UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_________________________
FORM 10-Q
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 |
31-0888951 |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
10000 Alliance Road, Cincinnati, Ohio |
45242 |
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(Address of principal executive offices) |
(Zip Code) |
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(513) 793-3200 |
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Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Common Stock, no par value |
LYTS |
NASDAQ Global Select Market |
Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§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 checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ |
Accelerated filer ☒ |
Emerging growth company ☐ | ||
Non-accelerated filer ☐ |
Smaller reporting company ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 29, 2021, there were 26,920,238 shares of the registrant's common stock, no par value per share, outstanding.
LSI INDUSTRIES INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2021
INDEX
Begins on Page |
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PART I. Financial Information |
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ITEM 1. |
Financial Statements (Unaudited) |
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Condensed Consolidated Statements of Operations |
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3 |
Condensed Consolidated Statements of Comprehensive Income |
4 |
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Condensed Consolidated Balance Sheets |
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5 |
Condensed Consolidated Statements of Shareholders’ Equity |
7 |
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Condensed Consolidated Statements of Cash Flows |
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8 |
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Notes to Condensed Consolidated Financial Statements |
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9 |
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ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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21 |
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ITEM 3. |
Quantitative and Qualitative Disclosures About Market Risk |
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27 |
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ITEM 4. |
Controls and Procedures |
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27 |
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PART II. Other Information |
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ITEM 5. |
Other Information |
28 |
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ITEM 6. |
Exhibits |
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28 |
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Signatures |
29 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended |
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September 30 |
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(In thousands, except per share data) |
2021 |
2020 |
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Net Sales |
$ | 106,397 | $ | 70,006 | ||||
Cost of products and services sold |
81,887 | 51,731 | ||||||
Restructuring costs |
- | 3 | ||||||
Gross profit |
24,510 | 18,272 | ||||||
Selling and administrative expenses |
20,066 | 16,070 | ||||||
Operating income |
4,444 | 2,202 | ||||||
Interest (income) |
- | (1 | ) | |||||
Interest expense |
234 | 58 | ||||||
Other expense (income) |
79 | (105 | ) | |||||
Income before income taxes |
4,131 | 2,250 | ||||||
Income tax expense |
998 | 260 | ||||||
Net income |
$ | 3,133 | $ | 1,990 | ||||
Earnings per common share (see Note 5) |
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Basic |
$ | 0.12 | $ | 0.08 | ||||
Diluted |
$ | 0.11 | $ | 0.07 | ||||
Weighted average common shares outstanding |
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Basic |
26,996 | 26,520 | ||||||
Diluted |
27,743 | 26,968 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended |
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September 30 |
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(In thousands) |
2021 |
2020 |
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Net Income |
$ | 3,133 | $ | 1,990 | ||||
Foreign currency translation adjustment |
(44 | ) | 45 | |||||
Comprehensive Income |
$ | 3,089 | $ | 2,035 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, |
June 30, |
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(In thousands, except shares) |
2021 |
2021 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
$ | 2,570 | $ | 2,282 | ||||
Accounts receivable, less allowance for credit losses of $292 and $256, respectively |
63,865 | 57,685 | ||||||
Inventories |
67,906 | 58,941 | ||||||
Refundable income taxes |
1,131 | 1,275 | ||||||
Other current assets |
5,440 | 4,825 | ||||||
Total current assets |
140,912 | 125,008 | ||||||
Property, Plant and Equipment, at cost |
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Land |
4,010 | 3,984 | ||||||
Buildings |
24,375 | 24,393 | ||||||
Machinery and equipment |
66,346 | 65,928 | ||||||
Buildings under finance leases |
2,033 | 2,033 | ||||||
Construction in progress |
653 | 933 | ||||||
97,417 | 97,271 | |||||||
Less accumulated depreciation |
(67,961 | ) | (66,719 | ) | ||||
Net property, plant and equipment |
29,456 | 30,552 | ||||||
Goodwill |
43,788 | 43,788 | ||||||
Other intangible assets, net |
71,557 | 72,773 | ||||||
Operating lease right-of-use assets |
10,808 | 11,579 | ||||||
Other long-term assets, net |
3,067 | 3,121 | ||||||
Total assets |
$ | 299,588 | $ | 286,821 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except shares) |
2021 |
2021 |
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LIABILITIES & SHAREHOLDERS' EQUITY |
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Current liabilities |
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Current maturities of long-term debt |
$ | 3,571 | $ | - | ||||
Accounts payable |
41,281 | 32,977 | ||||||
Accrued expenses |
28,950 | 37,918 | ||||||
Total current liabilities |
73,802 | 70,895 | ||||||
Long-term debt |
74,700 | 68,178 | ||||||
Finance lease liabilities |
1,454 | 1,521 | ||||||
Operating lease liabilities |
10,092 | 10,890 | ||||||
Other long-term liabilities |
4,167 | 4,167 | ||||||
Commitments and contingencies (Note 13) |
- | - | ||||||
Shareholders' Equity |
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Preferred shares, without par value; Authorized 1,000,000 shares, none issued |
- | - | ||||||
Common shares, without par value; Authorized 40,000,000 shares; Outstanding 26,611,003 and 26,517,836 shares, respectively |
134,968 | 132,526 | ||||||
Treasury shares, without par value |
(4,471 | ) | (2,450 | ) | ||||
Deferred compensation plan |
4,471 | 2,450 | ||||||
Retained earnings (loss) |
400 | (1,405 | ) | |||||
Accumulated other comprehensive income |
5 | 49 | ||||||
Total shareholders' equity |
135,373 | 131,170 | ||||||
Total liabilities & shareholders' equity |
$ | 299,588 | $ | 286,821 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
Common Shares |
Treasury Shares |
Key Executive |
Accumulated Other |
Retained |
Total |
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Number Of |
Number Of |
Compensation |
Comprehensive |
Earnings |
Shareholders' |
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(In thousands, except per share data) |
Shares |
Amount |
Shares |
Amount |
Amount |
Income (Loss) |
(Loss) |
Equity |
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Balance at June 30, 2020 |
26,466 | $ | 127,713 | (180 | ) | $ | (1,121 | ) | $ | 1,121 | $ | (93 | ) | $ | (1,920 | ) | $ | 125,700 | ||||||||||||||
Net Income |
- | - | - | - | - | - | 1,990 | 1,990 | ||||||||||||||||||||||||
Other comprehensive income |
- | - | - | - | - | 45 | - | 45 | ||||||||||||||||||||||||
Stock compensation awards |
12 | 75 | - | - | - | - | - | 75 | ||||||||||||||||||||||||
Restricted stock units issued |
28 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Shares issued for deferred compensation |
62 | 412 | - | - | - | - | - | 412 | ||||||||||||||||||||||||
Activity of treasury shares, net |
- | - | (59 | ) | (383 | ) | - | - | - | (383 | ) | |||||||||||||||||||||
Deferred stock compensation |
- | - | - | - | 383 | - | - | 383 | ||||||||||||||||||||||||
Stock compensation expense |
- | 505 | - | - | - | - | - | 505 | ||||||||||||||||||||||||
Stock options exercised, net |
11 | 53 | - | - | - | - | - | 53 | ||||||||||||||||||||||||
Dividends — $0.20 per share |
- | - | - | - | - | - | (1,340 | ) | (1,340 | ) | ||||||||||||||||||||||
Balance at September 30, 2020 |
26,579 | $ | 128,758 | (239 | ) | $ | (1,504 | ) | $ | 1,504 | $ | (48 | ) | $ | (1,270 | ) | $ | 127,440 |
Common Shares |
Treasury Shares |
Key Executive |
Accumulated Other |
Retained |
Total |
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Number Of |
Number Of |
Compensation |
Comprehensive |
Earnings |
Shareholders' |
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Shares |
Amount |
Shares |
Amount |
Amount |
Income (Loss) |
(Loss) |
Equity |
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Balance at June 30, 2021 |
26,863 | $ | 132,526 | (346 | ) | $ | (2,450 | ) | $ | 2,450 | $ | 49 | $ | (1,405 | ) | $ | 131,170 | |||||||||||||||
Net Income |
- | - | - | - | - | - | 3,133 | 3,133 | ||||||||||||||||||||||||
Other comprehensive loss |
- | - | - | - | - | (44 | ) | - | (44 | ) | ||||||||||||||||||||||
Stock compensation awards |
10 | 75 | - | - | - | - | - | 75 | ||||||||||||||||||||||||
Restricted stock units issued, net of shares withheld for tax withholdings |
79 | (247 | ) | - | - | - | - | - | (247 | ) | ||||||||||||||||||||||
Shares issued for deferred compensation |
263 | 2,042 | - | - | - | - | - | 2,042 | ||||||||||||||||||||||||
Activity of treasury shares, net |
- | - | (261 | ) | (2,021 | ) | - | - | - | (2,021 | ) | |||||||||||||||||||||
Deferred stock compensation |
- | - | - | - | 2,021 | - | - | 2,021 | ||||||||||||||||||||||||
Stock compensation expense |
- | 556 | - | - | - | - | - | 556 | ||||||||||||||||||||||||
Stock options exercised, net |
3 | 16 | - | - | - | - | - | 16 | ||||||||||||||||||||||||
Dividends — $0.20 per share |
- | - | - | - | - | - | (1,328 | ) | (1,328 | ) | ||||||||||||||||||||||
Balance at September 30, 2021 |
27,218 | $ | 134,968 | (607 | ) | $ | (4,471 | ) | $ | 4,471 | $ | 5 | $ | 400 | $ | 135,373 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended |
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September 30 |
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(In thousands) |
2021 |
2020 |
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Cash Flows from Operating Activities |
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Net income |
$ | 3,133 | $ | 1,990 | ||||
Non-cash items included in net income |
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Depreciation and amortization |
2,563 | 2,033 | ||||||
Deferred income taxes |
(13 | ) | 381 | |||||
Deferred compensation plan |
2,042 | 412 | ||||||
Stock compensation expense |
556 | 505 | ||||||
Issuance of common shares as compensation |
75 | 75 | ||||||
Loss on disposition of fixed assets |
14 | - | ||||||
Allowance for doubtful accounts |
10 | (38 | ) | |||||
Inventory obsolescence reserve |
572 | 496 | ||||||
Changes in certain assets and liabilities |
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Accounts receivable |
(6,260 | ) | (6,136 | ) | ||||
Inventories |
(9,578 | ) | 926 | |||||
Refundable income taxes |
138 | (393 | ) | |||||
Accounts payable |
8,359 | 5,912 | ||||||
Accrued expenses and other |
(6,663 | ) | (521 | ) | ||||
Customer prepayments |
(2,837 | ) | 1,997 | |||||
Net cash flows (used in) provided by operating activities |
(7,889 | ) | 7,639 | |||||
Cash Flows from Investing Activities |
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Purchases of property, plant and equipment |
(297 | ) | (405 | ) | ||||
Net cash flows used in investing activities |
(297 | ) | (405 | ) | ||||
Cash Flows from Financing Activities |
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Payments of long-term debt |
(42,533 | ) | - | |||||
Borrowings of long-term debt |
52,659 | - | ||||||
Cash dividends paid |
(1,326 | ) | (1,321 | ) | ||||
Shares withheld for employees' taxes |
(247 | ) | (5 | ) | ||||
Payments on financing lease obligations |
(64 | ) | (58 | ) | ||||
Proceeds from stock option exercises |
16 | 53 | ||||||
Net cash flows provided by (used in) financing activities |
8,505 | (1,331 | ) | |||||
Change related to foreign currency |
(31 | ) | 43 | |||||
Increase in cash and cash equivalents |
288 | 5,946 | ||||||
Cash and cash equivalents at beginning of period |
2,282 | 3,517 | ||||||
Cash and cash equivalents at end of period |
$ | 2,570 | $ | 9,463 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The interim condensed consolidated financial statements are unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the interim financial statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of September 30, 2021, the results of its operations for the three-month periods ended September 30, 2021 and 2020, and its cash flows for the three-month periods ended September 30, 2021 and 2020. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2021 Annual Report on Form 10-K. Financial information as of June 30, 2021 has been derived from the Company’s audited consolidated financial statements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation:
A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2021 Annual Report on Form 10-K.
Revenue Recognition:
The Company recognizes revenue when it satisfies the performance obligation in its customer contracts or purchase orders. Most of the Company’s products have a single performance obligation which is satisfied at a point in time when control is transferred to the customer. Control is generally transferred at time of shipment when title and risk of ownership passes to the customer. For customer contracts with multiple performance obligations, the Company allocates the transaction price and any discounts to each performance obligation based on relative standalone selling prices. Payment terms are typically within 30 to 90 days from the shipping date, depending on the terms with the customer. The Company offers standard warranties that do not represent separate performance obligations.
Installation is a separate performance obligation, except for the Company’s digital signage products. For digital signage products, installation is not a separate performance obligation as the product and installation is the combined item promised in digital signage contracts. The Company is not always responsible for installation of products it sells and has no post-installation responsibilities other than standard warranties.
A number of the Company's display solutions 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 has a legal right to payment for performance to date and generally does not accept returns on these items. The measurement of performance is based upon cost plus a reasonable profit margin for work completed. Because there is no alternative use and there is a legal right to payment, the Company transfers control of the item as the item is being produced and therefore, recognizes revenue over time. The customized product types are as follows:
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Customer specific branded print graphics |
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Electrical components based on customer specifications |
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Digital signage and related media content |
The Company also offers installation services for its display solutions elements and select lighting products. Installation revenue is recognized over time as the 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 performance obligation.
Disaggregation of Revenue
The Company disaggregates the revenue from contracts with customers by the timing of revenue recognition because the Company believes it best depicts the nature, amount, and timing of its revenue and cash flows. The table below presents a reconciliation of the disaggregation by reportable segments:
Three Months Ended |
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(In thousands) |
September 30, 2021 |
September 30, 2020 |
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Lighting Segment |
Display Solutions Segment |
Lighting Segment |
Display Solutions Segment |
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Timing of revenue recognition |
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Products and services transferred at a point in time |
$ | 44,582 | $ | 37,431 | $ | 40,040 | $ | 14,454 | ||||||||
Products and services transferred over time |
6,678 | 17,706 | 5,365 | 10,147 | ||||||||||||
$ | 51,260 | $ | 55,137 | $ | 45,405 | $ | 24,601 |
Three Months Ended |
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September 30, 2021 |
September 30, 2020 |
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Lighting Segment |
Display Solutions Segment |
Lighting Segment |
Display Solutions Segment |
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Type of Product and Services |
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LED lighting, digital signage solutions, electronic circuit boards |
$ | 41,879 | $ | 12,428 | $ | 37,869 | $ | 5,081 | ||||||||
Poles, other display solution elements |
8,966 | 33,302 | 7,074 | 14,325 | ||||||||||||
Project management, installation services, shipping and handling |
415 | 9,407 | 462 | 5,195 | ||||||||||||
$ | 51,260 | $ | 55,137 | $ | 45,405 | $ | 24,601 |
Practical Expedients and Exemptions
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The Company’s contracts with customers have an expected duration of one year or less, as such, the Company applies the practical expedient to expense sales commissions as incurred, and has omitted disclosures on the amount of remaining performance obligations. |
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Shipping costs that are not material in context of the delivery of products are expensed as incurred. |
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The Company’s accounts receivable balance represents the Company’s unconditional right to receive 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. |
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The Company collects sales tax and other taxes concurrent with revenue-producing activities which are excluded from revenue. Shipping and handling costs are treated as fulfillment activities and included in cost of products and services sold on the Consolidated Statements of Operations. |
New Accounting Pronouncements:
On July 1, 2020, the Company adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (ASC 326 or "CECL"), which amended 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. The adoption of ASU 2016-13 did not have a material impact on the consolidated financial statements and related disclosures.
In March 2020 and January 2021, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and ASU 2021-01, “Reference Rate Reform: Scope,” respectively. Together, the ASUs provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures, if adopted.
NOTE 3 — 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 expands 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 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) |
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Cash and cash equivalents |
$ | 4,067 | ||
Accounts receivable, net |
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 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 |
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(In thousands) |
Fair Value |
Life (Years) |
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Tradename |
$ | 8,680 |
Indefinite life |
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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 the fourth quarter of fiscal 2021.
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 give 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 |
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June 30 |
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(In thousands, unaudited) |
2021 |
2020 |
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Net sales |
$ | 391,000 | $ | 362,541 | ||||
Gross profit |
$ | 97,947 | $ | 86,399 | ||||
Operating income |
$ | 19,312 | $ | 13,878 |
NOTE 4 - SEGMENT REPORTING INFORMATION
The accounting guidance on Segment Reporting establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (the Company’s Chief Executive Officer or “CODM”) in making decisions on how to allocate resources and assess performance. The Company’s two operating segments are Lighting and 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 $12.3 million or 11.6% of the Company’s net sales in the three months ended September 30, 2021. There were no customers or customer programs representing a concentration of 10% or more of the Company’s consolidated net sales in the three months ended September 30, 2020. There was no concentration of accounts receivable at September 30, 2021 or June 30, 2021.
Summarized financial information for the Company’s operating segments is provided for the indicated periods and as of September 30, 2021 and September 30, 2020:
Three Months Ended |
||||||||
(In thousands) |
September 30 |
|||||||
2021 |
2020 |
|||||||
Net Sales: |
||||||||
Lighting Segment |
$ | 51,260 | $ | 45,405 | ||||
Display Solutions Segment |
55,137 | 24,601 | ||||||
$ | 106,397 | $ | 70,006 | |||||
Operating Income (Loss): |
||||||||
Lighting Segment |
$ | 4,339 | $ | 3,588 | ||||
Display Solutions Segment |
3,749 | 1,823 | ||||||
Corporate and Eliminations |
(3,644 | ) | (3,209 | ) | ||||
$ | 4,444 | $ | 2,202 | |||||
Capital Expenditures: |
||||||||
Lighting Segment |
$ | 180 | $ | 369 | ||||
Display Solutions Segment |
221 | 27 | ||||||
Corporate and Eliminations |
(104 | ) | 9 | |||||
$ | 297 | $ | 405 | |||||
Depreciation and Amortization: |
||||||||
Lighting Segment |
$ | 1,461 | $ | 1,619 | ||||
Display Solutions Segment |
1,031 | 358 | ||||||
Corporate and Eliminations |
71 | 56 | ||||||
$ | 2,563 | $ | 2,033 |
September 30,
|
June 30,
|
|||||||
Identifiable Assets: |
||||||||
Lighting Segment |
$ | 137,071 | $ | 132,169 | ||||
Display Solutions Segment |
155,203 | 147,354 | ||||||
Corporate and Eliminations |
7,314 | 7,298 | ||||||
$ | 299,588 | $ | 286,821 |
The segment net sales reported above represent sales to external customers. Segment operating income, which is used in management’s evaluation of segment performance, represents net sales less all operating expenses. Identifiable assets are those assets used by each segment in its operations.
The Company records a 10% mark-up on intersegment revenues. Any intersegment profit in inventory is eliminated in consolidation. Intersegment revenues were eliminated in consolidation as follows:
Three Months Ended |
||||||||
(In thousands) |
September 30 |
|||||||
2021 |
2020 |
|||||||
Lighting Segment inter-segment net sales |
$ | 10,457 | $ | 4,080 | ||||
Display Solutions Segment inter-segment net sales |
$ | 163 | $ | 38 |
The Company’s operations are located solely within North America. As a result, the geographic distribution of the Company’s net sales and long-lived assets originate within North America.
NOTE 5 - EARNINGS PER COMMON SHARE
The following table presents the amounts used to compute basic and diluted earnings per common share, as well as the effect of dilutive potential common shares on weighted average shares outstanding (in thousands, except per share data):
(a) |
Calculated using the “Treasury Stock” method as if dilutive securities were exercised and the funds were used to purchase common shares at the average market price during the period. |
(b) |
Anti-dilutive securities were excluded from the computation of diluted net income per share for the three months ended September 30, 2021 and September 30, 2020 because the exercise price was greater than the average fair market price of the common shares or because the assumed proceeds from the award’s exercise or vesting was greater than the average fair market price of the common shares. |
NOTE 6 – INVENTORIES, NET
The following information is provided as of the dates indicated:
September 30, |
June 30, |
|||||||
(In thousands) |
2021 |
2021 |
||||||
Inventories: |
||||||||
Raw materials |
$ | 44,477 | $ | 40,567 | ||||
Work-in-progress |
2,872 | 4,757 | ||||||
Finished goods |
20,557 | 13,617 | ||||||
Total Inventories |
$ | 67,906 | $ | 58,941 |
NOTE 7 - ACCRUED EXPENSES
The following information is provided as of the dates indicated:
September 30, |
June 30, |
|||||||
(In thousands) |
2021 |
2021 |
||||||
Accrued Expenses: |
||||||||
Customer prepayments |
$ | 8,512 | $ | 11,352 | ||||
Compensation and benefits |
5,734 | 10,051 | ||||||
Accrued warranty |
5,100 | 5,295 | ||||||
Operating lease liabilities |
1,425 | 1,424 | ||||||
Accrued sales commissions |
1,347 | 2,568 | ||||||
Accrued FICA |
1,200 | 1,190 | ||||||
Finance lease liabilities |
266 | 263 | ||||||
Accrued income tax |
- | 434 | ||||||
Other accrued expenses |
5,366 | 5,341 | ||||||
Total Accrued Expenses |
$ | 28,950 | $ | 37,918 |
NOTE 8 - 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.
The following table presents information about the Company's goodwill on the dates or for the periods indicated:
(In thousands) |
Display |
|||||||||||
Lighting |
Solutions |
|||||||||||
Segment |
Segment |
Total |
||||||||||
Balance as of September 30, 2021 |
||||||||||||
Goodwill |
$ | 70,971 | $ | 62,105 | $ | 133,076 | ||||||
Accumulated impairment losses |
(61,763 | ) | (27,525 | ) | (89,288 | ) | ||||||
Goodwill, net as of September 30, 2021 |
$ | 9,208 | $ | 34,580 | $ | 43,788 | ||||||
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 |
The gross carrying amount and accumulated amortization by each major intangible asset class is as follows:
September 30, 2021 |
||||||||||||
(In thousands) |
Gross |
|||||||||||
Carrying |
Accumulated |
Net |
||||||||||
Amount |
Amortization |
Amount |
||||||||||
Amortized Intangible Assets |
||||||||||||
Customer relationships |
$ | 62,083 | $ | 11,839 | $ | 50,244 | ||||||
Patents |
268 | 245 | 23 | |||||||||
LED technology firmware, software |
20,966 | 13,711 | 7,255 | |||||||||
Trade name |
2,658 | 966 | 1,692 | |||||||||
Non-compete |
260 | 19 | 241 | |||||||||
Total Amortized Intangible Assets |
86,235 | 26,780 | 59,455 | |||||||||
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 | $ | 26,780 | $ | 71,557 |
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 |
Three Months Ended |
||||||||
September 30 |
||||||||
(In thousands) |
2021 |
2020 |
||||||
Amortization Expense of Other Intangible Assets |
$ | 1,215 | $ | 671 |
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 9 - DEBT
The Company’s long-term debt as of September 30, 2021 and June 30, 2021 consisted of the following:
September 30, |
June 30, |
|||||||
(In thousands) |
2021 |
2021 |
||||||
Secured line of credit |
$ | 53,304 | $ | 68,178 | ||||
Term loan, net of debt issuance costs of $33 and $0, respectively |
24,967 | - | ||||||
Total debt |
78,271 | 68,178 | ||||||
Less: amounts due within one year |
3,571 | - | ||||||
Total amounts due after one year, net |
$ | 74,700 | $ | 68,178 |
In September 2021, the Company amended its existing $100 million secured line of credit, to a $25 million term loan and $75 million remaining as a secured revolving line of credit. Both facilities expire in the third quarter of fiscal 2026. The principal of the term loan is repaid $3.6 million annually over the five-year period with a balloon payment of the remaining balance due on the last month. Interest on both the revolving line of credit and the term loan 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 225 basis points, and the increment over the Base Rate fluctuates between 0 and 125 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 rate will be 200 basis points for the second quarter of fiscal 2022. The fee on the unused balance of the $75 million committed line of credit fluctuates between 15 and 25 basis points. Under the terms of this line of credit, the Company has agreed to a negative pledge of real estate assets and is required to comply with financial covenants that limit the ratio of indebtedness to EBITDA and require a minimum fixed charge ratio. As of September 30, 2021, there was $21.7 million available for borrowing under the $75 million line of credit.
The Company is in compliance with all of its loan covenants as of September 30, 2021.
NOTE 10 - CASH DIVIDENDS
The Company paid cash dividends of $1.3 million in both the three months ended September 30, 2021 and September 30, 2020. Dividends on restricted stock units in the amount of $0.1 million were accrued as of both September 30, 2021 and 2020, respectively. These dividends will be paid upon the vesting of the restricted stock units when shares are issued to the award recipients. In November 2021, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable November 23, 2021 to shareholders of record as of November 15, 2021. The indicated annual cash dividend rate is $0.20 per share.
NOTE 11 – 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 number of shares that remain reserved for issuance under the 2019 Omnibus Plan equates to 1,974,655 as of September 30, 2021. The 2019 Omnibus Plan implements the use of a fungible share ratio that consumes 2.5 available shares for every full value share awarded by the Company as stock compensation. The 2019 Omnibus Plan allows for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units (“RSUs”), performance stock units (“PSUs”) and other stock-based awards.
There were no equity awards granted in the three months ended September 30, 2021. Stock compensation expense was $0.6 million and $0.5 million for the three months ended September 30, 2021 and 2020, respectively.
NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION
Three Months Ended |
||||||||
(In thousands) |
September 30 |
|||||||
2021 |
2020 |
|||||||
Cash Payments: |
||||||||
Interest |
$ | 203 | $ | 24 | ||||
Income taxes |
$ | 1,183 | $ | 223 | ||||
Non-cash investing and financing activities |
||||||||
Issuance of common shares as compensation |
$ | 75 | $ | 75 | ||||
Issuance of common shares to fund deferred compensation plan |
$ | 2,042 | $ | 412 |
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Company is party to various negotiations, customer bankruptcies, and legal proceedings arising in the normal course of business. The Company provides reserves for these matters when a loss is probable and reasonably estimable. The Company does not disclose a range of potential loss because the likelihood of such a loss is remote. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations, cash flows or liquidity.
The Company may occasionally issue a standby letter of credit in favor of third parties. As of September 30, 2021, there were no such standby letters of credit issued.
NOTE 14 – SEVERANCE COSTS
The activity in the Company’s accrued severance liability is as follows for the periods indicated:
Three Months |
Three Months |
Fiscal Year |
||||||||||
Ended |
Ended |
Ended |
||||||||||
September 30, |
September 30, |
June 30, |
||||||||||
(In thousands) |
2021 |
2020 |
2021 |
|||||||||
Balance at beginning of period |
$ | 13 | $ | 639 | $ | 639 | ||||||
Accrual of expense |
- | - | 41 | |||||||||
Payments |
(13 | ) | (225 | ) | (667 | ) | ||||||
Balance at end of period |
$ | - | $ | 414 | $ | 13 |
NOTE 15 - LEASES
The Company leases certain manufacturing facilities along with a small office space, 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. 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. For the three months ended September 30, 2021 and 2020, the rent expense for these leases is immaterial.
The Company has certain leases that contain lease and non-lease components and has elected to utilize the practical expedient to account for these components together as a single lease component.
Lease expense is recognized on a straight-line basis over the lease term. The Company used its incremental borrowing rate when determining the present value of lease payments.
Three Months Ended |
||||||||
September 30 |
||||||||
(In thousands) |
2021 |
2020 |
||||||
Operating lease cost |
$ | 879 | $ | 573 | ||||
Financing lease cost: |
||||||||
Amortization of right of use assets |
74 | 73 | ||||||
Interest on lease liabilities |
21 | 24 | ||||||
Variable lease cost |
22 | 1 | ||||||
Sublease income |
(94 | ) | - | |||||
Total lease cost |
$ | 902 | $ | 671 |
Three Months Ended |
||||||||
September 30 |
||||||||
(In thousands) |
2021 |
2020 |
||||||
Cash flows from operating leases |
||||||||
Fixed payments - operating cash flows |
$ | 887 | $ | 570 | ||||
Liability reduction - operating cash flows |
$ | 744 | $ | 461 | ||||
Cash flows from finance leases |
||||||||
Interest - operating cash flows |
$ | 21 | $ | 24 | ||||
Repayments of principal portion - financing cash flows |
$ | 64 | $ | 58 |
Operating Leases:
September 30, |
June 30, |
|||||||
2021 |
2021 |
|||||||
Total operating right-of-use assets |
$ | 10,808 | $ | 11,579 | ||||
Accrued expenses (Current liabilities) |
$ | 1,425 | $ | 1,424 | ||||
Long-term operating lease liability |
10,092 | 10,890 | ||||||
Total operating lease liabilities |
$ | 11,517 | $ | 12,314 | ||||
Weighted Average remaining Lease Term (in years) |
3.70 | 3.93 | ||||||
Weighted Average Discount Rate |
4.81 | % | 4.81 | % |
Finance Leases:
|
September 30, |
June 30, |
||||||
2021 |
2021 |
|||||||
Buildings under finance leases |
$ | 2,033 | $ | 2,033 | ||||
Equipment under finance leases |
30 | 30 | ||||||
Accumulated depreciation |
(412 | ) | (339 | ) | ||||
Total finance lease assets, net |
$ | 1,651 | $ | 1,724 | ||||
Accrued expenses (Current liabilities) |
$ | 266 | $ | 263 | ||||
Long-term finance lease liability |
1,454 | 1,521 | ||||||
Total finance lease liabilities |
$ | 1,720 | $ | 1,784 | ||||
Weighted Average remaining Lease Term (in years) |
5.53 | 5.78 | ||||||
Weighted Average Discount Rate |
4.86 | % | 4.86 | % |
Maturities of Lease Liability: |
Operating Lease Liabilities |
Finance Lease Liabilities |
Operating Subleases |
Net Lease Commitments |
||||||||||||
2022 |
$ | 2,808 | $ | 278 | $ | (283 | ) | $ | 2,803 | |||||||
2023 |
3,550 | 342 | (377 | ) | 3,515 | |||||||||||
2024 |
3,247 | 337 | (377 | ) | 3,207 | |||||||||||
2025 |
2,096 | 362 | (31 | ) | 2,427 | |||||||||||
2026 |
795 | 362 | - | 1,157 | ||||||||||||
Thereafter |
212 | 304 | - | 516 | ||||||||||||
Total lease payments |
$ | 12,708 | $ | 1,985 | $ | (1,068 | ) | $ | 13,625 | |||||||
Less: Interest |
(1,191 | ) | (265 | ) | (1,456 | ) | ||||||||||
Present Value of Lease Liabilities |
$ | 11,517 | $ | 1,720 | $ | 12,169 |
NOTE 16 – INCOME TAXES
The Company's effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year's taxable income as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law in March 2020. The CARES Act allowed the Company to carry back a federal net operating loss to prior tax years, offset taxable income in those earlier tax years and request a refund of income taxes that were paid at a higher statutory tax rate. The Company recognized tax benefits of $0.4 million in the first quarter of fiscal 2021 for utilizing the net operating losses in the prior tax years.
Three Months Ended |
||||||||
September 30 |
||||||||
2021 |
2020 |
|||||||
Reconciliation of effective tax rate: |
||||||||
Provision for income taxes at the anticipated annual tax rate |
24.2 |
% |
23.9 |
% |
||||
Uncertain tax positions |
0.8 | 1.0 | ||||||
Tax rate changes |
- | (15.7 | ) | |||||
Share-based compensation |
(0.8 | ) | 2.4 | |||||
Effective tax rate |
24.2 |
% |
11.6 |
% |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note About Forward-Looking Statements
This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including this section. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in in our Annual Report on Form 10-K in the following sections: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures about Market Risk,” and “Risk Factors.” All of those risks and uncertainties are incorporated herein by reference. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of LSI Industries Inc. MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended June 30, 2021, and our financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).
Our condensed consolidated financial statements, accompanying notes and the “Safe Harbor” Statement, each as appearing earlier in this report, should be referred to in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Summary of Consolidated Results
Net Sales by Business Segment |
||||||||
Three Months Ended |
||||||||
September 30 |
||||||||
(In thousands) |
2021 |
2020 |
||||||
Lighting Segment |
$ | 51,260 | $ | 45,405 | ||||
Display Solutions Segment |
55,137 | 24,601 | ||||||
$ | 106,397 | $ | 70,006 |
Net sales of $106.4 million for the three months ended September 30, 2021 increased $36.4 million or 52% as compared to net sales of $70.0 million for the three months ended September 30, 2020. Net sales were driven by increased net sales of the Display Solutions Segment (an increase of $30.5 million or 124%) and increased net sales of the Lighting Segment (an increase of $5.9 million or 13%).
Operating income of $4.4 million for the three months ended September 30, 2021 represents a $2.2 million increase from operating income of $2.2 million in the three months ended September 30, 2020. Adjusted operating income, a Non-GAAP measure, was $5.0 million in the three months ended September 30, 2021 compared to $2.7 million in the three months ended September 30, 2020. Refer to “Non-GAAP Financial Measures” below for a reconciliation of Non-GAAP financial measures to U.S. GAAP measures.
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 stock compensation expense and restructuring 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 Net Sales. 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. Although the impacts of some of these items have been recognized in prior periods and could recur in future periods, we exclude these items because they provide greater comparability and enhanced visibility into our results of operations. 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 be used only 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 Net Sales.
Reconciliation of net income to adjusted net income |
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Three Months Ended |
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September 30 |
||||||||||||||||
(In thousands, except per share data) |
2021 |
2020 |
||||||||||||||
Diluted EPS |
Diluted EPS |
|||||||||||||||
Net Income as reported |
$ | 3,133 | $ | 0.11 | $ | 1,990 | $ | 0.07 | ||||||||
Stock compensation expense |
407 | (1) | 0.01 | 380 | (2) | 0.01 | ||||||||||
(3) | ||||||||||||||||
Restructuring costs |
- | - | 2 | - | ||||||||||||
Tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes |
- | - | (297 | ) | (0.01 | ) | ||||||||||
Net Income adjusted |
$ | 3,540 | $ | 0.13 | $ | 2,075 | $ | 0.08 |
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 (in thousands):
(1) $149
(2) $125
(3) $1
The reconciliation of reported net income and earnings per share to adjusted net income and earnings per share may not agree due to rounding differences and due to the difference between basic and dilutive weighted average shares outstanding in the computation of earnings per share.
Reconciliation of Net Debt |
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September 30, |
June 30, |
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(In thousands) |
2021 |
2021 |
||||||
Current portion and long-term debt as reported |
$ | 78,271 | $ | 68,178 | ||||
Less: |
||||||||
Cash and cash equivalents as reported |
2,570 | 2,282 | ||||||
Net Debt |
$ | 75,701 | $ | 65,896 |
Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2020
Lighting Segment |
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Three Months Ended |
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September 30 |
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(In thousands) |
2021 |
2020 |
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Net Sales |
$ | 51,260 | $ | 45,405 | ||||
Gross Profit |
$ | 15,457 | $ | 13,826 | ||||
Operating Income |
$ | 4,339 | $ | 3,588 |
Lighting Segment net sales of $51.3 million in the three months ended September 30, 2021 increased 13% from net sales of $45.4 million in the same period in fiscal 2021. The increase is due to an increase in project business with sales improving in parking, automotive and warehousing verticals.
Gross profit of $15.5 million in the three months ended September 30, 2021 increased $1.6 million or 12% from the same period of fiscal 2021. Gross profit as a percentage of net sales was 30.2% in the three months ended September 30, 2021 compared to 30.5% in the same period of fiscal 2021. Gross profit as a percentage of net sales has been impacted by material and supply chain cost increases. We were successful in adjusting selling prices and driving productivity to mitigate these cost increases.
Operating expenses of $11.1 million in the three months ended September 30, 2021 increased $0.9 million from the same period of fiscal 2021, primarily driven by higher commission expense as a result of higher sales and non-recurring cost savings in the prior year quarter.
Lighting Segment operating income of $4.3 million for the three months ended September 30, 2021 increased $0.7 million from operating income of $3.6 million in the same period of fiscal 2021 primarily driven by sales volume.
Display Solutions Segment |
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Three Months Ended |
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September 30 |
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(In thousands) |
2021 |
2020 |
||||||
Net Sales |
$ | 55,137 | $ | 24,601 | ||||
Gross Profit |
$ | 9,036 | $ | 4,442 | ||||
Operating Income |
$ | 3,749 | $ | 1,823 |
Display Solutions Segment net sales of $55.1 million in the three months ended September 30, 2021 increased $30.5 million or 124% from net sales of $24.6 million in the same period in fiscal 2021. The increase is driven by the inclusion of three months of results for JSI and growth in our Quick-Service Restaurants vertical.
Gross profit of $9.0 million in the three months ended September 30, 2021 increased $4.6 million or 103% from the same period of fiscal 2021. Gross profit as a percentage of net sales in the three months ended September 30, 2021 was 16.4% compared to 18.1% in the same period of fiscal 2021. We secured customer acceptance for price adjustments on national, multi-site Display Solutions programs, some of which are multi-year, but due to the size and significance of these program decisions, the duration of the pricing discussions limited price realization in the first quarter. Higher level pricing will be realized throughout the second quarter and more aligned with input costs by the end of the second quarter.
Operating expenses of $5.3 million in the three months ended September 30, 2021 increased $2.7 million from $2.6 million in the same period of fiscal 2021, primarily driven by the inclusion of three months of results for JSI and non-recurring cost savings in the prior year quarter.
Display Solutions Segment operating income of $3.7 million in the three months ended September 30, 2021 increased $1.9 million from operating income of $1.8 million in the same period of fiscal 2021. The increase of $1.9 million was primarily driven by an increase in sales.
Corporate and Eliminations |
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Three Months Ended |
||||||||
September 30 |
||||||||
(In thousands) |
2021 |
2020 |
||||||
Gross Profit |
$ | 17 | $ | 4 | ||||
Operating (Loss) |
$ | (3,644 | ) | $ | (3,209 | ) |
The gross profit relates to the change in the intercompany profit in inventory elimination.
Operating expenses of $3.7 million in the three months ended September 30, 2021 increased $0.4 million or 14% from the same period of fiscal 2021. The net increase was primarily due to non-recurring cost savings in the prior year quarter.
Consolidated Results
We reported $0.2 million and $0.1 million of net interest expense in the three months ended September 30, 2021 and September 30, 2020, respectively. We also recorded other expense/(income) of $0.1 million and ($0.1) million in the three months ended September 30, 2021 and September 30, 2020, respectively, both of which is related to net foreign exchange currency transaction losses and gains through our Mexican and Canadian subsidiaries.
The $1.0 million of income tax expense in the three months ended September 30, 2021 represents a consolidated effective tax rate of 24.2%. The $0.3 million of income tax expense in the three months ended September 30, 2020 represents a consolidated effective tax rate of 11.6% and was driven by a favorable deferred tax asset adjustment related to a net operating loss carryback from the CARES Act.
We reported net income of $3.1 million in the three months ended September 30, 2021 compared to net income of $2.0 million in the three months ended September 30, 2020. Non-GAAP adjusted net income was $3.5 million for the three months ended September 30, 2021 compared to adjusted net income of $2.1 million for the three months ended September 30, 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 sales. Diluted earnings per share of $0.11 was reported in the three months ended September 30, 2021 as compared to $0.07 diluted earnings per share in the same period of fiscal 2021. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the three months ended September 30, 2021 were 27,743,000 shares compared to 26,968,000 shares in the same period last year.
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 September 30, 2021, we had working capital of $67.1 million compared to $54.1 million at June 30, 2021. The ratio of current assets to current liabilities was 1.91 to 1 compared to a ratio of 1.76 to 1 at June 30, 2021. The increase in working capital from June 30, 2021 to September 30, 2021 is primarily driven by a $9.0 million increase in net inventory, $9.0 million decrease in accrued expenses and a $6.2 million increase in net accounts receivable, partially offset by a $8.3 million increase in accounts payable and a $3.6 million increase in current maturities of long-term debt.
Net accounts receivable was $63.9 million and $57.7 million at September 30, 2021 and June 30, 2021, respectively. DSO decreased to 53 days at September 30, 2021 from 56 days at June 30, 2021.
Net inventories of $67.9 million at September 30, 2021 increased $9.0 million from $58.9 million at June 30, 2021. The increase of $9.0 million is the result of an increase in gross inventory of $9.1 million and an increase in obsolescence reserves of $0.1 million. Lighting Segment net inventory increased $6.8 million, in anticipation of an increase in market demand and ongoing supply chain challenges. Net inventory in the Display Solutions Segment increased $2.0 million.
Cash generated from operations and borrowing capacity under our line of credit is our primary source of liquidity. In September 2021, we amended our existing $100 million secured line of credit, to a $25 million term loan and $75 million remaining as a secured revolving line of credit. Both facilities expire in the third quarter of fiscal 2026. As of September 30, 2021, $21.7 million of the credit line was available. We are in compliance with all of our loan covenants. We believe that our $100 million credit facility plus cash flows from operating activities are adequate for operational and capital expenditure needs for the remainder of fiscal 2022. However, as the impact of COVID-19 on the economy and our operations evolves, we will continue to assess our liquidity needs. We also 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 used $7.9 million of cash from operating activities in the three months ended September 30, 2021 compared to a source of cash of $7.6 million in the three months ended September 30, 2020. The decrease in net cash flows from operating activities is the result of increases in inventory and accounts receivable and decreases in accrued expense and customer prepayments, partially offset by improved earnings and an increase in accounts payable.
We used $0.3 million and $0.4 million of cash related to investing activities in the three months ended September 30, 2021 and September 30, 2020, respectively, all of which were for capital expenditures in both periods.
We had a source of cash of $8.5 million related to financing activities in the three months ended September 30, 2021 compared to a use of cash of $1.3 million in the three months ended September 30, 2020. The $9.8 million change in cash flow was the net result of an increase in working capital, the majority of which was due to the build-up of inventory to ensure product availability, given supply chain challenges.
We have on our balance sheet financial instruments consisting primarily of cash and cash equivalents, short-term investments, revolving lines of credit, and long-term debt. The fair value of these financial instruments approximates carrying value because of their short-term maturity and/or variable, market-driven interest rates.
Off-Balance Sheet Arrangements
We have no financial instruments with off-balance sheet risk and have no off-balance sheet arrangements.
Cash Dividends
In November 2021, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable November 23, 2021 to shareholders of record as of November 15, 2021. The indicated annual cash dividend rate for fiscal 2022 is $0.20 per share. The Board of Directors has adopted a policy regarding dividends which indicates that dividends will be determined by the Board of Directors in its discretion based upon its evaluation of earnings, cash flow requirements, financial condition, debt levels, stock repurchases, future business developments and opportunities, and other factors deemed relevant.
Critical Accounting Policies and Estimates
A summary of our significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2021 Annual Report on Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except for the broad effects of the COVID-19 pandemic as a result of its negative impact on the global economy and major financial markets, there have been no material changes in our exposure to market risk since June 30, 2021. Additional information can be found in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, which appears on page 13 of the Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
We conducted, under the supervision of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2021, our disclosure controls and procedures were effective. Management believes that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly presented in all material respects in accordance with GAAP for interim financial statements, and the Company’s Chief Executive Officer and Chief Financial Officer have certified that, based on their knowledge, the condensed consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for each of the periods presented in this report.
Changes in Internal Control
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits:
10.1 |
31.1 |
Certification of Principal Executive Officer required by Rule 13a-14(a) |
31.2 |
Certification of Principal Financial Officer required by Rule 13a-14(a) |
32.1 |
32.2 |
101.INS Inline XBRL Instance Document
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 |
Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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LSI Industries Inc. |
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By: |
/s/ James A. Clark |
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James A. Clark |
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Chief Executive Officer and President |
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(Principal Executive Officer) | |||
By: | /s/ James E. Galeese | ||
James E. Galeese | |||
Executive Vice President and Chief Financial Officer | |||
(Principal Financial Officer) | |||
November 4, 2021 |
Exhibit 10.1
Sixth Amendment to Loan Documents |
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THIS SIXTH AMENDMENT TO LOAN DOCUMENTS (this “Amendment”), dated as of September 30, 2021 (“Effective Date”), by and between LSI INDUSTRIES INC., an Ohio corporation (the “Borrower”), and PNC BANK, NATIONAL ASSOCIATION, a national banking association (the “Bank”).
BACKGROUND
A. The Borrower has executed and delivered to the Bank one or more promissory notes, loan agreements, security agreements, mortgages, pledge agreements, collateral assignments, and other agreements, instruments, certificates and documents, some or all of which are more fully described on the attached Exhibit A, which is made a part of this Amendment (collectively as amended from time to time, the “Loan Documents”) which evidence or secure some or all of the Borrower’s obligations to the Bank for one or more loans or other extensions of credit (the “Obligations”).
B. The Borrower and the Bank desire to amend the Loan Documents as provided for in this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants herein contained and intending to be legally bound hereby, the parties hereto agree as follows:
1. Certain of the Loan Documents are amended as set forth in Exhibit A. Any and all references to any Loan Document in any other Loan Document shall be deemed to refer to such Loan Document as amended by this Amendment. This Amendment is deemed incorporated into each of the Loan Documents. Any initially capitalized terms used in this Amendment without definition shall have the meanings assigned to those terms in the Loan Documents. To the extent that any term or provision of this Amendment is or may be inconsistent with any term or provision in any Loan Document, the terms and provisions of this Amendment shall control.
2. The Borrower hereby certifies that: (a) all of its representations and warranties in the Loan Documents, as amended by this Amendment, are, except as may otherwise be stated in this Amendment: (i) true and correct as of the date of this Amendment, (ii) ratified and confirmed without condition as if made anew, and (iii) incorporated into this Amendment by reference, (b) no Event of Default or event which, with the passage of time or the giving of notice or both, would constitute an Event of Default, exists under any Loan Document which will not be cured by the execution and effectiveness of this Amendment, (c) no consent, approval, order or authorization of, or registration or filing with, any third party is required in connection with the execution, delivery and carrying out of this Amendment or, if required, has been obtained, and (d) this Amendment has been duly authorized, executed and delivered so that it constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. The Borrower confirms that the Obligations remain outstanding without defense, set off, counterclaim, discount or charge of any kind as of the date of this Amendment.
3. The Borrower hereby confirms that any collateral for the Obligations, including liens, security interests, mortgages, and pledges granted by the Borrower or third parties (if applicable), shall continue unimpaired and in full force and effect, and shall cover and secure all of the Borrower’s existing and future Obligations to the Bank, as modified by this Amendment.
4. As a condition precedent to the effectiveness of this Amendment, the Borrower shall comply with the terms and conditions (if any) specified in Exhibit A.
5. To induce the Bank to enter into this Amendment, the Borrower waives and releases and forever discharges the Bank and its officers, directors, attorneys, agents, and employees from any liability, damage, claim, loss or expense of any kind that it may have against the Bank or any of them arising out of or relating to the Obligations as of the date hereof. The Borrower further agrees to indemnify and hold the Bank and its officers, directors, attorneys, agents and employees harmless from any loss, damage, judgment, liability or expense (including reasonable attorneys’ fees) suffered by or rendered against the Bank or any of the other indemnified parties on account of any claims arising out of or relating to the Obligations as of the date hereof. The Borrower further states that it has carefully read the foregoing release and indemnity, knows the contents thereof, and grants the same as its own free act and deed.
6. This Amendment may be signed in any number of counterpart copies and by the parties to this Amendment on separate counterparts, but all such copies shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart. Upon written request by the other party (which may be made by electronic mail), any party so executing this Amendment by facsimile transmission shall promptly deliver a manually executed counterpart, provided that any failure to do so shall not affect the validity of the counterpart executed by facsimile transmission.
7. Notwithstanding any other provision herein or in the other Loan Documents, the Borrower agrees that this Amendment, the Note, the other Loan Documents, any other amendments thereto and any other information, notice, signature card, agreement or authorization related thereto (each, a “Communication”) may, at the Bank’s option, be in the form of an electronic record. Any Communication may, at the Bank’s option, be signed or executed using electronic signatures. For the avoidance of doubt, the authorization under this paragraph may include, without limitation, use or acceptance by the Bank of a manually signed paper Communication which has been converted into electronic form (such as scanned into PDF format) for transmission, delivery and/or retention. The Borrower and the Bank acknowledge and agree that the methods for delivering Communications, including notices, under the Loan Documents include electronic transmittal to any electronic address provided by either party to the other party from time to time.
8. This Amendment will be binding upon and inure to the benefit of the Borrower and the Bank and their respective heirs, executors, administrators, successors and assigns.
9. This Amendment has been delivered to and accepted by the Bank and will be deemed to be made in Cincinnati, Ohio. This Amendment will be interpreted and the rights and liabilities of the parties hereto determined in accordance with the laws of the State of Ohio, excluding its conflict of laws rules, including without limitation the Electronic Transactions Act (or equivalent) in such State (or, to the extent controlling, the laws of the United States of America, including without limitation the Electronic Signatures in Global and National Commerce Act).
10. Except as amended hereby, the terms and provisions of the Loan Documents remain unchanged, are and shall remain in full force and effect unless and until modified or amended in writing in accordance with their terms, and are hereby ratified and confirmed. Except as expressly provided herein, this Amendment shall not constitute an amendment, waiver, consent or release with respect to any provision of any Loan Document, a waiver of any default or Event of Default under any Loan Document, or a waiver or release of any of the Bank’s rights and remedies (all of which are hereby reserved). The Borrower expressly ratifies and confirms the waiver of jury trial provisions contained in the Loan Documents.
[signature page follows]
WITNESS the due execution of this Amendment as a document under seal as of the date first written above.
LSI INDUSTRIES INC.
By: /s/James Galeese
Print Name: James Galeese
Title: EVP, CFO
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Edward McGarry
Print Name: Edward McGarry
Title: Senior Vice President
EXHIBIT A TO
SIXTH AMENDMENT TO LOAN DOCUMENTS
DATED AS OF SEPTEMBER 30, 2021
(LSI Industries Inc.)
A. |
The “Loan Documents” that are the subject of this Amendment include the following (as any of the following have previously been amended, supplemented or otherwise modified): |
1. |
Amended and Restated Loan Agreement dated as of June 19, 2014 (the “Loan Agreement”) between the Borrower and the Bank; |
2. |
$100,000,000 Fifth Amended and Restated Revolving Line of Credit Note dated as of March 30, 2021 (the “Revolving Note”) made by the Borrower in favor of the Bank; |
3. |
Second Amended and Restated Line of Credit and Investment Sweep Rider dated as of March 30, 2021 (the “Sweep Rider”) between the Borrower and the Bank; |
4. |
Third Amended and Restated Guaranty Agreement dated as of February 21, 2017 (the “Guaranty”) made by the guarantors party thereto in favor of the Bank with respect to the obligations of the Borrower to the Bank; and |
5. |
All other documents, instruments, agreements, and certificates executed and delivered in connection with the Loan Documents listed in this Section A. |
B. |
The Loan Documents are amended as follows: |
1. |
Concurrently with the execution and delivery of this Amendment, the Borrower shall execute and deliver to the Bank a restated note (the “Restated Note”) evidencing the Revolving Loan (as defined in the Loan Agreement) in the principal amount of $75,000,000, in form and substance satisfactory to the Bank. Upon receipt by the Bank of the Restated Note, the existing Revolving Note shall be canceled; the Revolving Loan and all accrued and unpaid interest on the existing Revolving Note shall thereafter be evidenced by the Restated Note; and all references to the “Revolving Note” evidencing the Revolving Loan in any documents relating thereto shall thereafter be deemed to refer to the Restated Note. Without duplication, the Restated Note shall not constitute a novation and shall in no way extinguish the Borrower’s unconditional obligation to repay all indebtedness, including accrued and unpaid interest, evidenced by the existing Revolving Note. |
2. |
The first paragraph of Section 1.1 of the Loan Agreement is hereby deleted and replaced with the following: |
1.1. Loans. The Bank has made or may make one or more loans (collectively, the “Loans”) to the Borrower subject to the terms and conditions and in reliance upon the representations and warranties of the Borrower set forth in this Agreement. The Loans shall be used by the Borrower for general corporate purposes including acquisitions permitted hereunder. As of September 30, 2021, the Loans include a revolving credit loan (the “Revolving Loan”) in the principal amount of up to $75,000,000 and a term loan (the “Term Loan”) in the principal amount of $25,000,000. The Loans are or will be evidenced by a promissory note or notes of the Borrower and all renewals, extensions, amendments and restatements thereof (if one or more, collectively, the “Note”) acceptable to the Bank, which may set forth the interest rate, repayment and other provisions, the terms of which are incorporated into this Agreement by reference.
3. |
The table set forth in subsection (a) of Section 1.4 (Applicable Margin) of the Loan Agreement is hereby deleted and replaced with the following: |
Pricing Level |
Leverage Ratio |
LIBOR Applicable Margin |
Base Rate Applicable Margin |
Facility Fee Applicable Margin |
I |
≤ 1.00x |
1.00% |
0.00% |
0.150% |
II |
> 1.00x & ≤ 1.50x |
1.25% |
0.25% |
0.175% |
III |
> 1.50x & ≤ 2.00x |
1.50% |
0.50% |
0.175% |
IV |
> 2.00x & ≤ 2.50x |
1.75% |
0.75% |
0.200% |
V |
> 2.50x & ≤ 3.00x |
2.00% |
1.00% |
0.225% |
VI |
> 3.00x |
2.25% |
1.25% |
0.250% |
4. |
Section 4.11(a) of the Loan Agreement is hereby deleted and replaced with the following: |
(a) Fixed Charge Coverage Ratio. The Borrower shall maintain as of the end of each fiscal quarter, on a rolling four quarters basis, a Fixed Charge Coverage Ratio of at least 1.15 to 1.00.
5. |
Section 4.11(b) of the Loan Agreement is hereby deleted and replaced with the following: |
(b) Leverage Ratio. The Borrower shall maintain a Leverage Ratio of not more than the following for the following periods:
6. |
The definition of “Consolidated EBITDA” set forth in Section 4.11 of the Loan Agreement is hereby deleted and replaced with the following: |
“Consolidated EBITDA” means, for the relevant period, the sum of the Borrower’s (i) Consolidated net income, (ii) Consolidated income tax expense, (iii) Consolidated interest expense, (iv) Consolidated depreciation and amortization expenses and (v) other Consolidated non-cash expenses for the Borrower, all determined in accordance with GAAP; provided that there shall be excluded from Consolidated net income any extraordinary items of gain or loss (including, without limitation, those items created by mandated changes in GAAP). Without duplication of amounts otherwise included in the Borrower’s Consolidated net income, Consolidated EBITDA for any relevant period shall be calculated on a basis approved by the Bank in its reasonable credit judgment after giving pro forma effect to any Permitted Acquisition made during such relevant period as if such Permitted Acquisition had occurred on the first day of such relevant period.
7. |
The following definition is hereby added to Section 4.11 of the Loan Agreement in appropriate alphabetical order: |
“Fixed Charge Coverage Ratio” means (i) Consolidated EBITDA, divided by (ii) the sum of Consolidated capital expenditures plus Consolidated cash taxes paid plus Consolidated cash interest expense plus dividends plus Current Maturities.
8. |
Schedule 3.15 to the Loan Agreement is hereby deleted and replaced with the following: |
Schedule 3.15 - Equity Interests; Subsidiaries & Partnerships.
LSI MidWest Lighting Inc.
LSI Adapt Inc.
Grady McCauley Inc.
LSI Integrated Graphics LLC – 100% owned by LSI Lightron Inc.
LSI Kentucky, LLC
LSI Lightron Inc.
LSI Retail Graphics LLC – 100% owned by LSI Lightron Inc.
LSI ADL Technology LLC
LSI Controls Inc.
Atlas Lighting Products, Inc.
LSI Fresh Subsidiary Inc.
JSI Holding Corp. –100% owned by LSI Fresh Subsidiary Inc.
JSI SF Incorporated –100% owned by JSI Holding Corp.
Milo Holding Corp. –100% owned by JSI Holding Corp.
JSI Store Fixtures Canada Inc. –100% owned by JSI SF Incorporated
JSI Store Fixtures Incorporated –95% owned by Milo Holding Corp.
and 5% owned by JSI SF Incorporated
C. |
Conditions to Effectiveness of Amendment: The Bank’s willingness to agree to the amendments set forth in this Amendment is subject to the prior satisfaction of the following conditions: |
1. |
Amendment and Related Documents. The Bank shall have received from the Borrower and each Guarantor, as applicable, a duly executed counterpart of this Amendment (including the attached Consent), the Sixth Amended and Restated Revolving Line of Credit Note in the principal amount of $75,000,000 of even date herewith made by the Borrower in favor of the Bank, the Term Note in the principal amount of $25,000,000 of even date herewith made by the Borrower in favor of the Bank, the Guaranty Agreement of LSI Fresh Subsidiary Inc. in favor of the Bank, and such other certificates, documents, instruments and agreements as the Bank shall reasonably request. |
2. |
Legal Fees. The Borrower shall have paid, or reimbursed the Bank for, the reasonable fees and expenses of the Bank’s counsel in connection with the preparation, negotiation, execution and delivery of this Amendment and the related documents. |
3. |
Costs and Expenses. The Borrower shall have paid, or reimbursed the Bank for, all other costs and expenses incurred by the Bank in connection with the structuring of the transactions contemplated by this Amendment and the negotiation, execution and delivery of this Amendment and the related documents. |
CONSENT OF GUARANTOR
Each of the undersigned guarantors (individually and collectively, the “Guarantor”) consents to the provisions of the foregoing Amendment and all prior amendments (if any) and confirms and agrees that: (a) the Guarantor’s obligations under its Third Amended and Restated Guaranty Agreement dated as of February 21, 2017 (the “Guaranty”) relating to the Obligations mentioned in the Amendment shall be unimpaired by the Amendment; (b) the Guarantor has no defenses, set offs, counterclaims, discounts or charges of any kind against the Bank, its officers, directors, employees, agents or attorneys with respect to the Guaranty; and (c) all of the terms, conditions and covenants in the Guaranty remain unaltered and in full force and effect and are hereby ratified and confirmed and apply to the Obligations, as modified by the Amendment. The Guarantor certifies that all representations and warranties made in the Guaranty are true and correct.
The Guarantor hereby confirms that any collateral for the Obligations, including liens, security interests, mortgages, and pledges granted by the Guarantor or third parties (if applicable), shall continue unimpaired and in full force and effect, shall cover and secure all of the Guarantor’s existing and future Obligations to the Bank, as modified by the Amendment.
The Guarantor ratifies and confirms the indemnification and waiver of jury trial provisions contained in the Guaranty.
WITNESS the due execution of this Consent as a document under seal as of the date of the Amendment, intending to be legally bound hereby.
LSI MIDWEST LIGHTING INC.
LSI ADAPT INC.
GRADY McCAULEY INC.
LSI INTEGRATED GRAPHICS LLC
LSI KENTUCKY, LLC
LSI LIGHTRON INC.
LSI RETAIL GRAPHICS LLC
LSI ADL TECHNOLOGY LLC
LSI CONTROLS INC.
ATLAS LIGHTING PRODUCTS, INC.
By: /s/ James Galeese
Print Name: James Galeese
Title: EVP, CFO
EXHIBIT 31.1
Certification of Principal Executive Officer
Pursuant to Rule 13a-14(a)
I, James A. Clark, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LSI Industries Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 4, 2021 |
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/s/ James A. Clark |
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Principal Executive Officer |
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EXHIBIT 31.2
Certification of Principal Financial Officer
Pursuant to Rule 13a-14(a)
I, James E. Galeese, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LSI Industries Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 4, 2021 |
/s/ James E. Galeese |
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Principal Financial Officer |
EXHIBIT 32.1
CERTIFICATION OF JAMES A. CLARK
Pursuant to Section 1350 of Chapter 63 of the
United States Code and Rule 13a-14b
In connection with the filing with the Securities and Exchange Commission of the Quarterly Report of LSI Industries Inc. (the “Company”) on Form 10-Q for the quarter ended September 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 |
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James A. Clark |
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Chief Executive Officer and President |
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Date: November 4, 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 Quarterly Report of LSI Industries Inc. (the “Company”) on Form 10-Q for the quarter ended September 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 |
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James E. Galeese |
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Executive Vice President and Chief Financial Officer |
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Date: November 4, 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.