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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington , DC 20549
_________________________
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO ________________. |
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Commission File No.
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LSI Industries Inc. |
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(Exact name of registrant as specified in its charter) |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
(Zip Code) |
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(
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Registrant’s telephone number, including area code) |
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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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.
Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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.
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Large accelerated filer ☐ |
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Emerging growth company
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Non-accelerated filer ☐ |
Smaller reporting company
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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
As of October 30, 2020, there were
LSI INDUSTRIES INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 3 0 , 2020
INDEX
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Begins on Page |
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PART I. Financial Information |
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ITEM 1. |
Financial Statements (Unaudited) |
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Condensed Consolidated Statements of Operations |
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3 |
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Condensed Consolidated Statements of Comprehensive Income |
4 |
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Condensed Consolidated Balance Sheets |
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5 |
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Condensed Consolidated Statements of Shareholders’ Equity |
7 |
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Condensed Consolidated Statements of Cash Flows |
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8 |
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Notes to Condensed Consolidated Financial Statements |
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9 |
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ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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21 |
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ITEM 3. |
Quantitative and Qualitative Disclosures About Market Risk |
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27 |
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ITEM 4. |
Controls and Procedures |
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27 |
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PART II. Other Information |
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ITEM 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
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28 |
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ITEM 6. |
Exhibits |
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29 |
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Signatures |
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30 |
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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September 30 |
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(In thousands, except per share data) |
2020 |
2019 |
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Net Sales |
$ |
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$ |
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Cost of products and services sold |
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Restructuring costs |
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Gross profit |
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Selling and administrative expenses |
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Restructuring gains |
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(
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Operating income |
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Interest (income) |
(
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(
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Interest expense |
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Other (income) expense |
(
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Income before income taxes |
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Income tax expense |
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Net income |
$ |
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$ |
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Earnings per common share (see Note 4) |
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Basic |
$ |
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$ |
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Diluted |
$ |
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$ |
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Weighted average common shares outstanding |
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Basic |
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Diluted |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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Three Months Ended |
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September 30 |
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(In thousands) |
2020 |
2019 |
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Net Income |
$ |
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$ |
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Foreign currency translation adjustment |
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(
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Comprehensive Income |
$ |
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$ |
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LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 30, |
June 30, |
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(In thousands, except shares) |
2020 |
2020 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
$ |
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$ |
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Accounts receivable, less allowance for doubtful accounts of $ and $ , respectively |
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Inventories |
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Refundable income tax |
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Other current assets |
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Total current assets |
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Property, Plant and Equipment, at cost |
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Land |
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Buildings |
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Machinery and equipment |
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Buildings under finance leases |
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Construction in progress |
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Less accumulated depreciation |
(
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(
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Net property, plant and equipment |
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Goodwill |
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Other Intangible Assets, net |
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Operating Lease Right-of-Use Assets |
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Other Long-Term Assets, net |
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Total assets |
$ |
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$ |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 30, |
June 30, |
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(In thousands, except shares) |
2020 |
2020 |
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LIABILITIES & SHAREHOLDERS' EQUITY |
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Current liabilities |
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Accounts payable |
$ |
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$ |
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Accrued expenses |
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Total current liabilities |
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Long-Term Debt |
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Finance Lease Liabilities |
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Operating Lease Liabilities |
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Other Long-Term Liabilities |
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Commitments and Contingencies (Note 12) |
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Shareholders' Equity |
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Preferred shares, par value; Authorized shares, issued |
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Common shares, par value; Authorized shares; Outstanding and shares, respectively |
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Treasury shares, without par value |
(
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Deferred compensation plan |
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Retained (loss) |
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Accumulated other comprehensive loss |
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Total shareholders' equity |
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Total liabilities & shareholders' equity |
$ |
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$ |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
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Common Shares |
Treasury Shares |
Key Executive |
Accumulated Other |
Retained |
Total |
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(In thousands, except per share data) |
Number Of Shares |
Amount |
Number Of Shares |
Amount |
Compensation Amount |
Comprehensive Income (Loss) |
Earnings (Loss) |
Shareholders' Equity |
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Balance at June 30, 2019 |
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$ |
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(
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(
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$ |
(
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Net Loss |
- |
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- |
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Other comprehensive income |
- |
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- |
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(
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(
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Stock compensation awards |
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Restricted stock units issued |
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Shares issued for deferred compensation |
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Activity of treasury shares, net |
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Deferred stock compensation |
- |
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- |
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(
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(
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Stock compensation expense |
- |
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- |
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Dividends — $ per share |
- |
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- |
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(
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(
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Cumulative effect of adoption of accounting guidance |
- |
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- |
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(
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(
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Balance at September 30, 2019 |
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$ |
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(
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) | $ |
(
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) | $ |
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$ |
(
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) | $ |
(
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) | $ |
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Common Shares |
Treasury Shares |
Key Executive |
Accumulated Other |
Total |
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Number Of Shares |
Amount |
Number Of Shares |
Amount |
Compensation Amount |
Comprehensive Income (Loss) |
Retained Earnings |
Shareholders' Equity |
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Balance at June 30, 2020 |
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$ |
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(
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) | $ |
(
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(
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(
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Net Income |
- |
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- |
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Other comprehensive income |
- |
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- |
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Stock compensation awards |
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Restricted stock units issued |
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Shares issued for deferred compensation |
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Activity of treasury shares, net |
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(
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(
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(
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Deferred stock compensation |
- |
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- |
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Stock compensation expense |
- |
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- |
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Stock options exercised, net |
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Dividends — $ per share |
- |
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- |
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(
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(
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Balance at September 30, 2020 |
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$ |
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(
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) | $ |
(
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) | $ |
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$ |
(
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) | $ |
(
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) | $ |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended |
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September 30 |
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(In thousands) |
2020 |
2019 |
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Cash Flows from Operating Activities |
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Net income |
$ |
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$ |
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Non-cash items included in net income |
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Depreciation and amortization |
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Deferred income taxes |
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Deferred compensation plan |
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Stock compensation expense |
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Issuance of common shares as compensation |
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Gain on disposition of fixed assets |
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(
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Allowance for doubtful accounts |
(
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Inventory obsolescence reserve |
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Changes in certain assets and liabilities |
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Accounts receivable |
(
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(
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Inventories |
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Refundable income taxes |
(
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(
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Accounts payable |
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Accrued expenses and other |
(
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Customer prepayments |
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Net cash flows provided by operating activities |
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Cash Flows from Investing Activities |
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Purchases of property, plant and equipment |
(
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(
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Proceeds from the sale of fixed assets |
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Net cash flows (used in) provided by investing activities |
(
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Cash Flows from Financing Activities |
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Payments of long-term debt |
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(
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Borrowings of long-term debt |
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Cash dividends paid |
(
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(
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Shares withheld for employees' taxes |
(
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(
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Payments on financing lease obligations |
(
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Proceeds from stock option exercises |
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Net cash flows used in financing activities |
(
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(
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Change related to foreign currency |
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Increase in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
$ |
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$ |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The interim condensed consolidated financial statements are unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the interim financial statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of September 30, 2020, the results of its operations for the three month periods ended September 30, 2020 and 2019, and its cash flows for the three month periods ended September 30, 2020 and 2019. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2020 Annual Report on Form 10 -K. Financial information as of June 30, 2020 has been derived from the Company’s audited consolidated financial statements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation:
A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2020 Annual Report on Form 10 -K. Significant changes to our accounting policies as a result of adopting Accounting Standards Update (“ASU”) 2016 - 02 (“ASU 2016 - 02” ), “Leases (Topic 842 )” (ASC 842 ) in the first quarter of fiscal 2020 are discussed below.
Revenue Recognition:
The Company recognizes revenue when it satisfies the performance obligation in its customer contracts or purchase orders. Most of the Company’s products have a single performance obligation which is satisfied at a point in time when control is transferred to the customer. Control is generally transferred at time of shipment when title and risk of ownership passes to the customer. For customer contracts with multiple performance obligations, the Company allocates the transaction price and any discounts to each performance obligation based on relative standalone selling prices. Payment terms are typically within 30 to 90 days from the shipping date, depending on the terms with the customer. The Company offers standard warranties that do not represent separate performance obligations.
Installation is a separate performance obligation, except for the Company’s digital signage products. For digital signage products, installation is not a separate performance obligation as the product and installation is the combined item promised in digital signage contracts. The Company is not always responsible for installation of products it sells and has no post-installation responsibilities other than standard warranties.
A number of the Company's Graphics and select Lighting products are highly customized for specific customers. As a result, these customized products do not have an alternative use. For these products, the Company has a legal right to payment for performance to date and generally does not accept returns on these items. The measurement of performance is based upon cost plus a reasonable profit margin for work completed. Because there is no alternative use and there is a legal right to payment, the Company transfers control of the item as the item is being produced and therefore, recognizes revenue over time. The customized product types are as follows:
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Customer specific print graphics branding |
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Electrical components based on customer specifications |
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Digital signage and related media content |
The Company also offers installation services for its Graphics and select Lighting products. Installation revenue is recognized over time as our customer simultaneously receives and consumes the benefits provided through the installation process.
For these customized products and installation services, revenue is recognized using a cost-based input method: recognizing revenue and gross profit as work is performed based on the relationship between the actual cost incurred and the total estimated cost for the contract.
Disaggregation of Revenue
The Company disaggregates the revenue from contracts with customers by the timing of revenue recognition because the Company believes it best depicts the nature, amount, and timing of its revenue and cash flows. The table presents a reconciliation of the disaggregation by reportable segments.
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Three Months Ended |
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(In thousands) |
September 30, 2020 |
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Lighting Segment |
Graphics Segment |
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Timing of revenue recognition |
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Products and services transferred at a point in time |
$ |
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$ |
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Products and services transferred over time |
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| $ |
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$ |
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Three Months Ended |
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September 30, 2020 |
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Lighting Segment |
Graphics Segment |
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Type of Product and Services |
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LED lighting, digital signage solutions, electronic circuit boards |
$ |
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$ |
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Legacy products |
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Turnkey services and other |
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| $ |
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$ |
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Legacy products include lighting fixtures utilizing light sources other than LED technology and printed two - and three -dimensional graphic products. Turnkey services and other includes project management and installation services along with shipping and handling charges.
Practical Expedients and Exemptions
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● |
The Company’s contracts with customers have an expected duration of one year or less, as such, the Company applies the practical expedient to expense sales commissions as incurred, and has omitted disclosures on the amount of remaining performance obligations. |
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● |
Shipping costs that are not material in context of the delivery of products are expensed as incurred. |
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● |
The Company’s accounts receivable balance represents the Company’s unconditional right to receive payment from its customers with contracts. Payments are generally due within 30 to 90 days of completion of the performance obligation and invoicing, therefore, payments do not contain significant financing components. |
|
● |
The Company collects sales tax and other taxes concurrent with revenue-producing activities which are excluded from revenue. Shipping and handling costs are treated as fulfillment activities and included in cost of products and services sold on the Consolidated Statements of Operations. |
New Accounting Pronouncements:
On July 1, 2019, the Company adopted ASU 2016 - 02 using a modified-retrospective transition method, under which it elected not to adjust comparative periods. The Company elected the package of practical expedients permitted under the new guidance. In addition, the Company elected accounting policies to not record short-term leases on the balance sheet and to not separate lease and non-lease components.
The Company’s most significant leases are those related to certain manufacturing facilities along with a small office space. Besides these real estate leases, most other leases are insignificant and consist of leases related to a vehicle, forklifts and various office equipment. The adoption of the new lease standard resulted in the recognition of right-of-use assets (ROU assets) of $
On July 1, 2020, the Company adopted ASU 2016 - 13, "Financial Instruments - Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments" (ASC 326 or "CECL"), which amended the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. The adoption of ASU 2016 - 13 did not have a material impact on the consolidated financial statements and related disclosures.
Subsequent Events:
The Company has evaluated subsequent events for potential recognition and disclosure through the date the consolidated financial statements were filed. No items were identified during this evaluation that required adjustment to or disclosure in the accompanying consolidated financial statements.
NOTE 3 - SEGMENT REPORTING INFORMATION
The accounting guidance on Segment Reporting establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (the Company’s Chief Executive Officer or “CODM”) in making decisions on how to allocate resources and assess performance. The Company’s two operating segments are Lighting and Graphics, with one executive team under the organizational structure reporting directly to the CODM with responsibilities for managing each segment. Corporate and Eliminations, which captures the Company’s corporate administrative activities, is also reported in the segment information.
The Lighting Segment includes outdoor and indoor lighting utilizing both traditional and LED light sources that have been fabricated and assembled for the Company’s markets, primarily petroleum / convenience stores, parking lot and garage markets, automotive dealerships, quick-service restaurants, grocery and pharmacy stores, and retail/national accounts. The Company serves these lighting product customers through the commercial, industrial, stock and flow, and renovation channels. The Lighting Segment also includes the design, engineering, and manufacturing of electronic circuit boards, assemblies and sub-assemblies which are sold directly to customers.
The 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 and menu board systems that are either digital or print by design. These products are used in visual image programs in several markets including the petroleum / convenience store market, quick-service restaurant market, the grocery store and pharmacy markets, as well as customers with multi-site retail operations. The Graphics Segment implements, installs and provides program management services related to products sold by the Graphics Segment and by the Lighting Segment.
The Company’s corporate administration activities are reported in the Corporate and Eliminations line item. These activities primarily include intercompany profit in inventory eliminations, expense related to certain corporate officers and support staff, the Company’s internal audit expenses, expense related to the Company’s Board of Directors, equity compensation expense for various equity awards granted to corporate administration employees, certain consulting expenses, investor relations activities, and a portion of the Company’s legal, auditing and professional fee expenses. Corporate identifiable assets primarily consist of cash, invested cash (if any), refundable income taxes (if any), and deferred income taxes.
There was
Summarized financial information for the Company’s operating segments is provided for the indicated periods and as of September 30, 2020 and September 30, 2019:
|
Three Months Ended |
||||||||
|
(In thousands) |
September 30 |
|||||||
|
2020 |
2019 |
|||||||
|
Net Sales: |
||||||||
|
Lighting Segment |
$ |
|
$ |
|
||||
|
Graphics Segment |
|
|
||||||
| $ |
|
$ |
|
|||||
|
Operating Income (Loss): |
||||||||
|
Lighting Segment |
$ |
|
$ |
|
||||
|
Graphics Segment |
|
|
||||||
|
Corporate and Eliminations |
(
|
) |
(
|
) | ||||
| $ |
|
$ |
|
|||||
|
Capital Expenditures: |
||||||||
|
Lighting Segment |
$ |
|
$ |
|
||||
|
Graphics Segment |
|
|
||||||
|
Corporate and Eliminations |
|
|
||||||
| $ |
|
$ |
|
|||||
|
Depreciation and Amortization: |
||||||||
|
Lighting Segment |
$ |
|
$ |
|
||||
|
Graphics Segment |
|
|
||||||
|
Corporate and Eliminations |
|
|
||||||
| $ |
|
$ |
|
|||||
|
September 30,
|
June 30,
|
|||||||
|
Identifiable Assets: |
||||||||
|
Lighting Segment |
$ |
|
$ |
|
||||
|
Graphics Segment |
|
|
||||||
|
Corporate and Eliminations |
|
|
||||||
| $ |
|
$ |
|
|||||
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
|
Three Months Ended |
||||||||
|
(In thousands) |
September 30 |
|||||||
|
2020 |
2019 |
|||||||
|
Lighting Segment inter-segment net sales |
$ |
|
$ |
|
||||
|
Graphics Segment inter-segment net sales |
$ |
|
$ |
|
||||
The Company’s operations are located solely within North America. As a result, the geographic distribution of the Company’s net sales and long-lived assets originate within North America.
NOTE 4 - EARNINGS PER COMMON SHARE
The following table presents the amounts used to compute basic and diluted earnings per common share, as well as the effect of dilutive potential common shares on weighted average shares outstanding (in thousands, except per share data):
|
Three Months Ended |
||||||||
|
September 30 |
||||||||
|
2020 |
2019 |
|||||||
|
BASIC EARNINGS PER SHARE |
||||||||
|
Net income |
$ |
|
$ |
|
||||
|
Weighted average shares outstanding during the period, net of treasury shares |
|
|
||||||
|
Weighted average vested restricted stock units outstanding |
|
|
||||||
|
Weighted average shares outstanding in the Deferred Compensation Plan during the period |
|
|
||||||
|
Weighted average shares outstanding |
|
|
||||||
|
Basic income per share |
$ |
|
$ |
|
||||
|
DILUTED EARNINGS PER SHARE |
||||||||
|
Net income |
$ |
|
$ |
|
||||
|
Weighted average shares outstanding: |
||||||||
|
Basic |
|
|
||||||
|
Effect of dilutive securities (a): |
||||||||
|
Impact of common shares to be issued under stock option plans, and contingently issuable shares, if any |
|
|
||||||
|
Weighted average shares outstanding |
|
|
||||||
|
Diluted income per share |
$ |
|
$ |
|
||||
|
Anti-dilutive securities (b) |
|
|
||||||
|
(a) |
Calculated using the “Treasury Stock” method as if dilutive securities were exercised and the funds were used to purchase common shares at the average market price during the period. |
|
(b) |
Anti-dilutive securities were excluded from the computation of diluted net income per share for the three months ended September 30, 2020 and September 30, 2019 because the exercise price was greater than the average fair market price of the common shares or because the assumed proceeds from the award’s exercise or vesting was greater than the average fair market price of the common shares. |
NOTE 5 - INVENTORIES
The following information is provided as of the dates indicated:
|
September 30, |
June 30, |
|||||||
|
(In thousands) |
2020 |
2020 |
||||||
|
Inventories: |
||||||||
|
Raw materials |
$ |
|
$ |
|
||||
|
Work-in-progress |
|
|
||||||
|
Finished goods |
|
|
||||||
|
Total Inventories |
$ |
|
$ |
|
||||
NOTE 6 - ACCRUED EXPENSES
The following information is provided as of the dates indicated:
|
September 30, |
June 30, |
|||||||
|
(In thousands) |
2020 |
2020 |
||||||
|
Accrued Expenses: |
||||||||
|
Accrued warranty |
$ |
|
$ |
|
||||
|
Compensation and benefits |
|
|
||||||
|
Customer prepayments |
|
|
||||||
|
Accrued sales commissions |
|
|
||||||
|
Operating lease liabilities |
|
|
||||||
|
Finance lease liabilities |
|
|
||||||
|
Other accrued expenses |
|
|
||||||
|
Total Accrued Expenses |
$ |
|
$ |
|
||||
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment. The Company may first assess qualitative factors in order to determine if goodwill and indefinite-lived intangible assets are impaired. If through the qualitative assessment it is determined that it is more likely than not that goodwill and indefinite-lived assets are not impaired, no further testing is required. If it is determined more likely than not that goodwill and indefinite-lived assets are impaired, or if the Company elects not to first assess qualitative factors, the Company’s impairment testing continues with the estimation of the fair value of the reporting unit using a combination of a market approach and an income (discounted cash flow) approach, at the reporting unit level. The estimation of the fair value of reporting unit requires significant management judgment with respect to revenue and expense growth rates, changes in working capital and the selection and use of an appropriate discount rate. The estimates of the fair value of reporting units are based on the best information available as of the date of the assessment. The fair value measurements of the reporting units are based on significant inputs not observable in the market and thus represent Level 3 measurements as defined by ASC 820 “Fair Value Measurements.” The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease an impairment charge. Company management uses its judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as adverse business conditions, economic factors and technological change or competitive activities may signal that an asset has become impaired.
The Company identified its reporting units in conjunction with its annual goodwill impairment testing. The Company has a total of
The following table presents information about the Company's goodwill as of September 30, 2020 and June 30, 2020:
|
Goodwill |
||||||||||||
|
(In thousands) |
Lighting |
Graphics |
||||||||||
|
Segment |
Segment |
Total |
||||||||||
|
Goodwill |
$ |
|
$ |
|
$ |
|
||||||
|
Accumulated impairment losses |
(
|
) |
(
|
) |
(
|
) | ||||||
|
Goodwill, net |
$ |
|
$ |
|
$ |
|
||||||
The following table presents the gross carrying amount and accumulated amortization by each major asset class:
|
Other Intangible Assets |
September 30, 2020 |
|||||||||||
|
(In thousands) |
Gross |
|||||||||||
|
Carrying |
Accumulated |
Net |
||||||||||
|
Amount |
Amortization |
Amount |
||||||||||
|
Amortized Intangible Assets |
||||||||||||
|
Customer relationships |
$ |
|
$ |
|
$ |
|
||||||
|
Patents |
|
|
|
|||||||||
|
LED technology firmware, software |
|
|
|
|||||||||
|
Trade name |
|
|
|
|||||||||
|
Total Amortized Intangible Assets |
|
|
|
|||||||||
|
Indefinite-lived Intangible Assets |
||||||||||||
|
Trademarks and trade names |
|
- |
|
|||||||||
|
Total indefinite-lived Intangible Assets |
|
- |
|
|||||||||
|
Total Other Intangible Assets |
$ |
|
$ |
|
$ |
|
||||||
|
Other Intangible Assets |
June 30, 2020 |
|||||||||||
|
(In thousands) |
Gross |
|||||||||||
|
Carrying |
Accumulated |
Net |
||||||||||
|
Amount |
Amortization |
Amount |
||||||||||
|
Amortized Intangible Assets |
||||||||||||
|
Customer relationships |
$ |
|
$ |
|
$ |
|
||||||
|
Patents |
|
|
|
|||||||||
|
LED technology firmware, software |
|
|
|
|||||||||
|
Trade name |
|
|
|
|||||||||
|
Total Amortized Intangible Assets |
|
|
|
|||||||||
|
Indefinite-lived Intangible Assets |
||||||||||||
|
Trademarks and trade names |
|
- |
|
|||||||||
|
Total indefinite-lived Intangible Assets |
|
- |
|
|||||||||
|
Total Other Intangible Assets |
$ |
|
$ |
|
$ |
|
||||||
|
Three Months Ended |
||||||||
|
September 30 |
||||||||
|
(In thousands) |
2020 |
2019 |
||||||
|
Amortization Expense of Other Intangible Assets |
$ |
|
$ |
|
||||
The Company expects to record annual amortization expense as follows:
|
(In thousands) |
||||
|
2021 |
$ |
|
||
|
2022 |
$ |
|
||
|
2023 |
$ |
|
||
|
2024 |
$ |
|
||
|
2025 |
$ |
|
||
|
After 2025 |
$ |
|
NOTE 8 - REVOLVING LINE OF CREDIT
In
February 2019,
the Company amended its secured line of credit to a $
The Company is in compliance with all of its loan covenants as of September 30, 2020.
NOTE 9 - CASH DIVIDENDS
The Company paid cash dividends of $
NOTE 10 – EQUITY COMPENSATION
In
November 2019,
the Company’s shareholders approved the
2019
Omnibus Award Plan (
“2019
Omnibus Plan”). The purpose of the
2019
Omnibus Plan is to provide a means through which the Company
may
attract and retain key personnel and to provide a means by which directors, officers, and employees can acquire and maintain an equity interest in the Company. The number of shares that remain reserved for issuance under the
2019
Omnibus Plan is
In the
first
quarter of fiscal
2021,
the Company granted
NOTE 1 1 - SUPPLEMENTAL CASH FLOW INFORMATION
|
Three Months Ended |
||||||||
|
(In thousands) |
September 30 |
|||||||
|
2020 |
2019 |
|||||||
|
Cash Payments: |
||||||||
|
Interest |
$ |
|
$ |
|
||||
|
Income taxes |
$ |
|
$ |
|
||||
|
Non-cash investing and financing activities |
||||||||
|
Issuance of common shares as compensation |
$ |
|
$ |
|
||||
|
Issuance of common shares to fund deferred compensation plan |
$ |
|
$ |
|
||||
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, 2020,
there were
NOTE 1 3 – SEVERANCE COSTS
The activity in the Company’s accrued severance liability is as follows for the periods indicated:
|
Three Months |
Three Months |
Fiscal Year |
||||||||||
|
Ended |
Ended |
Ended |
||||||||||
|
September 30, |
September 30, |
June 30, |
||||||||||
|
(In thousands) |
2020 |
2019 |
2020 |
|||||||||
|
Balance at beginning of period |
$ |
|
$ |
|
$ |
|
||||||
|
Accrual of expense |
|
|
|
|||||||||
|
Payments |
(
|
) |
(
|
) |
(
|
) | ||||||
|
Balance at end of period |
$ |
|
$ |
|
$ |
|
||||||
The $
NOTE 1 4 – RESTRUCTURING COSTS
In the
first
quarter of fiscal
2020,
the Company sold its New Windsor, New York facility. The net proceeds from the sale were $
The following table presents information about restructuring costs for the periods indicated:
|
Three Months Ended |
||||||||
|
September 30 |
||||||||
|
(In thousands) |
2020 |
2019 |
||||||
|
Exit costs |
$ |
|
$ |
|
||||
|
Impairment of fixed assets and accelerated depreciation |
|
|
||||||
|
Gain on sale of facility |
|
(
|
) | |||||
|
Total |
$ |
|
$ |
(
|
) | |||
The following table presents a roll forward of the beginning and ending liability balances related to the restructuring costs:
|
Balance as of |
Balance as of |
|||||||||||||||||||
|
June 30, |
Restructuring |
September 30, |
||||||||||||||||||
|
(In thousands) |
2020 |
Expense |
Payments |
Adjustments |
2020 |
|||||||||||||||
|
Severance and termination benefits |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
|
Other restructuring costs |
|
|
(
|
) |
|
$ |
|
|||||||||||||
|
Total |
$ |
|
$ |
|
$ |
(
|
) | $ |
|
$ |
|
|||||||||
NOTE 15 - LEASES
The Company leases certain manufacturing facilities along with a small office space, a company vehicle, several forklifts, several small tooling items, and various items of office equipment. All but one of the Company’s leases are operating leases. Leases have a remaining term of to years some of which have an option to renew. The Company does not assume renewals in determining the lease term unless the renewals are deemed reasonably certain. The lease agreements do not contain any material residual guarantees or material variable lease payments.
The Company has periodically entered into short-term operating leases with an initial term of twelve months or less. The Company elected not to record these leases on the balance sheet. For the three months ended September 30, 2020 and 2019, the rent expense for these leases is immaterial.
The Company has certain leases that contain lease and non-lease components and has elected to utilize the practical expedient to account for these components together as a single lease component.
Lease expense is recognized on a straight-line basis over the lease term. The Company used its incremental borrowing rate when determining the present value of lease payments. The adoption of the new lease standard resulted in the recognition of right-of-use assets (ROU assets) of $
|
Three months ended |
Three months ended |
|||||||
|
(In thousands) |
September 30, 2020 |
September 30, 2019 |
||||||
|
Operating lease cost |
$ |
|
$ |
|
||||
|
Financing lease cost: |
||||||||
|
Amortization of right of use assets |
|
|
||||||
|
Interest on lease liabilities |
|
|
||||||
|
Variable lease cost |
|
|
||||||
|
Total lease cost |
$ |
|
$ |
|
||||
|
Supplemental Cash Flow Information: |
||||||||
|
Three months ended |
Three months ended |
|||||||
|
(In thousands) |
September 30, 2020 |
September 30, 2019 |
||||||
|
Cash flows from operating leases |
||||||||
|
Fixed payments - operating cash flows |
$ |
|
$ |
|
||||
|
Liability reduction - operating cash flows |
$ |
|
$ |
|
||||
|
Cash flows from finance leases |
||||||||
|
Interest - operating cash flows |
$ |
|
$ |
|
||||
|
Repayments of principal portion - financing cash flows |
$ |
|
$ |
|
||||
|
Operating Leases: |
At September 30, 2020 |
At June 30, 2020 |
||||||
|
Total operating right-of-use assets |
$ |
|
$ |
|
||||
|
Accrued expenses (Current liabilities) |
$ |
|
$ |
|
||||
|
Long-term operating lease liability |
|
|
||||||
|
Total operating lease liabilities |
$ |
|
$ |
|
||||
|
Weighted Average remaining Lease Term (in years) |
|
|
||||||
|
Weighted Average Discount Rate |
|
% |
|
% | ||||
|
Finance Leases: |
At September 30, 2020 |
At June 30, 2020 |
||||||
|
Buildings under finance leases |
$ |
|
$ |
|
||||
|
Accumulated depreciation |
(
|
) |
(
|
) | ||||
|
Total finance lease assets, net |
$ |
|
$ |
|
||||
|
Accrued expenses (Current liabilities) |
$ |
|
$ |
|
||||
|
Long-term finance lease liability |
|
|
||||||
|
Total finance lease liabilities |
$ |
|
$ |
|
||||
|
Weighted Average remaining Lease Term (in years) |
|
|
||||||
|
Weighted Average Discount Rate |
|
% |
|
% | ||||
|
Maturities of Lease Liability: |
Operating Lease | Finance Lease | ||||||
| Liabilities |
Liabilities |
|||||||
|
2021 |
$ |
|
$ |
|
||||
|
2022 |
|
|
||||||
|
2023 |
|
|
||||||
|
2024 |
|
|
||||||
|
2025 |
|
|
||||||
|
Thereafter |
|
|
||||||
|
Total lease payments |
|
|
||||||
|
Less: Interest |
(
|
) |
(
|
) | ||||
|
Present Value of Lease Liabilities |
$ |
|
$ |
|
||||
NOTE 1 6 – INCOME TAXES
The Company's effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year's taxable income as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law in
March 2020.
The CARES Act allows the Company to carry back a federal net operating loss to prior tax years, offset taxable income in those earlier tax years, and obtain a refund of income taxes that were paid at a higher statutory tax rate. During the
first
quarter of fiscal
2021,
the IRS issued Treasury Regulations resulting in an increase to the expected net operating loss that can be carried back and the Company recognized an additional tax benefit of $
In the
first
quarter of fiscal
2020,
the Company sold its New Windsor facility resulting in a book gain of $
|
Three Months Ended |
||||||||
|
September 30 |
||||||||
|
2020 |
2019 |
|||||||
|
Reconciliation of effective tax rate: |
||||||||
|
Provision for income taxes at the anticipated annual tax rate |
|
% |
|
% |
||||
|
Uncertain tax positions |
|
|
||||||
|
Tax rate changes |
(
|
) |
|
|||||
|
Shared-based compensation |
|
|
||||||
|
Other |
|
|
||||||
|
Effective tax rate |
|
% |
|
% |
||||
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
N ote About Forward-Looking Statements
This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including this section. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in in our Annual Report on Form 10-K in the following sections: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures about Market Risk,” and “Risk Factors.” All of those risks and uncertainties are incorporated herein by reference. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of LSI Industries Inc. MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended June 30, 2020, and our financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).
Our condensed consolidated financial statements, accompanying notes and the “Safe Harbor” Statement, each as appearing earlier in this report, should be referred to in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
COVID-19 Pandemic
The COVID-19 pandemic will likely continue to impact business activity across industries in the U.S. and worldwide. We remain committed to taking actions to address the health, safety and welfare of our employees, customers, agents and suppliers. The potential for additional outbreaks of COVID-19 in the U.S. and globally and the actions taken by governmental authorities in response to future resurgence are highly uncertain and unpredictable. Future developments such as these will determine the extent to which COVID-19 continues to impact our results of operations and financial conditions. See the risk factor captioned “Our financial condition and results of operations for fiscal 2021 and future periods may be adversely affected by the recent novel coronavirus disease (“COVID-19”) outbreak or other outbreaks of infectious disease or similar public health threats and the resulting economic impact” in Item 1A, Risk Factors, included in Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 for an additional discussion of risks related to COVID-19.
|
Net Sales by Business Segment |
||||||||
|
Three Months Ended |
||||||||
|
September 30 |
||||||||
|
(In thousands) |
2020 |
2019 |
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Lighting Segment |
$ | 45,405 | $ | 63,191 | ||||
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Graphics Segment |
24,601 | 25,510 | ||||||
| $ | 70,006 | $ | 88,701 | |||||
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Operating Income (Loss) by Business Segment |
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Three Months Ended |
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September 30 |
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(In thousands) |
2020 |
2019 |
||||||
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Lighting Segment |
$ | 3,588 | $ | 9,159 | ||||
|
Graphics Segment |
1,823 | 1,017 | ||||||
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Corporate and Eliminations |
(3,209 | ) | (3,337 | ) | ||||
| $ | 2,202 | $ | 6,839 | |||||
Summary of Consolidated Results
Net sales of $70.0 million for the three months ended September 30, 2020 decreased $18.7 million or 21% as compared to net sales of $88.7 million for the three months ended September 30, 2019. Net sales were unfavorably influenced by decreased net sales of the Lighting Segment (a decrease of $17.8 million or 28%) and decreased net sales of the Graphics Segment (a decrease of $0.9 million or 4%).
Operating income of $2.2 million for the three months ended September 30, 2020 represents a $4.6 million decrease from operating income of $6.8 million in the three months ended September 30, 2019. The $4.6 million decrease from fiscal 2020 was impacted by the sale of the New Windsor, New York facility in the first quarter of fiscal 2020 which favorably resulted in a pre-tax gain of $4.8 million. When the impact of the sale of the New Windsor facility, other restructuring and plant closure costs and stock compensation expense are removed from the operating results, adjusted operating income, a Non-GAAP measure, was $2.7 million in the three months ended September 30, 2020 compared to $2.6 million in the three months ended September 30, 2019. Refer to “Non-GAAP Financial Measures” below.
We continue to maintain a strong balance sheet with a cash balance of $9.5 million and no long-term debt as of September 30, 2020. We believe that our liquidity position is adequate to meet our projected needs in the reasonably foreseeable future.
Non-GAAP Financial Measures
We believe it is appropriate to evaluate our performance after making adjustments to the as-reported U.S. GAAP operating income, net income, and earnings per share. Adjusted operating income, net income and earnings per share, which exclude the impact of restructuring and plant closure costs (gains) and stock compensation expense are Non-GAAP financial measures. Also included below are Non-GAAP financial measures including Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA and Adjusted EBITDA), Free Cash Flow and Net Debt. We believe that these adjusted supplemental measures are useful in assessing the operating performance of our business. These supplemental measures are used by our management, including our chief operating decision maker, to evaluate business results. Although the impacts of some of these items have been recognized in prior periods and could recur in future periods, we exclude these items because they provide greater comparability and enhanced visibility into our results of operations. Below is a reconciliation of these Non-GAAP measures to operating income, net income, and earnings per share for the periods indicated along with the calculation of EBITDA and Adjusted EBITDA, Free Cash Flow and Net Debt.
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Reconciliation of operating income to adjusted operating income: |
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Three Months Ended |
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|
September 30 |
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(In thousands) |
2020 |
2019 |
||||||
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Operating Income as reported |
$ | 2,202 | $ | 6,839 | ||||
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Restructuring and plant closure costs (gains) |
3 | (4,588 | ) | |||||
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Stock compensation expense |
505 | 398 | ||||||
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Adjusted Operating Income |
$ | 2,710 | $ | 2,649 | ||||
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Reconciliation of net income to adjusted net income |
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Three Months Ended |
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September 30 |
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(In thousands, except per share data) |
2020 |
2019 |
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Diluted EPS |
Diluted EPS |
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Net Income as reported |
$ | 1,990 | $ | 0.07 | $ | 4,475 | $ | 0.17 | ||||||||||
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Restructuring and plant closure costs (gains) |
2 | (1) | - | (3,446 | ) | (3) | (0.13 | ) | ||||||||||
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Stock compensation expense |
380 | (2) | 0.01 | 299 | (4) | 0.01 | ||||||||||||
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Tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes |
(297 | ) | (0.01 | ) | 275 | 0.01 | ||||||||||||
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Net Income adjusted |
$ | 2,075 | $ | 0.08 | $ | 1,603 | $ | 0.06 | ||||||||||
The following represents the income tax effects of the adjustments in the tables above, which were calculated using the estimated combined U.S. and Mexico effective income tax rates for the periods indicated (in thousands):
(1) $1
(2) $125
(3) ($1,142)
( 4 ) $99
The reconciliation of reported net income and earnings per share to adjusted net income and earnings per share may not agree due to rounding differences and due to the difference between basic and dilutive weighted average shares outstanding in the computation of earnings per share.
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Reconciliation of operating income to EBITDA and Adjusted EBITDA |
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Three Months Ended |
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September 30 |
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(In thousands) |
2020 |
2019 |
||||||
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Operating Income as reported |
$ | 2,202 | $ | 6,839 | ||||
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Depreciation and Amortization |
2,033 | 2,399 | ||||||
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EBITDA |
$ | 4,235 | $ | 9,238 | ||||
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Restructuring and plant closure costs (gains) |
3 | (4,588 | ) | |||||
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Stock compensation expense |
505 | 398 | ||||||
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Adjusted EBITDA |
$ | 4,743 | $ | 5,048 | ||||
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Reconciliation of cash flow from operations to free cash flow |
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Three Months Ended |
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September 30 |
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(In thousands) |
2020 |
2019 |
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Cash Flow from Operations |
$ | 7,639 | $ | 6,359 | ||||
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Proceeds from sale of fixed assets |
- | 12,332 | ||||||
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Capital expenditures |
(405 | ) | (355 | ) | ||||
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Free Cash Flow |
$ | 7,234 | $ | 18,336 | ||||
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Reconciliation of Net Debt |
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September 30, |
June 30, |
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(In thousands) |
2020 |
2020 |
||||||
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Long-Term Debt as reported |
$ | - | $ | - | ||||
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Less: |
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Cash and cash equivalents as reported |
9,463 | 3,517 | ||||||
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Net Debt |
$ | (9,463 | ) | $ | (3,517 | ) | ||
Results of Operations
THREE MONTHS ENDED SEPTEMBER 30 , 2020 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30 , 2019
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Lighting Segment |
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Three Months Ended |
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September 30 |
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(In thousands) |
2020 |
2019 |
||||||
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Net Sales |
$ | 45,405 | $ | 63,191 | ||||
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Gross Profit |
$ | 13,826 | $ | 17,219 | ||||
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Operating Income |
$ | 3,588 | $ | 9,159 | ||||
Lighting Segment net sales of $45.4 million in the three months ended September 30, 2020 decreased 28% from net sales of $63.2 million in the same period in fiscal 2020. The drop in sales is attributed to the impact of COVID-19 disruptions on construction markets in the fourth quarter of fiscal 2020 and the subsequent lower backlog entering the first quarter of fiscal 2021.
Gross profit of $13.8 million in the three months ended September 30, 2020 decreased $3.4 million or 20% from the same period of fiscal 2020 and increased from 26.9% to 27.9% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The growth in gross profit as a percentage of net sales reflects the ongoing impact of our focus on higher-value market applications, the successful introduction of new products, cost savings from the closure of the New Windsor facility and product design cost reductions.
Selling and administrative expenses of $10.2 million in the three months ended September 30, 2020 increased $2.2 million from the same period of fiscal 2020 primarily due to the $4.8 million gain on the sale of the New Windsor facility in the first quarter of fiscal 2020. When the $4.8 million gain is removed from fiscal 2020 results, there was a $2.7 million decrease in selling and administrative expenses. The decrease in selling and administrative expenses is mostly driven by lower commission expense as a result of lower sales and a conscientious effort to reduce spending as a result of the pandemic.
Lighting Segment operating income of $3.6 million for the three months ended September 30, 2020 decreased $5.6 million from operating income of $9.2 million in the same period of fiscal 2020 primarily due to the $4.8 million pre-tax gain on the sale of the New Windsor facility in fiscal 2020.
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Graphics Segment |
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Three Months Ended |
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|
September 30 |
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|
(In thousands) |
2020 |
2019 |
||||||
|
Net Sales |
$ | 24,601 | $ | 25,510 | ||||
|
Gross Profit |
$ | 4,442 | $ | 4,626 | ||||
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Operating Income |
$ | 1,823 | $ | 1,017 | ||||
Graphics Segment net sales of $24.6 million in the three months ended September 30, 2020 decreased $0.9 million or 4% from net sales of $25.5 million in the same period in fiscal 2020. The decrease in sales is from a reduction in the Petroleum market vertical partially offset by growth in the Other Retail and Digital market verticals. The pandemic continued to impact Graphics in the first quarter, resulting in a number of project installation delays.
Gross profit of $4.4 million in the three months ended September 30, 2020 decreased $0.2 million or 4% from the same period of fiscal 2020. Gross profit as a percentage of Graphic Segment net sales (customer plus inter-segment sales) was consistent from the prior year first quarter.
Selling and administrative expenses of $2.6 million decreased $1.0 million from $3.6 million in the same period of fiscal 2020. The decrease in selling and administrative expenses was due to lower operating costs as a result of an organizational realignment executed in the second half of fiscal 2020 and a conscientious effort to reduce spending as a result of the pandemic.
Graphics Segment operating income of $1.8 million in the three months ended September 30, 2020 increased $0.8 million from operating income of $1.0 million in the same period of fiscal 2020. The increase of $0.8 million was primarily due to lower operating expenses.
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Corporate and Eliminations |
||||||||
|
Three Months Ended |
||||||||
|
September 30 |
||||||||
|
(In thousands) |
2020 |
2019 |
||||||
|
Gross Profit |
$ | 4 | $ | 10 | ||||
|
Operating (Loss) |
$ | (3,209 | ) | $ | (3,337 | ) | ||
The gross profit relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $3.2 million in the three months ended September 30, 2020 decreased $0.1 million or 4% from the same period of fiscal 2020. The net decrease was the result of conscientious efforts to contain and reduce costs during the pandemic.
Consolidated Results
We reported $0.1 million net interest expense in the three months ended September 30, 2020 compared to $0.4 million net interest expense in the three months ended September 30, 2019. The decrease in interest expense from fiscal 2020 to fiscal 2021 is the result of lower levels of debt outstanding on our line of credit. We also recorded other income of $0.1 million in the three months ended September 30, 2020 compared to other expense of $0.1 million in the three months ended September 30, 2019, both of which are related to net foreign exchange currency transaction gains and losses through our Mexican subsidiary.
The $0.3 million income tax expense in the three months ended September 30, 2020 represents a consolidated effective tax rate of 11.6% and was driven by a favorable deferred tax asset adjustment related to a net operating loss carryback from the CARES Act. The $1.8 million income tax expense in the three months ended September 30, 2019 represents a consolidated effective tax rate of 29.3%, influenced mostly by the gain on the sale of the New Windsor facility and by certain permanent book-tax differences and by an expense related to uncertain income tax positions.
We reported net income of $2.0 million in the three months ended September 30, 2020 compared to net income of $4.5 million in the three months ended September 30, 2019. The decrease in net income is primarily driven by the $4.8 million gain on the sale of the New Windsor facility in the first quarter of fiscal 2020. When the impact of all Non-GAAP items is removed from both fiscal years, Non-GAAP adjusted net income was $2.1 million for the three months ended September 30, 2020 compared to adjusted net income of $1.6 million for the three months ended September 30, 2019 (Refer to the Non-GAAP tables above). The increase in Non-GAAP adjusted net income is primarily the net result of an improved gross profit margin, decreased interest expense, a lower effective tax rate and foreign exchange currency transaction gains, partially offset by decreased net sales. Diluted earnings per share of $0.07 was reported in the three months ended September 30, 2020 as compared to $0.17 diluted earnings per share in the same period of fiscal 2020. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the three months ended September 30, 2020 were 26,968,000 shares as compared to 26,293,000 shares in the same period last year.
Liquidity and Capital Resources
We consider our level of cash on hand, borrowing capacity, current ratio and working capital levels to be our most important measures of short-term liquidity. For long-term liquidity indicators, we believe our ratio of long-term debt to equity and our historical levels of net cash flows from operating activities to be the most important measures.
At September 30, 2020, we had working capital of $55.1 million compared to $51.2 million at June 30, 2020. The ratio of current assets to current liabilities was 2.29 to 1 as compared to a ratio of 2.48 to 1 at June 30, 2020. The $3.9 million increase in working capital from June 30, 2020 to September 30, 2020 is primarily driven by a $6.3 million increase in in accounts receivable, a $5.9 million increase in cash, a $6.1 million increase in accounts payable, a $2.1 million increase in accrued expenses, a $1.2 million increase in other assets and a $1.4 million decrease in inventory.
We generated $7.6 million of cash from operating activities in the three months ended September 30, 2020 as compared to $6.4 million in the same period of fiscal 2020. This $1.2 million increase in net cash flows from operating activities is the result of our improved earnings as well as our ongoing strategy to aggressively manage our working capital which includes the reduction of accounts receivable days sales outstanding (DSO), while simultaneously managing our inventory levels for an anticipated slow but steady market recovery and also to support several new product launches.
Net accounts receivable were $44.1 million and $37.8 million at September 30, 2020 and June 30, 2020, respectively. DSO decreased to 54 days at September 30, 2020 from 56 days at June 30, 2020. We believe that our receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.
Net inventories of $37.4 million at September 30, 2020 decreased $1.4 million from $38.8 million at June 30, 2020. The decrease of $1.4 million is the result of a decrease in gross inventory of $1.1 million and an increase in obsolescence reserves of $0.3 million. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory decreased $1.7 million in the three months ended September 30, 2020 in the Lighting Segment which was partially offset by an increase in net inventory in the Graphics Segment of $0.1 million.
Cash generated from operations and borrowing capacity under our line of credit is our primary source of liquidity. We have a secured $75 million revolving line of credit with our bank, with $75 million of the credit line available as of October 15, 2020. This line of credit is a $75 million five-year credit line expiring in the third quarter of fiscal 2022. We are in compliance with all of our loan covenants. We believe that our $75 million line of credit plus cash flows from operating activities are adequate for fiscal 2021 operational and capital expenditure needs. However, as the impact of COVID-19 on the economy and our operations evolves, we will continue to assess our liquidity needs.
We used $0.4 million of cash related to investing activities in the three months ended September 30, 2020 as compared to $12.0 million of cash provided by investing activities in the same period of fiscal 2020, resulting in a decrease of $12.4 million. Capital expenditures was consistent in the three months ended September 30, 2020 and 2019. We sold our New Windsor manufacturing facility for $12.3 million in the first quarter of fiscal 2020, which was the primary contributing factor to the decrease in cash flow from investing activities from fiscal 2020 to fiscal 2021.
We used $1.3 million of cash related to financing activities in the three months ended September 30, 2020 compared to $17.7 million in the three months ended September 30, 2019. The $16.4 million change in cash flow was primarily the net result of payments of long-term debt in excess of borrowings which was primarily driven by cash flow from operations.
We have on our balance sheet financial instruments consisting primarily of cash and cash equivalents, short-term investments, revolving lines of credit, and long-term debt. The fair value of these financial instruments approximates carrying value because of their short-term maturity and/or variable, market-driven interest rates.
Off-Balance Sheet Arrangements
We have no financial instruments with off-balance sheet risk and have no off-balance sheet arrangements.
Cash Dividends
In October 2020, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable November 17, 2020 to shareholders of record as of November 9, 2020. The indicated annual cash dividend rate for fiscal 2021 is $0.20 per share. The Board of Directors has adopted a policy regarding dividends which indicates that dividends will be determined by the Board of Directors in its discretion based upon its evaluation of earnings, cash flow requirements, financial condition, debt levels, stock repurchases, future business developments and opportunities, and other factors deemed relevant.
Critical Accounting Policies and Estimates
A summary of our significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2020 Annual Report on Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except for the broad effects of the COVID-19 pandemic as a result of its negative impact on the global economy and major financial markets, there have been no material changes in our exposure to market risk since June 30, 2020. Additional information can be found in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, which appears on page 12 of the Annual Report on Form 10-K for the fiscal year ended June 30, 2020.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
We conducted, under the supervision of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2020, our disclosure controls and procedures were effective. Management believes that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly presented in all material respects in accordance with GAAP for interim financial statements, and the Company’s Chief Executive Officer and Chief Financial Officer have certified that, based on their knowledge, the condensed consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for each of the periods presented in this report.
Changes in Internal Control
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Effective September 28, 2020, the Compensation Committee of the Board of Directors granted inducement awards of stock options in accordance with NASDAQ Listing Rule 5635(c)(4) to Pablo Leguina, Senior Vice President - Sales. Mr. Leguina was granted an inducement stock option to purchase up to 75,000 shares of the Company’s common stock. The award was approved in connection with the commencement of his employment with the Company and has a ten-year term. The option is exercisable at a price of $7.06 per share (the closing price on September 28, 2020). Two-thirds of the options will vest on the second anniversary date of grant; the remaining shares will vest on the third anniversary date of grant. The grant of such awards is exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended and/or Rule 701 promulgated pursuant to the Securities Act of 1933, as amended.
ITEM 6. EXHIBITS
Exhibits:
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10.1 |
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10.2 |
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10.3 |
Form of 2019 Omnibus Award Plan Non-Qualified Stock Option Award Agreement* |
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10.4 |
Form of 2019 Omnibus Award Plan Restricted Stock Unit Award Agreement* |
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10.5 |
Form of 2019 Omnibus Award Plan Performance Stock Unit Award Agreement*++ |
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31.1 |
Certification of Principal Executive Officer required by Rule 13a-14(a) |
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31.2 |
Certification of Principal Financial Officer required by Rule 13a-14(a) |
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32.1 |
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32.2 |
101.INS Inline XBRL Instance Document
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
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104 |
Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) |
* Management compensatory agreement.
++ Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K. The omitted information is not material and would likely cause competitive harm to the Registrant if publicly disclosed. The Registrant hereby agrees to furnish a copy of any omitted portion to the SEC upon request.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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LSI Industries Inc. |
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By: |
/s/ James A. Clark |
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James A. Clark |
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Chief Executive Officer and President |
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(Principal Executive Officer) |
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By: |
/s/ James E. Galeese |
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James E. Galeese |
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Executive Vice President and Chief Financial Officer |
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(Principal Financial Officer) |
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November 5, 2020 |
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