments.
The Company has periodically entered into short-term operating leases with an initial term of twelve months or less. The Company elected not to record these leases on the balance sheet. For the three and six months ended December 31, 2019, the rent expense for these leases is immaterial.
The Company has certain leases that contain lease and non-lease components and has elected to utilize the practical expedient to account for these components together as a single lease component.
Lease expense is recognized on a straight-line basis over the lease term. The Company used its incremental borrowing rate when determining the present value of lease payments. The adoption of the new lease standard resulted in the recognition of right-of-use assets (ROU assets) of $10.4 million and lease liabilities of $10.8 million which includes the impact of existing deferred rents and tenant improvement allowances on the consolidated balance sheets as of July 1, 2019 for the Company’s real estate leases. The adoption of the new standard resulted in no material impact to the consolidated statements of operations or consolidated statements of cash flow.
Three months ended |
Six months ended |
|||||||
(In thousands) |
December 31, 2019 |
December 31, 2019 |
||||||
Operating lease cost |
$ | 575 | $ | 1,162 |
Supplemental Cash Flow Information: |
||||
Six months ended |
||||
(In thousands) |
December 31, 2019 |
|||
Operating cash flows from operating leases |
||||
Fixed payments |
1,139 | |||
Liability reduction |
885 |
Operating Leases: |
||||
At December 31, 2019 |
||||
Total operating right-of-use asset (Other long-term assets) |
9,504 | |||
Accrued liabilities (Current liabilities) |
344 | |||
Long-term operating lease liability (Other long-term liabilities) |
9,906 | |||
10,250 | ||||
Weighted Average remaining Lease Term (in years) |
5.05 | |||
Weighted Average Discount Rate |
4.85 | % |
Maturities of Lease Liability: |
||||
2020 |
1,404 | |||
2021 |
2,303 | |||
2022 |
2,279 | |||
2023 |
2,244 | |||
2024 |
1,917 | |||
Thereafter |
1,679 | |||
Total lease payments |
11,826 | |||
Less: Interest |
(1,579 | ) | ||
Present Value of Lease Liabilities |
10,247 |
NOTE 16 – INCOME TAXES
The Company's effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year's taxable income as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions.
In December 2019, the Company signed a definitive agreement to sell a graphics manufacturing facility in North Canton, Ohio. This sale is expected to result in a capital gain during fiscal 2020 resulting in a tax benefit due to the utilization of a capital loss carryforward, which reduces the anticipated full year estimated effective income tax rate.
In the first quarter of fiscal 2020, the Company sold its New Windsor, New York facility resulting in a book gain of $4.8 million. The Company was able to utilize a deferred tax asset of $864,000 related to the sale of the facility.
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.
Three Months Ended |
Six Months Ended |
|||||||||||||||
December 31 |
December 31 |
|||||||||||||||
2019 |
2018 |
2019 |
2018 |
|||||||||||||
Reconciliation of effective tax rate: |
||||||||||||||||
Provision for income taxes at the anticipated annual tax rate |
(2.6 |
%) |
23.0 |
% |
18.1 |
% |
23.0 |
% |
||||||||
Uncertain tax positions |
(5.5 | ) | 0.8 | (0.7 | ) | 0.8 | ||||||||||
Difference between deferred and current tax rate related to the impairment of goodwill |
- | 0.6 | - | 0.7 | ||||||||||||
Shared-based compensation |
0.3 | - | 3.5 | (0.5 | ) | |||||||||||
Other |
- | - | 0.8 | - | ||||||||||||
Effective tax rate |
(7.8 |
%) |
24.4 |
% |
21.7 |
% |
24.0 |
% |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note About Forward-Looking Statements
This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including this section. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in in our Annual Report on Form 10-K in the following sections: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures about Market Risk,” and “Risk Factors.” All of those risks and uncertainties are incorporated herein by reference. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of LSI Industries Inc. MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended June 30, 2019, and our financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).
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.
Overview
LSI Industries is a leading producer of high-performance, American-made lighting solutions. The Company’s strength in outdoor lighting applications creates opportunities for it to introduce additional solutions to its valued customers. LSI’s indoor and outdoor products and services, including its digital and print graphics capabilities, are valued by architects, engineers, distributors and contractors for their quality, reliability and innovation. The Company’s products are used extensively in automotive dealerships, petroleum stations, quick service restaurants, grocery stores and pharmacies, retail establishments, sports complexes, parking lots and garages, and commercial and industrial buildings.
Net Sales by Business Segment |
||||||||||||||||
Three Months Ended |
Six Months Ended |
|||||||||||||||
December 31 |
December 31 |
|||||||||||||||
(In thousands) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
Lighting Segment |
$ | 53,436 | $ | 63,654 | $ | 116,627 | $ | 125,086 | ||||||||
Graphics Segment |
28,941 | 25,887 | 54,451 | 49,412 | ||||||||||||
$ | 82,377 | $ | 89,541 | $ | 171,078 | $ | 174,498 |
Operating Income (Loss) by Business Segment |
||||||||||||||||
Three Months Ended |
Six Months Ended |
|||||||||||||||
December 31 |
December 31 |
|||||||||||||||
(In thousands) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
Lighting Segment |
$ | 3,150 | $ | (18,452 | ) | $ | 12,309 | $ | (14,602 | ) | ||||||
Graphics Segment |
1,362 | 861 | 2,379 | 3,248 | ||||||||||||
Corporate and Eliminations |
(2,752 | ) | (2,680 | ) | (6,089 | ) | (5,983 | ) | ||||||||
$ | 1,760 | $ | (20,271 | ) | $ | 8,599 | $ | (17,337 | ) |
Summary Comments
Fiscal 2020 second quarter net sales of $82,377,000 decreased $7.2 million or 8% as compared to second quarter fiscal 2019 net sales of $89,541,000. Net sales were favorably influenced by increased net sales of the Graphics Segment (an increase of $3.0 million or 12%) more than offset by decreased net sales of the Lighting Segment (a decrease of $10.2 million or 16%).
Fiscal 2020 first half net sales of $171,078,000 decreased $3.4 million or 2% as compared to first half fiscal 2019 net sales of $174,498,000. Net sales were favorably influenced by increased net sales of the Graphics Segment (an increase of $5.0 million or 10%) more than offset by decreased net sales of the Lighting Segment (a decrease of $8.4 million or 7%).
Fiscal 2020 second quarter operating income of $1.8 million represents a $22.1 million improvement from operating loss of $(20.3) million in the second quarter of fiscal 2019. The $22.1 million improvement from operating loss in fiscal 2019 was primarily the result of a pre-tax $20.2 million goodwill impairment charge in the Lighting Segment in the second quarter of fiscal 2019. When the impact of the goodwill impairment charge along with other restructuring and plant closure costs are removed from operating results, adjusted operating income, a non-GAAP financial measure, was $2.1 million in the second quarter of fiscal 2020 compared to $1.5 million in the second quarter of fiscal 2019. Refer to “Non-GAAP Financial Measures” below. The increase in adjusted operating income was the result of a decrease in selling and administrative expenses coupled with an improved margin on lower net sales. The Company is transitioning from low margin commodity business to focus on higher margin applications and solutions, resulting in lower sales in the short term and improved margins.
Fiscal 2020 first half operating income of $8.6 million represents a $25.9 million improvement from an operating loss of $(17.3) million in the first half of fiscal 2019. The $25.9 million improvement from operating loss in fiscal 2019 was impacted by the sale of the Company’s New Windsor, New York facility in the first quarter of fiscal 2020 which favorably resulted in a pre-tax gain of $4.8 million and a pre-tax $20.2 million goodwill impairment charge in the second quarter of fiscal 2019. Also contributing to the period-over-period improvement in operating income is a one-time adjustment to a Company benefit plan in fiscal 2019 which resulted in a favorable pre-tax adjustment to earnings of $1.2 million. When the impact of the sale of the New Windsor facility, the goodwill impairment charge and other restructuring and plant closure costs are removed from the operating results, adjusted operating income, a non-GAAP measure, was $4.3 million in the first half of fiscal 2020 compared to $5.1 million in the first half of fiscal 2019. Refer to “Non-GAAP Financial Measures” below. The decrease in adjusted operating income was the net result of decreased net sales, improved margins on lower sales and a decrease in selling and administrative expenses. As we mention above, the Company is transitioning from low margin commodity business to focus on higher margin applications and solutions, resulting in lower sales in the short term and improved margins.
Non-GAAP Financial Measures
We believe it is appropriate to evaluate our 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, 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.
Reconciliation of net income (loss) to adjusted net income |
||||||||||||||||||
Three Months Ended December 31 |
||||||||||||||||||
(In thousands, except per share data) |
2019 |
2018 |
||||||||||||||||
Diluted EPS |
Diluted EPS |
|||||||||||||||||
Net Income (Loss) as reported |
$ | 1,743 | $ | 0.07 | $ | (15,782 | ) | $ | (0.61 | ) | ||||||||
Restructuring and plant closure costs |
223 |
(1) |
0.01 | 817 |
(3) |
0.03 | ||||||||||||
Severance costs |
44 |
(2) |
- | 385 |
(4) |
0.01 | ||||||||||||
Goodwill impairment |
- | - | 15,361 |
(5) |
0.60 | |||||||||||||
Transition and re-alignment costs |
- | - | 94 |
(6) |
- | |||||||||||||
Tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes |
(435 | ) | (0.02 | ) | - | - | ||||||||||||
Net Income adjusted |
$ | 1,575 | $ | 0.06 | $ | 875 | $ | 0.03 |
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) $53
(2) $10
(3) $216
(4) $107
(5) $4,804
(6) $26
Reconciliation of net income (loss) to adjusted net income |
||||||||||||||||||
Six Months Ended December 31 |
||||||||||||||||||
(In thousands, except per share data) |
2019 |
2018 |
||||||||||||||||
Diluted EPS |
Diluted EPS |
|||||||||||||||||
Net Income (Loss) as reported |
$ | 6,218 | $ | 0.24 | $ | (14,033 | ) | $ | (0.54 | ) | ||||||||
Restructuring and plant closure (gain) costs |
(3,226 | ) |
(1) |
(0.12 | ) | 1,271 |
(3) |
0.05 | ||||||||||
Severance costs |
44 |
(2) |
- | 385 |
(4) |
0.01 | ||||||||||||
Goodwill impairment |
- | - | 15,361 |
(5) |
0.60 | |||||||||||||
Transition and re-alignment costs |
- | - | 94 |
(6) |
- | |||||||||||||
Tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes |
(435 | ) | (0.02 | ) | - | - | ||||||||||||
Net Income adjusted |
$ | 2,601 | $ | 0.10 | $ | 3,078 | $ | 0.12 |
The reconciliation of reported net income (loss) and earnings (loss) per share to adjusted net income and earnings per share may not agree 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) $(1,086)
(2) $10
(3) 352
(4) 107
(5) 4,804
(6) 26
Results of Operations
THREE MONTHS ENDED DECEMBER 31, 2019 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2018
Lighting Segment |
||||||||
Three Months Ended |
||||||||
December 31 |
||||||||
(In thousands) |
2019 |
2018 |
||||||
Net Sales |
$ | 53,436 | $ | 63,654 | ||||
Gross Profit |
$ | 15,501 | $ | 14,742 | ||||
Operating Income (Loss) |
$ | 3,150 | $ | (18,452 | ) |
Lighting Segment net sales of $53,436,000 in the second quarter of fiscal 2020 decreased 16% from fiscal 2019 same period net sales of $63,654,000. The 16% drop in sales is attributed to the continued transition toward a less commoditized, higher-value sales mix and the softness in select vertical markets.
Gross profit of $15,501,000 in the second quarter of fiscal 2020 increased $0.8 million or 5% from the same period of fiscal 2019, and increased from 22.8% to 28.5% 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 $1,008,000 in fiscal 2019 with no comparable costs in fiscal 2020. The increase in gross profit is also due to product mix and moving away from low-margin commodity business to higher value opportunities which contributed to the improvement in gross profit margin.
Selling and administrative expenses of $12,351,000 in the second quarter of fiscal year 2020 decreased $20.8 million from the same period of fiscal 2019 selling and administrative expenses of $33,194,000, primarily due to the $20.2 million pre-tax goodwill impairment charge in the second quarter of fiscal 2019. When the goodwill impairment charge is removed from fiscal 2019 results, there was a $0.7 million or 5% reduction in selling and administrative expenses. The reduction in selling and administrative expenses is mostly driven by lower commission expense due to lower sales volume.
Lighting Segment second quarter fiscal 2020 operating income of $3,150,000 increased $21.6 million from operating loss of $(18,452,000) in the same period of fiscal 2019 primarily due to a $20.2 million pre-tax goodwill impairment charge in the second quarter of fiscal 2019. When all non-GAAP charges are removed from both fiscal years, fiscal 2020 adjusted operating income, a non-GAAP financial measure, was $3,166,000 compared to $2,929,000 in fiscal 2019 (refer to the non-GAAP table below for a reconciliation of Lighting Segment operating income (loss) to adjusted operating income). The reduction in sales volume was partially offset by higher gross profit margin and lower selling and administrative expenses.
Graphics Segment |
||||||||
Three Months Ended |
||||||||
December 31 |
||||||||
(In thousands) |
2019 |
2018 |
||||||
Net Sales |
$ | 28,941 | $ | 25,887 | ||||
Gross Profit |
$ | 4,465 | $ | 4,927 | ||||
Operating Income (Loss) |
$ | 1,362 | $ | 861 |
Graphics Segment net sales of $28,941,000 in the second quarter of fiscal 2020 increased $3.0 million or 12% from fiscal 2019 same period net sales of $25,887,000. Most of the increase in sales is from growth in sales to the Petroleum market.
Gross profit of $4,465,000 in the second quarter of fiscal 2020 decreased $0.5 million or 9% from the same period of fiscal 2019. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 19.0% in the second quarter of fiscal 2019 to 15.4% in the second quarter of fiscal 2020. As reported in the previous quarter, 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 $3,103,000 in the second quarter of fiscal 2020 decreased $1.0 million or 24% from the same period of fiscal 2019 as a result of decreased wages and benefit expense due to lower headcount and a reduction in bad debt expense.
Graphics Segment second quarter fiscal 2020 operating income of $1,362,000 increased $0.5 million or 58% from operating income of $861,000 in the same period of fiscal 2019. The increase of $0.5 million was primarily the net result of an increase in sales and a decrease in selling and administrative expenses partially offset by decreased gross profit and decreased gross profit margin as a percentage of sales.
Corporate and Eliminations |
||||||||
Three Months Ended |
||||||||
December 31 |
||||||||
(In thousands) |
2019 |
2018 |
||||||
Gross (Loss) |
$ | (2 | ) | $ | (13 | ) | ||
Operating (Loss) |
$ | (2,752 | ) | $ | (2,680 | ) |
The gross (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $2,750,000 in the second quarter of fiscal 2020 increased $0.1 million or 3% from the same period of the prior year. The increase is primarily the result of several increases and decreases across several cost categories.
Consolidated Results
The Company reported $233,000 net interest expense in the second quarter of fiscal 2020 compared to $615,000 net interest expense in the second quarter of fiscal 2019. The decrease in interest expense from fiscal 2019 to fiscal 2020 is the result of lower levels of debt outstanding on the Company’s line of credit. The Company also recorded $91,000 of other income related to net foreign exchange currency transaction gains from transactions with its customers and suppliers through its Mexican subsidiary.
The $125,000 income tax benefit in the second quarter of fiscal 2020 was driven by a lower estimated annualized income tax rate at the end of the second quarter compared to the income tax rate at the end of the first quarter. The lower estimated annualized income tax rate is due to the utilization of a capital loss carryforward related to the anticipated capital gain on the sale of the North Canton, Ohio facility. The $5,104,000 income tax benefit in the second quarter of fiscal 2019 represented a consolidated effective tax rate of 24.4%, which is slightly higher than the expected annual rate of 23% due to the fiscal 2019 second quarter goodwill impairment.
The Company reported net income of $1,743,000 in the second quarter of fiscal 2020 compared to net loss of $(15,782,000) in the same period of the prior year. The improvement in the net loss in the second quarter of fiscal 2019 to net income in the second quarter of fiscal 2020 is mostly driven by the $20.2 million pre-tax goodwill impairment charge in the second quarter of fiscal 2019 with no comparable charge in the second quarter of fiscal 2020. To a lesser degree, there were other non-GAAP charges in both fiscal years besides the goodwill impairment impacting the comparable quarter-over-quarter results (refer to the non-GAAP tables above.) When the impact of all non-GAAP charges is removed from both fiscal years, the fiscal 2020 adjusted net income, a non-GAAP financial measure, of $1,575,000 increased $0.7 million from fiscal 2019 adjusted net income of $875,000. The increase in adjusted net income is primarily the net result of lower net sales, improved gross margin percentage on lower net sales, decreased interest expense, decreased selling and administrative expenses, and a lower tax rate. Diluted earnings per share of $0.07 was reported in the second quarter of fiscal 2020 as compared to $(0.61) diluted loss per share in the same period of fiscal 2019. The weighted average common shares outstanding for purposes of computing diluted earnings (loss) per share in the second quarter of fiscal 2020 were 26,534,000 shares as compared to 26,083,000 shares in the same period last year.
SIX MONTHS ENDED DECEMBER 31, 2019 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2018
Lighting Segment |
||||||||
Six Months Ended |
||||||||
December 31 |
||||||||
(In thousands) |
2019 |
2018 |
||||||
Net Sales |
$ | 116,627 | $ | 125,086 | ||||
Gross Profit |
$ | 32,720 | $ | 30,217 | ||||
Operating Income (Loss) |
$ | 12,309 | $ | (14,602 | ) |
Lighting Segment net sales of $116,627,000 in the first half of fiscal 2020 decreased 7% from fiscal 2019 same period net sales of $125,086,000. The reduction in sales is attributed to the continued transition toward a less commoditized, higher-value sales mix and the softness in select vertical markets.
Gross profit of $32,720,000 in the first half of fiscal 2020 increased $2.5 million or 8% from the same period of fiscal 2019 and increased from 23.9% to 27.7% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The growth in gross profit and gross profit as a percentage of sales is due to continued favorable price/mix. Also contributing to the period-over-period improvement in gross profit is the initial cost savings from the closure of the Company’s New Windsor, New York facility.
Selling and administrative expenses of $20,411,000 in the first half of fiscal 2020 decreased $24.4 million from the same period of fiscal 2019 selling and administrative expenses of $44,819,000, primarily due to the $4.8 million pre-tax gain on the sale of the New Windsor, New York facility in the first half of fiscal 2020 and the $20.2 million pre-tax goodwill impairment charge in the first half of fiscal 2019. When the $4.8 million gain is removed from fiscal 2020 results and the goodwill impairment charge was removed from fiscal 2019 results, there was a $0.6 million or 2% increase in selling and administrative expenses. The increase in selling and administrative expenses is mostly driven by a one-time adjustment to a Company benefit plan in fiscal 2019 with no comparable event in fiscal 2020 partially offset by lower commission expense which is the result of decreased sales volume.
Lighting Segment first half fiscal 2020 operating income of $12,309,000 increased $26.9 million from an operating loss of $(14,602,000) in the same period of fiscal 2019 primarily due to the $4.8 million pre-tax gain on the sale of the New Windsor, New York facility in the first half of fiscal 2020 and a $20.2 million pre-tax goodwill impairment charge in the first half of fiscal 2019. When all non-GAAP charges are removed from both fiscal years, fiscal 2020 Non-GAAP adjusted operating income of $7,676,000 was $0.3 million higher than fiscal 2019 Non-GAAP adjusted operating income of $7,369,000 (refer to the non-GAAP table below for a reconciliation of Lighting Segment operating income (loss) to adjusted operating income). The increase in Non-GAAP adjusted operating income is due to higher gross profit and improved gross profit as a percentage of sales partially offset by a decrease in sales volume and higher selling and administrative expenses.
Graphics Segment |
||||||||
Six Months Ended |
||||||||
December 31 |
||||||||
(In thousands) |
2019 |
2018 |
||||||
Net Sales |
$ | 54,451 | $ | 49,412 | ||||
Gross Profit |
$ | 9,091 | $ | 10,709 | ||||
Operating Income |
$ | 2,379 | $ | 3,248 |
Graphics Segment net sales of $54,451,000 in the first half of fiscal 2020 increased $5.0 million or 10% from fiscal 2019 same period net sales of $49,412,000. Growth was realized across the petroleum and digital signage product applications.
Gross profit of $9,091,000 in the first half of fiscal 2020 decreased $1.6 million or 15% from the same period of fiscal 2019. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 21.6% in the first half of fiscal 2019 to 16.7% in the first half of fiscal 2020. The decrease in amount of gross profit is due to the net effect of increased net sales (customer plus inter-segment net sales) offset by a change in customer program mix. Graphics gross margin was unfavorably impacted by several factors including: new and early stage petroleum products and start-up costs associated therewith, improved inventory levels and impact of lower absorption, alignment of manufacturing resources required to support the transition from print to digital in certain market applications, and a one-time adjustment to a Company benefit plan in fiscal 2019 with no comparable event in fiscal 2020.
Selling and administrative expenses of $6,712,000 in the first half of fiscal 2020 decreased $0.7 million or 10% from the same period of fiscal 2019 primarily as a result of decreased wages and benefit expense due to lower headcount and a reduction in bad debt expense.
Graphics Segment first half fiscal 2020 operating income of $2,379,000 decreased $0.9 million or 27% from operating income of $3,248,000 in the same period of fiscal 2019. The decrease of $0.9 million was primarily the net result of increased net sales and lower selling and administrative costs more than offset by decreased gross profit and decreased gross profit margin as a percentage of sales.
Corporate and Eliminations |
||||||||
Six Months Ended |
||||||||
December 31 |
||||||||
(In thousands) |
2019 |
2018 |
||||||
Gross Profit (Loss) |
$ | 8 | $ | (9 | ) | |||
Operating (Loss) |
$ | (6,089 | ) | $ | (5,983 | ) |
The gross profit (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $6,097,000 in the first half of fiscal 2020 increased $0.1 million from the same period of the prior year. The increase is primarily the result of several increases and decreases across several cost categories.
Consolidated Results
The Company reported $664,000 net interest expense in the first half of fiscal 2020 compared to $1,133,000 net interest expense in the first half of fiscal 2019. The decrease in interest expense from fiscal 2019 to fiscal 2020 is primarily the result of reduced borrowings against the Company’s line of credit. The Company also recorded $9,000 of other income related to net foreign exchange currency transaction gains from transactions with its customers and suppliers through its Mexican subsidiary.
The $1,726,000 income tax expense in the first half of fiscal 2020 represents a consolidated effective tax rate of 21.7% influenced mostly by a discrete item related to stock-based compensation expense and the utilization of a capital loss carryforward related to the anticipated capital gain on the sale of the North Canton, Ohio facility. The $4,437,000 income tax benefit in the first half of fiscal 2019 represents a consolidated effective tax rate of 24.0%, which is slightly higher than the expected annual rate of 23% due to the goodwill impairment.
The Company reported a net income of $6,218,000 in the first half of fiscal 2020 compared to net loss of $(14,033,000) in the same period of the prior year. The improvement from the net loss in the first half of fiscal 2019 to the net income in the first half of fiscal 2020 is driven by the $4.8 million pre-tax gain on the sale of the Company’s New Windsor, New York facility in the first half of fiscal 2020 and the $20.2 million pre-tax goodwill impairment charge in the first half of fiscal 2019. To a lesser degree, there were other non-GAAP charges in both fiscal years besides the gain on the New Windsor, New York facility and goodwill impairment charge (Refer to the Non-GAAP tables above.) When the impact of all non-GAAP charges is removed from both fiscal years, the fiscal 2020 Non-GAAP adjusted net income of $2,601,000 decreased $0.5 million from fiscal 2019 adjusted net income of $3,078,000. The decrease in Non-GAAP adjusted net income is primarily the net result of decreased net sales partially offset by an improved gross profit margin, decreased selling and administrative expenses, decreased interest expense, and a lower effective tax rate. Diluted earnings per share of $0.24 was reported in the first half of fiscal 2020 as compared to $(0.54) diluted loss per share in the same period of fiscal 2019. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first half of fiscal 2020 were 26,364,000 shares as compared to 26,058,000 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 December 31, 2019, the Company had working capital of $51.6 million, compared to $71.1 million at June 30, 2019. The ratio of current assets to current liabilities was 2.24 to 1 as compared to a ratio of 2.78 to 1 at June 30, 2019. The balance sheet at June 30, 2019 included an asset held for sale of $7.5 million which was sold in the first quarter of fiscal 2020. When June 30, 2019 current assets are revised to exclude the asset held for sale, adjusted working capital, a non-GAAP financial measure, and the ratio of current assets to current liability are $63.6 million and 2.59 to 1, respectively, as of June 30, 2019. The $12.0 million decrease in working capital from June 30, 2019 to December 31, 2019 (as adjusted and excludes held for sale assets) is primarily driven by a $10.2 million decrease in accounts receivable and an increase in accounts payable of $1.9 million.
The Company generated $20.9 million of cash from operating activities in the first half of fiscal 2020 as compared to $7.6 million in the same period of the prior year. This $13.3 million increase in net cash flows from operating activities is the result of the Company’s ongoing strategy to aggressively manage its working capital which includes the reduction of accounts receivable days sales outstanding (DSO), increasing inventory turns while simultaneously reducing inventory levels, and effectively managing the Company’s supply chain which includes partnering with its suppliers to find the appropriate service level while effectively managing payment terms.
Net accounts receivable were $44.5 million and $54.7 million at December 31, 2019 and June 30, 2019, respectively. DSO decreased to 54 days at December 31, 2019 from 63 days at June 30, 2019. 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 $43.3 million at December 31, 2019 decreased $0.2 million from $43.5 million at June 30, 2019. The decrease of $0.2 million is the result of a decrease in gross inventory of $0.4 million and a decrease in obsolescence reserves of $0.2 million. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory decreased $1.4 million in the first half of fiscal 2020 in the Graphics Segment which was partially offset by an increase in net inventory in the Lighting Segment of $1.2 million.
Cash generated from operations and borrowing capacity under the Company’s line of credit is the Company’s primary source of liquidity. The Company has a secured $75 million revolving line of credit with its bank, with $66.6 million of the credit line available as of January 16, 2020. 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 2020 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.
The Company had a source of cash of $11.2 million related to investing activities in the first half of fiscal 2020 as compared to a use of $1.6 million in the same period of the prior year, resulting in a favorable change of $12.8 million. Capital expenditures for the first half of fiscal 2020 decreased from $1.6 million in fiscal 2019 to $1.1 million in fiscal 2020. The Company sold its New Windsor, New York manufacturing facility for $12.3 million in the first quarter of fiscal 2020 which was the primary contributing factor to the increase in cash flow from investing activities from fiscal 2019 to fiscal 2020.
The Company used $31.8 million of cash related to financing activities in the first half of fiscal 2020 compared to a source of cash of $0.3 million in the first half of fiscal 2019. The $32.1 million unfavorable change in cash flow was primarily the net result of payments of long-term debt in excess of borrowings which was primarily driven by cash flow from operations.
The Company has 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.
Cash Dividends
In February 2020, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable February 26, 2020 to shareholders of record as of February 18, 2020. The indicated annual cash dividend rate for fiscal 2020 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 2019 Annual Report on Form 10-K.
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, 2019. 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, 2019.
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 December 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 six months ended December 31, 2019, the Company enacted additional controls related to the adoption of ASU 2016-02, “Leases.” 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 December 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 6. EXHIBITS
Exhibits:
10.1* |
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
*Management compensatory agreement.
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.
|
LSI Industries Inc. |
|
|
|
|
|
|
|
By: |
/s/ James A. Clark |
|
|
|
James A. Clark |
|
|
|
Chief Executive Officer and President |
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
By: |
/s/ James E. Galeese |
|
|
|
James E. Galeese |
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
|
(Principal Financial Officer) |
|
February 6, 2020 |
|
|
|
Page 32
Exhibit 10.1
LSI INDUSTRIES INC.
NONQUALIFIED DEFERRED COMPENSATION PLAN
(Amended and Restated as of December 30, 2019)
PREAMBLE
LSI Industries Inc. and each Employer hereby amend and restate the Plan effective as of December 30, 2019 as set forth herein. The Plan was originally effective as of September 15, 1996. The Plan was amended and restated as of July 1, 1998, July 1, 2002, April 27, 2004, September 9, 2005, November 1, 2006, December 31, 2008, November 19, 2009, November 18, 2010 and November 20, 2014. This Plan is an unfunded deferred compensation arrangement for a select group of management or highly compensated employees who render services to an Employer. Amounts credited to a Participant’s Deferred Compensation Account are deemed to be invested in Common Stock of LSI Industries Inc (the “Shares”) and distributions to Plan Participants are made in Shares.
ARTICLE I. DEFINITIONS
1.1 |
“Beneficiary” shall mean the person or persons entitled to receive the distributions, if any, payable under the Plan upon or after a Participant’s death, to such person or persons as such Participant’s Beneficiary. Each Participant may designate a Beneficiary by filing the proper form with the Committee. A Participant may designate one or more contingent Beneficiaries to receive any distributions after the death of a prior Beneficiary. A designation shall be effective upon said filing, provided that it is so filed during such Participant’s lifetime and may be changed from time to time by the Participant. |
1.2 |
“Change in Control” shall mean the occurrence of a “change in the ownership,” a “change in the effective control” or a “change in the ownership of a substantial portion of the assets” of LSI Industries Inc., as defined under Section 409A of the Code. |
1.3 |
“Code” shall mean the Internal Revenue Code of 1986 as amended. |
1.4 |
“Committee” shall mean the Compensation Committee of the Board of Directors of LSI Industries Inc., or its designee, which is responsible for the administration of this Plan in accordance with the provisions of the Plan as set forth in this document. |
1.5 |
“Compensation” shall mean the total amount of earnings (including bonuses) paid by an Employer to an Executive or which would otherwise be paid but for a deferral election hereunder or a salary reduction election under any Code Section 401(k) plan or Code Section 125 plan. |
1.6 |
“Deferred Compensation Account” shall mean the account to be established by an Employer as a book reserve to reflect the amounts deferred by a Participant, the amounts credited by the Employer, and the earnings adjustment under Article VII. A Participant’s Deferred Compensation Account shall be reduced by distributions under Article VIII and Article IX. |
1.7 |
“Employer” shall mean LSI Industries Inc. and any affiliate of LSI Industries Inc. (whether or not incorporated) which has adopted the Plan with the consent of LSI Industries Inc., or any successor or assignee of any of them. |
1.8 |
“Executive” shall mean any employee designated by the Committee (in conjunction with senior management of LSI Industries Inc.) as a member of the select group of management or highly compensated employees eligible for participation in this Plan. |
1.9 |
“Participant” shall mean any Executive who has a right to a benefit under the Plan and a person who was such at the time of the Executive’s death or Separation from Service and who retains, or whose Beneficiary retains, a benefit under the Plan which has not been distributed. |
1.10 |
“Plan” shall mean the LSI Industries Inc. Nonqualified Deferred Compensation Plan as described in this instrument, amended and restated, and, as may be amended thereafter. |
1.11 |
“Plan Year” shall mean the 12-consecutive month period beginning on July 1. |
1.12 |
“Separation from Service” shall mean a “separation from service” within the meaning of Code Section 409A and the rules and regulations promulgated thereunder. |
1.13 |
“Shares” is defined in the Preamble. |
1.14 |
“Subsequent Election” is defined in Section 8.2(b). |
ARTICLE II. PARTICIPANT’S ELECTION TO DEFER
2.1 |
Each Executive may elect to have up to 40% of the Executive’s Compensation (in whole percentages) for a Plan Year deferred and credited with earnings in accordance with the terms and conditions of the Plan. The Committee may allow separate elections with respect to base salary and bonuses. Deferrals are credited to a Participant’s Deferred Compensation Account and deemed to be invested in Shares. |
2.2 |
An Executive desiring to exercise an election under Paragraph 2.1 shall notify the Committee of his/her deferral election. Such notice must be in writing on a form provided by the Committee, or in a manner otherwise satisfactory to the Committee, and provided to the Committee by such date as the Committee shall specify, but in all events no later than the end of the calendar year preceding the first day of the Plan Year to which such election is to apply. Notwithstanding the foregoing, the following special rules shall apply: |
(a) |
Base Salary. The deferral election with respect to base salary earned for periods commencing after December 31, 2019 (and that is not otherwise subject to an irrevocable deferral election) must be filed with the Committee by, and shall become irrevocable as of, December 31 (or such earlier date as specified by the Committee on the deferral election) of the calendar year next preceding the calendar year for which such base salary would otherwise be earned. For purposes of illustration only, an election for deferral of base salary to be earned in calendar year 2020 for the fiscal 2020 Plan Year must be made by December 31, 2019. |
(b) |
Annual Bonus. |
(1) Subject to Section 2.2 (b)(2) of the Plan, the deferral election with respect to annual bonuses commencing with the 2021 Plan Year that are “fiscal year compensation” as defined under Code Section 409A must be filed with the Committee by, and shall become irrevocable as of, the close of the Plan Year (or such earlier date as specified by the Committee on the deferral election) next preceding the first day of the Plan Year for which such annual bonus would otherwise be earned. For purposes of illustration only, an election for deferral of a bonus which is “fiscal year compensation” to be earned in Plan Year 2021 and if earned, payable in August 2021, shall be made by June 30, 2020; and
(2) An Executive’s election relating to Compensation from a performance-based bonus payment based on services over a period of at least 12 months must be made no later than 6 months before the end of the service period, provided the Executive performs services continuously from the later of the beginning of the performance period or the date the performance criteria are established through the date an election is made under this Paragraph 2.2, and provided further that in no event may an election to defer Compensation from a performance-based bonus payment be made after such Compensation has become readily ascertainable. For purposes of illustration only, an election for deferral of a bonus to be earned in Plan Year 2020 and if earned, payable in August 2020, shall be made by December 31, 2019.
(c) |
New Participants. An Executive’s election for deferrals must be provided no later than 30 days following the date the Executive first becomes eligible, and such election will only be effective with regard to Compensation earned following the election; otherwise the Executive must wait until the next enrollment period. |
2.3 |
A deferral election shall be effective with respect to the entire Plan Year or calendar year to which it relates and may not be modified or terminated for that Plan Year or calendar year; provided, however, in the event of an unforeseeable emergency (as defined in Paragraph 8.4), a Participant’s deferral election shall be terminated for the remainder of the respective Plan Year or calendar year, as applicable. |
2.4 |
The Compensation otherwise payable to the Executive during the Plan Year or calendar year shall be reduced pursuant to the Executive’s election under this Article II. Such amounts shall be credited to the Executive’s Deferred Compensation Account. |
ARTICLE III. EMPLOYER MAKE-UP ALLOCATIONS
3.1 |
If because of an election under Article II, a Participant receives a smaller allocation of Employer contributions and/or forfeitures under the LSI Industries Inc. Retirement Plan for a Plan Year of that plan than the Participant would have received had no such election been made, then there shall be credited to the Participant’s Deferred Compensation Account an amount equal to the amount which bears the same relationship to the amounts deferred under Article II and credited to the Participant’s Deferred Compensation Account during the Plan Year as the Participant’s allocations (of Employer contributions and/or forfeitures) under the LSI Industries Inc. Retirement Plan bear to the Participant’s compensation taken into account under that plan. Such amount shall be credited to the Participant’s Deferred Compensation Account at such time as the Committee shall determine. |
3.2 |
(a) If, by reason of the application of the compensation limitation imposed by Code Section 401(a)(17) (or any corresponding successor provision), including any provision in the LSI Industries Inc. Retirement Plan providing such limitation, a Participant receives a smaller allocation of Employer contributions and/or forfeitures under the LSI Industries Inc. Retirement Plan for any plan year of that plan than he would have received had no such limitation been in effect, then there shall be credited to his Deferred Compensation Account the amount determined under (b) below. Such amount shall be credited to the Participant’s Deferred Compensation Account at such time as the Committee shall determine. |
(b) |
The amount hereunder shall be equal to the amount which is the same percentage of the Participant’s compensation (as defined in the LSI Industries Inc. Retirement Plan) in excess of the compensation limitation referred to in (a) above as the percentage allocated under the LSI Industries Inc. Retirement Plan on compensation in excess of the Social Security taxable wage base (but not in excess of the limitation referred to in (a) above). |
ARTICLE IV. LSI INCENTIVE ALLOCATIONS
4.1 |
Each Participant shall be eligible for an Employer incentive allocation for a Plan Year, to be determined in accordance with Paragraph 4.2, if the Participant satisfies both of the following requirements: |
(a) |
The Participant must have elected to make Compensation deferrals under the Plan for the Plan Year of the LSI incentive allocation; and |
(b) |
The Participant must be employed by an Employer at the time the Committee makes the allocation. |
4.2 |
Participants eligible for an Employer incentive allocation under Paragraph 4.1 above shall receive such an allocation determined by the Committee as follows: |
(a) |
The Employer shall match 100% the amount deferred by the Participant; provided that the Employer shall not in a Plan Year make matches that in the aggregate exceed 40% of the Participant’s Compensation; and |
(b) |
The Committee shall make the match at the same time the Participant deferral is made or at such time as is reasonably administratively practical for the Employer. The match shall be deemed to be made in Shares. |
ARTICLE V. ADDITIONAL LSI ALLOCATIONS
The Employer may make additional discretionary allocations to certain Participants. Such additional discretionary allocations must be approved by the Committee and shall be credited to the Participants’ Deferred Compensation Accounts at such time as the Committee shall determine.
ARTICLE VI. PARTICIPANT’S INTEREST
Neither a Participant nor a Participant’s designated Beneficiary shall acquire any property interest in the Participant’s Deferred Compensation Account or any other assets of the Employer, their rights being limited to receiving from the Employer a deferred payment as set forth in this Plan, and these rights are conditioned upon continued compliance with the terms and conditions of this Plan. To the extent that any Participant or Beneficiary acquires a right to receive benefits under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Employer.
ARTICLE VII. CREDITING OF EARNINGS
7.1 |
General. There shall be credited to the Deferred Compensation Account of each Participant an additional amount of earnings (or losses) determined under this Article VII. |
7.2 |
Investment of Compensation Deferrals in Shares. All Compensation deferrals shall be credited with earnings (or losses) as though invested in Shares without reference to dividends paid on Shares. |
7.3 |
Employer Allocations. Employer allocations under Article III and Article IV shall be credited with earnings (or losses) as if it were invested in Shares without reference to the payment of dividends. The Participant shall have no right to elect that alternative investments be used. |
7.4 |
Valuation of Deferred Amounts and Employer Matching Contribution. Executive deferrals shall be valued at the closing price of Shares on the NASDAQ on the date the deferral is made, and the Employer matching contribution shall be likewise valued. The Committee shall determine the valuation of any Employer discretionary contribution. |
7.5 |
Valuation of Account. For each Plan Year quarter or other period, the Participant’s Deferred Compensation Account shall be increased or decreased as if it had been invested in Shares on the date of the valuation using the NASDAQ closing price for the Shares om such date. |
ARTICLE VIII. PLAN BENEFITS
8.1 |
Vesting. A Participant’s rights to the Participant’s Deferred Compensation Account (as adjusted for earnings and losses) shall be fully vested and nonforfeitable at all times. |
8.2 |
Distribution of Benefit. |
(a) |
At the time an Executive makes the first deferral election under Article II, the Executive shall also elect to have the amounts represented by the Executive’s Deferred Compensation Account paid in one of the following two forms commencing as soon as administratively feasible upon the Executive’s Separation from Service but in all events within 90 days following the date of such Separation from Service: |
(1) |
a single lump sum payment, or |
(2) |
approximately equal annual installments to last not more than 10 years. |
If installment payments are in effect, the Participant’s Deferred Compensation Account shall continue to be credited with earnings (or losses) under Article VII until payment of the final installment.
(b) A Participant may change the election referred to in (a) above only in accordance with this Paragraph 8.2(b). A Participant may make a one-time election on a form provided by the Employer to change the form of payment of his Deferred Compensation Account to a form otherwise permitted under Section 8.2(a) of the Plan (a “Subsequent Payment Election”). The Subsequent Payment Election shall become irrevocable upon acceptance by the Employer and shall be made in accordance with the following rules:
(1) The Subsequent Payment Election may not take effect until at least 12 months after the date on which it is accepted by the Employer.
(2) Except in the event of the death or unforeseeable emergency (within the meaning of Section 8.4 hereof) of the Participant, the payment of such Deferred Compensation Account will be delayed until the 5th anniversary of the date that the Deferred Compensation Account would otherwise have been paid under the Plan if such Subsequent Payment Election had not been made (or, in the case of installment payments, which are treated as a single payment for purposes of this Section, on the 5th anniversary of the date that the first installment payment was scheduled to be made).
(c) |
If a Participant has no election concerning the form of benefit payment under this Paragraph 8.2 in effect at the time of the Participant’s Separation from Service, payment shall be made in a single lump sum payment. |
(d) |
Elections shall be made in writing, on a form provided by the Committee, and shall be made in accordance with the rules established by the Committee. |
(e) |
Notwithstanding the Participant’s payment election under this Paragraph 8.2 for a Participant who is a “specified employee” as defined in Code Section 409A and the rules and regulations promulgated thereunder, a distribution may not be made before the date which is 6 months after the date of the Participant’s Separation from Service (or if earlier, the date of death of the Participant). |
8.3 |
Distribution of Shares. Participants shall receive benefit payments in the form of whole shares of Shares. Any fractional shares shall be paid in cash. Any expenses attributable to such payment may be deducted from the Participant’s Deferred Compensation Account. The issuance of Shares under the Plan must be pursuant to a Shareholder approved plan. |
8.4 |
Hardship Distribution. Subject to the approval of the Committee, a Participant may withdraw all or a portion of the Participant’s Deferred Compensation Account in the event of a hardship. The distribution shall be made in the form of whole Shares. Any fractional shares shall be paid in cash. A hardship distribution shall only be made in the event of an unforeseeable emergency that would result in severe financial hardship to the Participant if hardship distributions were not permitted. Withdrawals of amounts because of an unforeseeable emergency shall only be permitted to the extent reasonably needed to satisfy the emergency need. An unforeseeable emergency is defined as severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant, the Participant’s spouse, the Participant’s Beneficiary, or the Participant’s dependent (as defined in Code Section 152, without regard to Code Section 152(b)(1), (b)(2) and (d)(1)(B)), loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The circumstances that will constitute an unforeseeable emergency will depend upon the facts of each case, but, in any case, payment may not be made to the extent such hardship is or may be relieved (1) through reimbursement or compensation by insurance or otherwise (2) liquidation of the Participant’s assets (to the extent the liquidation of such assets would not cause severe financial hardship, or (3) by cessation of deferrals under the Plan. In the event of an unforeseeable emergency (regardless of whether a hardship distribution is made), a Participant’s deferral election under Paragraph 2.1 shall terminate and no further deferrals shall be made for such Participant for the remainder of the Plan Year or calendar year. |
8.5 |
Change in Control. For deferrals of Compensation related to deferral elections that first become irrevocable on or after December 31, 2019, notwithstanding any payment election or Plan provision to the contrary, upon the occurrence of a Change in Control, the remaining amount of the Participant’s Deferred Compensation Account attributable to such deferrals shall be paid to the Participant or his Beneficiary in a single lump sum within 30 days following such Change in Control, or such later date as may be required under Section 8.2(e) hereof. |
ARTICLE IX. DEATH
Upon the death of a Participant prior to commencement of payment under Article VIII, the amounts represented by the Participant’s Deferred Compensation Account, increased by any amounts due to be credited but not yet credited under Article II, Article III or Article IV shall be payable to the Participant’s Beneficiary as soon as administratively feasible following the date of the Participant’s death but in all events within 90 days following such date in the form of distribution elected by the Participant pursuant to Paragraph 8.2(a). If the Participant has already commenced receiving the amounts represented by the Participant’s Deferred Compensation Account in the installment payment form, the installment payments shall continue to be paid to the Participant’s Beneficiary. The Beneficiary shall receive any benefit payments in the form of whole shares of Shares.
ARTICLE X. NON-ASSIGNABLE/NON-ATTACHMENT
Except as required by law, no right of the Participant or designated Beneficiary to receive payments under this Plan shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law and any attempt, voluntary or involuntary, to effect any such action shall be null and void and of no effect. An Employer may not assign its obligations hereunder.
ARTICLE XI. CONSTRUCTION
This Plan shall be construed under the laws of the Code and to the extent not preempted by federal law, according to the laws of the State of Ohio. Article headings are for convenience only and shall not be considered as part of the terms and provisions of the Plan. The Committee shall have full power and authority to interpret, construe and administer this Plan.
ARTICLE XII. AMENDMENT OR TERMINATION OF PLAN
The Plan may be terminated at any time or amended in whole or in part from time to time by LSI Industries Inc. provided that no such termination or amendment may directly or indirectly reduce a Participant’s Deferred Compensation Account (other than through a distribution thereof to the Participant (or his Beneficiary in the event of his death)); and any such amendment shall be binding on each Employer, Participant and designated Beneficiary.
ARTICLE XIII. MISCELLANEOUS
13.1 |
Neither this Plan, nor any action of LSI Industries Inc., an Employer or the Committee, nor any election to defer Compensation hereunder shall be held or construed to confer on any person any legal right to be continued as an employee of LSI Industries Inc. or any Employer. |
13.2 |
LSI Industries Inc. and the Participant’s Employer shall have the right to deduct from all payments and amounts credited hereunder any taxes required by law to be withheld with respect to any benefits under this Plan. |
IN WITNESS WHEREOF, LSI Industries Inc. and each Employer, with the consent of LSI Industries Inc., have caused this amended and restated Plan to be executed as of this 30th day of December 2019
LSI INDUSTRIES INC.
By: /s/ James A. Clark, Chief Executive Officer |
- 9 -
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: February 6, 2020 |
|
/s/ James A. Clark |
|
|
|
Principal Executive Officer |
|
|
|
|
|
|
|
|
|
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: February 6, 2020 |
|
/s/ James E. Galeese |
|
|
|
Principal Financial Officer |
|
|
|
|
|
|
|
|
|
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 December 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 |
|
|
|
|
James A. Clark |
|
|
|
|
Chief Executive Officer and President |
|
|
|
|
|
|
|
|
|
Date: February 6, 2020 |
|
|
|
|
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 December 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 |
|
|
|
|
James E. Galeese |
|
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
|
|
|
|
|
|
|
Date: February 6, 2020 |
|
|
|
|
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.