lyts20180930_10q.htm
 

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

X

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018.

 

 

 

 

 

 

 

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.

 

State of Incorporation - Ohio        IRS Employer I.D. No. 31-0888951

 

10000 Alliance Road

 

Cincinnati, Ohio  45242

 

(513) 793-3200

 

Indicate by checkmark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  YES    X     NO ____

 

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES    X      NO ____

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer [    ]  

 

Accelerated filer [ X ]

 

Non-accelerated filer [    ] 

 

Smaller reporting company [    ]

 

Emerging growth company[    ]

   

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ____  NO    X

 

As of October 25, 2018 there were 26,025,256 shares of the registrant's common stock, no par value per share, outstanding.

 

 

 

  

 

LSI INDUSTRIES INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2018

 

INDEX

 

 

 

Begins on Page

PART I.  Financial Information

  

  

  

  

  

  

  

  

ITEM 1.

Financial Statements (Unaudited)

  

  

  

  

  

  

  

  

  

Condensed Consolidated Statements of Operations

  

3

  

  

Condensed Consolidated Balance Sheets

  

4

  

  

Condensed Consolidated Statements of Cash Flows

  

6

  

  

  

  

  

  

  

Notes to Condensed Consolidated Financial Statements

  

7

  

  

  

  

  

  

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

18  

  

  

  

  

  

  

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

  

22

  

  

  

  

  

  

ITEM 4.

Controls and Procedures

  

23

  

  

  

  

  

PART II.  Other Information

  

  

  

  

  

  

  

  

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

  

24

  

  

  

  

  

  

ITEM 6.

Exhibits

  

24

  

  

  

  

  

Signatures

 

24

 

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995

 

This Form 10-Q contains certain forward-looking statements that are subject to numerous assumptions, risks or uncertainties.  The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements.  Forward-looking statements may be identified by words such as “estimates,” “anticipates,” “projects,” “plans,” “expects,” “intends,” “believes,” “seeks,” “may,” “will,” “should” or the negative versions of those words and similar expressions, and by the context in which they are used.  Such statements, whether expressed or implied, are based upon current expectations of the Company and speak only as of the date made.  Actual results could differ materially from those contained in or implied by such forward-looking statements as a result of a variety of risks and uncertainties over which the Company may have no control.  These risks and uncertainties include, but are not limited to, the impact of competitive products and services, product demand and market acceptance risks, potential costs associated with litigation and regulatory compliance, reliance on key customers, financial difficulties experienced by customers, the cyclical and seasonal nature of our business, the adequacy of reserves and allowances for doubtful accounts, fluctuations in operating results or costs whether as a result of uncertainties inherent in tax and accounting matters or otherwise, unexpected difficulties in integrating acquired businesses, the ability to retain key employees of acquired businesses, unfavorable economic and market conditions, the results of asset impairment assessments and the other risk factors that are identified herein.  You are cautioned to not place undue reliance on these forward-looking statements.  In addition to the factors described in this paragraph, the risk factors identified in our Form 10-K and other filings the Company may make with the SEC constitute risks and uncertainties that may affect the financial performance of the Company and are incorporated herein by reference.  The Company does not undertake and hereby disclaims any duty to update any forward-looking statements to reflect subsequent events or circumstances.

 

Page 2

 

  

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

 

LSI INDUSTRIES INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

   

Three Months Ended

 
   

September 30

 

(In thousands, except per share data)

 

2018

   

2017

 
                 

Net sales

  $ 84,957     $ 87,466  
                 

Cost of products and services sold

    63,541       63,763  
                 

Restructuring costs

    155       --  
                 

Gross profit

    21,261       23,703  
                 

Selling and administrative expenses

    18,327       20,517  
                 

Impairment of goodwill

    --       28,000  
                 

Operating income (loss)

    2,934       (24,814

)

                 

Interest (income)

    (14

)

    (8

)

                 

Interest expense

    532       411  
                 

Income (loss) before income taxes

    2,416       (25,217

)

                 

Income tax expense (benefit)

    667       (9,588

)

                 

Net income (loss)

  $ 1,749     $ (15,629

)

                 
                 

Earnings (Loss) per common share (see Note 4)

               

Basic

  $ 0.07     $ (0.61

)

Diluted

  $ 0.07     $ (0.61

)

                 
                 

Weighted average common shares outstanding

               

Basic

    26,032       25,791  

Diluted

    26,365       25,791  

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

 

Page 3

 

 

LSI INDUSTRIES INC.

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

(In thousands, except shares)

 

September 30,

   

June 30,

 
   

2018

   

2018

 
                 

ASSETS

               
                 

Current Assets

               
                 

Cash and cash equivalents

  $ 4,162     $ 3,178  
                 

Accounts receivable, less allowance for doubtful accounts of  $363 and $409, respectively

    59,781       50,609  
                 

Inventories

    49,580       50,994  
                 

Refundable income taxes

    1,197       1,784  
                 

Other current assets

    3,625       3,516  
                 

Total current assets

    118,345       110,081  
                 

Property, Plant and Equipment, at cost

               

Land

    6,718       6,470  

Buildings

    35,984       35,961  

Machinery and equipment

    77,658       77,108  

Construction in progress

    1,261       1,340  
      121,621       120,879  

Less accumulated depreciation

    (79,098

)

    (77,176

)

Net property, plant and equipment

    42.523       43,703  
                 

Goodwill

    30,538       30,538  
                 

Other Intangible Assets, net

    34,718       35,409  
                 

Other Long-Term Assets, net

    9,420       9,786  
                 

Total assets

  $ 235,544     $ 229,517  

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

 

Page 4

 

 

LSI INDUSTRIES INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

   

September 30,

   

June 30,

 

(In thousands, except shares)

 

2018

   

2018

 
                 

LIABILITIES & SHAREHOLDERS’ EQUITY

               
                 

Current Liabilities

               

Accounts payable

  $ 23,774     $ 17,927  

Accrued expenses

    21,949       24,272  
                 

Total current liabilities

    45,723       42,199  
                 

Long-Term Debt

    46,152       45,360  
                 

Other Long-Term Liabilities

    2,606       2,707  
                 

Commitments and Contingencies (Note 12)

               
                 

Shareholders’ Equity

               

Preferred shares, without par value; Authorized 1,000,000 shares, none issued

    --       --  

Common shares, without par value; Authorized 40,000,000 shares; Outstanding 25,799,257 and 25,641,913 shares, respectively

    124,871       124,104  

Treasury shares, without par value;

    (1,845

)

    (2,110

)

Deferred compensation plan

    1,869       2,133  

Retained earnings

    16,168       15,124  
                 

Total shareholders’ equity

    141,063       139,251  
                 

Total liabilities & shareholders’ equity

  $ 235,544     $ 229,517  

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

   

Page 5

 

 

LSI INDUSTRIES INC.

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

(In thousands)

 

Three Months Ended

 
   

September 30

 
   

2018

   

2017

 

Cash Flows from Operating Activities

               

Net income (loss)

  $ 1,749     $ (15,629

)

Non-cash items included in net income:

               

Depreciation and amortization

    2,643       2,572  

Deferred income taxes

    85       (10,815

)

Impairment of goodwill

    --       28,000  

Deferred compensation plan

    127       160  

Stock compensation expense

    551       984  

Issuance of common shares as compensation

    90       78  

Loss on disposition of fixed assets

    --       (31

)

Allowance for doubtful accounts

    (19

)

    49  

Inventory obsolescence reserve

    766       143  
                 

Changes in certain assets and liabilities

               

Accounts receivable

    (4,218

)

    (5,421

)

Inventories

    (3,519

)

    683  

Refundable income taxes

    587       775  

Accounts payable

    5,723       (1,559

)

Accrued expenses and other

    (3,172

)

    (3,133

)

Customer prepayments

    795       419  

Net cash flows provided by (used in) operating activities

    2,188       (2,725

)

                 

Cash Flows from Investing Activities

               

Proceeds from the sale of assets

    --       1,527  

Purchases of property, plant and equipment

    (648

)

    (498

)

Net cash flows (used in) provided by investing activities

    (648

)

    1,029  
                 

Cash Flows from Financing Activities

               

Payments of long-term debt

    (23,039

)

    (22,247

)

Borrowings of long-term debt

    23,831       24,411  

Cash dividends paid

    (1,296

)

    (1,286

)

Shares withheld for employees taxes

    (52

)

    (110

)

Purchase of treasury shares

    --       (106

)

Exercise of stock options

    --       115  

Net cash flows (used in) provided by financing activities

    (556

)

    777  
                 

Increase (Decrease) in cash and cash equivalents

    984       (919

)

                 

Cash and cash equivalents at beginning of period

    3,178       3,039  
                 

Cash and cash equivalents at end of period

  $ 4,162     $ 2,120  

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

 

Page 6

 

 

 LSI INDUSTRIES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The interim condensed consolidated financial statements are unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the interim financial statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of September 30, 2018, the results of its operations for the three month periods ended September 30, 2018 and 2017, and its cash flows for the three month periods ended September 30, 2018 and 2017. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2018 Annual Report on Form 10-K.  Financial information as of June 30, 2018 has been derived from the Company’s audited consolidated financial statements.

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2018 Annual Report on Form 10-K.  Significant changes to our accounting policies as a result of adopting ASU-2014-09 “Revenue from Contracts with Customers” (Topic 606) are discussed below.

 

Revenue Recognition: 

 

The Company recognizes revenue when it satisfies the performance obligation in its customer contracts or purchase orders. Most of the Company’s products have a single performance obligation which is satisfied at a point in time when control is transferred to the customer. Control is generally transferred at time of shipment when title and risk of ownership passes to the customer. For customer contracts with multiple performance obligations, the Company allocates the transaction price and any discounts to each performance obligation based on relative standalone selling prices. Payment terms are typically within 30 to 90 days from the shipping date, depending on our terms with the customer. The Company offers standard warranties that do not represent separate performance obligations.

 

Installation is a separate performance obligation, except for our digital signage products.  For digital signage products, installation is not a separate performance obligation as the product and installation is the combined item promised in digital signage contracts. The Company is not always responsible for installation of products it sells and has no post-installation responsibilities other than standard warranties. 

 

A number of the Company's products are highly customized. As a result, these customized products do not have an alternative use. For these products, the Company has a legal right to payment for performance to date and generally does not accept returns on these items. The measurement of performance is based upon cost plus a reasonable profit margin for work completed. Because there is no alternative use and there is a legal right to payment, the Company transfers control of the item as the item is being produced and therefore, recognizes revenue over time. The customized product types are as follows:

 

 

Customer specific printed graphic branding

 

Electrical components based on customer specifications

 

Digital signage and related media content

 

The Company also offers installation services. Installation revenue is recognized over time as our customer simultaneously receives and consumes the benefits provided through the installation process.

 

For these customized products and installation services, revenue is recognized using a cost-based input method: recognizing revenue and gross profit as work is performed based on the relationship between the actual cost incurred and the total estimated cost for the contract.

 

Page 7

 

 

Disaggregation of Revenue

The Company disaggregates the revenue from contracts with customers by the timing of revenue recognition because we believe it best depicts the nature, amount, and timing of our revenue and cash flows. The table presents a reconciliation of the disaggregation by reportable segments.

 

   

Three Months Ended September 30

 
   

Lighting Segment

   

Graphics Segment

 

Timing of revenue recognition

               

Products and services transferred at a point in time

  $ 54,249     $ 17,694  

Products and services transferred over time

    7,183       5,831  
    $ 61,432     $ 23,525  

 

   

Three Months Ended September 30

 
   

Lighting Segment

   

Graphics Segment

 

Type of Product and Services

               

New Technology Products

  $ 51,305     $ 2,402  

Legacy Products

    9,076       15,964  

Turnkey Services and Other

    1,051       5,159  
    $ 61,432     $ 23,525  

 

New technology products include LED lighting and controls, electronic circuit boards, and digital signage solutions. Legacy products include lighting fixtures utilizing light sources other than LED technology and printed two and three dimensional graphic products. Turnkey services and other includes installation services along with shipping and handling charges.

 

Practical Expedients and Exemptions

 

The Company’s contracts with customers have an expected duration of one year or less, as such we apply the practical expedient to expense sales commissions as incurred, and have omitted disclosures on the amount of remaining performance obligations.

 

Shipping costs that are not material in context of the delivery of products are expensed as incurred.

 

The Company’s accounts receivable balance represents the Company’s unconditional right to receive consideration from its customers with contracts. Payments are due within 30 to 90 days of completion of the performance obligation and invoicing, therefore, does not contain significant financing components.

 

The Company collects sales tax and other taxes concurrent with revenue-producing activities and are excluded from revenue. Shipping and handling costs are treated as fulfillment activities and included in cost of products and services sold on the Consolidated Statements of Operations.

 

New Accounting Pronouncements:

 

On July 1, 2018, the Company adopted ASU 2014-09. “Revenue from Contracts with Customers,” (Topic 606) using the modified retrospective adoption method which requires a cumulative effect adjustment to the opening balance of retained earnings. This approach was applied to contracts that were not completed as of June 30, 2018. Results for reporting periods beginning July 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The Company recorded a net increase to beginning retained earnings of $591,000 on July 1, 2018 due to the cumulative impact of adopting Topic 606, as described below.

 

   

Balance as of

June 30, 2018

   

Adjustments

   

Opening Balance as of

July 1, 2018

 

Assets:

                       

Accounts receivable, net

    50,609       4,935       55,544  

Inventories, net

    50,994       (4,167

)

    46,827  

Other long-term assets, net

   
9,786
      (177

)

    9,609  

Stockholders' Equity:

                       

Retained earnings

    15,124       591       15,715  

 

In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases.” The amended guidance requires an entity to recognize assets and liabilities that arise from leases. The amended guidance is effective for financial statements issued for fiscal years and interim periods within those years, beginning after December 15, 2018, or the Company’s fiscal year 2020, with early adoption permitted. The Company is currently evaluating the impact the amended guidance will have on its financial statements.  

 

Subsequent Events:

 

The Company has evaluated subsequent events for potential recognition and disclosure through the date the consolidated financial statements were filed.  No items were identified during this evaluation that required adjustment to or disclosure in the accompanying financial statements other than noted below.

 

On October 29, 2018, The Company announced that it will permanently close its New Windsor, New York manufacturing facility. The facility manufactures indoor lighting products and is included in the results of the Lighting Segment. Production will be transferred to the Company’s Erlanger, Kentucky and Blue Ash, Ohio facilities, also included in the Lighting Segment. The New Windsor facility has a workforce of 140 employees.

 

On October 15, 2018, the Board of Directors of the Company appointed James A. Clark as the Company’s Chief Executive Officer and President. Mr. Clark entered into an Employment Agreement as of October 16, 2018 which provides that his employment with the Company shall begin on November 1, 2018. The Employment Agreement also defines his compensation and benefit package.

 

Page 8

 

 

Reclassifications:

 

Certain prior year amounts have been reclassified to conform to the current year presentation within the cash flows from operating activities section and cash flows from financing activities section of the statement of cash flows. These reclassifications have no impact on net income or earnings per share.

 

 

NOTE 3 - SEGMENT REPORTING INFORMATION

 

The accounting guidance on Segment Reporting establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (the Company’s Chief Executive Officer or “CODM”) in making decisions on how to allocate resources and assess performance. The Company’s two operating segments are Lighting and Graphics, with one executive team under the new organizational structure reporting directly to the CODM with responsibilities for managing each segment. Corporate and Eliminations, which captures the Company’s corporate administrative activities, is also reported in the segment information.

 

The Lighting Segment includes outdoor and indoor lighting utilizing both traditional and LED light sources that have been fabricated and assembled for the Company’s markets, primarily petroleum / convenience stores, automotive dealerships, quick-service restaurants, grocery and pharmacy store, and retail/national accounts. The Company also addresses lighting product customers through the commercial industrial, stock and flow, and renovation channels. The Lighting Segment also includes the design, engineering, and manufacturing of electronic circuit boards, assemblies and sub-assemblies used to manufacture certain LED light fixtures and sold directly to customers.

 

Segment also includes the design, engineering, and manufacturing of electronic circuit boards, assemblies and sub-assemblies used to manufacture certain LED light fixtures and sold directly to customers.

 

The Graphics Segment designs, manufactures and installs exterior and interior visual image elements such as traditional graphics, interior branding, electrical and architectural signage, active digital signage along with the management of media content related to digital signage, LED video screens, and menu board systems that are either digital or traditional by design. These products are used in visual image programs in several markets including, but not limited to the petroleum / convenience store market, multi-site retail operations, banking, and restaurants. The Graphics Segment implements, installs and provides program management services related to products sold by the Graphics Segment and by the Lighting Segment.

 

The Company’s corporate administration activities are reported in the Corporate and Eliminations line item.  These activities primarily include intercompany profit in inventory eliminations, expense related to certain corporate officers and support staff, the Company’s internal audit staff, expense related to the Company’s Board of Directors, equity compensation expense for various equity awards granted to corporate administration employees, certain consulting expenses, investor relations activities, and a portion of the Company’s legal, auditing and professional fee expenses. Corporate identifiable assets primarily consist of cash, invested cash (if any), refundable income taxes (if any), and deferred income taxes.

 

There was no concentration of consolidated net sales in the three months ended September 30, 2018 or 2017.  There was no concentration of accounts receivable at September 30, 2018 or June 30, 2018.

 

Page 9

 

 

Summarized financial information for the Company’s operating segments is provided for the indicated periods and as of September 30, 2018 and September 30, 2017:

 

   

Three Months Ended

 

(In thousands)

 

September 30

 
   

2018

   

2017

 

Net Sales:

               

Lighting Segment

  $ 61,432     $ 68,428  

Graphics Segment

    23,525       19,038  
    $ 84,957     $ 87,466  
                 

Operating Income (Loss):

               

Lighting Segment

  $ 3,850     $ (22,930

)

Graphics Segment

    2,387       1,476  

Corporate and Eliminations

    (3,303

)

    (3,360

)

    $ 2,934     $ (24,814

)

                 

Capital Expenditures:

               

Lighting Segment

  $ 276     $ 261  

Graphics Segment

    266       182  

Corporate and Eliminations

    106       55  
    $ 648     $ 498  
                 

Depreciation and Amortization:

               

Lighting Segment

  $ 1,990     $ 1,901  

Graphics Segment

    395       379  

Corporate and Eliminations

    258       292  
    $ 2643     $ 2,572  

 

   

September 30,

2018

   

June 30,

2018

 

Identifiable Assets:

               

Lighting Segment

  $ 173,254     $ 172,799  

Graphics Segment

    45,493       39,881  

Corporate and Eliminations

    16,797       16,837  
    $ 235,544     $ 229,517  

 

The segment net sales reported above represent sales to external customers.  Segment operating income, which is used in management’s evaluation of segment performance, represents net sales less all operating expenses. Identifiable assets are those assets used by each segment in its operations.

 

The Company records a 10% mark-up on intersegment revenues. Any intersegment profit in inventory is eliminated in consolidation. Intersegment revenues were eliminated in consolidation as follows:

 

   

Three Months Ended

 
   

September 30

 

(In thousands)

 

2018

   

2017

 
                 

Lighting Segment inter-segment net sales

  $ 409     $ 715  
                 

Graphics Segment inter-segment net sales

  $ 31     $ 31  

 

The Company’s operations are located solely within the United States. As a result, the geographic distribution of the Company’s net sales and long-lived assets originate within the United States.

 

Page 10

 

 

 

NOTE 4 - EARNINGS PER COMMON SHARE

 

The following table presents the amounts used to compute basic and diluted earnings per common share, as well as the effect of dilutive potential common shares on weighted average shares outstanding (in thousands, except per share data):

 

   

Three Months Ended

 
   

September 30

 
   

2018

   

2017

 
                 

BASIC EARNINGS (LOSS) PER SHARE

               
                 

Net income (loss)

  $ 1,749     $ (15,629

)

                 

Weighted average shares outstanding, net of treasury shares (a)

    25,752       25,505  

Weighted average vested restricted stock units outstanding

    53       41  

Weighted average shares outstanding in the Deferred Compensation Plan

    227       245  
                 

Weighted average shares outstanding

    26,032       25,791  
                 

Basic earnings (loss) per share

  $ 0.07     $ (0.61

)

                 

DILUTED EARNINGS (LOSS) PER SHARE

               
                 

Net income (loss)

  $ 1,749     $ (15,629

)

                 

Weighted average shares outstanding

               
                 

Basic

    26,032       25,791  
                 

Effect of dilutive securities (b):

               

Impact of common shares to be issued under stock option plans, and contingently issuable shares, if any

    333       --  
                 

Weighted average shares outstanding (c)

    26,365       25,791  
                 

Diluted earnings (loss) per share

  $ 0.07     $ (0.61

)

 

 

 

(a)

Includes shares accounted for like treasury stock.

 

 

(b)

Calculated using the “Treasury Stock” method as if dilutive securities were exercised and the funds were used to purchase common shares at the average market price during the period.

 

 

(c)

Options to purchase 3,146,466 common shares and 3,791,936 common shares at September 30, 2018 and 2017, respectively, were not included in the computation of the three month period for diluted earnings (loss) per share, respectively, because the exercise price was greater than the average fair market value of the common shares. For the three months ended September 30, 2017, the effect of dilutive securities was not included in the calculation of diluted earnings (loss) per share because there was a net operating loss for the period.

 

Page 11

 

 

 

NOTE 5 - INVENTORIES

 

The following information is provided as of the dates indicated:

 

   

September 30,

   

June 30,

 

(In thousands)

 

2018

   

2018

 
                 

Inventories:

               

Raw materials

  $ 33,131     $ 31,795  

Work-in-process

    1,937       3,833  

Finished goods

    14,512       15,366  

Total Inventories

  $ 49,580     $ 50,994  

 

 

 

NOTE 6 - ACCRUED EXPENSES

 

The following information is provided as of the dates indicated:

 

   

September 30,

   

June 30,

 

(In thousands)

 

2018

   

2018

 
                 

Accrued Expenses:

               

Compensation and benefits

  $ 5,668     $ 9,394  

Customer prepayments

    1,865       1,070  

Accrued sales commissions

    1,776       2,274  

Accrued warranty

    7,095       6,876  

Other accrued expenses

    5,545       4,658  

Total Accrued Expenses

  $ 21,949     $ 24,272  

 

 

NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS

 

The carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment. The Company may first assess qualitative factors in order to determine if goodwill and indefinite-lived intangible assets are impaired. If through the qualitative assessment it is determined that it is more likely than not that goodwill and indefinite-lived assets are not impaired, no further testing is required. If it is determined more likely than not that goodwill and indefinite-lived assets are impaired, or if the Company elects not to first assess qualitative factors, the Company’s impairment testing continues with the estimation of the fair value of the reporting unit using a combination of a market approach and an income (discounted cash flow) approach, at the reporting unit level. The estimation of the fair value of reporting unit requires significant management judgment with respect to revenue and expense growth rates, changes in working capital and the selection and use of an appropriate discount rate.  The estimates of the fair value of reporting units are based on the best information available as of the date of the assessment.  The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease an impairment charge.  Company management uses its judgment in assessing whether assets may have become impaired between annual impairment tests.  Indicators such as adverse business conditions, economic factors and technological change or competitive activities may signal that an asset has become impaired.

 

The Company identified its reporting units in conjunction with its annual goodwill impairment testing. The Company has a total of three reporting units that contain goodwill. There are two reporting units within the Lighting Segment and one reporting unit within the Graphics Segment. The Company relies upon a number of factors, judgments and estimates when conducting its impairment testing including, but not limited to, the Company’s stock price, operating results, forecasts, anticipated future cash flows and marketplace data. There are inherent uncertainties related to these factors and judgments in applying them to the analysis of goodwill impairment.

 

Page 12

 

 

The following table presents information about the Company's goodwill on the dates or for the periods indicated:

 

Goodwill

                       

(In thousands)

 

Lighting

   

Graphics

         
   

Segment

   

Segment

   

Total

 

Balance as of June 30, 2018

                       

Goodwill

  $ 94,564     $ 28,690     $ 123,254  

Accumulated impairment losses

    (65,191

)

    (27,525

)

    (92,716

)

Goodwill, net as of June 30, 2018

  $ 29,373     $ 1,165     $ 30,538  
                         

Balance as of September 30, 2018

                       

Goodwill

  $ 94,564       28,690       123,254  

Accumulated impairment losses

    (65,191

)

    (27,525

)

    (92,716

)

Goodwill, net as of September 30, 2018

  $ 29,373     $ 1,165     $ 30,538  

 

The gross carrying amount and accumulated amortization by major other intangible asset class is as follows:

 

   

September 30, 2018

 

Other Intangible Assets

 

Gross

                 

(In thousands)

 

Carrying

   

Accumulated

   

Net

 
   

Amount

   

Amortization

   

Amount

 

Amortized Intangible Assets

                       

Customer relationships

  $ 35,563     $ 10,525     $ 25,038  

Patents

    338       226       112  

LED technology firmware, software

    16,066       11,941       4,125  

Trade name

    2,658       637       2,021  

Total Amortized Intangible Assets

    54,625       23,329       31,296  
                         

Indefinite-lived Intangible Assets

                       

Trademarks and trade names

    3,422       --       3,422  

Total Indefinite-lived Intangible Assets

    3,422       --       3,422  
                         

Total Other Intangible Assets

  $ 58,047     $ 23,329     $ 34,718  

 

 

   

June 30, 2018

 

Other Intangible Assets

 

Gross

                 

(In thousands)

 

Carrying

   

Accumulated

   

Net

 
   

Amount

   

Amortization

   

Amount

 

Amortized Intangible Assets

                       

Customer relationships

  $ 35,563     $ 10,011     $ 25,552  

Patents

    338       217       121  

LED technology firmware, software

    16,066       11,801       4,265  

Trade name

    2,658       609       2,049  

Total Amortized Intangible Assets

    54,625       22,638       31,987  
                         

Indefinite-lived Intangible Assets

                       

Trademarks and trade names

    3,422       --       3,422  

Total Indefinite-lived Intangible Assets

    3,422       --       3,422  
                         

Total Other Intangible Assets

  $ 58,047     $ 22,638     $ 35,409  

 

Page 13

 

 

(In thousands)

 

Amortization Expense of

Other Intangible Assets

 
             
   

September 30, 2018

   

September 30, 2017

 
                 

Three Months Ended

  $ 691     $ 690  

 

The Company expects to record annual amortization expense as follows:

 

(In thousands)  
         

2019

  $ 2,069  

2020

  $ 2,687  

2021

  $ 2,682  

2022

  $ 2,460  

2023

  $ 2,412  

After 2023

  $ 18,986  

 

 

NOTE 8 - REVOLVING LINE OF CREDIT

 

In February 2017, the Company amended its secured line of credit to a $100 million facility. The line of credit expires in the third quarter of fiscal 2022. Interest on the revolving line of credit is charged based upon an increment over the LIBOR rate as periodically determined, or at the bank’s base lending rate, at the Company’s option.  The increment over the LIBOR borrowing rate, as periodically determined, fluctuates between 125 and 250 basis points depending upon the ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA”), as defined in the line of credit agreement. The increment over LIBOR borrowing rate will remain at 175 basis points for the next twelve months.  The fee on the unused balance of the $100 million committed line of credit is 20 basis points.  Under the terms of this line of credit, the Company has agreed to a negative pledge of real estate assets and is required to comply with financial covenants that limit the ratio of indebtedness to EBITDA and require a minimum fixed charge coverage ratio. As of September 30, 2018, there was $46.2 million borrowed against the line of credit, and $53.8 million was available as of that date. Based on the terms of the line of credit and the maturity date, the debt has been classified as long term.

 

The Company is in compliance with all of its loan covenants as of September 30, 2018.

 

 

NOTE 9 - CASH DIVIDENDS

 

The Company paid cash dividends of $1,296,000 and $1,286,000 in the three months ended September 30, 2018 and 2017, respectively. Dividends on restricted stock units in the amount of $31,553 and $29,106 were accrued as of September 30, 2018 and 2017, respectively. These dividends will be paid upon the vesting of the restricted stock units when shares are issued to the award recipients. In November 2018, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable November 27, 2018 to shareholders of record as of November 16, 2018. The indicated annual cash dividend rate is $0.20 per share.

 

 

NOTE 10 - EQUITY COMPENSATION

 

The Company’s equity compensation plan, the 2012 Stock Incentive Plan (“the 2012 Plan”), was approved by shareholders in November 2012. The 2012 Plan covers all of the Company’s full-time employees, outside directors and certain advisors and replaced all previous equity compensation plans. In November 2016, the Company’s shareholders approved an amendment to the 2012 Plan that added 1,600,000 shares to the plan and implemented the use of a fungible share ratio that consumes 2.5 available shares for every full value share awarded by the Company as stock compensation. The 2012 Plan allows for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted and unrestricted stock awards, performance stock units, and other stock-based awards. Stock option grants or stock awards made pursuant to the 2012 Plan are granted at fair market value at the date of option grant or stock award.  

 

Page 14

 

 

Stock option grants may be service-based or performance-based.  Service-based options granted during fiscal year 2017 and prior fiscal years generally have a four year ratable vesting period beginning one year after the date of grant. Service-based options granted during fiscal year 2018 have a three year ratable vesting period beginning one year after the date of grant. The maximum exercise period of stock options granted under the 2012 Plan is ten years. Restricted Stock Units (RSUs) granted prior to fiscal year 2018 have a four year ratable vesting period. RSUs granted during fiscal year 2018 have a three year ratable vesting period. The RSUs are non-voting, but accrue cash dividends at the same per share rate as those cash dividends declared and paid on LSI’s common stock. If a stock option or RSU holder’s employment with the Company terminates by reason of death, disability or retirement, as defined in the Plan, the Plan generally provides for acceleration of vesting.  

 

In the first quarter of fiscal 2019, the Company granted Performance Stock Units (PSUs). PSUs are full value awards and consume the pool of available shares at the fungible rate of 2.5 for every full share awarded. The vesting of the PSUs is subject to the achievement of Return on Net Assets (RONA) and EBITDA objectives over a three year performance cycle. If certain one year performance objectives are met, one-third of the PSU’s will vest and be released. If the one year performance objectives are not met, the entire PSU awards may be earned over the remaining three-year performance cycle.

 

The Company has a non-qualified deferred compensation plan providing for both Company contributions and participant deferrals of compensation. This plan is fully funded in a Rabbi Trust. All plan investments are in shares of common stock of the Company. The Company also awards its directors shares of common stock as part of their compensation.  Stock compensation awards are made in the form of newly issued common shares of the Company.   

 

In the first quarter of fiscal 2019, the Company granted 422,900 serviced-based stock options with an exercise price of $4.94 and 134,350 PSUs at a fair value of $4.94. In the first quarter of fiscal 2018, the Company granted 724,037 service-based and performance-based stock options with an exercise price of $5.92 and 91,490 Restricted Stock Units with a fair value of $5.92. Stock compensation expense was $551,000 and $984,000 in the first quarter of fiscal 2019 and 2018, respectively.

 

 

NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION

 

(In thousands)

 

Three Months Ended

September 30

 
   

2018

   

2017

 

Cash payments:

               

Interest

  $ 518     $ 382  

Income taxes

  $ (39 )   $ --  
                 

Non-cash investing and financing activities:

               

Issuance of common shares as compensation

  $ 90     $ 78  

Issuance of common shares to fund deferred compensation plan

  $ 127     $ 191  

 

 

NOTE 12 - COMMITMENTS AND CONTINGENCIES

 

The Company is party to various negotiations, customer bankruptcies, and legal proceedings arising in the normal course of business. The Company provides reserves for these matters when a loss is probable and reasonably estimable. The Company does not disclose a range of potential loss because the likelihood of such a loss is remote. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations, cash flows or liquidity.

 

The Company may occasionally issue a standby letter of credit in favor of third parties. As of September 30, 2018, there were no such standby letters of credit issued.

 

Page 15

 

 

 

NOTE 13 – SEVERANCE COSTS

 

The activity in the Company’s Accrued Severance Liability is as follows for the periods indicated:

 

 

   

Three

   

Three

   

Fiscal

 
   

Months Ended

   

Months Ended

   

Year Ended

 

(In thousands)

 

September 30,

   

September 30,

   

June 30,

 
   

2018

   

2017

   

2018

 
                         

Balance at beginning of the period

  $ 1,772     $ 235     $ 235  

Accrual of expense

    --       --       1,900  

Payments

    (197

)

    (159

)

    (363

)

Adjustments

    --       --        

Balance at end of the period

  $ 1,575     $ 76     $ 1,772  

 

 

On April 23, 2018, the Company’s Board of Directors announced the appointment of an interim Chief Executive Officer (CEO) and Chief Operating Officer in connection with the departure of Dennis Wells, the Company’s former CEO. The $1,772,000 severance liability reported as of June 30, 2018 represents the severance benefits Mr. Wells is entitled to receive under his employment agreement. Of the total $1,575,000 reported as of September 30, 2018, $590,000 has been classified as a current liability and will be paid out over the next twelve months. The remaining $985,000 has been classified as a long-term liability.

 

 

NOTE 14 – RESTRUCTURING COSTS

 

In the first quarter of fiscal 2018, management approved the closure of its 12,000 square foot leased facility in Hawthorne, California. The facility was used as a warehouse and for light assembly of light fixtures. The Company will move the light assembly to its Blue Ash, Ohio facility. The restructuring charges consist primarily of transportation costs to move inventory to Blue Ash, the impairment of equipment, costs to restore the leased facility, and severance benefits. The Company also incurred $435,000 related to the write-down of inventory which is not included in the table below. All restructuring costs are reported in cost of sales in the Lighting Segment.

 

The following table presents information about restructuring costs for the periods indicated:

 

   

Three

   

Three

 
   

Months Ended

   

Months Ended

 

(In thousands)

 

September 30,

   

September 30,

 
   

2018

   

2017

 
                 

Severance benefits

  $ 19     $ --  

Moving Costs

    53       --  

Impairment of fixed assets and accelerated depreciation

    43       --  

Facility Repairs

    40       --  

Total

  $ 155     $ --  

 

Page 16

 

 

The following table presents a roll forward of the beginning and ending liability balances related to the restructuring costs:

 

(In thousands)

                                       
   

Balance as of

June 30,

2018

   

Restructuring

Expense

   

Payments

   

Adjustments

   

Balance as of

September 30,

2018

 
                                         

Severance and termination benefits

  $ --     $ 19     $ --     $ --     $ 19  

Other

    --       93       9       --       84  

Total

  $ --     $ 112     $ 9     $ --     $ 103  

 

 

 

NOTE 15 – INCOME TAXES

 

The Company's effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year's taxable income as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions. In the first quarter of fiscal 2018, a deferred tax asset of $10.7 million was created as a result of the impairment of goodwill in the Lighting reporting unit.

 

The Tax Cuts and Jobs Act (the “Act”) was signed into law in December 2017 and makes numerous changes to the Internal Revenue Code. Among other changes, the Act reduces the U.S. corporate income tax rate to 21% effective January 1, 2018. Because the Act became effective mid-way through the Company’s fiscal 2018 tax year, the Company had a U.S. statutory income tax rate of 34% in the first quarter of fiscal 2018, before the new tax law was enacted, and will have a 21% U.S statutory income tax rate for fiscal years 2019 and after.

 

   

Three Months Ended

 
   

September 30

 
   

2018

   

2017

 

Reconciliation to effective tax rate:

               
                 

Provision for income taxes at the anticipated annual tax rate

    23.0

%

    33.7

%

Uncertain tax positions

    1.3       (0.2

)

Difference between deferred and current tax rate related to the impairment of goodwill

    --       4.8  

Shared based compensation

    3.3       --  

Other

    --       (0.3

)

Effective tax rate

    27.6

%

    38.0

%

 

 
Page 17

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The Company’s condensed consolidated financial statements, accompanying notes and the “Safe Harbor” Statement, each as appearing earlier in this report, should be referred to in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

 

Net Sales by Business Segment

(In thousands)

 

Three Months Ended

 
   

September 30

 
   

2018

   

2017

 
                 

Lighting Segment

  $ 61,432     $ 68,428  

Graphics Segment

    23,525       19,038  
    $ 84,957     $ 87,466  

 

Operating Income (Loss) by Business Segment

(In thousands)

 

Three Months Ended

 
   

September 30

 
   

2018

   

2017

 
                 

Lighting Segment

  $ 3,850     $ (22,930 )

Graphics Segment

    2,387       1,476  

Corporate and Eliminations

    (3,303 )     (3,360 )
    $ 2,934     $ (24,814 )

 

Summary Comments

 

Fiscal 2019 first quarter net sales of $84,957,000 decreased $2.5 million or 2.9% as compared to first quarter fiscal 2018. Net sales were favorably influenced by increased net sales of the Graphics Segment (up $4.5 million or 23.6%) more than offset by decreased net sales of the Lighting Segment (down $7.0 million or 10.2%).

 

Fiscal 2019 first quarter operating income of $2.9 million increased $27.7 million from an operating loss of $(24,814,000) in the first quarter of fiscal 2018. The $27.7 million change from an operating loss in fiscal 2018 to operating income in fiscal 2019 was mostly the result of a pre-tax $28 million goodwill impairment charge in the Lighting Segment in fiscal 2018. Adjusted fiscal 2019 operating income of $3.5 million (which reflects the removal of plant closure costs) increased 10.6% from adjusted fiscal 2018 operating income of $3.2 (which reflects the removal of the goodwill impairment). Refer to “Non-GAAP Financial Measures” below. The increase in adjusted operating income was the result of decreased net sales and decreased gross profit more than offset by a decrease in selling and administrative expenses. Also contributing to the period-over-period results is a one-time adjustment to the Company’s paid-time-off policy in fiscal 2019 which resulted in a favorable pre-tax adjustment to earnings of $1.2 million.

 

On October 29, 2018, The Company announced that it will permanently close its New Windsor, New York manufacturing facility. The facility manufactures indoor lighting products and is included in the results of the Lighting Segment. Production will be transferred to the Company’s Erlanger, Kentucky and Blue Ash, Ohio facilities, also included in the Lighting Segment. The New Windsor facility has a workforce of 140 employees. The closure is part of ongoing actions to align the Company’s supply chain to more cost effectively serve the changing requirements of the lighting market. The closure will also allow the Company to improve utilization of existing manufacturing capacity. The transfer of production is expected to be completed by June 30, 2019.

 

Page 18

 

 

Non-GAAP Financial Measures

 

The Company believes it is appropriate to evaluate its performance after making adjustments to the as-reported U.S. GAAP operating income, net income, and earnings per share. Adjusted operating income, net income and earnings per share, which exclude the impact of goodwill impairment and restructuring and plant closure costs, are non-GAAP financial measures. We believe that these adjusted supplemental measures are useful in assessing the operating performance of our business. These supplemental measures are used by our management, including our chief operating decision maker, to evaluate business results. We exclude these items because they are not representative of the ongoing results of operations of our business. Below is a reconciliation of these non-GAAP measures to operating income, net income, and earnings per share for the periods indicated.

 

(in thousands, unaudited)

               
   

FY 2019

   

FY 2018

 

Reconciliation of operating income to adjusted operating income:

               
                 

Operating income (loss) as reported

  $ 2,934     $ (24,814

)

                 

Adjustment for goodwill impairment

    --       28,000  
                 

Adjustment for restructuring, plant closure costs, and related inventory write-downs

    590       --  
                 

Adjusted operating income

  $ 3,524     $ 3,186  

 

 

(in thousands, except per share data; unaudited)

 

First Quarter

 
   

FY 2019

     

Diluted

EPS

   

FY 2018

     

Diluted

EPS

 

Reconciliation of net income to adjusted net income:

                                   
                                     

Net income (loss) and earnings (loss) per share as reported

  $ 1,749       $ 0.07     $ (15,629

)

    $ (0.61

)

                                     

Adjustment for goodwill impairment, inclusive of the income tax effect

    --         --       17,363   (2)    $ 0.67  
                                     

Adjustment for restructuring, plant closure costs, and related inventory write-downs inclusive of the income tax effect

    454   (1)      0.01       --         --  
                                     

Adjusted net income and earnings per share

  $ 2,203       $ 0.08     $ 1,734       $ 0.07  

 

 

The income tax effects of the adjustments in the tables above were calculated using the estimated U.S. effective income tax rates for the periods indicated. The income tax effects were as follows (in thousands):

 

(1) 136

(2) 10,637

 

Results of Operations

 

THREE MONTHS ENDED SEPTEMBER 30, 2018 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2017

 

Lighting Segment

(In thousands)

 

Three Months Ended

 
   

September 30

 
   

2018

   

2017

 
                 

Net Sales

  $ 61,432     $ 68,428  

Gross Profit

  $ 15,475     $ 18,673  

Operating Income (loss)

  $ 3,850     $ (22,930 )

 

Lighting Segment net sales of $61,432,000 in the first quarter of fiscal 2019 decreased 10.2% from fiscal 2018 same period net sales of $68,428,000. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $49.7 million in the first quarter of fiscal 2019 which represent 91% of total lighting product net sales. There continues to be a reduction in the Company’s traditional lighting sales (metal halide and fluorescent light sources) as customers convert from traditional lighting to light fixtures having solid-state LED technology.

 

Page 19

 

 

Gross profit of $15,475,000 in the first quarter of fiscal 2019 decreased $3.2 million or 17.1% from the same period of fiscal 2018, and decreased from 27.0% to 25.0% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The Company incurred restructuring and plant closure costs that were recorded in cost of sales related to the closure of its Hawthorne, California facility of $590,000 in fiscal 2019 with no comparable costs in fiscal 2018. The remaining decrease in amount of gross profit is due to the effect of reduced sales volume, competitive pricing pressures, and inflationary pressures of certain commodities, partially offset by manufacturing efficiencies as a result of the Company’s lean initiatives.

 

Selling and administrative expenses of $11,625,000 in the first quarter of fiscal year 2019 decreased $30 million from the same period of fiscal 2018 selling and administrative expenses of $41,603,000, primarily due to the $28 million goodwill impairment charge in fiscal 2018. When the goodwill impairment charge is removed from fiscal 2018 results, there was a $2.0 million or 14.4% reduction in selling and administrative expenses. The reduction in selling and administrative expenses is mostly driven by lower commission expense which is due to lower sales volume and a reduction of wage and benefit expense.

 

The Lighting Segment first quarter fiscal 2019 operating income of $3,850,000 increased $26.8 million from an operating loss of $(22,930,000) in the same period of fiscal 2018 primarily due to a $28 million pre-tax goodwill impairment charge. When the impact of the goodwill charge is removed from fiscal 2018 results and the restructuring and plant closure costs of $590,000 are removed from the fiscal 2019 results, fiscal 2019 adjusted operating income of $4,440,000 was $630,000 lower than fiscal 2018 adjusted operating income of $5,070,000. The reduction in sales volume and gross profit was partially offset by lower selling and administrative expenses.   

 

Graphics Segment

(In thousands)

 

Three Months Ended

 
   

September 30

 
   

2018

   

2017

 
                 

Net Sales

  $ 23,525     $ 19,038  

Gross Profit

  $ 5,782     $ 5,063  

Operating Income

  $ 2,387     $ 1,476  

 

Graphics Segment net sales of $23,525,000 in the first quarter of fiscal 2019 increased $4.5 million or 23.6% from fiscal 2018 same period net sales of $19,038,000. Most of the increase in sales is from growth in sales to the Petroleum and Quick Service Restaurant markets including digital technology.

 

Gross profit of $5,782,000 in the first quarter of fiscal 2019 increased $0.7 million or 14.2% from the same period of fiscal 2018. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 26.6% in the first quarter of fiscal 2018 to 24.5% in the first quarter of fiscal 2019. The change in amount of gross profit is due to the net effect of increased net sales (customer plus inter-segment net sales) partially offset by a change in product mix. Also contributing to the year-over-year change in gross profit was a $0.6 million increase in overhead spending mostly driven by an increase in wage expense.

 

Selling and administrative expenses of $3,395,000 in the first quarter of fiscal 2019 decreased $0.2 million or 5.4% from the same period of fiscal 2018 primarily as a result of decreased wage and benefit expense.

 

The Graphics Segment first quarter fiscal 2019 operating income of $2,387,000 increased $0.9 million or 61.7% from operating income of $1,476,000 in the same period of fiscal 2018. The net increase of $0.9 million was primarily the net result of increased net sales, increased gross profit, decreased gross profit margin as a percentage of sales, and decreased selling and administrative expenses.

 

Corporate and Eliminations

(In thousands)

 

Three Months Ended

 
   

September 30

 
   

2018

   

2017

 
                 

Gross Profit (Loss)

  $ 4     $ (33 )

Operating (Loss)

  $ (3,303 )   $ (3,360 )

 

The gross profit or loss relates to the elimination of intercompany profit in inventory.

 

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Administrative expenses of $3,307,000 in the first quarter of fiscal 2019 decreased slightly from the same period of the prior year. The change is primarily the result of a decrease in employee compensation and benefit expense ($0.6 million) offset by an equal an increase in outside service expense ($0.4 million), and a net increase in various other expense categories ($0.2 million).

 

Consolidated Results

 

The Company reported $518,000 net interest expense in the first quarter of fiscal 2019 compared to $403,000 net interest expense in the first quarter of fiscal 2019. The change from interest expense from fiscal 2018 to fiscal 2019 is the result of higher interest rates on the Company’s line of credit and higher commitment fees on its unused portion of the line of credit.

 

The $667,000 income tax expense in the first quarter of fiscal 2019 represents a consolidated effective tax rate of 27.6% influenced by certain permanent book-tax differences and by an expense related to uncertain income tax positions. The $9,588,000 income tax benefit in the first quarter of fiscal 2018 represents a consolidated effective tax rate of 38% influenced by the goodwill impairment.

 

The Company reported a net income of $1,749,000 in the first quarter of fiscal 2019 compared to a net loss of $(15,629,000) in the same period of the prior year. The change between a net loss in fiscal 2018 to net income in fiscal 2019 is mostly driven by the $28 million pre-tax goodwill impairment charge in fiscal 2018 with no comparable event in fiscal 2019. When the impact of the fiscal 2018 goodwill impairment charge and the fiscal 2019 restructuring and plant costs are removed from the reported results, the fiscal 2019 adjusted net income of $2,203,000 increased $0.5 million or 27% from fiscal 2018 adjusted net income of $1,734,000. The change in adjusted net income is primarily the net result of decreased net sales, decreased gross profit, decreased selling and administrative expenses, increased interest expense, and a lower tax rate. Diluted earnings per share of $0.07 was reported in the first quarter of fiscal 2019 as compared to $(0.61) diluted loss per share in the same period of fiscal 2018. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first quarter of fiscal 2019 were 26,365,000 shares as compared to 25,791,000 shares in the same period last year.

 

 

Liquidity and Capital Resources 

 

The Company considers its level of cash on hand, borrowing capacity, current ratio and working capital levels to be its most important measures of short-term liquidity. For long-term liquidity indicators, the Company believes its ratio of long-term debt to equity and its historical levels of net cash flows from operating activities to be the most important measures.

 

At September 30, 2018, the Company had working capital of $72.6 million, compared to $67.9 million at June 30, 2018. The ratio of current assets to current liabilities was 2.59 to 1 as compared to a ratio of 2.61 to 1 at June 30, 2018. The $4.7 million increase in working capital from June 30, 2018 to September 30, 2018 was primarily related to the net effect of increased cash and cash equivalents ($1.0 million), increased net accounts receivable ($9.2 million), decreased net inventory ($1.4 million), an increase in accrued expenses ($2.3 million), a decrease in refundable income taxes ($0.6 million), and an increase in accounts payable ($5.8 million). The $4.1 million of the increase in accounts receivable is the result of the adoption of the new revenue guidance. The Company has a strategy of aggressively managing working capital, including reduction of the accounts receivable days sales outstanding (DSO) and reduction of inventory levels, without reducing service to its customers.

 

The Company generated $2.2 million of cash from operating activities in the first quarter of fiscal 2019 as compared to a use of cash of $2.7 million in the same period of the prior year. This $4.9 million increase in net cash flows from operating activities is primarily the net result of an increase rather than a decrease in accounts payable (favorable change of $7.3 million), a smaller increase in net accounts receivable (favorable change of $1.2 million), an increase rather than a decrease in net inventory (unfavorable change of $4.2 million), a smaller decrease in refundable income taxes (favorable change of $0.2 million), an increase in customer prepayments (favorable change of $0.4 million), and an increase in net income in fiscal 2019 from a net loss in fiscal 2018 offset by several non-cash add-backs (favorable change of $0.4 million).

 

Net accounts receivable were $59.8 million and $50.6 million at September 30, 2018 and June 30, 2018, respectively. DSO increased to 59 days at September 30, 2018 from 53 days at June 30, 2018. The Company believes that its receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.

 

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Net inventories of $49.6 million at September 30, 2018 decreased $1.4 million from $51.0 million at June 30, 2018. The decrease of $1.4 million is the result of a decrease in gross inventory of $0.9 million and an increase in obsolescence reserves of $0.5 million. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory increased 1.8 million in the first quarter of fiscal 2019 in the Graphics Segment which was more than offset by a decrease in net inventory in the Lighting Segment of $3.2 million.

 

Cash generated from operations and borrowing capacity under the Company’s line of credit is the Company’s primary source of liquidity. The Company has a secured $100 million revolving line of credit with its bank, with $46.1 million of the credit line available as of October 29, 2018. This line of credit is a $100 million five year credit line expiring in the third quarter of fiscal 2022. The Company believes that its $100 million line of credit plus cash flows from operating activities are adequate for the Company’s fiscal 2019 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.

 

The Company used cash of $0.7 million related to investing activities in the first quarter of fiscal 2019 as compared to a source of $1.0 million in the same period of the prior year, resulting in an unfavorable change of $1.7 million. Capital expenditures for the first quarter of fiscal 2019 increased $0.2 million to $0.6 million from the same period in fiscal 2018. The Company sold its Woonsocket manufacturing facility for $1.5 million in the first quarter of fiscal 2018 which contributed to the change in cash flow from investing activities from fiscal 2018 to fiscal 2019.

 

The Company used $0.6 million of cash related to financing activities in the first quarter of fiscal 2019 compared to a source of cash of $0.8 million in the first quarter of fiscal 2018. The $1.3 million unfavorable change in cash flow was the net result of borrowings in excess of payments of long term debt of $1.4 million.

 

The Company has, or could have, on its balance sheet financial instruments consisting primarily of cash and cash equivalents, short-term investments, revolving lines of credit, and long-term debt. The fair value of these financial instruments approximates carrying value because of their short-term maturity and/or variable, market-driven interest rates.

 

Off-Balance Sheet Arrangements

 

The Company has no financial instruments with off-balance sheet risk and has no off-balance sheet arrangements, except for various operating leases. However, none of these operating leases, individually or in the aggregate have or are reasonably likely to have a current effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material.

 

Cash Dividends

 

In November 2018, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable November 27, 2018 to shareholders of record as of November 16, 2018. The indicated annual cash dividend rate for fiscal 2019 is $0.20 per share. The Board of Directors has adopted a policy regarding dividends which indicates that dividends will be determined by the Board of Directors in its discretion based upon its evaluation of earnings, cash flow requirements, financial condition, debt levels, stock repurchases, future business developments and opportunities, and other factors deemed relevant.

 

Critical Accounting Policies and Estimates

 

A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2018 Annual Report on Form 10-K.

 

New Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases.” The amended guidance requires an entity to recognize assets and liabilities that arise from leases. The amended guidance is effective for financial statements issued for fiscal and interim periods within those years, beginning after December 15, 2018, or the Company’s fiscal 2020, with early adoption permitted. The Company has not yet determined the impact the amended guidance will have on its financial statements.  

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There have been no material changes in the Company’s exposure to market risk since June 30, 2017.  Additional information can be found in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, which appears on page 13 of the Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

 

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ITEM 4.  CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures (as such term is defined Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

We conducted, under the supervision of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2018, our disclosure controls and procedures were effective. Management believes that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly presented in all material respects in accordance with GAAP for interim financial statements, and the Company’s Chief Executive Officer and Chief Financial Officer have certified that, based on their knowledge, the condensed consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for each of the periods presented in this report.

 

 

Changes in Internal Control

 

During the quarter ended September 30, 2018, the Company enacted additional controls related to the adoption of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, except as otherwise described in this Item 4.

  

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PART II.  OTHER INFORMATION

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

NONE

 

 

ITEM 6.  EXHIBITS

 

Exhibits:

 

10.1 Nonqualified Stock Option Agreement for Inducement Awards between the Company and James A. Clark dated November 1, 2018
   
10.2 Restrictive Covenant and Confidentiality Agreement executed by James A. Clark dated November 1, 2018
   

31.1

Certification of Principal Executive Officer and Principal Financial Officer required by Rule 13a-14(a)

 

32.1

Section 1350 Certification of Principal Executive Officer and Principal Financial Officer

 

 

101.INS XBRL Instance Document

 

101.SCH XBRL Taxonomy Extension Schema Document

 

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

LSI Industries Inc.

 

 

 

 

 

       

 

By:

/s/ James E. Galeese

 

 

 

James E. Galeese

 

 

 

Executive Vice President and Chief

Financial Officer

 

 

 

(Principal Executive Officer and

Principal Financial Officer)

 

 

 

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