UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED JUNE 30, 2021
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
Commission File No. 0-13375
LSI INDUSTRIES INC.
(Exact name of Registrant as specified in its charter)
Ohio
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10000 Alliance Road
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IRS Employer I.D.
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(513) 793-3200 |
(Telephone of principal executive offices) |
Securities Registered Pursuant to Section 12(b) of the Act: |
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Common shares, no par value |
LYTS |
The NASDAQ Stock Market LLC
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Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☑ No ☐
Indicate by check mark 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 ☑ |
Non-accelerated filer ☐ |
Smaller reporting company☑ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of December 31, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $206,799,551 based upon a closing sale price of $8.56 per share as reported on The NASDAQ Global Select Market.
At August 31, 2021 there were 26,596,438 no par value Common Shares issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the 2021 Annual Meeting of Shareholders to be held on November 2, 2021 are incorporated by reference in Part III, as specified.
LSI INDUSTRIES INC.
2021 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Begins on | |
Page | |
PART I | |
ITEM 1. BUSINESS |
1 |
ITEM 1A. RISK FACTORS |
4 |
ITEM 1B. UNRESOLVED STAFF COMMENTS |
12 |
ITEM 2. PROPERTIES |
12 |
ITEM 3. LEGAL PROCEEDINGS |
12 |
ITEM 4. MINE SAFETY DISCLOSURES |
12 |
PART II |
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
13 |
ITEM 6. SELECTED FINANCIAL DATA |
13 |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
13 |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
13 |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
14 |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
14 |
ITEM 9A. CONTROLS AND PROCEDURES |
14 |
ITEM 9B. OTHER INFORMATION |
15 |
PART III |
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
15 |
ITEM 11. EXECUTIVE COMPENSATION |
15 |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
15 |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
16 |
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES |
16 |
PART IV |
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
16 |
ITEM 16. FORM 10-K SUMMARY | 19 |
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 the following sections: “Business” (Part I, Item 1 of this Form 10-K), “Risk Factors” (Part I, Item 1A of this Form 10-K), and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (Part II, Item 7 of this Form 10-K). These forward-looking statements generally are identified by the words “encourage,” “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 “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures about Market Risk” (Part II, Item 7A of this Form 10-K). Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.
PART I
ITEM 1. BUSINESS
Overview
LSI Industries Inc. (LSI) is a leading producer of non-residential lighting and retail display solutions. Non-residential lighting consists of high-performance, American-made lighting products. The Company’s strength in outdoor lighting applications creates opportunities for it to introduce additional solutions to its customers. Retail display solutions consist of graphics solutions, digital signage, and technically advanced food display equipment for strategic vertical markets. LSI’s team of internal specialists also provide comprehensive project management services in support of large-scale rollouts.
Our business is organized as follows: the Lighting Segment, which represented 60% of our fiscal 2021 net sales and the Display Solutions Segment, which represented 40% of our fiscal 2021 net sales. See Note 3 of Notes to Consolidated Financial Statements beginning on page 45 of this Form 10-K for additional information on business segments. Net sales by segment are as follows (in thousands):
2021 |
2020 |
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Lighting Segment |
$ | 189,000 | $ | 206,199 | ||||
Display Solutions Segment |
126,612 | 99,359 | ||||||
Total Net Sales |
$ | 315,612 | $ | 305,558 |
Lighting Segment
Our Lighting Segment manufactures, markets, and sells non-residential outdoor and indoor lighting solutions in the commercial and industrial markets, including the following vertical markets: the petroleum/convenience markets, parking lot and garage markets, quick-service restaurant market, retail and grocery store markets, the automotive market, the warehouse market, and the sports complex market. We service these markets through multiple channels: project job business sold through electrical distributors, agents, and shipped direct to the customer; standard products sold to and stocked by distributors; and direct to end-use customers. Our products are designed and manufactured to provide maximum value and meet the high-quality, competitively priced product requirements of the markets we serve. Focusing on key market applications allows us to deliver unique product solutions which in turn provides value to our customers.
Our lighting fixtures, poles and brackets are produced in a variety of designs, styles, and finishes. Important functional variations include types of mounting, such as pole, bracket and surface, and the nature of the light requirement, such as but not limited to interior and exterior down-lighting, wall-wash lighting, canopy lighting, floodlighting, emergency exit lighting, area lighting and security lighting. We also offer a variety of lighting controls including sensors, photocontrols, dimmers, motion detection and Bluetooth systems to support our lighting fixtures. Our engineering professionals perform photometric analyses and wind load safety studies for our light fixtures. In addition, our light fixtures are certified to UL, DLC, and (for outdoor lighting) IDA and IPC standards. Our lighting products utilize LED light sources. All of our products are designed for performance, reliability, ease of installation and service, as well as attractive appearance. We also focus on designing lighting system solutions and implementing strategies related to energy savings in all markets served.
Display Solutions Segment
We acquired JSI Store Fixtures (JSI) in the fourth quarter of fiscal 2021 and consolidated it with our former Graphics Segment, which has been rebranded as our Display Solutions Segment, to more closely align our comprehensive product offering with the markets we serve. The Display Solutions Segment manufactures, sells and installs exterior and interior visual image and display elements, including printed graphics, structural graphics, digital signage, menu board systems, display fixtures, refrigerated displays, and custom display elements. The major products and services offered within our Display Solutions Segment include: signage and canopy graphics, pump dispenser graphics, building fascia graphics, decals, interior signage and marketing graphics, aisle markers, wall mural graphics, and refrigerated and non-refrigerated merchandising displays. We also provide a variety of project management services to complement our display elements such as installation management, site surveys, permitting, and content management which are offered to our customers to support our digital signage. We also manage and execute the implementation of large rollout programs. These programs provide our customers a variety of display solutions and visual image upgrades in the same markets served in the lighting segment which include the petroleum/convenience markets, parking lot and garage markets, quick-service restaurant market, retail and grocery store markets, the automotive market, the warehouse market, and the sports complex market. We believe our expertise with the products and services we offer in the markets we serve represents a significant competitive advantage. We work with our customers and design firms to establish and implement cost effective corporate visual image programs to advance our customer’s brand. Increasingly, we have become the primary supplier of exterior and interior visual image and display elements for our customers.
Sales, Customers and Marketing
The products and services we offer are sold primarily throughout the United States, but also in Canada, Mexico, Australia, and Latin America (approximately 4% of consolidated net sales are outside the United States). Our lighting product sales originate from two primary revenue streams. The first revenue stream is from project-based business, quoting and receiving orders as a preferred vendor for product sales to multiple end-users, including customer-owned as well as franchised and licensed dealer operations. The second revenue stream is from selling standard product to stocking distributors, who subsequently provide product to electrical contractors and end users for a variety of lighting applications. Our display solution elements and related services, which in many instances are program-driven, are sold primarily through our own sales force.
Sales are developed through a wide variety of contacts such as, but not limited to, national retail marketers, branded product companies, and franchised and dealer operations. In addition, sales are also achieved through recommendations from local architects, engineers, and electrical distributors and contractors. The Company utilizes the latest technology to track sales leads and customer quotes with the goal to turn them into orders from our customers. Our sales are partially seasonal as installation of our non-residential outdoor lighting and visual display solutions in the northern states decreases during the winter months. The Company had one customer program with annual consolidated sales exceeding 10 percent of total net sales in fiscal 2021.
The Company markets its products and service capabilities to end users in multiple channels through a broad spectrum of marketing and promotional methods, including direct customer contact, trade shows, on-site and virtual training, print advertising in industry publications, product brochures and other literature, as well as the internet and social media. We have made investments in our marketing support team to continue to build awareness of LSI’s product and service capabilities. Our marketing approach and means of distribution vary by product line and by market.
Manufacturing and Distribution
We currently operate out of eleven manufacturing facilities in six U.S. states and one in Ontario, Canada. In the first quarter of fiscal 2020, the Company sold its New Windsor, New York facility, and moved its production from this location to our Cincinnati, Ohio and Independence, Kentucky locations. In the third quarter of fiscal 2020, the Company sold its North Canton, Ohio facility. In conjunction with the sale of the North Canton facility, we moved to a smaller manufacturing facility in Akron, Ohio. These changes allowed us to leverage our existing footprint in Ohio, Kentucky, North Carolina, and Texas while strengthening our commitment to U.S. based manufacturing along with a diverse and redundant supply chain. The Company added four manufacturing facilities resulting from the acquisition of JSI which included manufacturing facilities located in Maine, Utah, and Canada.
We design, engineer and manufacture most of our lighting and visual display products through the utilization of lean manufacturing principles. Our investment in our production facilities is focused primarily on improving capabilities, product quality, and manufacturing efficiency as well as environmental, health, and safety compliance. The majority of products we sell are engineered, designed, and assembled by the Company, while a small portion of the products and components we sell are purchased from select qualified vendors. Our lighting and visual display products are delivered directly from our manufacturing facilities to our customers utilizing third-party common carriers.
The principal raw materials and purchased components used in the manufacturing of our products are steel, aluminum, aluminum castings, fabrications, LEDs, power supplies, sensors, powder paint, steel tubing, wire harnesses, acrylic, silicon and glass lenses, inks, various graphics substrates such as Aluminum Composite Material (ACM), Expanded PVC sheet (EPVC), vinyl film, styrene, foamboards, wood and wood laminates, condensing units, and digital screens. We source these materials and components from a variety of suppliers. Although an interruption of these supplies and components could disrupt our operations, we believe generally that alternative sources of supply exist and could be readily arranged prior to the COVID-19 pandemic. As a result of the pandemic, we have increased our safety stock in certain components in order to mitigate a potential disruption to our operations resulting from an anticipated shortage of these same components. We are not dependent on any one supplier for critical component parts. We strive to reduce price volatility in our purchases of raw materials and components through annual contracts with strategic suppliers. Our Lighting operations generally carry a certain level of sub-assemblies and finished goods inventory to meet quick delivery requirements. The Company’s operations dealing with LED products generally carry LED and LED component inventory due to longer lead times. Most lighting products are made to order and shipped shortly after they are manufactured. Our display solutions operations manufacture custom products for customers who require us to stock certain amounts of finished goods in exchange for their commitment to that inventory. An example is our digital signage business where customers require us to carry an inventory of digital screens to meet the demands of a large rollout program.
Research and Development:
We invest in the development of new products and solutions as well as the enhancement of existing product offerings to meet the needs of our customers. Research and development costs are directly attributable to new product development, including the development of new technology for both existing and new products, and consist of salaries, payroll taxes, employee benefits, materials, outside legal costs and filing fees related to obtaining patents, supplies, depreciation, and other administrative costs. Research and development costs related to both product and software development totaled $3.7 million and $3.6 million for the fiscal years ended June 30, 2021, and 2020, respectively.
Competition
We experience competition in both segments and in all markets we serve based on numerous factors, including price, brand name recognition, product quality, product design, prompt delivery, energy efficiency, customer relationships, reputation, and service capabilities. Although we have many competitors, both nationally and internationally, some of which have greater financial and other resources, we do not compete with the same companies across both segments and all markets.
Working Capital
For a discussion of our working capital, see “Liquidity and Capital Resources” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations."
Backlog Orders
We had a backlog of orders, which we believe to be firm, of $62.1 million and $26.2 million at June 30, 2021 and 2020, respectively. Fiscal 2021 includes the backlog of JSI. All orders are expected to be shippable or installed within twelve months.
Environmental Regulations
We are subject to a variety of federal, state, and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. These include statutory and regulatory provisions under which we are responsible for the management of hazardous materials we use and the disposition of hazardous wastes resulting from our manufacturing processes. Failure to comply with such provisions could result in fines and other liabilities to the government or third parties.
Human Capital
The Company works to attract and retain the best of the best. We have 1,335 full-time employees as of June 30, 2021. We have a long tenured workforce and are an employer of choice for many of the best employees in our industry. From the executive office to the shop floor, we believe that every LSI team member plays an important role in the Company’s success.
As a responsible employer, we offer attractive and rewarding career opportunities to people from every background and education level.
In addition to providing competitive pay and benefits, including multiple health care options, life insurance and more, we work hard to foster a work environment that encourages innovation, teamwork, and safety every day. We take a structured and scientific approach to safety in order to help ensure that all of our employees end their shifts as safely as they started them. We also promote active and healthy lifestyles within the company, as well as within the communities in which we operate. As part of that vision, we provide free onsite wellness examinations to all of our employees.
We strongly believe that LSI’s success depends on employees understanding how their work contributes to the Company’s overall strategy. To this end, we utilize a variety of channels to facilitate open and direct communication, including open forums or town hall meetings with the CEO along with regular ongoing update communications.
Information Concerning LSI Industries Inc.
We file reports with the Securities and Exchange Commission (“SEC”) on Forms 10-K, 10-Q and 8-K. The SEC maintains an internet website that contains reports, proxy and information statements and other information regarding us. The address of that site is http://www.sec.gov. Our internet address is http://www.lsicorp.com. We make available free of charge through our internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practical after we electronically file them with the SEC.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the following factors which could materially affect our business, financial condition, cash flows or future results. Any one of these factors could cause the Company’s actual results to vary materially from recent results or from anticipated future results. The risks described below are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Risk Factor Summary
Risks Related to Our Strategy
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Our financial condition and results of operations for future periods may be adversely affected by the COVID-19 outbreak or other outbreaks of infectious disease or similar public health threats and the resulting economic impact. |
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Lower levels of economic activity in our end markets could adversely affect our operating results. |
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Our business is cyclical and seasonal, and in downward economic cycles our operating profits and cash flows could be adversely affected. |
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Our operating results may be adversely affected by unfavorable economic, political and market conditions. |
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The inability to effectively execute our business strategies could adversely affect our financial condition and results of operations. |
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The markets in which we operate are subject to competitive pressures that could affect selling prices, and therefore could adversely affect our operating results. |
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We have a concentration of net sales to the petroleum/convenience store market, and any substantial change in this market could have an adverse effect on our business. |
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The Company may pursue future growth through strategic acquisitions and investments, which may not yield anticipated benefits. |
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If we do not develop the appropriate new products or if customers do not accept new products, we could experience a loss of competitive position which could adversely affect future revenues. |
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If we are unable to adequately protect our intellectual property, we may lose some of our competitive advantage. |
Risks Related to our Operations
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Sudden or unexpected changes in a customer’s creditworthiness could result in significant accounts receivable write-offs. |
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Price increases, significant shortages of raw materials and components, shortages in transportation and an increase in fuel prices could adversely affect our operating margin. |
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Our information technology systems are subject to certain cyber risks and could be subject to disasters that are beyond our control. |
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Labor shortages or increases in labor costs could adversely impact our business and results of operations. |
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If the Company’s products are improperly designed, manufactured, packaged, or labeled, the Company may need to recall those items, may have increased warranty costs, and could be the target of product liability claims. |
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Changes in a customer’s demands and commitment to proprietary inventory could result in significant inventory write-offs. |
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The turnover of independent commissioned sales representatives could cause a significant disruption in sales volume. |
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The Company may be unable to sustain significant customer and/or channel partner relationships. |
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A loss of key personnel or inability to attract qualified personnel could have an adverse effect on our operating results. |
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Changes in a shift in product mix can have a significant impact on our gross margins. |
Risks Related to Legal and Regulatory Matters
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Any actual or perceived failure by us to comply with legal or regulatory requirements related to privacy or data security in one or multiple jurisdictions could result in proceedings, actions, or penalties against us. |
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The costs of litigation and compliance with environmental regulations, if significantly increased, could have an adverse effect on our operating profits. |
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Potential changes in U.S. trade policies could have a material adverse effect on the Company. |
Risks Related to Financial Matters
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A significant decline in our stock price could adversely affect our ability to raise additional capital. |
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Changes in the method of determining London Interbank Offered Rate ("LIBOR"), or the replacement of LIBOR with an alternative reference rate, may adversely affect interest expense related to outstanding debt |
RISKS RELATED TO OUR STRATEGY
Our financial condition and results of operations for future periods may be adversely affected by the COVID-19 outbreak or other outbreaks of infectious disease or similar public health threats and the resulting economic impact.
COVID-19 and variants thereof continue to spread globally and resulted in authorities implementing numerous measures in 2020 and 2021 to try to contain the virus, such as but not limited to travel bans and restrictions, quarantines, shelter in place orders, and shutdowns. These measures have impacted previous operating results and may continue to impact our workforce and operations, the operations of our customers, and those of our respective vendors and suppliers if the virus continues to spread resulting in further mandated actions. We have experienced some limited disruptions in supply from some of our suppliers, although the disruptions to date have not been significant. Additionally, there was a disruption to the construction markets, as well as inventory de-stocking by our distributors, which had a negative impact to sales. Restrictions on access to our manufacturing facilities or on our support operations or workforce, or similar limitations for our vendors and suppliers, and restrictions or disruptions of transportation, such as reduced availability of air transport, port closures, and increased border controls or closures, could limit our capacity to meet customer demand, lead to increased costs and have a material adverse effect on our financial condition and results of operations.
The outbreak continues to increase economic and demand uncertainty. These uncertainties could make it more difficult for us to assess the quality of our product order backlog and to estimate future financial results. The outbreak of COVID-19 caused an economic slowdown, and it is increasingly possible that its continued spread could lead to a global recession, which could have a material adverse effect on demand for our products and on our financial condition and results of operations. The spread of COVID-19 caused us to modify our business practices in fiscal 2021 (including employee travel, employee work locations, limitations on physical participation in meetings, events and conferences, and responsible efforts to preserve cash and control spending. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, and suppliers. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus and its consequences, and our ability to perform critical functions could be harmed. In addition, given the challenges posed by COVID-19, our workforce operated at reduced levels at our manufacturing facilities, which had an adverse impact on our ability to timely meet future customer orders.
The duration of further business disruption and related financial impact cannot be reasonably estimated at this time. However, it may materially affect our ability to obtain raw materials and components, manage customer credit risk, or manufacture products in a timely manner, and it also may impair our ability to meet customer demand for products, result in lost sales, additional costs, or penalties, or damage our reputation. The extent to which COVID-19 or any other health epidemic will further impact our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. Further, the continued existence of the pandemic may adversely impact the health of our workforce, which could result in higher healthcare costs.
Lower levels of economic activity in our end markets could adversely affect our operating results.
Our businesses operate in several market segments including the petroleum/convenience markets, parking lot and garage markets, quick-service restaurant market, retail and grocery store markets, the automotive market, the warehouse market, and the sports complex market. Operating results can be negatively impacted by volatility in these markets. Future downturns in any of the markets we serve could adversely affect our overall sales, profitability, and cash flow. In addition, customer difficulties in the future could result from economic declines or issues arising from the cyclical nature of their business and, in turn, result in decreases in product demand, increases in bad debt write-offs, decreases in timely collection of accounts receivable and adjustments to our allowance for doubtful accounts receivable, resulting in material reductions to our revenues and net earnings.
Our business is cyclical and seasonal, and in downward economic cycles our operating profits and cash flows could be adversely affected.
Historically, sales of our products have been subject to cyclical variations caused by changes in general economic conditions. The demand for our products reflects the capital investment decisions of our customers, which depend upon the general economic conditions of the markets that our customers serve. During periods of expansion in construction and industrial activity, we generally have benefited from increased demand for our products. Conversely, downward economic cycles in these industries result in reductions in sales and pricing of our products, which may reduce our profits and cash flow. During economic downturns, customers also tend to delay purchases of new products. The cyclical and seasonal nature of our business could at times adversely affect our liquidity and financial results.
Our operating results may be adversely affected by unfavorable economic, political and market conditions.
Economic and political conditions worldwide have from time to time contributed to slowdowns in our industry at large, as well as to the specific markets in which we operate. When combined with ongoing customer consolidation activity and periodic manufacturing and inventory initiatives, an uncertain macro-economic and political climate, including but not limited to the effects of possible weakness in domestic and foreign financial and credit markets, could lead to reduced demand from our customers and increased price competition for our products, increased risk of excess and obsolete inventories and uncollectible receivables, and higher overhead costs as a percentage of revenue. If the markets in which we participate experience further economic downturns, as well as a slow recovery period, this could negatively impact our sales and revenue generation, margins, and operating expenses, and consequently have a material adverse effect on our business, financial condition and results of operations.
The inability to effectively execute our business strategies could adversely affect our financial condition and results of operations.
Various uncertainties and risks are associated with our approach to strategically penetrate certain market verticals, including but not limited to, the development, marketing and selling of new products and solutions, new product development, and the overall development, marketing, and selling of lighting and display solutions. Those uncertainties and risks include but are not limited to diversion of management’s attention; difficulty in retaining or attracting employees; negative impact on relationships and customers; obsolescence of current products and slow new product development; inability to produce products with quality, performance, and cost attributes equal to or better than provided by our competitors; and unforeseen difficulties in the implementation of the management operating structure. Problems with strategy execution could offset anticipated benefits, disrupt service to customers, and impact product quality as well as adversely affect our business. With the addition of new products and solutions, we may encounter new and different competitors that may have more experience with respect to such products and solutions.
The markets in which we operate are subject to competitive pressures that could affect selling prices, and therefore could adversely affect our operating results.
Our businesses operate in markets that are highly competitive, and we compete on the basis of price, quality, service and/or brand name across the industries and markets served. Some of our competitors for certain products, primarily in the Lighting Segment, have greater sales, assets, and financial resources. Some of our competitors are based in foreign countries and have cost structures and prices in foreign currencies. Accordingly, currency fluctuations could cause our U.S. dollar-priced products to be less competitive than our competitors’ products which are priced in other currencies. Competitive pressures could affect prices we charge our customers or demand for our products, which could adversely affect our operating results. Additionally, customers for our products may attempt to reduce the number of vendors from which they purchase in order to reduce the size and diversity of their inventories and their transaction costs. To remain competitive, we will need to invest continuously in research and development, manufacturing, marketing, customer service and support, and our distribution networks. We may not have sufficient resources to continue to make such investments and we may be unable to maintain our competitive position.
We have a concentration of net sales to the petroleum / convenience store market, and any substantial change in this market could have an adverse effect on our business.
Approximately 34% of our net sales in fiscal year 2021 are concentrated in the petroleum/convenience store market. Sales to this market segment are dependent upon the general conditions prevailing in and the profitability of the petroleum/convenience store industry and general market conditions. Our petroleum market business can be subject to reactions by the petroleum industry to world political events, particularly those in the Middle East, to the price and supply of oil and to a decline in demand resulting from an economic recession or other factors. Major disruptions in the petroleum industry generally result in a curtailment of retail marketing efforts, including expansion and refurbishing of retail outlets, by the petroleum industry and adversely affect our business. Any substantial change in purchasing decisions by one or more of our larger customers whether due to actions by our competitors, customer financial constraints, and industry factors or otherwise, could have an adverse effect on our business.
The Company may pursue future growth through strategic acquisitions and investments, which may not yield anticipated benefits
The Company has strengthened its business through strategic acquisitions including the recent acquisition of JSI, and may continue to do so as opportunities arise in the future. The Company will benefit from such activity only to the extent that it can effectively leverage and integrate the assets or capabilities of the acquired businesses including, but not limited to, personnel, technology, and operating processes. Moreover, unanticipated events, negative revisions to valuation assumptions and estimates, diversions of resources and management’s attention from other business concerns, and difficulties in attaining synergies, among other factors, could adversely affect the Company’s ability to recover initial and subsequent investments, particularly those related to acquired goodwill and intangible assets, which in turn could result in the impairment of the acquired company’s goodwill and related assets. In addition, such investment transactions may limit the Company’s ability to invest in other activities, which could be more profitable or advantageous.
If we do not develop the appropriate new products or if customers do not accept new products, we could experience a loss of competitive position which could adversely affect future revenues.
The Company is committed to product innovation on a timely basis to meet customer demands. Development of new products for targeted markets requires the Company to develop or otherwise leverage leading technologies in a cost-effective and timely manner. Failure to meet these changing demands could result in a loss of competitive position and seriously impact future revenues. Products or technologies developed by others may render the Company’s products or technologies obsolete or noncompetitive. A fundamental shift in technologies in key product markets could have a material adverse effect on the Company’s operating results and competitive position within the industry. More specifically, the development of new or enhanced products is a complex and uncertain process requiring the anticipation of technological and market trends. Rapidly changing product technologies could adversely impact operating results due to potential technological obsolescence of certain inventories or increased warranty expense related to newly developed LED lighting products or any of the Company’s other products and services. We may experience design, manufacturing, marketing, or other difficulties, such as an inability to attract a sufficient number of experienced engineers which could delay or prevent our development, introduction or marketing of new products or enhancements and result in unexpected expenses. Such difficulties could cause us to lose business from our customers and could adversely affect our competitive position. In addition, added expenses could decrease the profitability associated with those products that do not gain market acceptance.
If we are unable to adequately protect our intellectual property, we may lose some of our competitive advantage.
Our success is determined in part by our ability to obtain United States and foreign patent protection for our technology and to preserve our trade secrets. Our ability to compete and the ability of our business to grow could suffer if our intellectual property rights are not adequately protected. There can be no assurance that our patent applications will result in patents being issued or that current or additional patents will afford protection against competitors. We rely on a combination of patents, copyrights, trademarks and trade secret protection and contractual rights to establish and protect our intellectual property. Failure of our patents, copyrights, trademarks and trade secret protection, non-disclosure agreements and other measures to provide protection of our technology and our intellectual property rights could enable our competitors to compete with us more effectively and have an adverse effect on our business, financial condition, and results of operations. In addition, our trade secrets and proprietary know-how may otherwise become known or be independently discovered by others. No guarantee can be given that others will not independently develop substantially equivalent proprietary information or techniques, or otherwise gain access to our proprietary technology.
RISKS RELATED TO OUR OPERATIONS
Sudden or unexpected changes in a customer’s creditworthiness could result in significant accounts receivable write-offs.
The Company takes a conservative approach when extending credit to its customers. Customers are granted an appropriate credit limit based upon the due diligence performed on the customer which includes, among other things, the review of the company’s financial statements and banking information, various credit checks, and payment history the customer has with the Company. At any given time, the Company can have a significant amount of credit exposure with its larger customers. While the Company is frequently monitoring its outstanding receivables with its customers, the risk does exist that a customer with large credit exposure is unable to make payment on its outstanding receivables which could result in a significant write-off of accounts receivable.
Price increases, significant shortages of raw materials and components, shortages in transportation and an increase in fuel prices could adversely affect our operating margin.
The Company purchases large quantities of raw materials and components such as steel, aluminum, aluminum castings, fabrications, LEDs, power supplies, powder paint, steel tubing, wire harnesses, acrylic, silicon and glass lenses, inks, various graphics substrates such as Aluminum Composite Material (ACM), Expanded PVC sheet (EPVC), vinyl film, styrene, foamboards, wood and wood laminates, condensing units, and digital screens. Materials comprise the largest component of costs, representing approximately 62% and 60% of the cost of sales in 2021 and 2020, respectively. The Company’s operating results could be affected by the availability and price fluctuations of these materials. The Company’s strategic sourcing plans include mitigating supply chain risk by utilizing multiple suppliers for a commodity to avoid significant dependence on any single supplier. Although an interruption of these supplies and components could disrupt our operations, we believe generally that alternative sources of supply exist and could be readily arranged prior to the COVID-19 pandemic. As a result, we have increased our safety stock in certain components in order to mitigate a potential disruption to our operations resulting from an anticipated shortage of these same components. With regard to price fluctuations of our raw material and component purchases, the price risk for materials the Company purchases is related to price increases in commodity items that affect all users of the materials, including the Company’s competitors. Significant tariffs or increases in the price of these raw materials and components could further increase the Company’s operating costs and materially adversely affect margins. The Company does, however, seek and qualify new suppliers, negotiate with existing suppliers, and arranges stocking agreements to mitigate risk of supply and price increases. The Company is also impacted by shortages and the availability of transportation of our products to our customers, in addition to rising fuel prices. On occasion, the Company’s Lighting Segment has implemented price increases and surcharges with customers to offset raw material price increases and to mitigate the impact of trade tariffs. The Company’s Display Solutions Segment generally establishes new sales prices, reflective of the then current raw material prices, for each program as it begins with further price increases throughout the life of the program when warranted. Although the Company attempts to pass along increased costs in the form of price increases or surcharges to its customers, the Company may be unsuccessful in doing so for competitive reasons. Even when price increases are successful, the timing of such price increases may lag significantly behind the incurrence of higher costs.
Our information technology systems are subject to certain cyber risks and could be subject to disasters that are beyond our control.
We depend heavily on the proper functioning and availability of our information, communications, and data processing systems, including operating and financial reporting systems, in operating our business. Our systems and those of our technology and communications providers are vulnerable to interruptions caused by natural disasters, power loss, telecommunication and internet failures, cyber-attack, and other events beyond our control. Accordingly, information security and the continued development and enhancement of the controls and processes designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for us.
We have been, and in the future may be, subject to cybersecurity and malware attacks and other intentional hacking. Any failure to identify and address or to prevent a cyber- or malware-attack could result in service interruptions, operational difficulties, loss of revenues or market share, liability to our customers or others, the diversion of corporate resources, injury to our reputation and increased service and maintenance costs. In August 2020, we experienced a malware incident affecting certain of our network systems. Immediately following the incident, actions were taken to recover the affected systems and to verify through third-party testing that no confidential data was extracted or compromised. There was minimal business interruption and immaterial net financial impact resulting from the incident. Since the incident occurred, we have significantly enhanced and will continue to improve our cybersecurity controls in order to minimize the likelihood or impact of a reoccurrence.
Our information systems are protected through physical and software security as well as redundant backup systems, however, as cyber-attacks continue to evolve, we are committed to investing in our cyber defenses in order to mitigate the risks. Some of our software systems are utilized by third parties who provide outsourced processing services which may increase the risk of a cyber-security incident. We have invested and continue to invest in technology security initiatives, employee training, information technology risk management and disaster recovery plans. The development and maintenance of these measures is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become increasingly more sophisticated. Despite our efforts, we are not fully insulated from data breaches, technology disruptions or data loss, which could adversely impact our competitiveness and results of operations. Any future successful cyber-attack or catastrophic natural disaster could significantly affect our operating and financial systems and could temporarily disrupt our ability to provide required services to our customers, impact our ability to manage our operations and perform vital financial processes, any of which could have a materially adverse effect on our business.
Labor shortages or increases in labor costs could adversely impact our business and results of operations.
We rely heavily on our employees and any shortage of qualified labor could adversely affect our business. If we are not successful in our recruiting and retention efforts due to general labor shortages or otherwise, we could encounter a shortage of qualified employees in future periods. Any such shortage would decrease our ability to produce sufficient quantities of our product to serve our customers effectively. Such a shortage may also require us to pay higher wages for employees and incur a corresponding reduction in our profitability. Improvements in the economy and labor markets also could impact our ability to attract and retain key personnel. Rising wages across an improving economy can increase the competition among employers for a scarce labor force and make it difficult for us to attract and retain key personnel.
If the Company’s products are improperly designed, manufactured, packaged, or labeled, the Company may need to recall those items, may have increased warranty costs, and could be the target of product liability claims
The Company may need to recall products if they are improperly designed, manufactured, packaged, or labeled, and the Company’s insurance may not provide full coverage for such recall events. Many of the Company's products and solutions have become complex and include sophisticated and sensitive electronic components. The Company has increasingly manufactured certain of those components and products in its own facilities. Widespread product recalls could result in significant losses due to the costs of a recall, the destruction of product inventory, penalties, and lost sales due to the unavailability of a product for a period of time. In addition, products developed by the Company that incorporates LED technology, generally provide for more extensive warranty protection which may result in increased warranty claim costs. The Company may also be liable if the use of any of its products causes harm and could suffer losses from a significant product liability judgment against the Company in excess of its insurance limits. The Company may not be able to obtain indemnity or reimbursement from its suppliers or other third parties for the warranty costs or liabilities associated with its products. A significant product recall, warranty claim, or product liability case could also result in adverse publicity, damage to the Company’s reputation, and a loss of consumer confidence in its products.
Changes in a customer’s demands and commitment to proprietary inventory could result in significant inventory write-offs.
Upgrading or replacing a customer’s current image requires the manufacture of inventory that is specific to the particular customer. This is particularly true in the Display Solutions Segment. In as many instances as possible, we require a commitment from the customer before the inventory is produced. Our request for a commitment can range from a single site or store to a large rollout program involving many sites or stores. The risk does exist that a customer cannot or will not honor its commitment to us. The reasons a customer cannot or will not honor its commitment can range from the bankruptcy of the customer to the change in the image during the rollout program, to canceling the program before its completion and before the inventory is sold to the customer. In each of these instances, we could be left with significant amounts of inventory required to support the customer’s re-imaging. While all efforts are made to hold the customer accountable for its commitment, there is the risk that a significant amount of inventory could be deemed obsolete or no longer usable which could result in significant inventory write-offs.
The turnover of independent commissioned sales representatives could cause a significant disruption in sales volume.
Commissioned sales representatives are critical to generating business in the Lighting Segment. From time to time, commissioned sales representatives representing a particular region resign or are terminated and replaced with new commissioned sales representatives. During this period of transition from the previous agency to the new one, sales in the particular region will likely fall as business is disrupted. It may take several months for the new sales representative to generate sales that will equal or exceed the previous sales representative. There is also the risk that the new sales agency will not attain the sales volume of the previous agency. These sales representative changes may occur individually as one agency is replaced due to lack of performance or changes may occur as a result of the mergers or acquisitions within the lighting industry. On the other hand, these sales representative changes can be widespread as a result of the competitive nature of the lighting industry as LSI and its competition vie for the strongest sales agency in a particular region.
The Company may be unable to sustain significant customer and/or channel partner relationships.
Relationships with customers are directly impacted by the Company’s ability to deliver quality products and services. The loss of or a substantial decrease in the volume of purchases by certain large customers could significantly harm the Company. The Company has relationships with channel partners such as electrical distributors, independent sales agencies, system integrators, contractors and value-added resellers, to name a few. While the Company maintains positive, and in many cases long-term relationships with these channel partners, the loss of a number of channel partners or substantial decrease in the volume of purchases from a major channel partner or group of channel partners could adversely affect the Company.
A loss of key personnel or inability to attract qualified personnel could have an adverse effect on our operating results.
The Company’s future success depends on the ability to attract and retain highly skilled technical, managerial, marketing and finance personnel, and, to a significant extent, upon the efforts and abilities of senior management. The Company’s management philosophy of cost-control results in a lean workforce. Future success of the Company will depend on, among other factors, the ability to attract and retain other qualified personnel, particularly executive management, research and development engineers, and sales professionals. The loss of the services of any key employees or the failure to attract or retain other qualified personnel could have a material adverse effect on the Company’s results of operations.
Changes in a shift in product mix can have a significant impact on our gross margins
Certain of our products have higher gross profit margins than others. Further, the difference in gross margin of the products sold within the Lighting and Display Solutions Segments can also vary significantly. Consequently, changes in the product mix of our sales from quarter-to-quarter or from year-to-year can have a significant impact on our reported gross profit margins.
RISKS RELATED TO LEGAL AND REGULATORY MATTERS
Any actual or perceived failure by us to comply with legal or regulatory requirements related to privacy or data security in one or multiple jurisdictions could result in proceedings, actions, or penalties against us.
There are numerous state, federal and foreign laws, regulations, decisions and directives regarding privacy and the collection, storage, transmission, use, processing, disclosure, and protection of personally identifiable information and other personal, customer or other data, the scope of which is continually evolving and subject to differing interpretations. For example, in the U.S., Health Insurance Portability and Accountability Act (“HIPAA”) privacy and security rules require us as a business associate to protect the confidentiality of patient health information, and the Federal Trade Commission asserts authority over protection of privacy and the use of cyber security in information systems. In Europe, the General Data Protection Regulation (“GDPR”), which went into effect in May 2018, imposes several stringent requirements for controllers and processors of personal data that will increase our obligations and, in the event of violations, may impose significant fines of up to the greater of 4% of worldwide annual revenue or €20 million. In the UK, a Data Protection Bill that substantially implements the GDPR became law in May 2018. China and Russia have also passed laws that require individually identifiable data on their citizens to be maintained on local servers and that may restrict transfer or processing of that data. Further, in June 2018, California passed the California Consumer Privacy Act of 2018 (“CCPA”), which became effective on January 1, 2020. CCPA imposes stringent data privacy and data protection requirements for the data of California residents and provides for penalties for noncompliance of up to $7,500 per violation. The restrictions imposed by these laws and regulations may limit the use and adoption of our products, reduce overall demand for our products, require us to modify our data handling practices and impose additional costs and burdens. In addition, U.S. and international laws that have been applied to protect user privacy (including laws regarding unfair and deceptive practices in the U.S. and GDPR in the EU) may be subject to evolving interpretations or applications in light of privacy developments. As a result, we may be subject to significant consequences, including penalties and fines, for any failure to comply with such laws, regulations, and directives.
Data protection legislation around the world is comprehensive and complex and there has been a recent trend towards more stringent enforcement of requirements regarding protection and confidentiality of personal data. The restrictions imposed by such laws and regulations may limit the use and adoption of our products and services, reduce overall demand for our products and services, require us to modify our data handling practices, and impose additional costs and burdens. With increasing enforcement of privacy, data protection and cyber security laws and regulations, there is no guarantee that we will not be subject to enforcement actions by governmental bodies or that our costs of compliance will not increase significantly. Enforcement actions can be costly and interrupt regular operations of our business. In addition, there has been a developing trend of civil lawsuits and class actions relating to breaches of consumer data held by large companies. While we have not been named in any such suits, if a substantial breach or loss of data from our records were to occur, we could become a target of such litigation. Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable laws, regulations, policies, industry standards, contractual obligations, or other legal obligations could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business. Our failure to comply with applicable laws and regulations could result in enforcement action against us, including fines and public censure, claims for damages by customers and other affected individuals, damage to our reputation and loss of goodwill (both in relation to existing customers and prospective customers), any of which could harm our business, results of operations and financial condition.
The costs of litigation and compliance with environmental regulations, if significantly increased, could have an adverse effect on our operating profits.
We are, and may in the future be, a party to any number of legal proceedings and claims, including those involving patent litigation, product liability, employment matters, and environmental matters, which could be significant. Given the inherent uncertainty of litigation, we can offer no assurance that existing litigation or a future adverse development will not have a material adverse impact. We are also subject to various laws and regulations relating to environmental protection and the discharge of materials into the environment, and it could potentially be possible we could incur substantial costs as a result of the noncompliance with or liability for clean up or other costs or damages under environmental laws.
Potential changes in U.S. trade policies could have a material adverse effect on the Company.
Changes in the U.S. trade policy, U.S. social, political, regulatory, and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently purchase component parts and sell products, and any resulting negative sentiments towards the United States as a result of such changes, could have an adverse effect on our business.
We rely on purchased components that are sourced from or manufactured in foreign countries. Import tariffs and potential import tariffs have resulted or may result in increased prices for these imported goods and materials and, in some cases, may result or have resulted in price increases for domestically sourced goods and materials. Changes in U.S. trade policy have resulted and could result in additional reactions from U.S. trading partners, including adopting responsive trade policies making it more difficult or costly for us to export our products or import goods and materials from those countries. These measures could also result in increased costs for goods imported into the U.S. or may cause us to adjust our foreign supply chain. Either of these could require us to increase prices to our customers which may reduce demand, or, if we are unable to increase prices, result in lowering our margin on products sold.
We cannot predict future trade policy or the terms of any renegotiated trade agreements and their impacts on our business. The adoption and expansion of trade restrictions, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements, or policies has the potential to adversely impact demand for our products, our costs, our customers, our suppliers, and the U.S. economy, which in turn could adversely impact our business, financial condition, and results of operations.
RISKS RELATED TO FINANCIAL MATTERS
A significant decline in our stock price could adversely affect our ability to raise additional capital.
The market price of our common stock has experienced fluctuations in prior years. Our progress in developing and commercializing our products, our quarterly operating results, announcements of new products by us or our competitors, our perceived prospects, changes in general conditions in the economy or the financial markets, adverse events related to our strategic relationships, and other developments affecting us, or our competitors could cause the market price of our common stock to fluctuate substantially. In addition, in recent years, including in fiscal 2021, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. These market fluctuations, regardless of the cause, may materially and adversely affect our stock price, regardless of our operating results, and this could impact our ability to raise capital.
Changes in the method of determining London Interbank Offered Rate ("LIBOR"), or the replacement of LIBOR with an alternative reference rate, may adversely affect interest expense related to outstanding debt.
Amounts drawn under our credit facility may bear interest rates in relation to LIBOR, depending on our selection of repayment options. On July 27, 2017, the Financial Conduct Authority (“FCA”) in the UK announced that it would phase out LIBOR as a benchmark by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve is considering replacing U.S. dollar LIBOR with a newly created index called the Broad Treasury Financing Rate, calculated with a broad set of short-term repurchase agreements backed by treasury securities. The overall financial market may be disrupted as a result of the phase-out or replacement of LIBOR. Disruption in the financial market or the inability to renegotiate our credit facility with favorable terms could have a material adverse effect on our business, financial position, and operating results.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Description |
Size |
Location |
Status |
||||
1) |
Corporate Headquarters and Lighting and Display Solutions manufacturing |
243,000 sq. ft. (includes 66,000 sq. ft of office space) |
Cincinnati, OH |
Owned |
|||
2) |
Lighting manufacturing |
122,000 sq. ft. |
Cincinnati, OH |
Owned |
|||
3) |
Lighting office and manufacturing |
96,000 sq. ft. (includes 5,000 sq. ft. of office space |
Independence, KY |
Owned |
|||
4) |
Display Solutions office and manufacturing |
183,000 sq. ft. (includes 34,000 sq. ft. of office space) |
Houston, TX |
Leased |
|||
5) |
Display Solutions office and manufacturing |
46,000 sq. ft. (includes 10,000 sq. ft. of office space |
Akron, OH |
Leased |
|||
6) |
Lighting office and manufacturing |
57,000 sq. ft. (includes 5,000 sq. ft. of office space) |
Columbus, OH |
Owned |
|||
7) |
Lighting office and manufacturing |
336,000 sq. ft. (includes 60,000 sq. ft. of office space) |
Burlington, NC |
Leased |
|||
8) |
Display Solutions office and manufacturing |
77,000 sq. ft. (includes 8,000 sq. ft. of office space |
Milo, ME |
Owned |
|||
9) |
Display Solutions office and manufacturing |
42,000 sq. ft. (includes 4,000 sq. ft. of office space) |
Bangor, ME |
Leased |
|||
10) |
Display Solutions manufacturing |
77,000 sq. ft. |
Collingwood, ON |
Leased |
|||
11) |
Display Solutions office |
1,000 sq. ft. |
Gloucester, MA |
Leased |
|||
12) |
Display Solutions manufacturing |
68,000 sq. ft. |
Payson, UT |
Leased |
The Company considers these 12 operating facilities adequate for its current level of operations.
ITEM 3. LEGAL PROCEEDINGS
See Note 14 of Notes to the Consolidated Financial Statements beginning on page 59 of this Form 10-K.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
LSI’s shares of common stock are traded on the NASDAQ Global Select Market under the symbol “LYTS.” At August 31, 2021, there were approximately 617 shareholders of record. The Company believes this represents approximately 3,000 beneficial shareholders.
The Company’s Board of Directors has adopted a dividend policy 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 by the Board of Directors. The Company has paid annual cash dividends beginning in fiscal 1987 through fiscal 1994, and quarterly cash dividends since fiscal 1995. The Company’s indicated annual rate for payment of a cash dividend at the end of fiscal 2021 was $0.20 per share.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” appears on pages 21 through 28 of this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in variable interest rates, changes in prices of raw materials and purchased component parts, and changes in foreign currency translation rates. Each of these risks is discussed below.
Interest Rate Risk
The Company earns interest income on its cash, cash equivalents, and short-term investments (if any) and pays interest expense on its debt (if any). Because of variable interest rates, the Company is exposed to the risk of interest rate fluctuations, which impact interest income, interest expense, and cash flows.
The Company’s $100 million line of credit is subject to interest rate fluctuations. Additionally, the Company expects to generate cash from its operations that will subsequently be used to pay down as much of the debt (if any is outstanding) as possible or invest cash in short-term investments (if no debt is outstanding), while still funding the growth of the Company.
Raw Material Price Risk
The Company purchases large quantities of raw materials and components such as are steel, aluminum, aluminum castings, fabrications, LEDs, power supplies, powder paint, steel tubing, wire harnesses, acrylic, silicon and glass lenses, inks, various graphics substrates such as Aluminum Composite Material (ACM), Expanded PVC sheet (EPVC), vinyl film, styrene, foamboards, wood and wood laminates, condensing units, and digital screens. The Company’s operating results could be affected by the availability and price fluctuations of these materials. The Company’s strategic sourcing plans include mitigating supply chain risk by utilizing multiple suppliers for a commodity to avoid significant dependence on any single supplier. Although an interruption of these supplies and components could disrupt our operations, we believe generally that alternative sources of supply exist and could be readily arranged prior to the COVID-19 pandemic. As a result of the pandemic, we have increased our safety stock in certain components in order to mitigate a potential disruption to our operations resulting from an anticipated shortage of these same components. The Company has not experienced any significant supply chain problems in recent years. With regard to price fluctuations of our raw material and component purchases, the price risk for materials the Company purchases is related to price increases in commodity items that affect all users of the materials, including the Company’s competitors. For the fiscal year ended June 30, 2021, the raw material component of cost of goods sold subject to price risk was approximately $147 million. The Company does not actively hedge or use derivative instruments to manage its risk in this area. The Company does, however, seek and qualify new suppliers, negotiate with existing suppliers, and arranges stocking agreements to mitigate risk of supply and price increases. On occasion, the Company’s Lighting Segment has implemented price increases with customers to offset raw material price increases and to mitigate the impact of trade tariffs. The Company’s Display Solutions Segment generally establishes new sales prices, reflective of the then current raw material prices, for each program as it begins with further price increases throughout the life of the program when warranted.
Foreign Currency Translation Risk
The Company has minimal foreign currency risk with respect to its Mexican and Canadian subsidiaries. The sales transacted by these subsidiaries in pesos and Canadian dollars represents approximately 2% of the Company’s consolidated net sales. All other business conducted by the Company is in U.S. dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Begins |
||||
on Page |
||||
Financial Statements: |
||||
Management’s Report On Internal Control Over Financial Reporting |
29 |
|||
Report of Independent Registered Public Accounting Firm |
30 |
|||
Report of Independent Registered Public Accounting Firm |
31 |
|||
Consolidated Statements of Operations for the years ended June 30, 2021 and 2020 |
33 |
|||
Consolidated Statements of Comprehensive Income |
34 |
|||
Consolidated Balance Sheets at June 30, 2021 and 2020 |
35 |
|||
Consolidated Statements of Shareholders’ Equity for the years ended June 30, 2021 and 2020 |
37 |
|||
Consolidated Statements of Cash Flows for the years ended June 30, 2021 and 2020 |
38 |
|||
Notes to Consolidated Financial Statements |
39 |
|||
Financial Statement Schedules: |
||||
Schedule II – Valuation and Qualifying Accounts for the years ended June 30, 2021 and 2020 |
62 |
Schedules other than those listed above are omitted for the reason(s) that they are either not applicable or not required or because the information required is contained in the financial statements or notes thereto. Selected quarterly financial data is found in Note 18 of the accompanying consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. 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 the 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 Exchange Act. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2021, our disclosure controls and procedures were effective. Management believes that the consolidated financial statements included in this Annual Report on Form 10-K are fairly presented in all material respects in accordance with U.S GAAP, and the Company’s Chief Executive Officer and Chief Financial Officer have certified that, based on their knowledge, the consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations, statement of shareholders’ equity, and cash flows for each of the periods presented in this report.
The Company acquired JSI on May 21, 2021. Management excluded JSI from its evaluation of the effectiveness of the internal control over financial reporting as of June 30, 2021. Including goodwill and acquired intangible assets, JSI represented 39% of the Company’s total consolidated assets as of June 30, 2021, and 3% of the Company’s total consolidated sales for the fiscal year ended June 30, 2021.
Management's Report on Internal Control over Financial Reporting appearing on page 29 of this report is incorporated by reference in this Item 9A.
Changes in Internal Control
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 June 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. See Management’s Report On Internal Control Over Financial Reporting on page 29.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information about our directors and officers may be found under the captions “Nominees for Board of Directors” and “Executive Officers” in our Proxy Statement for the Annual Meeting of Shareholders to be held November 2, 2021 (the “Proxy Statement”). Information about our Audit Committee may be found under the caption “Committees of the Board” in the Proxy Statement. That information is incorporated herein by reference.
We have adopted a code of ethics that applies to all of our employees, including our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, and other finance organization employees. The code of ethics is publicly available on our website at lsicorp.com. If we make any substantive amendments to the code of ethics or grant any waiver, including any implicit waiver, from a provision of the code to our Chief Executive Officer, Chief Financial Officer, or Chief Accounting Officer, we will disclose the nature of the amendment or waiver on that website or in a report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
The information in the Proxy Statement set forth under the captions “Director Compensation,” “Compensation Discussion and Analysis” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information in the Proxy Statement set forth under the captions “Security Ownership,” and “Equity Compensation Plan Information” is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information set forth in the Proxy Statement under the captions “Corporate Governance” and “Related Person Transactions” is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning principal accountant fees and services appears in the Proxy Statement under the headings “Ratification of Appointment of Independent Registered Public Accounting Firm” and “Committees of the Board” and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
(1) |
Consolidated Financial Statements appear as part of Item 8 of this Form 10-K. |
(2) |
Exhibits – Exhibits set forth below are either on file with the Securities and Exchange Commission and are incorporated by reference as exhibits hereto, or are filed with this Form 10-K.
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Exhibit No. |
Exhibit Description |
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4.1 |
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4.2 |
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10.1 |
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10.2 |
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10.3 |
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10.4* |
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10.5* |
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10.6* |
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10.8* |
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10.9* |
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10.10* |
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10.11* |
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10.12* |
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10.13* |
10.14* |
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10.15* |
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10.16* |
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10.17* |
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10.18* |
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10.19* |
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10.20* |
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10.2*1 |
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10.22* |
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10.23* |
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10.24* |
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10.25* |
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10.26* |
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10.27* |
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14 |
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21 |
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23.1 |
Consent of Independent Registered Public Accounting Firm (Grant Thornton LLP) |
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24 |
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31.1 |
Certification of Principal Executive Officer required by Rule 13a-14(a) |
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31.2 |
Certification of Principal Financial Officer required by Rule 13a-14(a) |
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32.1 |
18 U.S.C. Section 1350 Certification of Principal Executive Officer |
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32.2 |
18 U.S.C. Section 1350 Certification of Principal Financial Officer |
101.INS |
Inline XBRL Instance Document |
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101.SCH |
Inline XBRL Taxonomy Extension Schema |
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101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase |
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101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase |
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101.DEF |
Inline XBRL Taxonomy Extension Definition Document |
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104 |
Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) |
*Management compensatory agreement.
++ Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K. The omitted information is not material and would likely cause competitive harm to the Registrant if publicly disclosed. The Registrant hereby agrees to furnish a copy of any omitted portion to the SEC upon request.
LSI will provide shareholders with any exhibit upon the payment of a specified reasonable fee, which fee shall be limited to LSI’s reasonable expenses in furnishing such exhibit. The exhibits identified herein as being filed with the SEC have been so filed with the SEC but may not be included in this version of the Annual Report to Shareholders.
ITEM 16. FORM 10-K SUMMARY
Not included.
Pursuant to the requirements of Section 13 or 15(d) 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. |
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September 10, 2021 |
BY: |
/s/ James A. Clark |
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Date | James A. Clark | |||||
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Chief Executive Officer and President |
We, the undersigned directors and officers of LSI Industries Inc. hereby severally constitute James A. Clark and James E. Galeese, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, in our names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
Title |
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/s/ James A. Clark |
Chief Executive Officer and President |
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James A. Clark |
(Principal Executive Officer) |
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Date: September 10, 2021 |
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/s/ James E. Galeese |
Executive Vice President, and Chief Financial Officer |
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James E. Galeese |
(Principal Financial Officer) |
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Date: September 10, 2021 |
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/s/ Jeffery S. Bastian |
Vice President and Chief Accounting Officer |
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Jeffery S. Bastian |
(Principal Accounting Officer) |
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Date: September 10, 2021 |
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/s/ Robert P. Beech |
Director |
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Robert P. Beech |
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Date: September 10, 2021 |
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/s/ Ronald D. Brown |
Director |
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Ronald D. Brown |
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Date: September 10, 2021 |
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/s/ Amy L. Hanson |
Director |
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Amy L. Hanson |
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Date: September 10, 2021 |
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/s/ Chantel E. Lenard | Director | |
Chantel E. Lenard | ||
Date: September 10, 2021 | ||
/s/ Wilfred T. O’Gara | Chairman of the Board of Directors | |
Wilfred T. O’Gara | ||
Date: September 10, 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company’s “forward looking statements” and disclosures as presented earlier in this Form 10-K in the “Safe Harbor” Statement, as well as the Company’s consolidated financial statements and accompanying notes presented later in this Form 10-K should be referred to when reading Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
LSI is a leading producer of non-residential lighting and retail display solutions. Non-residential lighting consists of high-performance, American-made lighting products. The Company’s strength in outdoor lighting applications creates opportunities for it to introduce additional solutions to its customers. Retail display solutions consist of graphics solutions, digital signage, and technically advanced food display equipment for strategic vertical markets. LSI’s team of internal specialists also provide comprehensive project management services in support of large-scale rollouts.
COVID-19 Pandemic
The COVID-19 pandemic continues to impact business activity across industries in the U.S. and worldwide, including, but not limited to, workforce and supply chain disruptions. We remain committed to taking actions to address the health, safety and welfare of our employees, customers, agents and suppliers. Future developments, such as the actions taken by governmental authorities in response to future outbreaks that are highly uncertain and unpredictable, will determine the extent to which COVID-19 continues to impact our results of operations and financial conditions. See the risk factor captioned “Our financial condition and results of operations for future periods may be adversely affected by the COVID-19 outbreak or other outbreaks of infectious disease or similar public health threats and the resulting economic impact” in Item 1A, Risk Factors, included in Part I of this Annual Report on Form 10-K for an additional discussion of risks related to COVID-19.
Summary of Consolidated Results
Net Sales by Business Segment |
||||||||
(In thousands) |
2021 |
2020 |
||||||
Lighting Segment |
$ | 189,000 | $ | 206,199 | ||||
Display Solutions Segment |
126,612 | 99,359 | ||||||
Total Net Sales |
$ | 315,612 | $ | 305,558 |
Operating Income (Loss) by Business Segment |
||||||||
(In thousands) |
2021 |
2020 |
||||||
Lighting Segment |
$ | 13,328 | $ | 16,123 | ||||
Display Solutions Segment |
9,864 | 8,218 | ||||||
Corporate and Eliminations |
(15,162 | ) | (11,265 | ) | ||||
Total Operating Income |
$ | 8,030 | $ | 13,076 |
Fiscal 2021 net sales of $315.6 million increased $10.0 million or 3% as compared to fiscal 2020 net sales of $305.6 million. Net sales were favorably influenced by increased net sales in the Display Solutions Segment (up $27.3 million or 27%) and were unfavorably influenced by decreased net sales in the Lighting Segment (down $17.2 million or 8%).
Fiscal 2021 operating income of $8.0 million represents a $5.1 million decrease from fiscal 2020 operating income of $13.1 million. Current year results include $2.9 million of transaction costs related to the acquisition of JSI. Prior year results were favorably impacted by the $4.8 million pre-tax gain on the sale of the New Windsor, New York facility and the $3.7 million pre-tax gain on the sale of the North Canton, Ohio facility. Non-GAAP adjusted operating income in fiscal 2021 of $13.0 million increased $6.0 million or 86% from adjusted fiscal 2020 operating income of $7.0 million. Refer to “Non-GAAP Financial Measures” below for a reconciliation of Non-GAAP financial measures to U.S. GAAP measures. The increase in adjusted operating income was the net result of an increase in net sales, higher-value sales mix and lower selling and administrative expenses.
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 acquisition costs, stock compensation expense, severance costs and restructuring and plant closure (gains) costs are Non-GAAP financial measures. Also included below are Non-GAAP financial measures including Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA and Adjusted EBITDA), Free Cash Flow, Net Debt and Organic Sales Growth. 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. These Non-GAAP measures may be different from Non-GAAP measures used by other companies. In addition, the Non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations, in that they do not reflect all amounts associated with our results as determined in accordance with U.S. GAAP. Therefore, these measures should only be used to evaluate our results in conjunction with corresponding GAAP measures. Below is a reconciliation of these non-GAAP measures to operating income, net income, and earnings per share for the periods indicated along with the calculation of EBITDA and Adjusted EBITDA, Free Cash Flow, Net Debt and Organic Sales Growth.
Reconciliation of operating income to adjusted operating income:
(In thousands) |
2021 |
2020 |
||||||
Operating Income as reported |
$ | 8,030 | $ | 13,076 | ||||
Acquisition costs |
2,938 | - | ||||||
Stock compensation expense |
1,977 | 599 | ||||||
Severance costs |
41 | 346 | ||||||
Restructuring, plant closure (gain) costs and related inventory write-downs |
(14 | ) | (7,038 | ) | ||||
Adjusted Operating Income |
$ | 12,972 | $ | 6,983 |
Reconciliation of net income to adjusted net income
(In thousands, except per share data) |
2021 |
2020 |
||||||||||||||
Diluted EPS |
Diluted EPS |
|||||||||||||||
Net Income as reported |
$ | 5,868 | $ | 0.21 | $ | 9,592 | $ | 0.36 | ||||||||
Acquisition costs |
2,161 | (1) | 0.08 | - | - | |||||||||||
Stock compensation expense |
1,497 | (2) | 0.05 | 447 | (5) | 0.02 | ||||||||||
Severance costs |
32 | (3) | - | 252 | (6) | 0.01 | ||||||||||
Restructuring, plant closure (gain) costs and related inventory write-downs |
(11 | ) | (4) | - | (5,557 | ) | (7) | (0.21 | ) | |||||||
Tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes |
216 | 0.01 | (645 | ) | (0.02 | ) | ||||||||||
Net Income adjusted |
$ | 9,763 | $ | 0.36 | $ | 4,089 | $ | 0.15 |
The following represents the income tax effects of the adjustments in the tables above, which were calculated using the estimated combined U.S., Canada and Mexico effective income tax rates for the periods indicated:
(1) $777
(2) $480
(3) $9
(4) ($3)
(5) $152
(6) $94
(7) ($1,481)
The reconciliation of reported earnings per share to adjusted earnings per share may not produce identical amounts due to rounding differences.
Reconciliation of operating income to EBITDA and Adjusted EBITDA
(In thousands) |
2021 |
2020 |
||||||
Operating Income as reported |
$ | 8,030 | $ | 13,076 | ||||
Depreciation and Amortization |
8,114 | 8,654 | ||||||
EBITDA |
$ | 16,144 | $ | 21,730 | ||||
Acquisition costs |
2,938 | - | ||||||
Stock compensation expense |
1,977 | 599 | ||||||
Severance costs |
41 | 346 | ||||||
Restructuring, plant closure (gain) costs and related inventory write-downs |
(14 | ) | (7,038 | ) | ||||
Adjusted EBITDA |
$ | 21,086 | $ | 15,637 |
Reconciliation of cash flow from operations to free cash flow
(In thousands) |
2021 |
2020 |
||||||
Cash Flow from Operations |
$ | 28,009 | $ | 29,710 | ||||
Proceeds from sale of assets |
- | 20,150 | ||||||
Capital expenditures |
(2,233 | ) | (2,739 | ) | ||||
Free Cash Flow |
$ | 25,776 | $ | 47,121 |
Reconciliation of net debt
June 30, |
June 30, |
|||||||
(In thousands) |
2021 |
2020 |
||||||
Long-term debt as reported |
$ | 68,178 | $ | - | ||||
Less: |
||||||||
Cash and cash equivalents as reported |
2,282 | 3,517 | ||||||
Net Debt |
$ | 65,896 | $ | (3,517 | ) |
Reconciliation of net sales to organic net sales
(In thousands) |
2021 |
2020 |
||||||
Lighting Segment |
$ | 189,000 | $ | 206,199 | ||||
Display Solutions Segment |
126,612 | 99,359 | ||||||
Total net sales |
315,612 | 305,558 | ||||||
Less: |
||||||||
JSI |
9,084 | - | ||||||
Total organic net sales |
$ | 306,528 | $ | 305,558 |
Results of Operations
2021 Compared to 2020
Lighting Segment
(In thousands) |
2021 |
2020 |
||||||
Net Sales |
$ | 189,000 | $ | 206,199 | ||||
Gross Profit |
$ | 57,002 | $ | 56,855 | ||||
Operating Income |
$ | 13,328 | $ | 16,123 |
Lighting Segment net sales of $189.0 million in fiscal 2021 decreased 8% from fiscal 2020 net sales of $206.2 million. The 8% decrease is due to the impact of COVID-19 disruptions in construction markets. However, in the fiscal fourth quarter, the Lighting Segment generated sales growth of 30% compared to the prior year fourth quarter, with recovery in the construction market and significant increases in both project business and sales through distributor stock.
Gross profit of $57.0 million in fiscal 2021 remained relatively consistent with the same period of fiscal 2020. Gross profit as a percentage of net sales was 30.2% in fiscal 2021 compared to 27.6% in fiscal 2020. The growth in gross profit as a percentage of net sales reflects our continued focus on the entire lighting model, including higher value applications, price management, new and cost reduced products and supply chain and operations productivity.
Operating expenses of $43.7 million in fiscal 2021 increased $3.0 million or 7% from fiscal 2020 operating expenses of $40.7 million, primarily due to the $4.8 million pre-tax gain on the sale of the New Windsor facility in fiscal 2020 with no comparable event in fiscal 2021. When the $4.8 million gain is removed from the fiscal 2020 results, operating expenses in fiscal 2021 decreased from the prior year, driven by programs to reduce spending resulting from the pandemic.
The Lighting Segment fiscal 2021 operating income of $13.3 decreased $2.8 million from an operating income of $16.1 million in the same period of fiscal 2020 primarily due to the $4.8 million pre-tax gain on the sale of the New Windsor facility in fiscal 2020. Fiscal 2021 Non-GAAP adjusted operating income of $13.6 million increased $1.9 million from fiscal 2020 Non-GAAP adjusted operating income of $11.7 million (refer to the Non-GAAP table below for a reconciliation of Lighting Segment operating income to adjusted operating income). The increase in Non-GAAP adjusted operating income is primarily due to a favorable mix of sales on lower sales volume, improved productivity from manufacturing facility consolidation, and lower operating expenses.
Reconciliation of Lighting Segment operating income to adjusted operating income:
(In thousands) |
2021 |
2020 |
||||||
Operating Income |
$ | 13,328 | $ | 16,123 | ||||
Stock compensation expense |
272 | 131 | ||||||
Severance |
12 | 167 | ||||||
Restructuring and plant closure (gain) costs |
- | (4,674 | ) | |||||
Adjusted operating income |
$ | 13,612 | $ | 11,747 |
Display Solutions Segment
(In thousands) |
2021 |
2020 |
||||||
Net Sales |
$ | 126,612 | $ | 99,359 | ||||
Gross Profit |
$ | 21,989 | $ | 16,649 | ||||
Operating Income |
$ | 9,864 | $ | 8,218 |
Gross profit of $22.0 million in fiscal 2021 increased $5.3 million or 32% from fiscal 2020. Gross profit as a percentage of net sales increased to 17.4% in fiscal 2021 compared to 16.8% in fiscal 2020, primarily within our Petroleum and Grocery verticals.
Operating expenses of $12.1 million in fiscal 2021 increased $3.7 million or 43% from fiscal 2020. Operating expenses in fiscal 2020 were impacted by the $3.7 million pre-tax gain on the sale of the North Canton, Ohio facility with no comparable event in fiscal 2021.
Display Solutions Segment fiscal 2021 operating income of $9.9 million increased $1.7 million from operating income of $8.2 million in fiscal 2020. Non-GAAP adjusted operating income was $10.0 million in fiscal 2021 compared to adjusted operating income of $5.9 million in fiscal 2020 (refer to the Non-GAAP table below for a reconciliation of Display Solutions Segment operating income to adjusted operating income). The increase is primarily due to improved gross profit margin.
Reconciliation of Display Solutions Segment operating income to adjusted operating income:
(In thousands) |
2021 |
2020 |
||||||
Operating Income |
$ | 9,864 | $ | 8,218 | ||||
Stock compensation expense |
158 | 27 | ||||||
Severance |
23 | 63 | ||||||
Restructuring and plant closure (gain) costs |
(14 | ) | (2,387 | ) | ||||
Adjusted operating income |
$ | 10,031 | $ | 5,921 |
Corporate and Eliminations
(In thousands) |
2021 |
2020 |
||||||
Gross (Loss) Profit |
$ | (17 | ) | $ | 26 | |||
Operating (Loss) |
$ | (15,162 | ) | $ | (11,265 | ) |
The gross (loss) profit relates to the intercompany profit in inventory elimination.
Operating expenses of $15.2 million in fiscal 2021 increased $3.9 million or 35% from fiscal 2020. The increase is primarily due to $2.9 million of transaction costs related to the acquisition of JSI, an increase in stock compensation expense due to prior fiscal year forfeitures and an increase in the employer match related to the deferred compensation plan.
Consolidated Results
We reported $0.3 million net interest expense in fiscal 2021 compared to $0.9 million net interest expense in fiscal 2020. The decrease in interest expense from fiscal 2020 to fiscal 2021 is the result of reduced average borrowings against our line of credit. We also recorded other income of $0.1 million in fiscal 2021 and other expense of $0.5 million in fiscal 2020, both of which relate to net foreign currency transaction gains/losses through our Mexican and Canadian subsidiaries.
The $2.0 million of income tax expense represents a consolidated effective tax rate of 25.9%. The effective tax rate is impacted by non-deductible transaction costs related to the acquisition of JSI. The $2.1 million income tax expense in fiscal 2020 represents a consolidated effective tax rate of 18.0%. The effective tax rate was impacted by the following: 1) a tax rate benefit resulting from carryback of a net operating loss (NOL) allowed due to the enactment of the Coronavirus Aid, Relief and Economic Security (CARES) Act, and; 2) the utilization of a capital loss carryforward related to the capital gain on the sale of the North Canton facility.
We reported net income of $5.9 million in fiscal 2021 compared to net income of $9.6 million in fiscal 2020. Non-GAAP adjusted net income was $9.8 million in fiscal 2021 compared to adjusted net income of $4.1 million in fiscal 2020 (Refer to the Non-GAAP tables above). The increase in Non-GAAP adjusted net income is primarily the net result of an increase in net sales, improved gross profit margin and decreased interest expense and other expense. Diluted earnings per share of $0.21 was reported in fiscal 2021 compared to $0.36 diluted earnings per share in fiscal 2020. The weighted average common shares outstanding for purposes of computing diluted earnings per share in fiscal 2021 were 27,440,000 shares compared to 26,473,000 shares in fiscal 2020.
Liquidity and Capital Resources
We consider our level of cash on hand, borrowing capacity, current ratio and working capital levels to be our most important measures of short-term liquidity. For long-term liquidity indicators, we believe our ratio of long-term debt to equity and our historical levels of net cash flows from operating activities to be the most important measures.
At June 30, 2021 we had working capital of $54.1 million, compared to $51.2 million at June 30, 2020. The ratio of current assets to current liabilities was 1.76 to 1 as of June 30, 2021 compared to a ratio of 2.48 to 1 as of June 30, 2020. The $2.9 million increase in working capital from June 30, 2020 to June 30, 2021 is primarily driven by a $20.1 million increase in inventory, a $19.8 million increase in accounts receivable, partially offset by a $18.8 million increase in accounts payable and a $17.5 million increase in accrued expenses.
Net accounts receivable were $57.7 million and $37.8 million at June 30, 2021 and June 30, 2020, respectively. Some of the increase in accounts receivable is due to the acquisition of JSI. DSO was 56 days at both June 30, 2021 and June 30, 2020. We believe that our receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.
Net inventories of $58.9 million at June 30, 2021 increased $20.1 million from $38.8 million at June 30, 2020. The increase of $20.1 million is the result of an increase in gross inventory of $21.4 million and an increase in obsolescence reserves of $1.2 million. Lighting Segment net inventory increased $9.0 million, in anticipation of an increase in market demand and ongoing supply chain challenges. Net inventory in the Display Solutions Segment increased $11.2 million, primarily due to the acquisition of JSI.
Cash generated from operations and borrowing capacity under our line of credit is our primary source of liquidity. In March 2021, the Company amended its secured line of credit to a $100 million facility from a $75 million facility, with $24 million of the credit line available as of August 26, 2021. This $100 million five-year credit line expires in the third quarter of fiscal 2026. We are in compliance with all of our loan covenants. We believe that our $100 million line of credit plus cash flows from operating activities are adequate for fiscal 2021 operational and capital expenditure needs. However, as the impact of COVID-19 on the economy and our operations continues to evolve, we will continue to assess our liquidity needs. We have on file with the SEC a shelf registration statement which allows us to sell any combination of common stock, preferred stock warrants, senior or subordinated debt securities or other securities in one or more offerings if we choose to do so in the future. We expect to maintain the effectiveness of this shelf registration statement for the foreseeable future.
We generated $28.0 million of cash from operating activities in fiscal 2021 compared to $29.7 million in fiscal 2020. The $1.7 million decrease in net cash flows from operating activity is the net result of increases in accounts receivable and inventory, partially offset by our improved earnings as well as increases in accounts payable, customer project prepayments and accrued FICA from deferred payroll taxes allowed under the CARES Act.
We used $93.0 million of cash in investing activities in fiscal 2021 compared to a source of cash of $17.4 million in fiscal 2020, resulting in a decrease of $110.4 million. Capital expenditures decreased from $2.7 million in fiscal 2020 to $2.3 million in fiscal 2021. We acquired JSI in May 2021 for $90.7 million, net of cash acquired. In addition, we sold our New Windsor manufacturing facility for $12.3 million and our North Canton facility for $7.7 million in fiscal 2020, which contributed to the source of cash. The acquisition of JSI and the sale of our two facilities were the primary contributing factors for the change in investing activities from fiscal 2020 to fiscal 2021.
We had a source of $63.6 million of cash related to financing activities in fiscal 2021 compared to use of cash of $44.4 million in fiscal 2020. The $108.0 million change in cash flow was primarily the net result of borrowings of long-term debt in excess of payments which was primarily driven by the acquisition of JSI.
We have on our balance sheet financial instruments consisting primarily of cash and cash equivalents, 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
We have no financial instruments with off-balance sheet risk.
Cash Dividends
In August 2021, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable September 7, 2021 to shareholders of record as of August 30, 2021. The indicated annual cash dividend rate for fiscal 2021 was $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 at its discretion based upon its evaluation of earnings, cash flow requirements, financial conditions, debt levels, stock repurchases, future business developments and opportunities, and other factors deemed relevant.
Critical Accounting Policies and Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We believe that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the consolidated financial statements. Actual results could differ from these estimates.
Accounting policies are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and financial position. Management believes that the critical accounting policies and estimates involve the most difficult management judgments due to the sensitivity of the methods and assumptions used. We believe the following accounting topics represent our critical accounting estimates: warranty reserve, impairment of goodwill, stock-based compensation, income tax valuation allowance, revenue recognition and valuation of acquired intangible assets.
Our significant accounting policies are described in Note 2 in the accompanying consolidated financial statements of this Annual Report on Form 10-K.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Management of LSI Industries Inc. and subsidiaries (the “Company” or “LSI”) is responsible for the preparation and accuracy of the financial statements and other information included in this report. LSI’s Management is also responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rules 13a-15(f). Under the supervision and with the participation of Management, including LSI’s principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting as of June 30, 2021, based on the criteria set forth in “the 2013 Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the reality that judgments in decision making can be faulty, the possibility of human error, and the circumvention or overriding of the controls and procedures.
In meeting its responsibility for the reliability of the financial statements, the Company depends upon its system of internal accounting controls. The system is designed to provide reasonable assurance that assets are safeguarded and that transactions are properly authorized and recorded. The system is supported by policies and guidelines, and by careful selection and training of financial management personnel. The Company also has a Disclosure Controls Committee, whose responsibility is to help ensure appropriate disclosures and presentation of the financial statements and notes thereto. Additionally, the Company has an Internal Audit Department to assist in monitoring compliance with financial policies and procedures.
The Board of Directors meets its responsibility for overview of the Company’s financial statements through its Audit Committee which is composed entirely of independent Directors who are not employees of the Company. The Audit Committee meets periodically with Management and Internal Audit to review and assess the activities of each in meeting their respective responsibilities. Grant Thornton LLP has full access to the Audit Committee to discuss the results of their audit work, the adequacy of internal accounting controls, and the quality of financial reporting.
The Company acquired JSI Store Fixtures (JSI) on May 21, 2021. Management excluded JSI from its evaluation of the effectiveness of the internal control over financial reporting as of June 30, 2021. Including goodwill and acquired intangible assets, JSI represented 39% of the Company’s total consolidated assets as of June 30, 2021, and 3% of the Company’s total consolidated sales for the fiscal year ended June 30, 2021.
Based upon LSI’s evaluation, the Company’s principal executive officer and principal financial officer concluded that internal control over financial reporting was effective as of June 30, 2021. We reviewed the results of Management’s assessment with the Audit Committee of our Board of Directors. Additionally, our independent registered public accounting firm audited and independently assessed the effectiveness of the Company’s internal control over financial reporting. Grant Thornton LLP, an independent registered public accounting firm, has issued an opinion on the effectiveness of the Company’s internal control over financial reporting, which is presented in the financial statements.
James A. Clark
President and Chief Executive Officer
(Principal Executive Officer)
James E. Galeese
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
LSI Industries Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of LSI Industries Inc. (an Ohio Corporation) and subsidiaries (the “Company”) as of June 30, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended June 30, 2021, and our report dated September 10, 2021 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of JSI Holding Corp. (“JSI”), a wholly-owned subsidiary, whose financial statements reflect total assets and revenues constituting 39 percent and 3 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended June 30, 2021. As indicated in Management’s Report on Internal Control Over Financial Reporting, JSI was acquired during the fiscal year 2021. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of JSI.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Cincinnati, Ohio
September 10, 2021
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
Board of Directors and Shareholders
LSI Industries Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of LSI Industries Inc. (an Ohio corporation) and subsidiaries (the “Company”) as of June 30, 2021 and 2020, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the two years in the period ended June 30, 2021, and the related notes and financial statement schedules included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of June 30, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated September 10, 2021 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Estimation of product warranty reserves
As discussed in Note 1 to the consolidated financial statements, the Company provides warranty terms based upon the type of product sold. The Company estimates the amount of warranty costs associated with future product warranty claims, which are accrued at the time revenue is recognized. The estimate of the likelihood and cost of future claims considers various factors, including historical warranty costs, warranty terms, current trends, product mix and sales. The Company’s product warranty accrual as of June 30, 2021 was $5.3 million.
The principal considerations for our determination that the estimation of product warranty reserves is a critical audit matter is due to a higher risk of estimation uncertainty related to the determination of the likelihood and cost of future claims. The evaluation of the warranty accrual required a high degree of auditor judgement and an increased effort in assessing the reasonableness of management’s estimates of the likelihood and cost of future claims
The primary procedures we performed to address this critical audit matter included the following:
● |
Tested management’s internal controls over the Company’s product warranty accrual process including controls over the inputs to the estimate as well as controls over the process of capturing warranty claims |
● |
Tested the completeness and accuracy of the underlying claims used to develop the estimate |
● |
Evaluated the relevance, reliability, and sufficiency of the sources of claims used by the Company in developing the estimate |
Evaluated the methods and assumptions used by management by:
● |
Developing an estimation for the warranty accrual and comparing the results to the Company’s product warranty accrual estimate |
● |
Performing a retrospective review comparing management’s prior period assumptions of likelihood of claims and related costs to actual claim rate activity to evaluate management’s ability to estimate the warranty accrual |
Business Combination
As discussed in Note 2 to the consolidated financial statements, the Company completed an acquisition agreement wherein the Company acquired 100% ownership of JSI Holdings Corp. in May 2021 for total consideration of approximately $93.7M resulting in the addition of $45.8M of intangible assets. The acquisition was accounted for as a business combination.
The principal considerations for our determination that the valuation of acquired intangible assets is a critical audit matter is that the valuation of the acquired intangible assets was considered especially challenging and required significant auditor judgment due to the complex determination by management of the appropriate assumptions, such as discount rates, revenue projections, and projected profit margins, for the valuation of the acquired intangible assets. The Company, utilizing third-party specialists, used income valuation models including Relief from Royalty Method and the Multi-Period Excess Earning Method (MPEEM) to measure the identified intangible assets. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve professionals having expertise in the valuation of acquired intangible assets, when performing audit procedures to evaluate management’s judgments and conclusions related to the valuation of the intangible assets.
The primary procedures we performed to address this critical audit matter included the following:
● |
Tested management’s process and related internal controls for developing fair value estimates including the development of key assumptions such as discount rates, revenue projections, and projected profit margins |
● |
Tested the completeness and accuracy of the underlying data used to develop the fair value estimates |
● |
Evaluated the appropriateness of the valuation models and methodologies used by management |
● |
Assessed the reasonableness of management’s forecast by comparing the projections to historical results and external sources including industry trends and peer companies’ historical data |
● |
Involved professionals with specialized skills and knowledge to assist in the evaluation of the significant assumptions used by management including the discount rates, revenue projections, and projected profit margins |
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since fiscal 2010.
Cincinnati, Ohio
September 10, 2021
LSI INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 30, 2021 and 2020
(In thousands, except per share data)
2021 |
2020 |
|||||||
Net Sales |
$ | 315,612 | $ | 305,558 | ||||
Cost of products and services sold |
236,637 | 230,944 | ||||||
Severance costs |
15 | 104 | ||||||
Restructuring (gains) costs |
(14 | ) | 980 | |||||
Gross profit |
78,974 | 73,530 | ||||||
Selling and administrative expenses |
70,918 | 68,783 | ||||||
Severance costs |
26 | 242 | ||||||
Restructuring gains |
- | (8,571 | ) | |||||
Operating income |
8,030 | 13,076 | ||||||
Interest (income) |
(19 | ) | (3 | ) | ||||
Interest expense |
287 | 873 | ||||||
Other (income) expense |
(154 | ) | 513 | |||||
Income before income taxes |
7,916 | 11,693 | ||||||
Income tax expense |
2,048 | 2,101 | ||||||
Net income |
$ | 5,868 | $ | 9,592 | ||||
Earnings per common share (see Note 4) |
||||||||
Basic |
$ | 0.22 | $ | 0.37 | ||||
Diluted |
$ | 0.21 | $ | 0.36 | ||||
Weighted average common shares outstanding |
||||||||
Basic |
26,692 | 26,274 | ||||||
Diluted |
27,440 | 26,473 |
The accompanying notes are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended June 30, 2021 and 2020
(In thousands)
2021 |
2020 |
|||||||
Net Income |
$ | 5,868 | $ | 9,592 | ||||
Foreign currency translation adjustment |
142 | (109 | ) | |||||
Comprehensive Income |
$ | 6,010 | $ | 9,483 |
The accompanying notes are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2021 and 2020
(In thousands, except shares)
June 30, |
June 30, |
|||||||
2021 |
2020 |
|||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 2,282 | $ | 3,517 | ||||
Accounts receivable, less allowance for doubtful accounts of $256 and $273, respectively |
57,685 | 37,836 | ||||||
Inventories |
58,941 | 38,752 | ||||||
Refundable income tax |
1,275 | 2,776 | ||||||
Other current assets |
4,825 | 2,977 | ||||||
Total current assets |
125,008 | 85,858 | ||||||
Property, Plant and Equipment, at cost |
||||||||
Land |
3,984 | 3,933 | ||||||
Buildings |
24,393 | 20,638 | ||||||
Machinery and equipment |
65,928 | 67,796 | ||||||
Buildings under finance leases |
2,033 | 2,033 | ||||||
Construction in progress |
933 | 440 | ||||||
97,271 | 94,840 | |||||||
Less accumulated depreciation |
(66,719 | ) | (68,305 | ) | ||||
Net property, plant and equipment |
30,552 | 26,535 | ||||||
Goodwill |
43,788 | 10,373 | ||||||
Other Intangible Assets, net |
72,773 | 29,960 | ||||||
Operating Lease Right-of-Use Assets |
11,579 | 8,663 | ||||||
Other Long-Term Assets, net |
3,121 | 10,874 | ||||||
Total assets |
$ | 286,821 | $ | 172,263 |
The accompanying notes are an integral part of these financial statements.
June 30, |
June 30, |
|||||||
2021 |
2020 |
|||||||
LIABILITIES & SHAREHOLDERS' EQUITY |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 32,977 | $ | 14,216 | ||||
Accrued expenses |
37,918 | 20,433 | ||||||
Total current liabilities |
70,895 | 34,649 | ||||||
Long-Term Debt |
68,178 | - | ||||||
Finance Lease Liabilities |
1,521 | 1,755 | ||||||
Operating Lease Liabilities |
10,890 | 9,021 | ||||||
Other Long-Term Liabilities |
4,167 | 1,138 | ||||||
Commitments and Contingencies (Note 14) |
- | - | ||||||
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 26,517,836 and 26,286,009 shares, respectively |
132,526 | 127,713 | ||||||
Treasury shares, without par value |
(2,450 | ) | (1,121 | ) | ||||
Deferred compensation plan |
2,450 | 1,121 | ||||||
Retained (loss) |
(1,405 | ) | (1,920 | ) | ||||
Accumulated other comprehensive income (loss) |
49 | (93 | ) | |||||
Total shareholders' equity |
131,170 | 125,700 | ||||||
Total liabilities & shareholders' equity |
$ | 286,821 | $ | 172,263 |
The accompanying notes are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the years ended June 30, 2021 and 2020
(In thousands, except shares)
Common Shares |
Treasury Shares |
Key Executive |
Accumulated Other |
Retained |
Total |
|||||||||||||||||||||||||||
Number Of |
Number Of |
Compensation |
Comprehensive |
Earnings |
Shareholders' |
|||||||||||||||||||||||||||
Shares |
Amount |
Shares |
Amount |
Amount |
Income (Loss) |
(Loss) |
Equity |
|||||||||||||||||||||||||
Balance at June 30, 2019 |
26,176 | $ | 125,729 | (209 | ) | $ | (1,468 | ) | $ | 1,468 | 16 | $ | (5,808 | ) | $ | 119,937 | ||||||||||||||||
Net Income |
- | - | - | - | - | - | 9,592 | 9,592 | ||||||||||||||||||||||||
Other comprehensive loss |
- | - | - | - | - | (109 | ) | - | (109 | ) | ||||||||||||||||||||||
Stock compensation awards |
72 | 300 | - | - | - | - | - | 300 | ||||||||||||||||||||||||
Restricted stock units issued |
21 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Shares issued for deferred compensation |
85 | 473 | - | - | - | - | - | 473 | ||||||||||||||||||||||||
Activity of treasury shares, net |
- | - | 29 | 347 | - | - | - | 347 | ||||||||||||||||||||||||
Deferred stock compensation |
- | - | - | - | (347 | ) | - | - | (347 | ) | ||||||||||||||||||||||
Stock-based compensation expense |
- | 599 | - | - | - | - | - | 599 | ||||||||||||||||||||||||
Stock options exercised, net |
112 | 612 | - | - | - | - | 612 | |||||||||||||||||||||||||
Dividends — $0.20 per share |
- | - | - | - | - | - | (5,276 | ) | (5,276 | ) | ||||||||||||||||||||||
Cumulative effect of adoption of accounting guidance |
- | - | - | - | - | - | (428 | ) | (428 | ) | ||||||||||||||||||||||
Balance at June 30, 2020 |
26,466 | $ | 127,713 | (180 | ) | $ | (1,121 | ) | $ | 1,121 | $ | (93 | ) | $ | (1,920 | ) | $ | 125,700 | ||||||||||||||
Net Income |
- | - | - | - | - | - | 5,868 | 5,868 | ||||||||||||||||||||||||
Other comprehensive income |
- | - | - | - | - | 142 | - | 142 | ||||||||||||||||||||||||
Stock compensation awards |
43 | 315 | - | - | - | - | - | 315 | ||||||||||||||||||||||||
Restricted stock units issued |
28 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Shares issued for deferred compensation |
193 | 1,534 | - | - | - | - | - | 1,534 | ||||||||||||||||||||||||
Activity of treasury shares, net |
- | - | (166 | ) | (1,329 | ) | - | - | - | (1,329 | ) | |||||||||||||||||||||
Deferred stock compensation |
- | - | - | - | 1,329 | - | - | 1,329 | ||||||||||||||||||||||||
Stock-based compensation expense |
- | 1,977 | - | - | - | - | - | 1,977 | ||||||||||||||||||||||||
Stock options exercised, net |
133 | 987 | - | - | - | - | - | 987 | ||||||||||||||||||||||||
Dividends — $0.20 per share |
- | - | - | - | - | - | (5,353 | ) | (5,353 | ) | ||||||||||||||||||||||
Balance at June 30, 2021 |
26,863 | $ | 132,526 | (346 | ) | $ | (2,450 | ) | $ | 2,450 | $ | 49 | $ | (1,405 | ) | $ | 131,170 |
The accompanying notes are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30, 2021 and 2020
(In thousands)
2021 |
2020 |
|||||||
Cash Flows from Operating Activities |
||||||||
Net income |
$ | 5,868 | $ | 9,592 | ||||
Non-cash items included in net income |
||||||||
Depreciation and amortization |
8,114 | 8,654 | ||||||
Deferred income taxes |
(1,058 | ) | 3,925 | |||||
Deferred compensation plan |
1,534 | 473 | ||||||
Stock compensation expense |
1,977 | 599 | ||||||
Issuance of common shares as compensation |
315 | 300 | ||||||
Loss (gain) on disposition of fixed assets |
154 | (8,521 | ) | |||||
Allowance for doubtful accounts |
19 | 19 | ||||||
Inventory obsolescence reserve |
1,754 | 2,454 | ||||||
Changes in certain assets and liabilities, net of acquisition |
||||||||
Accounts receivable |
(10,570 | ) | 16,340 | |||||
Inventories |
(11,983 | ) | 2,246 | |||||
Refundable income taxes |
1,517 | (1,893 | ) | |||||
Accounts payable |
14,442 | (3,883 | ) | |||||
Accrued expenses and other |
6,285 | (546 | ) | |||||
Customer prepayments |
9,641 | (47 | ) | |||||
Net cash flows provided by operating activities |
28,009 | 29,712 | ||||||
Cash Flows from Investing Activities |
||||||||
Acquisition of JSI, excluding cash aquired |
(90,725 | ) | - | |||||
Purchases of property, plant and equipment |
(2,233 | ) | (2,739 | ) | ||||
Proceeds from the sale of fixed assets |
- | 20,150 | ||||||
Net cash flows (used in) provided by investing activities |
(92,958 | ) | 17,411 | |||||
Cash Flows from Financing Activities |
||||||||
Payments of long-term debt |
(18,579 | ) | (204,676 | ) | ||||
Borrowings of long-term debt |
86,757 | 165,135 | ||||||
Cash dividends paid |
(5,288 | ) | (5,276 | ) | ||||
Shares withheld for employees' taxes |
(60 | ) | (152 | ) | ||||
Payments on financing lease obligations |
(239 | ) | (39 | ) | ||||
Proceeds from stock option exercises |
987 | 612 | ||||||
Net cash flows provided by (used in) financing activities |
63,578 | (44,396 | ) | |||||
Change related to foreign currency |
136 | (176 | ) | |||||
(Decrease) increase in cash and cash equivalents |
(1,235 | ) | 2,551 | |||||
Cash and cash equivalents at beginning of period |
3,517 | 966 | ||||||
Cash and cash equivalents at end of period |
$ | 2,282 | $ | 3,517 |
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation:
The consolidated financial statements include the accounts of LSI Industries Inc. (an Ohio corporation) and its subsidiaries (collectively, the “Company”), all of which are wholly owned. All intercompany transactions and balances have been eliminated in consolidation.
COVID-19 Pandemic:
The COVID-19 pandemic continues to impact business activity across industries in the U.S. and worldwide, including, but not limited to, workforce and supply chain disruptions. The Company remains committed to taking actions to address the health, safety and welfare of its employees, customers, agents and suppliers. Future developments, such as the actions taken by governmental authorities in response to future outbreaks that are highly uncertain and unpredictable, will determine the extent to which COVID-19 continues to impact the Company’s results of operations and financial conditions. See the risk factor captioned “Our financial condition and results of operations for future periods may be adversely affected by the COVID-19 outbreak or other outbreaks of infectious disease or similar public health threats and the resulting economic impact” in Item 1A, Risk Factors, included in Part I of this Annual Report on Form 10-K for an additional discussion of risks related to COVID-19.
Revenue Recognition:
The Company recognizes revenue when it satisfies the performance obligations in its customer contracts or purchase orders. Most of the Company’s products have a single performance obligation which is satisfied at a point in time when control is transferred to the customer. Control is generally transferred at time of shipment when title and risk of ownership passes to the customer. For customer contracts with multiple performance obligations, the Company allocates the transaction price and any discounts to each performance obligation based on relative standalone selling prices. Payment terms are typically within 30 to 90 days from the shipping date, depending on our terms with the customer. The Company offers standard warranties that do not represent separate performance obligations.
Installation is a separate performance obligation, except for our digital signage products. For digital signage products, installation is not a separate performance obligation as the product and installation is the combined item promised in digital signage contracts. The Company is not always responsible for installation of products it sells and has no post-installation responsibilities other than standard warranties.
A number of the Company's graphics elements and select lighting products are highly customized for specific customers. As a result, these customized products do not have an alternative use. For these products, the Company generally 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 branded print graphics |
● |
Electrical components based on customer specifications |
● |
Digital signage and related media content |
The Company also offers installation services for its display solutions elements and select lighting products. Installation revenue is recognized over time as our customer simultaneously receives and consumes the benefits provided through the installation process.
For these customized products and installation services, revenue is recognized using a cost-based input method: recognizing revenue and gross profit as work is performed based on the relationship between the actual cost incurred and the total estimated cost for the contract.
Disaggregation of Revenue
The Company disaggregates the revenue from contracts with customers by the timing of revenue recognition because the Company believes it best depicts the nature, amount, and timing of our revenue and cash flows. The table presents a reconciliation of the disaggregation by reportable segments.
Twelve Months Ended |
||||||||
(In thousands) |
June 30, 2021 |
|||||||
Lighting Segment |
Display Solutions Segment |
|||||||
Timing of revenue recognition |
||||||||
Products and services transferred at a point in time |
$ | 165,062 | $ | 66,123 | ||||
Products and services transferred over time |
23,938 | 60,489 | ||||||
$ | 189,000 | $ | 126,612 | |||||
Type of Product and Services |
||||||||
LED lighting, digital signage solutions, electronic circuit boards |
$ | 164,778 | $ | 35,976 | ||||
Poles and other display solutions elements |
22,492 | 61,919 | ||||||
Project management, installation services, shipping and handling |
1,730 | 28,717 | ||||||
$ | 189,000 | $ | 126,612 |
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. |
Credit and Collections:
The Company maintains allowances for doubtful accounts receivable for probable estimated losses resulting from either customer disputes or the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against income. The Company determines its allowance for doubtful accounts by first considering all known collectability problems of customers’ accounts, and then applying certain percentages against the various aging categories based on the due date of the remaining receivables. The resulting allowance for doubtful accounts receivable is an estimate based upon the Company’s knowledge of its business and customer base, the current economic climate and historical trends. Receivables deemed uncollectable are written-off against the allowance for doubtful accounts receivable after all reasonable collection efforts have been exhausted. The Company also establishes allowances, at the time revenue is recognized, for returns, discounts, pricing and other possible customer deductions. These allowances are based upon historical trends. The following table presents the Company’s net accounts receivable at the dates indicated.
(In thousands) |
June 30, 2021 |
June 30, 2020 |
||||||
Accounts receivable |
$ | 57,941 | $ | 38,109 | ||||
Less: Allowance for doubtful accounts |
(256 | ) | (273 | ) | ||||
Accounts receivable, net |
$ | 57,685 | $ | 37,836 |
Cash and Cash Equivalents:
The cash balance includes cash and cash equivalents which have original maturities of less than three months. Cash and cash equivalents consist primarily of bank deposits and a bank money market account that is stated at cost, which approximates fair value. The Company maintains balances at financial institutions in the United States, Canada and Mexico. In the United States, the FDIC limit for insurance coverage on non-interest-bearing accounts is $250,000. As of June 30, 2021 and June 30, 2020, the Company had bank balances of $2.3 million and $3.7 million, respectively, without insurance coverage.
Inventories, Net and Inventory Reserves:
Inventories are stated at the lower of cost or net realizable value. Cost of inventories includes the cost of purchased raw materials and purchased components, direct labor, as well as manufacturing overhead which is generally applied to inventory based on direct labor and on material content, is determined on the first-in, first-out basis.
The Company maintains an inventory reserve for obsolete and excess inventory. The Company first determines its obsolete inventory reserve by considering specific known obsolete items, and then by applying certain percentages to specific inventory categories based upon inventory turns. The Company uses various tools, in addition to inventory turns, to identify which inventory items have the potential to become obsolete. Judgment is used to establish excess and obsolete inventory reserves and management adjusts these reserves as more information becomes available about the ultimate disposition of the inventory item.
Property, Plant and Equipment and Related Depreciation:
Property, plant and equipment are stated at cost. Major additions and betterments are capitalized while maintenance and repairs are expensed. For financial reporting purposes, depreciation is computed on the straight-line method over the estimated useful lives of the assets as follows:
Buildings (in years) |
28 | - | 40 | ||
Machinery and equipment (in years) |
3 | - | 10 | ||
Computer software (in years) |
3 | - | 8 |
Costs related to the purchase, internal development, and implementation of the Company’s fully integrated enterprise resource planning/business operating software system are either capitalized or expensed. Leasehold improvements are depreciated over the shorter of fifteen years or the remaining term of the lease.
The Company recorded $5.2 million and $6.0 million of depreciation expense in the years ended June 30, 2021 and, 2020 respectively.
Goodwill and Intangible Assets:
Intangible assets consisting of customer relationships, trade names and trademarks, patents, technology and software are recorded on the Company's balance sheet. The definite-lived intangible assets are being amortized to expense over periods ranging between five and twenty years. The Company evaluates definite-lived intangible assets for possible impairment when triggering events are identified. Neither indefinite-lived intangible assets nor the excess of cost over fair value of assets acquired ("goodwill") are amortized, however, they are subject to review for impairment. See additional information about goodwill and intangible assets in Note 7.
Fair Value:
The Company has financial instruments consisting primarily of cash and cash equivalents, revolving lines of credit, accounts receivable, accounts payable, 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. The Company has no financial instruments with off-balance sheet risk.
Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in goodwill and other intangible asset impairment analyses, long-lived asset impairment analyses and valuation of acquired assets and assumed liabilities. The accounting guidance on fair value measurement was used to measure the fair value of these nonfinancial assets and nonfinancial liabilities.
Product Warranties:
The Company offers a limited warranty that its products are free from defects in workmanship and materials. The specific terms and conditions vary somewhat by product line, but generally cover defective products returned within one to five years, with some exceptions where the terms extend to 10 years, from the date of shipment. The Company records warranty liabilities to cover the estimated future costs for repair or replacement of defective returned products as well as products that need to be repaired or replaced in the field after installation. The Company calculates its liability for warranty claims by applying estimates based upon historical claims as a percentage of sales to cover unknown claims, as well as estimating the total amount to be incurred for known warranty issues. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amount as necessary.
Changes in the Company’s warranty liabilities, which are included in accrued expenses in the accompanying consolidated balance sheets, during the periods indicated below were as follows:
(In thousands) |
June 30, 2021 |
June 30, 2020 |
||||||
Balance at beginning of the period |
$ | 6,956 | $ | 7,687 | ||||
Additions from company acquired |
248 | - | ||||||
Additions charged to expense |
859 | 2,482 | ||||||
Deductions for repairs and replacements |
(2,768 | ) | (3,213 | ) | ||||
Balance at end of the period |
$ | 5,295 | $ | 6,956 |
Employee Benefit Plans:
The Company has a 401(k) retirement plan whereby employee’s contributions to the 401(k) are matched by the Company. The 401(k) match program covers substantially all of its employees. The Company also has a nonqualified deferred compensation plan covering certain employees. The costs of employee benefit plans are charged to expense and funded annually. Total costs were $1.4 million and $1.3 million in June 30, 2021 and 2020, respectively.
Research and Development Costs:
Research and development costs are directly attributable to new product development, including the development of new technology for both existing and new products, and consist of salaries, payroll taxes, employee benefits, materials, outside legal costs and filing fees related to obtaining patents, supplies, depreciation and other administrative costs. The Company expenses as research and development all costs associated with development of software used in solid-state LED products. All costs are expensed as incurred and are included in selling and administrative expenses. Research and development costs related to both product and software development totaled $3.7 million and $3.6 million for the fiscal years ended June 30, 2021 and 2020, respectively.
Cost of Products and Services Sold:
Cost of products sold is primarily comprised of direct materials and supplies consumed in the manufacture of products, as well as manufacturing labor, depreciation expense and direct overhead expense necessary to acquire and convert the purchased materials and supplies into finished product. Cost of products sold also includes the cost to distribute products to customers, inbound freight costs, internal transfer costs, warehousing costs and other shipping and handling activity. Cost of services sold is primarily comprised of the internal and external labor costs required to support the Company’s installation and service revenue along with the management of media content.
Earnings Per Common Share:
The computation of basic earnings per common share is based on the weighted average common shares outstanding for the period net of treasury shares held in the Company’s nonqualified deferred compensation plan. The computation of diluted earnings per share is based on the weighted average common shares outstanding for the period and includes common share equivalents. Common share equivalents include the dilutive effect of stock options, restricted stock units, stock warrants, contingently issuable shares and common shares to be issued under a deferred compensation plan, all of which totaled 1,029,000 shares and 368,000 shares in fiscal 2021 and 2020, respectively. See further discussion in Note 4.
Income Taxes:
The Company accounts for income taxes in accordance with the accounting guidance for income taxes. Accordingly, deferred income taxes are provided on items that are reported as either income or expense in different time periods for financial reporting purposes than they are for income tax purposes. Deferred income tax assets are reported on the Company’s balance sheet. Significant management judgment is required in developing the Company’s income tax provision, including the estimation of taxable income and the effective income tax rates in the multiple taxing jurisdictions in which the Company operates, the estimation of the liability for uncertain income tax positions, the determination of deferred tax assets and liabilities, and any valuation allowances that might be required against deferred tax assets.
Foreign Exchange:
The functional currency of the Company’s Mexican subsidiary is the Mexican Peso and the functional currency of the Company’s Canadian subsidiary is the Canadian Dollar. Assets and liabilities of foreign operations are translated using period end exchange rates. Revenue and expenses are translated using average exchange rates during each period reported. Translation losses (gains) are reported in accumulated other comprehensive loss (gain) as a component of shareholders equity and were ($0.1) million and $0.1 million as of June 30, 2021 and 2020, respectively. The Company recognizes foreign currency transaction (gains) and losses on certain assets and liabilities that are denominated in the Mexican Peso and Canadian Dollar. These transaction (gains) and losses are reported in other expense in the consolidated statements of operations and were $0.2 million and $0.5 million for the twelve months ended June 30, 2021 and 2020, respectively.
New Accounting Pronouncements:
In June 2016, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update (“ASU”) 2016-13 (“ASU 2016-13), "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (ASC 326 or "CECL"), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for public companies for annual periods beginning after December 13, 2019, including interim periods within those fiscal years. The Company adopted this guidance in the first quarter of fiscal 2021. The adoption of ASU 2016-13 did not have a material impact on the consolidated financial statements and disclosures.
On July 1, 2019, the Company adopted ASU 2016-02, “Leases,” 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. In addition, the Company adopted an accounting policy to not record short-term leases on the balance sheet and elected the practical expedient to not separate lease and non-lease components.
The Company’s most significant leases are those related to certain manufacturing facilities along with a small office space. Besides these real estate leases, most other leases are insignificant and consist of leases related to a vehicle, forklifts and various office equipment. The adoption of the new lease standard resulted in the recognition of right-of-use assets (ROU assets) of $10.4 million, lease liabilities of $10.8 million which includes the impact of existing deferred rents and tenant improvement allowances and a $0.4 million adjustment to retained earnings 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 the consolidated statements of operations or consolidated statements of cash flow. Refer to Note 11.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform” (Topic 848) (“ASU 2020-04”), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The amendments are effective for all entities as of March 12, 2020 and expire on December 31, 2022. The provisions of ASU 2020-04 did not have a material effect on the Company’s financial condition, results of operations or cash flows as of June 30, 2021. The Company will continue to monitor any impacts of the standard and reference rate reform on its financial instruments.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Reclassifications:
Certain amounts reported in the prior year in Note 6 have been reclassified to conform to the current year’s presentation.
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.
NOTE 2 — ACQUISITION OF JSI STORE FIXTURES
On May 21, 2021, the Company acquired 100% of the issued and outstanding shares of capital stock of JSI Store Fixtures (JSI), a Maine-based provider of retail commercial display solutions, for $93.7 million. The acquisition of JSI will significantly increase the Company’s total addressable markets within the grocery and convenience store verticals. The Company funded the acquisition with a combination of cash on hand and $71.6 million from the $100 million revolving line of credit.
The Company accounted for this transaction as a business combination. The Company has preliminarily allocated the purchase price of approximately $93.7 million which includes an estimate of customary post-closing purchase price adjustments to the assets acquired and liabilities assumed at estimated fair values, and the excess of the purchase price over the aggregate fair values is recorded as goodwill. This preliminary allocation is subject to the final determination of the purchase price which will be finalized in fiscal 2022, as well as potential revision resulting from the finalization of pre-acquisition tax filings. The Company is in the process of finalizing third party valuations of certain assets. The preliminary allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed as of May 21, 2021, is as follows:
(In thousands) |
||||
Cash and cash equivalents |
$ | 4,067 | ||
Accounts receivable |
9,252 | |||
Inventories |
9,898 | |||
Property, plant and equipment |
7,076 | |||
Other assets |
7,440 | |||
Intangible assets |
45,760 | |||
Accounts payable |
(4,199 | ) | ||
Accrued liabilities |
(8,434 | ) | ||
Deferred tax liability |
(10,583 | ) | ||
Identifiable assets |
60,277 | |||
Goodwill |
33,415 | |||
Net purchase consideration |
$ | 93,692 |
The gross amount of accounts receivable is $9.3 million.
Goodwill recorded from the acquisition of JSI is attributable to the impact of the positive cash flow from JSI in addition to expected synergies from the business combination. The goodwill resulting from the acquisition is deductible for tax purposes. The intangible assets include amounts recognized for the fair value of the trade name, technology assets, non-compete agreements and customer relationships. The fair value of the intangible assets was determined based upon the income (discounted cash flow) approach. The following table presents the details of the intangible assets acquired at the date of acquisition:
Estimated |
Estimated Useful |
|||||||
(In thousands) |
Fair Value |
Life (Years) |
||||||
Tradename |
$ | 8,680 |
Indefinite life |
|||||
Technology asset |
4,900 | 7 | ||||||
Non-compete |
260 | 5 | ||||||
Customer relationship |
31,920 | 20 | ||||||
$ | 45,760 |
The fair market value write-up of the property, plant, and equipment totaled $1.8 million. Transaction costs related to the acquisition totaled $2.9 million in fiscal 2021 and are recorded in selling and administrative expenses on the consolidated statements of operations.
JSI’s post-acquisition results of operations for the period from May 21, 2021 through June 30, 2021 are included in the Company’s Consolidated Statements of Operations. Since the acquisition date, net sales of JSI for the period from May 21, 2021 through June 30, 2021 were $9.1 million and operating income was $0.7 million. The operating results of JSI are included in the Display Solutions Segment.
Pro Forma Impact of the Acquisition of JSI (unaudited)
The following table represents unaudited pro forma results of operations and gives effect to the acquisition of JSI as if the transaction had occurred on July 1, 2019. The unaudited pro forma results of operations have been prepared for comparative purposes only and are not necessarily indicative of what would have occurred had the business combination been completed at the beginning of the period or the results that may occur in the future. Furthermore, the unaudited pro forma financial information does not reflect the impact of any synergies or operating efficiencies resulting from the acquisition of JSI.
The unaudited pro forma financial information for the twelve months ended June 30, 2021 and June 30, 2020 is prepared using the acquisition method of accounting and has been adjusted to effect to the pro forma events that are: (1) directly attributable to the acquisition; (2) factually supportable; and (3) expected to have a continuing impact on the combined results. The unaudited pro forma operating income of $19.3 million excludes acquisition-related expenses of $2.9 million.
Twelve Months Ended |
||||||||
June 30 |
||||||||
(In thousands, unaudited) |
2021 |
2020 |
||||||
Net sales |
$ | 391,000 | $ | 362,541 | ||||
Gross profit |
$ | 97,947 | $ | 86,399 | ||||
Operating income |
$ | 19,312 | $ | 13,878 |
NOTE 3 — BUSINESS SEGMENT 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 Display Solutions (formerly known as the Graphics Segment), 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 non-residential outdoor and indoor lighting utilizing LED light sources that have been fabricated and assembled for the Company’s markets, primarily the petroleum/convenience markets, parking lot and garage markets, quick-service restaurant market, retail and grocery store markets, the automotive market, the warehouse market, and the sports complex market. The Company also offers a variety of lighting controls to complement its lighting fixtures which include sensors, photocontrols, dimmers, motion detection and Bluetooth systems. The Company also services lighting product customers through the commercial industrial, stock and flow, and renovation channels. The Lighting Segment also includes the design, engineering and manufacturing of electronic circuit boards, assemblies and sub-assemblies which are sold directly to customers.
The Company acquired JSI in the fourth quarter of fiscal 2021, and consolidated it into the former Graphics Segment, which has been rebranded as the Display Solutions Segment, to more closely align the Company’s comprehensive product offering with the markets it serves. The Display Solutions Segment manufactures, sells and installs exterior and interior visual image and display elements, including printed graphics, structural graphics, digital signage, menu board systems, display fixtures, refrigerated displays, and custom display elements. These products are used in visual image programs in several markets including the petroleum/convenience markets, parking lot and garage markets, quick-service restaurant market, retail and grocery store markets, the automotive market, the warehouse market, and the sports complex market. The Display Solutions Segment implements, installs and provides program management services related to products sold by the Display Solutions Segment and by the Lighting Segment.
The Company’s corporate administration activities are reported in the Corporate and Eliminations line item. These activities primarily include intercompany profit in inventory eliminations, expense related to certain corporate officers and support staff, the Company’s internal audit staff, expense related to the Company’s Board of Directors, equity compensation expense for various equity awards granted to corporate administration employees, certain consulting expenses, investor relations activities, and a portion of the Company’s legal, auditing and professional fee expenses. Corporate identifiable assets primarily consist of cash, invested cash (if any), refundable income taxes (if any), and deferred income taxes.
One customer program in the Display Solutions Segment represents $32.4 million or 10.3% of the Company’s net sales in the fiscal year ended June 30, 2021. There were no customers or customer programs representing a concentration of 10% or more of the Company’s net sales in the fiscal year ended June 30, 2020. There was no concentration of accounts receivable at June 30, 2021 or 2020. Summarized financial information for the Company’s reportable business segments is provided for the indicated periods and as of June 30, 2021 and June 30, 2020:
(In thousands) |
||||||||
2021 |
2020 |
|||||||
Net Sales: |
||||||||
Lighting Segment |
$ | 189,000 | $ | 206,199 | ||||
Display Solutions Segment |
126,612 | 99,359 | ||||||
$ | 315,612 | $ | 305,558 | |||||
Operating Income (Loss): |
||||||||
Lighting Segment |
$ | 13,328 | $ | 16,123 | ||||
Display Solutions Segment |
9,864 | 8,218 | ||||||
Corporate and Eliminations |
(15,162 | ) | (11,265 | ) | ||||
$ | 8,030 | $ | 13,076 | |||||
Capital Expenditures: |
||||||||
Lighting Segment |
$ | 1,596 | $ | 1,386 | ||||
Display Solutions Segment |
177 | 1,093 | ||||||
Corporate and Eliminations |
460 | 260 | ||||||
$ | 2,233 | $ | 2,739 | |||||
Depreciation and Amortization: |
||||||||
Lighting Segment |
$ | 6,306 | $ | 6,714 | ||||
Display Solutions Segment |
1,525 | 1,436 | ||||||
Corporate and Eliminations |
283 | 504 | ||||||
$ | 8,114 | $ | 8,654 |
June 30, 2021 |
June 30, 2020 |
|||||||
Identifiable Assets: |
||||||||
Lighting Segment |
$ | 132,169 | $ | 118,819 | ||||
Display Solutions Segment |
147,354 | 35,021 | ||||||
Corporate and Eliminations |
7,298 | 18,423 | ||||||
$ | 286,821 | $ | 172,263 |
The segment net sales reported above represent sales to external customers. Segment operating income (loss), 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 most intersegment revenues. Any intersegment profit in inventory is eliminated in consolidation. Intersegment revenues were eliminated in consolidation as follows:
(In thousands)
2021 |
2020 |
|||||||
Lighting Segment inter-segment net sales |
$ | 28,449 | $ | 3,718 | ||||
Display Solutions Segment inter-segment net sales |
$ | 219 | $ | 552 |
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:
(a) |
Calculative 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. |
(b) |
Anti-dilutive securities were excluded in the computation of diluted earnings per share for the year ended June 30, 2021 and June 30, 2020 because the exercise price was greater than the 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. |
NOTE 5 — INVENTORIES, NET
The following information is provided as of the dates indicated:
(In thousands) |
June 30, 2021 |
June 30, 2020 |
||||||
Inventories: |
||||||||
Raw materials |
$ | 40,567 | $ | 27,331 | ||||
Work-in-progress |
4,757 | 1,566 | ||||||
Finished goods |
13,617 | 9,855 | ||||||
Total Inventories |
$ | 58,941 | $ | 38,752 |
NOTE 6 — ACCRUED EXPENSES
The following information is provided as of the dates indicated:
(In thousands) |
June 30, 2021 |
June 30, 2020 |
||||||
Accrued Expenses: |
||||||||
Customer prepayments |
$ | 11,352 | $ | 1,698 | ||||
Compensation and benefits |
10,051 | 5,271 | ||||||
Accrued warranty |
5,295 | 6,956 | ||||||
Accrued sales commissions |
2,568 | 1,289 | ||||||
Accrued FICA |
1,190 | 730 | ||||||
Operating lease liabilities |
1,424 | 376 | ||||||
Accrued income tax |
434 | - | ||||||
Finance lease liabilities |
263 | 239 | ||||||
Other accrued expenses |
5,341 | 3,874 | ||||||
Total Accrued Expenses |
$ | 37,918 | $ | 20,433 |
NOTE 7 — GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment. The Company may first assess qualitative factors in order to determine if goodwill and indefinite-lived intangible assets are impaired. If through the qualitative assessment it is determined that it is more likely than not that goodwill and indefinite-lived assets are not impaired, no further testing is required. If it is determined more likely than not that goodwill and indefinite-lived assets are impaired, or if the Company elects not to first assess qualitative factors, the Company’s impairment testing continues with the estimation of the fair value of the reporting unit using a combination of a market approach and an income (discounted cash flow) approach, at the reporting unit level. The estimation of the fair value of reporting unit requires significant management judgment with respect to revenue and expense growth rates, changes in working capital and the selection and use of an appropriate discount rate. The estimates of the fair value of reporting units are based on the best information available as of the date of the assessment. The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease an impairment charge. Company management uses its judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as adverse business conditions, economic factors and technological change or competitive activities may signal that an asset has become impaired.
The Company identified its reporting units in conjunction with its annual goodwill impairment testing. Prior to the acquisition of JSI, the Company had two reporting units that contain goodwill. One reporting unit is within the Lighting Segment and one reporting unit is within the Display Solutions Segment. The tradename intangible asset has an indefinite life and is also tested separately on an annual basis. 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.
Fiscal 2021:
As of March 1, 2021, the Company performed its annual goodwill impairment test on the two reporting units that contain goodwill. The goodwill impairment test of the reporting unit in the Lighting Segment passed with a business enterprise value of $28.2 million or 26% above the carrying value of this reporting unit including goodwill. The goodwill impairment test of the reporting unit in the Display Solutions Segment passed with a business enterprise value of $11.4 million or 2,065% above the carrying value of the reporting unit including goodwill.
The Company also performed its annual review of its indefinite-lived intangible asset as of March 1, 2021 and determined there was no impairment. The indefinite-lived intangible impairment test passed with a fair market value that was $15.7 million or 358% above its carrying value.
The Company has performed an assessment of its goodwill and intangible assets from the date of the interim test as of March 1, 2021 through the balance sheet date for possible triggering events and has concluded that there were no triggering events that would indicate the assets are impaired.
The Company acquired JSI on May 21, 2021 (see Note 2). The total purchase price exceeded the estimated fair value of net assets by approximately $33.4 million, which was allocated to goodwill. Goodwill and intangible assets related to JSI are included in the assets of the Display Solutions Segment. Refer to Note 2 for additional information on the intangible assets of JSI. Beginning in fiscal 2022, JSI goodwill will be subject to annual impairment testing as a separate reporting unit.
Fiscal 2020:
As of March 1, 2020, the Company performed its annual goodwill impairment test on the two reporting units that contain goodwill. The goodwill impairment test of the reporting unit in the Lighting Segment passed with a business enterprise value of $31.6 million or 33% above the carrying value of this reporting unit including goodwill. The goodwill impairment test of the reporting unit in the Display Solutions Segment passed with a business enterprise value of $4.7 million or 619% above the carrying value of the reporting unit including goodwill.
The Company also performed its annual review of its indefinite-lived intangible asset as of March 1, 2020 and determined there was no impairment. The indefinite-lived intangible impairment test passed with a fair market value that was $16.8 million or 392% above its carrying value.
A significant decline in the Company’s stock price during March 2020 related to the COVID-19 pandemic led management to conclude that a triggering event occurred. As a result, an interim goodwill impairment test subsequent to the March 1 testing date was required for both reporting units as of March 31, 2020. The result of the impairment test on both reporting units indicated that goodwill was not impaired.
The following table presents information about the Company's goodwill on the dates or for the periods indicated:
Display |
||||||||||||
(In thousands) |
Lighting |
Solutions |
||||||||||
Segment |
Segment |
Total |
||||||||||
Balance as of June 30, 2020 |
||||||||||||
Goodwill |
$ | 86,711 | $ | 28,690 | $ | 115,401 | ||||||
Accumulated impairment losses |
(77,503 | ) | (27,525 | ) | (105,028 | ) | ||||||
Goodwill, net as of June 30, 2020 |
$ | 9,208 | $ | 1,165 | $ | 10,373 | ||||||
Balance as of June 30, 2021 |
||||||||||||
Goodwill |
$ | 70,971 | $ | 28,690 | $ | 99,661 | ||||||
Goodwill acquired |
- | 33,415 | 33,415 | |||||||||
Accumulated impairment losses |
(61,763 | ) | (27,525 | ) | (89,288 | ) | ||||||
Goodwill, net as of June 30, 2021 |
$ | 9,208 | $ | 34,580 | $ | 43,788 |
In fiscal 2021, the Company wrote-off the goodwill and impairment loss for a dissolved entity. The net impact to the consolidated financial statements, including the goodwill, net balance, was zero.
The gross carrying amount and accumulated amortization by major other intangible asset class is as follows:
June 30, 2021 |
||||||||||||
(In thousands) |
Gross |
|||||||||||
Carrying |
Accumulated |
Net |
||||||||||
Amount |
Amortization |
Amount |
||||||||||
Amortized Intangible Assets |
||||||||||||
Customer relationships |
$ | 62,083 | $ | 10,967 | $ | 51,116 | ||||||
Patents |
268 | 237 | 31 | |||||||||
LED technology firmware, software |
20,966 | 13,415 | 7,551 | |||||||||
Trade name |
2,658 | 939 | 1,719 | |||||||||
Non-compete |
260 | 6 | 254 | |||||||||
Total Amortized Intangible Assets |
86,235 | 25,564 | 60,671 | |||||||||
Indefinite-lived Intangible Assets |
||||||||||||
Trademarks and trade names |
12,102 | - | 12,102 | |||||||||
Total indefinite-lived Intangible Assets |
12,102 | - | 12,102 | |||||||||
Total Other Intangible Assets |
$ | 98,337 | $ | 25,564 | $ | 72,773 |
June 30, 2020 |
||||||||||||
(In thousands) |
Gross |
|||||||||||
Carrying |
Accumulated |
Net |
||||||||||
Amount |
Amortization |
Amount |
||||||||||
Amortized Intangible Assets |
||||||||||||
Customer relationships |
$ | 35,563 | $ | 14,129 | $ | 21,434 | ||||||
Patents |
338 | 277 | 61 | |||||||||
LED technology firmware, software |
16,066 | 12,852 | 3,214 | |||||||||
Trade name |
2,658 | 829 | 1,829 | |||||||||
Total Amortized Intangible Assets |
54,625 | 28,087 | 26,538 | |||||||||
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 | $ | 28,087 | $ | 29,960 |
In the fiscal 2021, the Company wrote-off intangible assets’ gross carrying amount and accumulated amortization for a dissolved entity. The net impact to the consolidated financial statements, including the total other intangible assets, was zero.
(In thousands) |
2021 |
2020 |
||||||
Amortization expense of other intangible assets |
$ | 2,948 | $ | 2,687 |
The Company expects to record annual amortization expense as follows:
(In thousands) |
||||
2022 |
$ | 4,808 | ||
2023 |
$ | 4,760 | ||
2024 |
$ | 4,760 | ||
2025 |
$ | 4,760 | ||
2026 |
$ | 4,754 | ||
After 2026 |
$ | 36,829 |
NOTE 8 — REVOLVING LINE OF CREDIT AND LONG-TERM DEBT
In March 2021, the Company amended its secured line of credit to a $100 million facility from a $75 million facility that expires in the third quarter of fiscal 2026. Interest on the revolving line of credit is charged based upon an increment over the LIBOR rate or a base rate, at the Company’s option. The base rate is calculated as the highest of (a) the Prime rate, (b) the sum of the Overnight Funding Rate plus 50 basis points and (c) the sum of the Daily LIBOR Rate plus 100 basis points as long as a Daily LIBOR rate is offered, ascertainable and not unlawful. The increment over the LIBOR borrowing rate fluctuates between 100 and 200 basis points, and the increment over the Base Rate fluctuates between 0 and 100 basis points, both of which depend 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 for the first quarter of fiscal 2022 has not been determined pending the outcome of a further amendment to the line of credit (See below). The fee on the unused balance of the $100 million committed line of credit fluctuates between 15 and 22.5 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 interest coverage ratio. As of June 30, 2021, there were $68.2 borrowings against the line of credit, and $31.8 million was available as of that date. Based on the terms of the line of credit and the maturity date, the debt has been classified as long term.
The Company is in the process of amending its secured line of credit as a result of the acquisition of JSI. One of the changes to the line of credit will allow for the historical EBITDA results of JSI in the computation of the debt covenants. The Company expects to be in compliance with its debt covenants once the amendments are in place. For the period ending June 30, 2021, the Company has obtained a waiver from its bank in relation to its loan covenants until the amended line of credit has been finalized.
NOTE 9 — CASH DIVIDENDS
The Company paid cash dividends of $5.3 million in both fiscal years 2021 and 2020. Dividends on restricted stock units in the amount of $0.1 million were accrued as of both June 30, 2021 and 2020. These dividends are paid upon the vesting of the restricted stock units when shares are issued to the award recipients. In August 2021, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable September 7, 2021 to shareholders of record August 30, 2021.
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 2,573,450 shares all of which are available for future grant or award as of June 30, 2021. The Plan contains 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, restricted stock units, performance stock units and other stock-based awards.
Inducement awards are granted by the Company to attract and retain key executives. Inducement awards are separately registered securities and are not part of the 2019 Omnibus Plan. In fiscal 2021, 75,000 inducement options, 30,626 RSUs and 122,509 PSUs were granted. In fiscal 2020, 280,000 inducement options were granted.
Stock Warrants
The Company has outstanding 200,000 fully exercisable stock warrants with an exercise price of $9.95 as of June 30, 2021. As of June 30, 2021, the warrants had a remaining contractual life of 0.6 years. The fair value of the warrants on the date of grant was estimated using the Black-Scholes option pricing model. The following table summarizes the weighted-average assumptions used in the Black-Scholes option price model to value the warrants in the period indicated:
February 21, 2017 |
||||
Dividend yield |
2.01 | % | ||
Expected volatility |
39 | % | ||
Risk-free interest rate |
1.80 | % | ||
Expected life (in years) |
4.5 | |||
Fair value per share |
$ | 2.87 |
Stock Options
The fair value of each option on the date of grant was estimated using the Black-Scholes option pricing model. The following table summarizes the weighted-average assumptions used in the Black-Scholes option pricing model to value the stock options granted in the periods indicated:
|
||||||||
2021 |
2020 |
|||||||
Dividend yield |
2.9 | % | 4.7 | % | ||||
Expected volatility |
50 | % | 43 | % | ||||
Risk-free interest rate |
0.3 | % | 1.4 | % | ||||
Expected life (in years) |
6.0 | 6.0 | ||||||
Fair value per share |
$ | 2.40 | $ | 1.22 |
Stock option expense is recorded on a straight-line basis, or sooner if the grantee is retirement eligible as defined in the 2019 Omnibus Plan, net of forfeitures. The forfeiture rate is based on historical rates and reduces the compensation expense recognized. The expected volatility of the Company’s stock was calculated based upon the historic monthly fluctuation in stock price for a period approximating the expected life of option grants. The risk-free interest rate is the rate of a five-year Treasury security at constant, fixed maturity on the approximate date of the stock option grant. The expected life of outstanding options is determined to be less than the contractual term for a period equal to the aggregate group of option holders’ estimated weighted average time within which options will be exercised. It is the Company’s policy that when stock options are exercised, new common shares shall be issued.
Service-based options have a three-year ratable vesting period beginning one year after the date of grant. Inducement stock options have a term of ten years only if the employee is employed for three years from the date of grant. The maximum exercise period of service-based and performance-based stock options granted under the 2019 Omnibus Plan is ten years.
The Company recorded $0.8 million and $0.4 million of expense related to stock options in fiscal years 2021 and 2020, respectively.
A summary of stock option activity as of June 30, 2021 and changes during the period from July 1, 2020 through June 30, 2021 are as follows:
Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual
Term
|
Aggregate
Intrinsic
|
|||||||||||||
Outstanding at June 30, 2020 |
2,282,938 | $ | 6.20 | 7.1 | $ | 2,731,949 | ||||||||||
Granted |
318,406 | $ | 6.86 | |||||||||||||
Exercised |
(139,367 | ) | $ | 7.38 | ||||||||||||
Forfeited |
(132,329 | ) | $ | 8.84 | ||||||||||||
Expired |
(2,500 | ) | $ | 7.29 | ||||||||||||
Outstanding at June 30, 2021 |
2,327,148 | $ | 6.07 | 6.7 | $ | 5,320,456 | ||||||||||
Exercisable at June 30, 2021 |
1,013,157 | $ | 7.58 | 5.0 | $ | 1,239,663 | ||||||||||
Vested and expected to vest at June 30, 2021 |
2,256,565 | $ | 6.08 | 6.6 | $ | 5,165,389 |
The aggregate intrinsic value of options exercised during the years ended June 30, 2021 and June 30, 2020 was $0.2 million and $0.1 million, respectively. The Company received $1.0 million and $0.6 million of proceeds from stock options exercises in fiscal 2021 and 2020, respectively.
As of June 30, 2021, there was $0.9 million of unrecognized compensation cost, net of forfeitures, related to stock options, which is expected to be recognized over a weighted-average remaining period of 1.8 years.
For fiscal year 2021, the Company recognized a current income tax benefit of $0.1 million for tax deductions related to equity compensation. A discrete tax expense of $0.1 million was recognized to reduce deferred tax assets for cancelled awards and detriments in excess of the tax deductions.
For fiscal year 2020, the Company recognized a current income tax benefit of $43,000 for tax deductions related to equity compensation. A discrete tax expense of $0.4 million was recognized to reduce deferred tax assets for cancelled awards and detriments in excess of the tax deductions.
Restricted Stock Units
A total of 163,752 RSUs with a weighted average fair value of $7.08 per share were awarded to employees during fiscal 2021. Inducement RSUs awarded during fiscal 2021 vest after three years of service. All other RSUs awarded during fiscal 2021 have a three-year vesting period, with 50% vesting on the first anniversary date of the award and 25% vesting on the second and third anniversary of the award. The Company determined the fair value of the awards based on the closing price of the Company stock on the date the RSUs were awarded. The unvested RSUs are non-voting, but accrue cash dividends at the same per share rate as those cash dividends declared and paid on LSI’s common stock. Dividends on RSUs in the amount of $42,085 and $16,931 were accrued as of June 30, 2021 and 2020, respectively. Accrued dividends are paid to the holder upon vesting of the RSUs and issuance of shares.
The Company recorded $0.6 million and $0.1 million of expense related to RSUs during fiscal year 2021 and 2020, respectively.
A summary of outstanding and unvested RSU activity as of June 30, 2021 and changes during the period from July 1, 2020 through June 30, 2021 are as follows:
Shares |
Weighted- Average Grant Date Fair Value |
|||||||
Unvested at June 30, 2020 |
72,820 | $ | 4.03 | |||||
Granted |
163,752 | $ | 7.08 | |||||
Vested |
(28,051 | ) | $ | 4.34 | ||||
Forfeited |
(7,800 | ) | $ | 5.49 | ||||
Unvested at June 30, 2021 |
200,721 | $ | 6.42 |
As of June 30, 2021, there was $0.6 million of unrecognized compensation cost, net of forfeitures, related to RSUs, which is expected to be recognized over a weighted-average remaining period of 2.2 years. The total fair value of RSUs that became fully vested during fiscal 2021 was $0.2 million.
Performance Stock Units
A total of 256,526 PSUs with a weighted average fair value of $7.50 per share were awarded to employees during fiscal 2021. The Company determined the fair value of the awards based on the closing price of the Company stock on the date the PSUs were awarded. PSUs vest if the Company meets certain financial metrics over a three-year period. The PSUs are non-voting, but accrue cash dividends at the same per share rate as those cash dividends declared and paid on LSI’s common stock. This applies to PSUs granted under the 2012 Stock Plan only. Dividends on PSUs in the amount of $86,196 and $46,865 were accrued as of June 30, 2021 and 2020, respectively. Accrued dividends are paid to the holder upon vesting of the PSUs and issuance of shares.
The Company recorded $0.6 million and $0.1 million of expense related to PSUs during fiscal years 2021 and 2020, respectively.
A summary of outstanding and unvested PSU activity as of June 30, 2021 and changes during the period from July 1, 2020 through June 30, 2021 are as follows:
Shares |
Weighted- Average Grant Date Fair Value |
|||||||
Unvested at June 30, 2020 |
206,974 | $ | 3.98 | |||||
Granted |
256,526 | $ | 7.50 | |||||
Vested |
- | $ | - | |||||
Forfeited |
(6,613 | ) | $ | 4.48 | ||||
Unvested at June 30, 2021 |
456,887 | $ | 5.95 |
As of June 30, 2021, there was $1.6 million of unrecognized compensation cost, net of forfeitures, related to PSUs, which is expected to be recognized over a weighted-average remaining period of 2.1 years.
Director and Employee Stock Compensation Awards
The Company awarded a total of 43,049 and 71,581 common shares as stock compensation awards in fiscal years 2021 and 2020, respectively. These common shares were valued at their approximate $0.3 million fair market values based on their stock price at dates of issuance multiplied by the number of common shares awarded, pursuant to the compensation programs for non-employee directors who receive a portion of their compensation as an award of Company stock and for employees who received a nominal recognition award in the form of Company stock. Stock compensation awards are made in the form of newly issued common shares of the Company.
Deferred Compensation Plan
The Company has a non-qualified deferred compensation plan providing for both Company matching contributions and participant funded deferrals of compensation. This plan is fully funded in a Rabbi Trust. All plan investments are in common shares of the Company. As of June 30, 2021, there were 31 participants, all with fully vested account balances. A total of 345,875 common shares with a cost of $2.5 million, and 180,264 common shares with a cost of $1.1 million, both of which included the Company contributions and the participant deferrals, were held in the plan as of June 30, 2021 and 2020, respectively, and, accordingly, have been recorded as treasury shares.
The change in the number of shares held by this plan is the net result of newly issued shares as compensation deferred into the plan offset by distributions to terminated employees. The Company issued 193,510 and 85,560 new common shares for purposes of the non-qualified deferred compensation plan during fiscal 2021 and during fiscal 2020, respectively.
NOTE 11 — LEASES AND PURCHASE COMMITMENTS
Purchase commitments of the Company totaled $29.0 million and $14.3 million as of June 30, 2021 and June 30, 2020, respectively.
The Company leases certain manufacturing facilities along with a small office space, a company vehicle, several forklifts, several small tooling items and various items of office equipment. The Company also acquired buildings, machinery and forklift leases with the acquisition of JSI, as well as one sublease. All but two of the Company’s leases are operating. Leases have a remaining term of one to seven 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. The rent expense for these leases was immaterial for fiscal 2021.
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 (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.
(In thousands) |
2021 |
2020 |
||||||
Operating lease cost |
$ | 2,428 | $ | 2,308 | ||||
Financing lease cost: |
||||||||
Amortization of right of use assets |
291 | 48 | ||||||
Interest on lease liabilities |
91 | 16 | ||||||
Variable lease cost |
10 | 6 | ||||||
Sublease income |
(43 | ) | - | |||||
Total lease cost |
$ | 2,777 | $ | 2,378 |
Supplemental Cash Flow Information: | ||||||||
(In thousands) |
2021 |
2020 |
||||||
Cash flows from operating leases |
||||||||
Fixed payments - operating cash flows |
$ | 2,412 | $ | 2,296 | ||||
Liability reduction - operating cash flows |
$ | 1,983 | $ | 1,810 | ||||
Cash flows from finance leases |
||||||||
Interest - operating cash flows |
$ | 91 | $ | 16 | ||||
Repayments of principal portion - financing cash flows |
$ | 239 | $ | 39 |
Operating Leases: |
June 30, 2021 |
June 30, 2020 |
||||||
Total operating right-of-use assets |
$ | 11,579 | $ | 8,663 | ||||
Accrued expenses (Current liabilities) |
$ | 1,424 | $ | 376 | ||||
Long-term operating lease liability |
10,890 | 9,021 | ||||||
Total operating lease liabilities |
$ | 12,314 | $ | 9,397 | ||||
Weighted Average remaining Lease Term (in years) |
3.93 | 4.59 | ||||||
Weighted Average Discount Rate |
4.81 | % | 4.85 | % |
Finance Leases: |
June 30, 2021 |
June 30, 2020 |
||||||
Buildings under finance leases |
$ | 2,033 | $ | 2,033 | ||||
Equipment under finance leases |
30 | - | ||||||
Accumulated depreciation |
(339 | ) | (48 | ) | ||||
Total finance lease assets, net |
$ | 1,724 | $ | 1,985 | ||||
Accrued expenses (Current liabilities) |
$ | 263 | $ | 239 | ||||
Long-term finance lease liability |
1,521 | 1,755 | ||||||
Total finance lease liabilities |
$ | 1,784 | $ | 1,994 | ||||
Weighted Average remaining Lease Term (in years) |
5.78 | 6.83 | ||||||
Weighted Average Discount Rate |
4.86 | % | 4.86 | % |
Maturities of Lease Liability: |
Operating Lease | Finance Lease | Operating | Net Lease | ||||||||||||
Liabilities |
Liabilities |
Subleases |
Commitments |
|||||||||||||
2022 |
$ | 3,558 | $ | 342 | $ | (377 | ) | $ | 3,523 | |||||||
2023 |
3,558 | 342 | (377 | ) | 3,523 | |||||||||||
2024 |
3,255 | 337 | (377 | ) | 3,215 | |||||||||||
2025 |
2,104 | 362 | (31 | ) | 2,435 | |||||||||||
2026 |
803 | 362 | - | 1,165 | ||||||||||||
Thereafter |
232 | 304 | - | 536 | ||||||||||||
Total lease payments |
$ | 13,510 | $ | 2,049 | $ | (1,162 | ) | $ | 14,397 | |||||||
Less: Interest |
(1,196 | ) | (265 | ) | (1,461 | ) | ||||||||||
Present Value of Lease Liabilities |
$ | 12,314 | $ | 1,784 | $ | 12,936 |
NOTE 12 — INCOME TAXES
The following information is provided for the years ended June 30:
(In thousands) |
2021 |
2020 |
||||||
Components of income before income taxes: |
||||||||
United States |
$ | 7,117 | $ | 11,494 | ||||
Foreign |
799 | 199 | ||||||
Income before income taxes |
$ | 7,916 | $ | 11,693 | ||||
Provision for income taxes |
||||||||
U.S. Federal |
$ | 2,425 | $ | (2,082 | ) | |||
Foreign |
247 | 83 | ||||||
State and local |
434 | 175 | ||||||
Total current |
3,106 | (1,824 | ) | |||||
Deferred |
(1,058 | ) | 3,925 | |||||
Total provision for income taxes |
$ | 2,048 | $ | 2,101 |
(In thousands) |
2021 |
2020 |
||||||
Reconciliation to federal statutory rate: |
||||||||
Federal statutory rate |
21.0 |
% |
21.0 |
% |
||||
State and local taxes, net of federal benefit |
1.5 | 2.0 | ||||||
Foreign operations |
1.0 | 0.4 | ||||||
Federal tax credits |
(1.5 | ) | (0.7 | ) | ||||
Valuation allowance |
(25.9 | ) | (13.4 | ) | ||||
New York state tax credits |
25.9 | - | ||||||
Expiration of capital loss carryforward |
- | 8.9 | ||||||
Transaction costs |
3.5 | - | ||||||
Uncertain tax position activity |
(0.1 | ) | (0.5 | ) | ||||
Stock-based compensation |
1.0 | 3.6 | ||||||
Tax rate changes |
(0.3 | ) | (5.4 | ) | ||||
Other |
(0.2 | ) | 2.1 | |||||
Effective tax rate |
25.9 |
% |
18.0 |
% |
The components of deferred income tax assets and (liabilities) at June 30, 2021 and 2020 are as follows:
(In thousands) |
2021 |
2020 |
||||||
Uncertain tax positions |
$ | 138 | $ | 125 | ||||
Reserves against current assets |
936 | 798 | ||||||
Accrued expenses |
3,348 | 2,196 | ||||||
Interest |
927 | - | ||||||
Deferred compensation |
514 | 235 | ||||||
Stock-based compensation |
841 | 597 | ||||||
State net operating loss carryover and credits |
624 | 2,194 | ||||||
Lease liability |
4,408 | 1,992 | ||||||
Goodwill, acquisition costs and intangible assets |
- | 8,040 | ||||||
U.S. Federal net operating loss carryover and credits |
1,587 | 217 | ||||||
Deferred income tax asset before valuation allowance |
13,323 | 16,394 | ||||||
Valuation allowance |
(108 | ) | (2,194 | ) | ||||
Deferred income tax asset |
13,215 | 14,200 | ||||||
Depreciation |
(2,677 | ) | (1,837 | ) | ||||
Right of use assets |
(4,299 | ) | (1,992 | ) | ||||
Goodwill, acquisition costs and intangible assets |
(3,683 | ) | - | |||||
Deferred income tax liability |
(10,659 | ) | (3,829 | ) | ||||
Net deferred income tax asset |
$ | 2,556 | $ | 10,371 |
The Company has U.S. federal net operating loss carry forward deferred tax assets of $1.5 million and $0.1 million at June 30, 2021 and June 30, 2020, respectively. The increase of $1.4 million for the year is from the acquisition of JSI and has an unlimited carryforward period. The remaining $0.1 million will expire over a three-year period beginning June 30, 2029. The Company has deferred tax assets for research and development credits of $0.1 million at both June 30, 2021 and June 30, 2020. Utilization of the federal net operating losses and research and development credits are limited by Internal Revenue Code Section 382, but are expected to be realized before expiration.
The Company has state net operating loss carryovers and tax credit deferred tax assets of $0.6 million and $2.2 million at June 30, 2021 and June 30, 2020, respectively. At June 30, 2021, there was $0.3 million of state net operating losses from the acquisition of JSI and $0.3 million other state net operating losses and tax credits. A valuation allowance of $0.1 million exists at June 30, 2021 against Oregon tax credits not expected to be used. The Oregon credits are otherwise expected to expire over a 4-year period beginning June 30, 2027.
At June 30, 2020, there was $2.1 million of New York tax credits and $0.1 million of Oregon tax credits. A full valuation allowance existed for both credits not expected to be used of $2.2 million. During fiscal year 2021, the Company eliminated the deferred tax asset and related valuation allowance for the New York tax credits of $2.1 million when the entity holding the New York credits was dissolved. There was no impact to the consolidated financial statements.
The Company had a capital loss carry forward of $10.7 million at June 30, 2019 that was generated from the sale of a Canadian subsidiary during fiscal 2015. During fiscal 2020, the Company sold its North Canton, Ohio and New Windsor, New York facilities, resulting in taxable capital gain; $6.4 million of the capital loss carry forward was used to offset the gain. The remaining capital loss carryforward of $4.3 million expired unused in fiscal 2020. The Company recognized the tax benefit of utilizing the capital loss of $0.6 million in the fiscal year 2020 by releasing the related valuation allowance.
At June 30, 2021, tax, interest, and penalties, net of potential federal tax benefits, were $0.7 million, $0.3 million and $0.2 million, respectively, of the total reserve for uncertain tax positions of $1.2 million. The entire uncertain tax position of $0.7 million net of federal tax benefit, would impact the effective tax rate if recognized.
At June 30, 2020, tax, interest, and penalties, net of potential federal tax benefits, were $0.5 million, $0.3 million, and $0.1 million, respectively, of the total reserve for uncertain tax positions of $0.9 million. The entire uncertain tax position of $0.5 million, net of federal tax benefit, would impact the effective tax rate if recognized. The liability for uncertain tax position is included in Other Long-Term Liabilities.
The Company is recording estimated interest and penalties related to potential underpayment of income taxes as a component of tax expense in the Consolidated Statements of Operations. The Company recognized a $0.1 million net tax benefit in both fiscal 2021 and fiscal 2020, related to the change in reserves for uncertain tax positions. The Company recognized interest net of federal benefit and penalties of $32,000 and $19,000, respectively, in fiscal 2021 and $0 and $13,000, respectively, in fiscal 2020. The reserve for uncertain tax positions is not expected to change significantly in the next twelve months.
The tax activity in the liability for uncertain tax positions was as follows:
(In thousands) |
2021 |
2020 |
||||||
Balance at the beginning of the fiscal year |
$ | 607 | $ | 675 | ||||
Decreases - tax positions in prior period |
(52 | ) | (70 | ) | ||||
Increase - tax positions in current period |
49 | 15 | ||||||
Increases - tax positions in prior period |
78 | - | ||||||
Settlements and payments |
- | (13 | ) | |||||
Balance at end of the fiscal year |
$ | 682 | $ | 607 |
The Company files a consolidated federal income tax return in the United States, and files various combined and separate tax returns in several state and local jurisdictions, and also in Canada and Mexico. With limited exceptions, the Company is no longer subject to U.S. Federal, state and local tax examinations by tax authorities for fiscal years ending prior to June 30, 2018.
NOTE 13 — SUPPLEMENTAL CASH FLOW INFORMATION
(In thousands) |
||||||||
2021 |
2020 |
|||||||
Cash Payments: |
||||||||
Interest |
$ | 127 | $ | 990 | ||||
Income taxes |
$ | 356 | $ | 6 | ||||
Non-cash investing and financing activities |
||||||||
Issuance of common shares as compensation |
$ | 315 | $ | 300 | ||||
Issuance of common shares to fund deferred compensation plan |
$ | 1,534 | $ | 473 |
NOTE 14 — 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 June 30, 2021, there were no such standby letters of credit issued. In August 2020, the Company experienced a cybersecurity incident. For details regarding this incident, see risk factor on page 8 of this Form 10-K.
NOTE 15 – SEVERANCE COSTS
The Company recorded severance charges of less than $0.1 million and $0.3 million in fiscal 2021 and 2020, respectively. This severance expense was related to reductions in staffing not related to plant restructuring. See further discussion of restructuring expenses in Note 16.
The activity in the Company’s accrued severance liability was as follows for the twelve months ended June 30, 2021 and 2020:
June 30, |
June 30, |
|||||||
(In thousands) |
2021 |
2020 |
||||||
Balance at beginning of period |
$ | 639 | $ | 1,134 | ||||
Accrual of expense |
41 | 344 | ||||||
Payments |
(667 | ) | (839 | ) | ||||
Balance at end of period |
$ | 13 | $ | 639 |
The severance reserve reported as of June 30, 2021 has been classified as a current liability and will be paid out over the next twelve months.
NOTE 16 – RESTRUCTURING COSTS
In fiscal 2019, the Company announced plans to close its lighting manufacturing facility in New Windsor, New York. The closure was part of ongoing actions to align the Company’s supply chain to more cost effectively serve the changing requirements of the lighting market. The sale of the New Windsor facility occurred during the first quarter of fiscal 2020. The net proceeds were $12.3 million resulting in a gain of $4.8 million. In addition, in the third quarter of fiscal 2020, the Company sold its North Canton, Ohio facility. The net proceeds were $7.7 million resulting in a net gain of $3.7 million. The Company relocated the production at the North Canton facility to smaller, leased facility in Akron, Ohio during the fourth quarter of fiscal 2020. The Company also incurred $0.6 million of expense to write-down inventory which is not included in the tables below. Other restructuring costs incurred in fiscal 2020 related to the realignment of the Company’s manufacturing footprint at its Houston, Texas facility. 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 facility.
The following table presents information about restructuring (gains) costs recorded in fiscal years 2021 and 2020:
(In thousands) |
2021 |
2020 |
||||||
Exit costs |
$ | (14 | ) | $ | 636 | |||
Impairment of fixed assets and accelerated depreciation |
- | 59 | ||||||
Gain on sale of facility |
- | (8,562 | ) | |||||
Manufacturing realignment costs |
- | 276 | ||||||
Total |
$ | (14 | ) | $ | (7,591 | ) |
The following table presents restructuring (gains) costs incurred by line item in the consolidated statement of operations in which the costs are included:
(In thousands) |
2021 |
2020 |
||||||
Cost of goods sold |
$ | (14 | ) | $ | 980 | |||
Operating expenses |
- | (8,571 | ) | |||||
Total |
$ | (14 | ) | $ | (7,591 | ) |
The following table presents information about restructuring (gains) costs by segment for the periods indicated:
(In thousands) |
2021 |
2020 |
||||||
Lighting Segment |
$ | - | $ | (4,674 | ) | |||
Display Solutions Segment |
(14 | ) | (2,940 | ) | ||||
Corporate and Eliminations |
- | 23 | ||||||
Total |
$ | (14 | ) | $ | (7,591 | ) |
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 |
June 30, |
||||||||||||||||||
(In thousands) |
2020 |
Expense |
Payments |
Adjustments |
2021 |
|||||||||||||||
Severance and termination benefits |
$ | 27 | $ | - | $ | - | $ | - | $ | 27 | ||||||||||
Other restructuring costs |
- | (14 | ) | 14 | - | - | ||||||||||||||
Total |
$ | 27 | $ | (14 | ) | $ | 14 | $ | - | $ | 27 |
Refer to Note 15 for information regarding additional severance expenses that are not included in the restructuring costs identified in this footnote.
NOTE 17 — RELATED PARTY TRANSACTIONS
One of the Company’s former independent outside directors is a director of Wesco International (Wesco). Wesco purchases lighting fixtures from the Company. Wesco will no longer be considered a related party after fiscal 2021.
The Company has recognized revenue related to the following related party transactions in the fiscal years indicated:
(In thousands) |
2021 |
2020 |
||||||
Wesco International |
$ | 2,013 | $ | 1,575 |
As of the balance sheet date indicated, the Company had the following accounts receivable recorded with respect to related party transactions:
(In thousands) |
2021 |
2020 |
||||||
Wesco International |
$ | 264 | $ | 108 |
NOTE 18 — SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
Quarter Ended |
||||||||||||||||||||
(In thousands except per share data) |
Sep. 30 |
Dec. 31 |
Mar. 31 |
Jun. 30 |
Fiscal Year |
|||||||||||||||
2021 |
||||||||||||||||||||
Net Sales |
$ | 70,006 | $ | 76,387 | $ | 72,204 | $ | 97,015 | $ | 315,612 | ||||||||||
Gross profit |
18,272 | 19,706 | 18,092 | 22,904 | 78,974 | |||||||||||||||
Net Income |
1,990 | 2,208 | 1,472 | 198 | 5,868 | |||||||||||||||
Earnings per share |
||||||||||||||||||||
Basic |
$ | 0.08 | $ | 0.08 | $ | 0.05 | $ | 0.01 | $ | 0.22 | (a) | |||||||||
Diluted |
$ | 0.07 | $ | 0.08 | $ | 0.05 | $ | 0.01 | $ | 0.21 | (a) | |||||||||
Range of share prices |
||||||||||||||||||||
High |
$ | 7.34 | $ | 9.01 | $ | 10.78 | $ | 9.54 | $ | 10.78 | ||||||||||
Low |
$ | 5.52 | $ | 6.75 | $ | 8.09 | $ | 7.55 | $ | 5.52 | ||||||||||
2020 |
||||||||||||||||||||
Net Sales |
$ | 88,701 | $ | 82,377 | $ | 71,010 | $ | 63,470 | $ | 305,558 | ||||||||||
Gross profit |
21,855 | 19,964 | 15,942 | 15,769 | 73,530 | |||||||||||||||
Net Income |
4,475 | 1,743 | 1,861 | 1,513 | 9,592 | |||||||||||||||
Earnings per share |
||||||||||||||||||||
Basic |
$ | 0.17 | $ | 0.07 | $ | 0.07 | $ | 0.06 | $ | 0.37 | (a) | |||||||||
Diluted |
$ | 0.17 | $ | 0.07 | $ | 0.07 | $ | 0.06 | $ | 0.36 | (a) | |||||||||
Range of share prices |
||||||||||||||||||||
High |
$ | 5.22 | $ | 6.30 | $ | 7.28 | $ | 6.81 | $ | 7.28 | ||||||||||
Low |
$ | 3.63 | $ | 4.90 | $ | 2.59 | $ | 3.51 | $ | 2.59 |
(a) |
The total of the earnings per share for each of the four quarters does not equal the total earnings per share for the full year because the calculations are based on the average shares outstanding during each of the individual periods. There is no difference between basic and diluted shares due to losses. |
LSI INDUSTRIES INC. AND SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2021 and 2020
(In thousands)
COLUMN A |
COLUMN B |
COLUMN C |
COLUMN D |
COLUMN E |
COLUMN F |
|||||||||||||||
Description |
Balance Beginning of Period |
Additions Charged to Costs and Expenses |
Additions from Company Acquired |
Deductions
|
Balance
Period |
|||||||||||||||
Allowance for Doubtful Accounts: |
||||||||||||||||||||
Year Ended June 30, 2021 |
$ | 273 | $ | 19 | $ | 24 | $ | (60 | ) | $ | 256 | |||||||||
Year Ended June 30, 2020 |
$ | 879 | $ | 19 | $ | - | $ | (625 | ) | $ | 273 | |||||||||
Inventory Obsolescence Reserve: |
||||||||||||||||||||
Year Ended June 30, 2021 |
$ | 3,821 | $ | 1,754 | $ | 380 | $ | (905 | ) | $ | 5,050 | |||||||||
Year Ended June 30, 2020 |
$ | 4,605 | $ | 2,454 | $ | 10 | $ | (3,248 | ) | $ | 3,821 | |||||||||
Deferred Tax Asset Valuation Reserve: |
||||||||||||||||||||
Year Ended June 30, 2021 |
$ | 2,194 | $ | - | $ | - | $ | (2,086 | ) | $ | 108 | |||||||||
Year Ended June 30, 2020 |
$ | 3,820 | $ | - | $ | - | $ | (1,626 | ) | $ | 2,194 |
(a) |
For Allowance for Doubtful Accounts, deductions are uncollectible accounts charged off, less recoveries. |
Exhibit 14
LSI INDUSTRIES INC.
CODE OF ETHICS AND CONDUCT
ADOPTED BY THE BOARD OF DIRECTORS ON AUGUST 18, 2021
The Nasdaq Stock Market rules and the rules and regulations promulgated under the Sarbanes-Oxley Act require that LSI Industries Inc. (the “Company,” “LSI” or “we”) provide a code of business conduct for all of our directors, officers and employees (the “Code”). LSI is committed to being a good corporate citizen. Our policy is to conduct business affairs honestly and in an ethical manner and LSI expects all of its directors, officers, employees and consultants to meet the standards set forth in this Code. That goal cannot be achieved unless you individually accept your responsibility to promote integrity and demonstrate the highest level of ethical conduct in all of your activities. Activities that may call into question the Company’s reputation or integrity should be avoided. We understand that not every situation is black and white. The key to compliance with the Code is exercising good judgment.
Managers set an example for other employees and are often responsible for directing the actions of others. Every manager and supervisor is expected to take necessary actions to ensure compliance with this Code, to provide guidance and assist employees in resolving questions concerning the Code and to permit employees to express any concerns regarding compliance with this Code. No one has the authority to order another employee to act in any manner that is contrary to this Code.
COMPLIANCE WITH LAWS AND REGULATIONS
LSI seeks to comply with both the letter and spirit of the laws and regulations in all countries in which it operates.
LSI is committed to full compliance with the laws and regulations of the cities, states and countries in which it operates. You must comply with all applicable laws, rules and regulations in performing your duties for the Company. Numerous federal, state and local laws and regulations define and establish obligations with which the Company, its employees and agents must comply. Under certain circumstances, local country law may establish requirements that differ from this Code. You are expected to comply with all local country laws in conducting the Company’s business. If you violate these laws or regulations in performing your duties for the Company, you not only risk individual indictment, prosecution and penalties, and civil actions and penalties, you also subject the Company to the same risks and penalties. If you violate these laws in performing your duties for the Company, you may be subject to immediate disciplinary action, including possible termination of your employment or affiliation with the Company. As explained below, you should always consult your manager or the Senior Vice President, Human Resources and General Counsel (“General Counsel”) with any questions about the legality of you or your colleagues’ conduct. For additional information regarding reporting suspected violations of this Code, please see Section 11 below.
FULL, FAIR, ACCURATE, TIMELY AND UNDERSTANDABLE DISCLOSURE
It is of paramount importance to LSI that all disclosure in reports and documents that the Company files with, or submits to, the Securities and Exchange Commission (“SEC”), and in other public communications made by the Company is full, fair, accurate, timely and understandable. You must take all steps available to assist the Company in fulfilling these responsibilities consistent with your role within the Company. In particular, you are required to provide prompt and accurate answers to all inquiries made to you in connection with the Company’s preparation of its public reports and disclosure.
Any attempt to enter inaccurate or fraudulent information into the Company’s accounting system will not be tolerated and will result in disciplinary action, up to and including termination of employment.
FINANCIAL REPORTING RESPONSIBILITIES
Senior Officers (which includes the CEO, CFO, General Counsel, Chief Accounting Officer and such other persons identified from time to time by the Audit Committee) each bear a special responsibility for promoting integrity throughout the Company. Furthermore, the Senior Officers have a responsibility to foster a culture throughout the Company as a whole that ensures the fair and timely reporting of the Company’s results of operations and financial condition and other financial information.
Because of this special role, the Senior Officers are bound by the following Senior Officer Code of Ethics, and by accepting the Code each agrees that he or she will:
Perform his or her duties in an honest and ethical manner.
● |
Handle all actual or apparent conflicts of interest between his or her personal and professional relationships in an ethical manner. |
● |
Take all necessary actions to ensure full, fair, accurate, timely, and understandable disclosure in reports and documents that the Company files with, or submits to, government agencies and in other public communications. |
● |
Comply with all applicable laws, rules and regulations of federal, state and local governments. |
● |
Proactively promote and be an example of ethical behavior in the work environment. |
Senior Officers are bound by and subject to the Code of Ethical Conduct For Financial Matters adopted by the Audit Committee.
INSIDER TRADING
You should never trade securities on the basis of confidential information acquired through your employment or fiduciary relationship with LSI.
You are prohibited under both federal law and Company policy from purchasing or selling Company stock, directly or indirectly, on the basis of material non-public information concerning the Company. Any person possessing material non-public information about the Company must not engage in transactions involving Company securities until this information has been released to the public. Generally, material information is that which would be expected to affect the investment decisions of a reasonable investor or the market price of the stock. You must also refrain from trading in the stock of other publicly held companies, such as existing or potential customers or suppliers, on the basis of material confidential information obtained in the course of your employment or service as a director. It is also illegal to recommend a stock to (i.e., “tip”) someone else on the basis of such information. If you have a question concerning appropriateness or legality of a particular securities transaction, consult with the Company’s General Counsel. Officers, directors, employees and consultants of the Company are subject to additional responsibilities under the Company’s insider trading policy, a copy of which has been made available to each such person, and which can be obtained from the Company’s General Counsel.
HARASSMENT
You should feel safe in the workplace. LSI will not tolerate any harassment by or of its employees.
LSI does not tolerate unlawful harassment or any mistreatment by or of employees, officers, directors, guests, customers or partners in the workplace or in a work-related situation on the basis of sex, race, color, nationality, ethnic, social or national origin, ancestry, citizenship, religion (or belief, where applicable), age, physical or mental disability, medical condition, sexual orientation, gender identity, gender expression, political opinion, veteran status, marital status, genetic information or characteristics (or those of a family member), or any other category protected under applicable federal, state, or local law. If you suspect harassment, discrimination, or retaliation has occurred, you are encouraged, and managers are required, to promptly provide a written or oral complaint to the Company’s General Counsel or to our Whistleblower Hotline listed below.
CONFLICTS OF INTEREST AND CORPORATE OPPORTUNITIES
You must avoid any situation in which your personal interests conflict or even appear to conflict with the Company’s interests. You owe a duty to the Company not to compromise the Company’s legitimate interests and to advance such interests when the opportunity to do so arises in the course of your employment.
You shall perform your duties to the Company in an honest and ethical manner. You shall handle all actual or apparent conflicts of interest between your personal and professional relationships in an ethical manner.
You should avoid situations in which your personal, family or financial interests conflict or even appear to conflict with those of the Company. You may not engage in activities that compete with the Company or compromise its interests. You should not take for your own benefit business, investment or other opportunities discovered in the course of employment that you have reason to know would benefit the Company. The following are examples of actual or potential conflicts:
● |
you, or a member of your family, receive improper personal benefits as a result of your position in the Company; |
● |
you use the Company’s property for your personal benefit; |
● |
you engage in activities that interfere with your loyalty to the Company or your ability to perform Company duties or responsibilities effectively; |
● |
you work simultaneously (whether as an employee or a consultant) for a customer, supplier or competitor; |
● |
you, or a member of your family, have a financial interest in a customer, supplier, or competitor which is significant enough to cause divided loyalty with the Company or the appearance of divided loyalty (the significance of a financial interest depends on many factors, such as size of investment in relation to your income, net worth and/or financial needs, your potential to influence decisions that could impact your interests, and the nature of the business or level of competition between the Company and the customer, supplier or competitor); |
● |
you, or a member of your family, acquire an interest in property (such as real estate, patent or other intellectual property rights or securities) in which you have reason to know the Company has, or might have, a legitimate interest; |
● |
you, or a member of your family, receive a loan or a guarantee of a loan from a customer, supplier or competitor (other than a loan from a financial institution made in the ordinary course of business and on an arm’s-length basis); |
● |
you divulge or use the Company’s confidential information - such as financial data, customer information, or computer programs - for your own personal or business purposes; |
● |
you make gifts or payments, or provide special favors, to customers, suppliers or competitors (or their immediate family members) with a value significant enough to cause the customer, supplier or competitor to make a purchase, or take or forego other action, which is beneficial to the Company and which the customer, supplier or competitor would not otherwise have taken; or |
● |
you are given the right to buy stock in other companies or you receive cash or other payments in return for promoting the services of an advisor, such as an investment banker, to the Company. |
Neither you, nor members of your immediate family, are permitted to solicit or accept valuable gifts, payments, special favors or other consideration from customers, suppliers or competitors. Any exchange of gifts must be conducted so that there is no appearance of impropriety. Gifts may be given only in compliance with the Foreign Corrupt Practices Act.
Conflicts are not always clear-cut. If you become aware of a conflict described above or any other conflict, potential conflict, or have a question as to a potential conflict, you should consult with your manager or the General Counsel, and/or follow the procedures described in Sections 11 and 12 of the Code. If you become involved in a situation that gives rise to an actual conflict, you must inform your supervisor or the General Counsel of the conflict.
CONFIDENTIALITY
All confidential information concerning the Company obtained by you is the property of the Company and must be protected.
Confidential information includes all non-public information that might be of use to competitors, or harmful to the Company or its customers, if disclosed. You must maintain the confidentiality of such information entrusted to you by the Company, its customers and its suppliers, except when disclosure is authorized by the Company or required by law.
Examples of confidential information include, but are not limited to: LSI’s trade secrets; business trends and projections; information about financial performance; new product or marketing plans; research and development ideas or information; manufacturing processes; information about potential acquisitions, divestitures and investments; stock splits, public or private securities offerings or changes in dividend policies or amounts; significant personnel changes; and existing or potential major contracts, orders, suppliers, customers or finance sources or the loss thereof.
Your obligation with respect to confidential information extends beyond the workplace. In that respect, it applies to communications with your family members and continues to apply even after your employment or director relationship with the Company terminates.
FAIR DEALING
Our goal is to conduct our business with integrity.
You should endeavor to deal honestly with LSI’s customers, suppliers, competitors, and employees. Under federal and state laws, LSI is prohibited from engaging in unfair methods of competition, and unfair or deceptive acts and practices. You should not take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other unfair dealing.
Employees, officers, directors and consultants are prohibited from taking any action to improperly influence, coerce, manipulate or mislead the Company’s internal or outside auditors or to prevent such persons from performing a diligent audit of the Company’s financial statements.
Employees, officers, directors and consultants are prohibited from taking any action to improperly influence, coerce, manipulate or mislead the Company’s internal or outside auditors or to prevent such persons from performing a diligent audit of the Company’s financial statements.
Examples of prohibited conduct include, but are not limited to:
● |
bribery or payoffs to induce business or breaches of contracts by others; |
● |
acquiring a competitor’s trade secrets through bribery or theft; |
● |
making false, deceptive or disparaging claims or comparisons about competitors or their products or services; or |
● |
mislabeling products or services. |
PROTECTION AND PROPER USE OF COMPANY ASSETS
You should endeavor to protect LSI’s assets and ensure their proper use.
Company assets, both tangible and intangible, are to be used only for legitimate business purposes of the Company and only by authorized employees or consultants. Intangible assets include intellectual property such as trade secrets, patents, trademarks and copyrights, business, marketing and service plans, engineering and manufacturing ideas, designs, databases, Company records, salary information, and any unpublished financial data and reports. Unauthorized alteration, destruction, use, disclosure or distribution of Company assets violates Company policy and this Code. Theft or waste of, or carelessness in using, these assets have a direct adverse impact on the Company’s operations and profitability and will not be tolerated.
The Company provides computers, voice mail, electronic mail (e-mail), and Internet access to certain employees for the purpose of achieving the Company’s business objectives. As a result, the Company has the right to access, reprint, publish, or retain any information created, sent or contained in any of the Company’s computers or e-mail systems of any Company machine. You may not use email, the Internet or voice mail for any illegal purpose or in any manner that is contrary to the Company’s policies or the standards embodied in this Code.
You should not make copies of, or resell or transfer copyrighted publications, including software, manuals, articles, books, and databases being used in the Company, that were created by another entity and licensed to the Company, unless you are authorized to do so under the applicable license agreement. In no event should you load or use, on any Company computer, any software, third party content or database without receiving the prior written permission of the Information Technology Department to do so. You must refrain from transferring any data or information to any Company computer other than for Company use. You may use a handheld computing device or mobile phone in connection with your work for the Company, but must not use such device or phone to access, load or transfer content, software or data in violation of any applicable law or regulation or without the permission of the owner of such content, software or data. If you should have any question as to what is permitted in this regard, please consult with the Company’s Information Technology Department.
REPORTING VIOLATIONS OF COMPANY POLICIES AND RECEIPT OF COMPLAINTS REGARDING FINANCIAL REPORTING OR ACCOUNTING ISSUES
You should report any violation or suspected violation of this Code to the appropriate LSI personnel or via our anonymous and confidential reporting procedures.
LSI’s efforts to ensure observance of, and adherence to, the goals and policies outlined in this Code mandate that you promptly bring to the attention of the CFO, the General Counsel or, if appropriate, the Chair of the Audit Committee, any material transaction, relationship, act, failure to act, occurrence or practice that you believe, in good faith, is inconsistent with, in violation of, or reasonably could be expected to give rise to a violation of, this Code. You should report any suspected violations of the Company’s financial reporting obligations or any complaints or concerns about questionable accounting or auditing practices in accordance with the procedures set forth below.
Here are some approaches to handling your reporting obligations:
● |
In the event you believe a violation of the Code or a violation of applicable laws and/or governmental regulations has occurred, or you have observed or become aware of conduct which appears to be contrary to the Code, immediately report the situation to your supervisor, the General Counsel, or the Chair of the Audit Committee. Supervisors or managers who receive any report of a suspected violation must report the matter to the General Counsel. |
● |
If you have or receive notice of a complaint or concern regarding the Company’s financial disclosure, accounting practices, internal accounting controls, auditing, or questionable accounting or auditing matters, you must immediately advise your supervisor, the CFO, the General Counsel or the Chair of the Audit Committee. |
● |
If you wish to report any such matters anonymously or confidentially, then you may do so as follows: |
Mail a description of the suspected violation or other complaint or concern to:
LSI Industries Inc.
10000 Alliance Road
Cincinnati, Ohio 45242
Attention: Chief Financial Officer or General Counsel
or
● |
Contact the Company’s Senior Vice President, Human Resources and General Counsel at (513) 372-3273. |
or
● |
Report the matter anonymously through the mechanisms established by the Company’s Whistleblowing Ethics Policy, as follows: |
● |
Through the Toll Free Hotline: 1-877-225-0471 |
● |
Use common sense and good judgment; Act in good faith. You are expected to become familiar with and to understand the requirements of the Code. If you become aware of a suspected violation, don’t try to investigate it or resolve it on your own. Prompt disclosure to the appropriate parties is vital to ensuring a thorough and timely investigation and resolution. The circumstances should be reviewed by appropriate personnel as promptly as possible, and delay may affect the results of any investigation. A violation of the Code, or of applicable laws and/or governmental regulations is a serious matter and could have legal implications. Allegations of such behavior are not taken lightly and should not be made to embarrass someone or put him or her in a false light. Reports of suspected violations should always be made in good faith. |
● |
Internal investigation. When an alleged violation of the Code, applicable laws and/or governmental regulations is reported, LSI will take appropriate action in accordance with the compliance procedures outlined in Section 12 of the Code. You are expected to cooperate in internal investigations of alleged misconduct or violations of the Code or of applicable laws or regulations. |
No fear of retaliation. The Company strictly prohibits retaliation, discrimination or harassment of any kind by any Company officer, director, employee or agent against any person who provides truthful information to a Company or law enforcement official concerning a possible violation of any law, regulation or Company policy, including this Code. Persons who retaliate, discriminate or harass may be subject to civil, criminal and administrative penalties, as well as disciplinary action, up to and including termination of employment. In cases in which you report a suspected violation in good faith and are not engaged in the questionable conduct, the Company will attempt to keep its discussions with you confidential to the extent reasonably possible. In the course of its investigation, the Company may find it necessary to share information with others on a “need to know” basis. No retaliation shall be taken against you for reporting alleged violations while acting in good faith.
COMPLIANCE PROCEDURES
The Company has established this Code as part of its overall policies and procedures. To the extent that other Company policies and procedures conflict with this Code, you should follow this Code. The Code applies to all Company directors and Company employees, including all officers, in all locations.
The Code is based on LSI’s core values, good business practices and applicable law. The existence of a Code, however, does not ensure that directors, officers and employees will comply with it or act in a legal and ethical manner. To achieve optimal legal and ethical behavior, the individuals subject to the Code must know and understand the Code as it applies to them and as it applies to others. You must champion the Code and assist others in knowing and understanding it.
● |
Compliance. You are expected to become familiar with and understand the requirements of the Code. Most importantly, you must comply with it. |
● |
CEO Responsibility. The Company’s CEO shall be responsible for ensuring that the Code is established and effectively communicated to all employees, officers and directors. Although the day-to-day compliance issues will be the responsibility of the Company’s managers and the General Counsel, the CEO has ultimate accountability with respect to the overall implementation of and successful compliance with the Code. |
● |
Corporate Compliance Management. The General Counsel will act as the primary compliance officer for the Code. The General Counsel will, with the assistance and cooperation of the Company’s officers, directors and managers, foster an atmosphere where employees are comfortable in communicating and/or reporting concerns and possible Code violations. If the General Counsel is not available, the CFO shall serve as the Code’s compliance officer. |
● |
Internal Reporting of Violations. The Company’s efforts to ensure observance of, and adherence to, the goals and policies outlined in this Code, mandate that all employees, officers and directors of the Company report suspected violations in accordance with Section 11 of this Code. |
● |
Screening of Employees. The Company shall exercise due diligence when hiring and promoting employees and, in particular, when conducting an employment search for a position involving the exercise of substantial discretionary authority, such as a member of the executive team, a senior management position or an employee with financial management responsibilities. The Company shall make reasonable inquiries into the background of each individual who is a candidate for such a position. All such inquiries shall be made in accordance with applicable law and good business practice. |
● |
Access to the Code. The Company shall ensure that employees, consultants, officers and directors may access the Code on the Company’s website. In addition, each current employee will be provided with a copy of the Code. New employees will receive a copy of the Code as part of their new hire information. From time to time, the Company will sponsor employee training programs in which the Code and other Company policies and procedures will be discussed. |
● |
Monitoring. The officers of the Company shall be responsible for reviewing the Code with all of the Company’s managers. In turn, the Company’s managers with supervisory responsibilities should review the Code with his/her direct reports. Managers are the “go to” persons for employee questions and concerns relating to the Code, especially in the event of a potential violation. Managers or supervisors will immediately report any violations or allegations of violations to the General Counsel. Managers will work with the General Counsel in assessing areas of concern, potential violations, any needs for enhancement of the Code or remedial actions to effect the Code’s policies and overall compliance with the Code and other related policies. |
● |
Auditing. An internal audit team selected by the Audit Committee will be responsible for auditing the Company’s compliance with the Code. |
● |
Internal Investigation. When an alleged violation of the Code is reported, the Company shall take prompt and appropriate action in accordance with applicable law and regulations and otherwise consistent with good business practice. If the suspected violation appears to involve either a possible violation of law or an issue of significant corporate interest, or if the report involves a complaint or concern of any person, whether employee, a shareholder or other interested person regarding the Company’s financial disclosure, internal accounting controls, questionable auditing or accounting matters or practices or other issues relating to the Company’s accounting or auditing, then the manager or investigator should immediately notify the CFO or General Counsel, who, in turn, shall notify the CEO and/or Chair of the Audit Committee, as applicable. If a suspected violation involves any director or executive officer or if the suspected violation concerns any fraud, whether or not material, involving management or other employees who have a significant role in the Company’s internal controls, any person who received such report should immediately report the alleged violation to the CFO, the General Counsel, and, if appropriate, the CEO, and, in every such case, the Chair of the Audit Committee. The CFO, General Counsel or the Chair of the Audit Committee, as applicable, shall assess the situation and determine the appropriate course of action. At a point in the process consistent with the need not to compromise the investigation, a person who is suspected of a violation shall be apprised of the alleged violation and shall have an opportunity to provide a response to the investigator. |
● |
Disciplinary Actions. Subject to the following sentence, the General Counsel, after consultation with the CEO, shall be responsible for implementing the appropriate disciplinary action in accordance with the Company’s policies and procedures for any employee who is found to have violated the Code. If a violation has been reported to the Audit Committee or another committee of the Board, that Committee shall be responsible for determining appropriate disciplinary action. Any violation of applicable law or any deviation from the standards embodied in this Code will result in disciplinary action, up to and including termination of employment. Any employee engaged in the exercise of substantial discretionary authority, including any Senior Officer, who is found to have engaged in a violation of law or unethical conduct in connection with the performance of his or her duties for the Company, shall be removed from his or her position and not assigned to any other position involving the exercise of substantial discretionary authority. In addition to imposing discipline upon employees involved in non-compliant conduct, the Company also will impose discipline, as appropriate, upon an employee’s supervisor, if any, who directs or approves such employees’ improper actions, or is aware of those actions but does not act appropriately to correct them, and upon other individuals who fail to report known non-compliant conduct. In addition to imposing its own discipline, the Company will bring any violations of law to the attention of appropriate law enforcement personnel. |
● |
Retention of Reports and Complaints. All reports and complaints made to or received by the CFO, General Counsel or the Chair of the Audit Committee shall be logged into a record maintained for this purpose by the General Counsel and this record of such report shall be retained for five (5) years. |
● |
Required Government Reporting. Whenever conduct occurs that requires a report to the government, the CFO and General Counsel shall be responsible for complying with such reporting requirements. |
Corrective Actions. Subject to the following sentence, in the event of a violation of the Code, the manager, the CFO and the General Counsel should assess the situation to determine whether the violation demonstrates a problem that requires remedial action as to Company policies and procedures. If a violation has been reported to the Audit Committee or another committee of the Board, that committee shall be responsible for determining appropriate remedial or corrective actions. Such corrective action may include providing revised public disclosure, retraining Company employees, modifying Company policies and procedures, improving monitoring of compliance under existing procedures and other action necessary to detect similar non-compliant conduct and prevent it from occurring in the future. Such corrective action shall be documented, as appropriate.
PUBLICATION OF THE CODE OF BUSINESS CONDUCT AND ETHICS; AMENDMENTS AND WAIVERS OF THE CODE OF BUSINESS CONDUCT AND ETHICS
The most current version of this Code will be posted and maintained on the Company’s website and posting of the Code will be disclosed in the Company’s Annual Report on Form 10-K. The Company’s Annual Report on Form 10-K, by reference to the Company's proxy statement, if permitted by SEC rules, shall disclose that substantive amendments and waivers with respect to officers will also be posted on the Company’s website.
Any substantive amendment or waiver of this Code (i.e., a material departure from the requirements of any provision) particularly applicable to or directed at executive officers or directors may be made only after approval by the Board of Directors after receiving a recommendation from the Audit Committee and will be disclosed within four (4) business days of such action (a) on the Company’s website for a period of not less than twelve (12) months or (b) in a Form 8-K filed with the SEC (or such other means then required by listing standards of the Nasdaq or applicable law). Such disclosure shall include the reasons for any waiver. The Company shall maintain disclosure relating to such amendment or waiver on its website for at least twelve (12) months and shall retain the disclosure relating to any such amendment or waiver for not less than five (5) years.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Percent |
|||||||
Business and |
Owned by |
State/Province |
|||||
Subsidiary |
Location |
Registrant |
Of Incorporation |
||||
Atlas Lighting Products, Inc. |
LED lighting |
100 |
% |
North Carolina |
|||
Burlington, NC |
|||||||
Grady McCauley Inc. |
Digital image and screen printed graphics; |
100 |
% |
Ohio |
|||
interior graphics and signs |
|||||||
Akron, OH |
|||||||
LSI ADL Technology Inc. |
Electronic circuit boards |
100 |
% |
Ohio |
|||
Columbus, OH |
|||||||
LSI Integrated Graphics LLC |
Screen and digital printed materials; |
100 |
% |
Ohio |
|||
and illuminated and non-illuminated |
|||||||
architectural graphics |
|||||||
Houston, TX |
|||||||
LSI Kentucky LLC |
Metal fabrication |
100 |
% |
Ohio |
|||
Independence, KY |
|||||||
LSI International Holdings, Inc. |
A holding company for LSI’s expansion into |
100 |
% |
Ohio |
|||
countries outside the United States (majority shareholder) |
|||||||
AsLSI International, LLC |
A holding company for LSI’s expansion into |
100 |
% |
Ohio |
|||
countries outside the United States (minority shareholder)_ |
|||||||
LSLSI Graficas e Illuminacion S |
Outsourced back-office support located in Mexico |
100 |
% |
Mexico |
|||
de de RL de C.V. |
City, Mexico |
||||||
LSI Fresh Subsidiary Inc. | A holding company for JSI Holding Corp. | 100 | % | Ohio | |||
JSI Holding Corp. | A holding company for JSI legal entities | 100 | % | Delaware | |||
Milo Holding Corp. | A holding company for JSI legal entities | 100 | % | Delaware | |||
JSI SF Inc. | Refrigerated and non-refrigerated | 100 | % | Delaware | |||
merchandising displays | |||||||
Greenville, South Carolina | |||||||
JSI Store Fixtures Inc. | Refrigerated and non-refrigerated | 100 | % | Delaware | |||
merchandising displays | |||||||
Milo, Maine | |||||||
Bangor, Maine | |||||||
Payson, Utah | |||||||
JSI Store Fixtures Canada Inc. | Refrigerated and non-refrigerated | 100 | % | British Columbia | |||
merchandising displays | |||||||
Collingwood, Ontario |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated September 10, 2021, with respect to the consolidated financial statements and internal control over financial reporting included in the Annual Report of LSI Industries Inc. on Form 10-K for the year ended June 30, 2021. We consent to the incorporation by reference of said reports in the Registration Statements of LSI Industries Inc. on Form S-3 (File No. 333-233660) and on Forms S-8 (File No. 333-249861, File No. 333-248747, File No. 333-234556, File No. 333-233661, File 333-215878, File No. 333-209386, File No. 333-201890, File No. 333-201889, File No. 333-183747, and File No. 333-186446).
/s/ GRANT THORNTON LLP
Cincinnati, Ohio
September 10, 2021
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 annual report on Form 10-K 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 fourth 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 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: September 10, 2021
/s/ James A. Clark | |
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 annual report on Form 10-K 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 fourth 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 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: September 10, 2021
/s/ James E. Galeese | |
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 Annual Report of LSI Industries Inc. (the “Company”) on Form 10-K for the fiscal year ended June 30, 2021 (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 | |
Principal Executive Officer |
September 10, 2021
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 Annual Report of LSI Industries Inc. (the “Company”) on Form 10-K for the fiscal year ended June 30, 2021 (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 | |
Principal Financial Officer |
September 10, 2021
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.