LYTS 10-Q Quarter ended Sept. 30, 2018

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		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

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(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

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		September 30,				June 30,
(In thousands, except share s )		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

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(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

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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:

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Customer specific printed graphic branding

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Electrical components based on customer specifications

●

Digital signage and related media content

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

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

Disaggregation of Revenue

The Company disaggregates the revenue from contracts with customers by the timing of revenue recognition because 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.

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

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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.

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.

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.

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:

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:

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.

NOTE 4 - EARNINGS PER COMMON SHARE

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

(a)

Includes shares accounted for like treasury stock.

(b)

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

(c)

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.

NOTE 5 - INVENTORIES

The following information is provided as of the dates indicated:

NOTE 6 - ACCRUED EXPENSES

The following information is provided as of the dates indicated:

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.

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

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

The Company expects to record annual amortization expense as follows:

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.

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 1 1 - SUPPLEMENTAL CASH FLOW INFORMATION

NOTE 1 2 - 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.

NOTE 1 3 – SEVERANCE COSTS

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

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 1 4 – 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:

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

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.

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