UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC20549
WASHINGTON, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO ________________. |
Commission File No. 0-13375
LSI Industries Inc. |
(Exact name of registrant as specified in its charter) |
| 31-0888951 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
10000 Alliance Road
10000 Alliance Road, Cincinnati, Ohio | 45242 | |
(Address of principal executive offices) | (Zip Code) | |
(513) 793-3200 | ||
Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, no par value | LYTS | NASDAQ Global Select Market |
Indicate by checkmark whether the Registrant: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 Registrantregistrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____Yes ☒ No ☐
Indicate by checkmark whether the Registrantregistrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to submit and post such files).
YES X NO ____Yes ☒ No ☐
Indicate by checkmark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | Emerging growth company | ||
Non-accelerated filer | ☐ | Smaller reporting company |
If an emerging growth company, indicate by check mark if the Registrantregistrant 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 Registrantregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ____ NO X ☐ No ☒
As of January 27, 20182023, there were 25,574,45728,166,965 shares of the Registrant'sregistrant's common stock, no par value per share, outstanding.
LSI INDUSTRIES INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBERDecember 31, 20172022
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“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995
This Form 10-Q contains certain forward-looking statements that are subject to numerous assumptions, risks or uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Forward-looking statements may be identified by words such as “estimates,” “anticipates,” “projects,” “plans,” “expects,” “intends,” “believes,” “seeks,” “may,” “will,” “should” or the negative versions of those words and similar expressions, and by the context in which they are used. Such statements, whether expressed or implied, are based upon current expectations of the Company and speak only as of the date made. Actual results could differ materially from those contained in or implied by such forward-looking statements as a result of a variety of risks and uncertainties over which the Company may have no control. These risks and uncertainties include, but are not limited to, the impact of competitive products and services, product demand and market acceptance risks, potential costs associated with litigation and regulatory compliance, reliance on key customers, financial difficulties experienced by customers, the cyclical and seasonal nature of our business, the adequacy of reserves and allowances for doubtful accounts, fluctuations in operating results or costs whether as a result of uncertainties inherent in tax and accounting matters or otherwise, unexpected difficulties in integrating acquired businesses, the ability to retain key employees of acquired businesses, unfavorable economic and market conditions, the results of asset impairment assessments and the other risk factors that are identified herein. You are cautioned to not place undue reliance on these forward-looking statements. In addition to the factors described in this paragraph, the risk factors identified in our Form 10-K and other filings the Company may make with the SEC constitute risks and uncertainties that may affect the financial performance of the Company and are incorporated herein by reference. The Company does not undertake and hereby disclaims any duty to update any forward-looking statements to reflect subsequent events or circumstances.
PART I. FINANCIAL INFORMATION
PART I.FINANCIAL INFORMATION | 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ITEM 1. FINANCIAL STATEMENTS
| 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | 5
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CONDENSED CONSOLIDATED BALANCE SHEETS
| 6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY | 7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| 8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | 9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 20 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 28 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ITEM 4. CONTROLS AND PROCEDURES | 28 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
PART II.OTHER INFORMATION | 29 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ITEM 5. OTHER INFORMATION | 29 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ITEM 6. EXHIBITS | 29 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SIGNATURES | 30 |
PART I.FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
December 31 | December 31 | |||||||||||||||
(In thousands, except per share data) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Net Sales | $ | 128,804 | $ | 111,143 | $ | 255,873 | $ | 217,540 | ||||||||
Cost of products and services sold | 94,646 | 85,695 | 186,964 | 167,582 | ||||||||||||
Severence Costs | 18 | - | 31 | - | ||||||||||||
Gross profit | 34,140 | 25,448 | 68,878 | 49,958 | ||||||||||||
Selling and administrative expenses | 25,102 | 21,026 | 49,819 | 41,092 | ||||||||||||
Operating income | 9,038 | 4,422 | 19,059 | 8,866 | ||||||||||||
Interest expense | 1,258 | 529 | 2,046 | 763 | ||||||||||||
Other expense (income) | (55 | ) | 9 | 158 | 88 | |||||||||||
Income before income taxes | 7,835 | 3,884 | 16,855 | 8,015 | ||||||||||||
Income tax expense | 1,418 | 779 | 4,177 | 1,777 | ||||||||||||
Net income | $ | 6,417 | $ | 3,105 | $ | 12,678 | $ | 6,238 | ||||||||
Earnings per common share (see Note 4) | ||||||||||||||||
Basic | $ | 0.23 | $ | 0.11 | $ | 0.45 | $ | 0.23 | ||||||||
Diluted | $ | 0.22 | $ | 0.11 | $ | 0.44 | $ | 0.22 | ||||||||
Weighted average common shares outstanding | ||||||||||||||||
Basic | 28,078 | 27,292 | 27,874 | 27,144 | ||||||||||||
Diluted | 29,204 | 28,067 | 28,766 | 27,895 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
December 31 | December 31 | |||||||||||||||
(In thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Net Income | $ | 6,417 | $ | 3,105 | $ | 12,678 | $ | 6,238 | ||||||||
Foreign currency translation adjustment | 68 | 9 | 75 | (35 | ) | |||||||||||
Comprehensive Income | $ | 6,485 | $ | 3,114 | $ | 12,753 | $ | 6,203 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, | June 30, | |||||||
(In thousands, except shares) | 2022 | 2022 | ||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 2,765 | $ | 2,462 | ||||
Accounts receivable, less allowance for credit losses of $392 and $499, respectively | 67,352 | 77,750 | ||||||
Inventories | 73,205 | 74,421 | ||||||
Refundable income taxes | 1,325 | 1,041 | ||||||
Other current assets | 4,378 | 3,243 | ||||||
Total current assets | 149,025 | 158,917 | ||||||
Property, Plant and Equipment, at cost | ||||||||
Land | 4,010 | 4,010 | ||||||
Buildings | 24,485 | 24,495 | ||||||
Machinery and equipment | 67,322 | 66,762 | ||||||
Buildings under finance leases | 2,033 | 2,033 | ||||||
Construction in progress | 893 | 618 | ||||||
98,743 | 97,918 | |||||||
Less accumulated depreciation | (72,957 | ) | (70,760 | ) | ||||
Net property, plant and equipment | 25,786 | 27,158 | ||||||
Goodwill | 45,030 | 45,030 | ||||||
Other intangible assets, net | 65,584 | 67,964 | ||||||
Operating lease right-of-use assets | 7,548 | 8,664 | ||||||
Other long-term assets, net | 3,310 | 3,347 | ||||||
Total assets | $ | 296,283 | $ | 311,080 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31 | June 30, | |||||||
(In thousands, except shares) | 2022 | 2022 | ||||||
LIABILITIES & SHAREHOLDERS' EQUITY | ||||||||
Current liabilities | ||||||||
Current maturities of long-term debt | $ | 3,571 | $ | 3,571 | ||||
Accounts payable | 27,293 | 34,783 | ||||||
Accrued expenses | 33,270 | 36,264 | ||||||
Total current liabilities | 64,134 | 74,618 | ||||||
Long-term debt | 59,250 | 76,025 | ||||||
Finance lease liabilities | 1,105 | 1,246 | ||||||
Operating lease liabilities | 6,957 | 8,240 | ||||||
Other long-term liabilities | 3,521 | 3,182 | ||||||
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 50,000,000 shares; Outstanding 28,120,755 and 27,484,514 shares, respectively | 142,988 | 139,500 | ||||||
Treasury shares, without par value | (6,988 | ) | (5,927 | ) | ||||
Deferred compensation plan | 6,988 | 5,927 | ||||||
Retained earnings | 18,208 | 8,224 | ||||||
Accumulated other comprehensive income | 120 | 45 | ||||||
Total shareholders' equity | 161,316 | 147,769 | ||||||
Total liabilities & shareholders' equity | $ | 296,283 | $ | 311,080 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
Common Shares | Treasury Shares | Key Executive | Accumulated Other | Retained | Total | |||||||||||||||||||||||||||
Number Of | Number Of | Compensation | Comprehensive | Earnings | Shareholders' | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Amount | Income (Loss) | (Loss) | Equity | |||||||||||||||||||||||||
Balance at June 30, 2021 | 26,863 | $ | 132,526 | (346 | ) | $ | (2,450 | ) | $ | 2,450 | $ | 49 | $ | (1,405 | ) | $ | 131,170 | |||||||||||||||
Net Income | - | - | - | - | - | - | 6,238 | 6,238 | ||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | - | (35 | ) | - | (35 | ) | ||||||||||||||||||||||
Stock compensation awards | 19 | 150 | �� | - | - | - | - | - | 150 | |||||||||||||||||||||||
Restricted stock units issued, net of shares withheld for tax withholdings | 80 | (250 | ) | - | - | - | - | - | (250 | ) | ||||||||||||||||||||||
Shares issued for deferred compensation | 334 | 2,569 | - | - | - | - | - | 2,569 | ||||||||||||||||||||||||
Activity of treasury shares, net | - | - | (324 | ) | (2,491 | ) | - | - | - | (2,491 | ) | |||||||||||||||||||||
Deferred stock compensation | - | - | - | - | 2,491 | - | - | 2,491 | ||||||||||||||||||||||||
Stock compensation expense | - | 1,686 | - | - | - | - | - | 1,686 | ||||||||||||||||||||||||
Stock options exercised, net | 5 | 26 | - | - | - | - | - | 26 | ||||||||||||||||||||||||
Dividends — $0.20 per share | - | - | - | - | - | - | (2,668 | ) | (2,668 | ) | ||||||||||||||||||||||
Balance at December 31, 2021 | 27,301 | $ | 136,707 | (670 | ) | $ | (4,941 | ) | $ | 4,941 | $ | 14 | $ | 2,165 | $ | 138,886 |
Common Shares | Treasury Shares | Key Executive | Accumulated Other | Retained | Total | |||||||||||||||||||||||||||
Number Of | Number Of | Compensation | Comprehensive | Earnings | Shareholders' | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Amount | Income (Loss) | (Loss) | Equity | |||||||||||||||||||||||||
Balance at June 30, 2022 | 27,484 | $ | 139,500 | (822 | ) | $ | (5,927 | ) | $ | 5,927 | $ | 45 | $ | 8,224 | $ | 147,769 | ||||||||||||||||
Net Income | - | - | - | - | - | - | 12,678 | 12,678 | ||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | - | 75 | - | 75 | ||||||||||||||||||||||||
Stock compensation awards | 35 | 173 | - | - | - | - | - | 173 | ||||||||||||||||||||||||
Restricted stock units issued, net of shares withheld for tax withholdings | 272 | (465 | ) | - | - | - | - | - | (465 | ) | ||||||||||||||||||||||
Shares issued for deferred compensation | 137 | 1,087 | - | - | - | - | - | 1,087 | ||||||||||||||||||||||||
Activity of treasury shares, net | - | - | (135 | ) | (1,061 | ) | - | - | - | (1,061 | ) | |||||||||||||||||||||
Deferred stock compensation | - | - | - | - | 1,061 | - | - | 1,061 | ||||||||||||||||||||||||
Stock compensation expense | - | 1,415 | - | - | - | - | - | 1,415 | ||||||||||||||||||||||||
Stock options exercised, net | 192 | 1,278 | - | - | - | - | - | 1,278 | ||||||||||||||||||||||||
Dividends — $0.20 per share | - | - | - | - | - | - | (2,694 | ) | (2,694 | ) | ||||||||||||||||||||||
Balance at December 31, 2022 | 28,120 | $ | 142,988 | (957 | ) | $ | (6,988 | ) | $ | 6,988 | $ | 120 | $ | 18,208 | $ | 161,316 |
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)
Six Months Ended | ||||||||
December 31 | ||||||||
(In thousands) | 2022 | 2021 | ||||||
Cash Flows from Operating Activities | ||||||||
Net income | $ | 12,678 | $ | 6,238 | ||||
Non-cash items included in net income | ||||||||
Depreciation and amortization | 4,840 | 5,101 | ||||||
Deferred income taxes | 49 | (256 | ) | |||||
Deferred compensation plan | 1,087 | 2,569 | ||||||
Stock compensation expense | 1,415 | 1,686 | ||||||
Issuance of common shares as compensation | 173 | 150 | ||||||
Loss on disposition of fixed assets | 37 | 22 | ||||||
Allowance for doubtful accounts | (108 | ) | 148 | |||||
Inventory obsolescence reserve | 300 | 955 | ||||||
Changes in certain assets and liabilities | ||||||||
Accounts receivable | 10,506 | (11,608 | ) | |||||
Inventories | 916 | (13,995 | ) | |||||
Refundable income taxes | (284 | ) | 77 | |||||
Accounts payable | (7,490 | ) | 3,747 | |||||
Accrued expenses and other | (1,581 | ) | (6,360 | ) | ||||
Customer prepayments | (2,476 | ) | (5,017 | ) | ||||
Net cash flows provided by (used in) operating activities | 20,062 | (16,543 | ) | |||||
Cash Flows from Investing Activities | ||||||||
Purchases of property, plant and equipment | (995 | ) | (745 | ) | ||||
Adjustment to JSI acquisition purchase price | - | 500 | ||||||
Proceeds from the sale of fixed assets | 1 | - | ||||||
Net cash flows used in investing activities | (994 | ) | (245 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Payments of long-term debt | (102,152 | ) | (77,737 | ) | ||||
Borrowings of long-term debt | 85,377 | 96,192 | ||||||
Cash dividends paid | (2,694 | ) | (2,657 | ) | ||||
Shares withheld for employees' taxes | (465 | ) | (250 | ) | ||||
Payments on financing lease obligations | (123 | ) | (129 | ) | ||||
Proceeds from stock option exercises | 1,278 | 26 | ||||||
Net cash flows (used in) provided by financing activities | (18,779 | ) | 15,445 | |||||
Change related to foreign currency | 14 | (25 | ) | |||||
Increase (decrease) in cash and cash equivalents | 303 | (1,368 | ) | |||||
Cash and cash equivalents at beginning of period | 2,462 | 2,282 | ||||||
Cash and cash equivalents at end of period | $ | 2,765 | $ | 914 |
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 December 31, 2022, the results of its operations for the three and six-month periods ended December 31, 2022, and 2021, and its cash flows for the six-month periods ended December 31, 2022, and 2021. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2022 Annual Report on Form 10-K. Financial information as of June 30, 2022, 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 2022 Annual Report on Form 10-K.
Revenue Recognition:
The Company recognizes revenue when it satisfies the performance obligation in its customer contracts or purchase orders. Most of the Company’s products have a single performance obligation which is satisfied at a point in time when control is transferred to the customer. Control is generally transferred at time of shipment when title and risk of ownership passes to the customer. For customer contracts with multiple performance obligations, the Company allocates the transaction price and any discounts to each performance obligation based on relative standalone selling prices. Payment terms are typically within 30 to 90 days from the shipping date, depending on the terms with the customer. The Company offers standard warranties that do not represent separate performance obligations.
Installation is a separate performance obligation, except for the Company’s digital signage products. For digital signage products, installation is not a separate performance obligation as the product and installation is the combined item promised in digital signage contracts. The Company is not always responsible for installation of products it sells and has no post-installation responsibilities other than standard warranties.
A number of the Company's display solutions and select lighting products are 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:
● | Customer specific branded print graphics |
| Electrical components based on customer specifications |
| Digital signage and
|
The Company also offers installation services for its display solutions elements and select lighting products. Installation revenue is recognized over time as the customer simultaneously receives and consumes the benefits provided through the installation process.
For these customized products and installation services, revenue is recognized using a cost-based input method: recognizing revenue and gross profit as work is performed based on the relationship between the actual cost incurred and the total estimated cost for the performance obligation.
On occasion, the Company enters into bill-and-hold arrangements on a limited basis. Each bill-and-hold arrangement is reviewed and revenue is recognized only when certain criteria have been met: (1) the customer has requested delayed delivery and storage of the products by the Company because the customer wants to secure a supply of the products but lacks storage space; (ii) the risk of ownership has passed to the customer; (iii) the products are segregated from the Company’s other inventory items held for sale; (iv) the products are ready for shipment to the customer; and (v) the Company does not have the ability to use the products or direct them to another customer.
Disaggregation of Revenue
The Company disaggregates the revenue from contracts with customers by the timing of revenue recognition because the Company believes it best depicts the nature, amount, and timing of its revenue and cash flows. The table below presents a reconciliation of the disaggregation by reportable segments:
Three Months Ended | ||||||||||||||||
(In thousands) | December 31, 2022 | December 31, 2021 | ||||||||||||||
Lighting Segment | Display Solutions Segment | Lighting Segment | Display Solutions Segment | |||||||||||||
Timing of revenue recognition | ||||||||||||||||
Products and services transferred at a point in time | $ | 58,591 | $ | 47,027 | $ | 50,141 | $ | 35,437 | ||||||||
Products and services transferred over time | 8,242 | 14,944 | 7,135 | 18,430 | ||||||||||||
$ | 66,833 | $ | 61,971 | $ | 57,276 | $ | 53,867 |
Six Months Ended | ||||||||||||||||
(In thousands) | December 31, 2022 | December 31, 2021 | ||||||||||||||
Lighting Segment | Display Solutions Segment | Lighting Segment | Display Solutions Segment | |||||||||||||
Timing of revenue recognition | ||||||||||||||||
Products and services transferred at a point in time | $ | 116,668 | $ | 94,516 | $ | 94,723 | $ | 72,868 | ||||||||
Products and services transferred over time | 17,698 | 26,991 | 13,813 | 36,136 | ||||||||||||
$ | 134,366 | $ | 121,507 | $ | 108,536 | $ | 109,004 |
Three Months Ended | ||||||||||||||||
(In thousands) | December 31, 2022 | December 31, 2021 | ||||||||||||||
Lighting Segment | Display Solutions Segment | Lighting Segment | Display Solutions Segment | |||||||||||||
Type of Product and Services | ||||||||||||||||
LED lighting, digital signage solutions, electronic circuit boards | $ | 54,410 | $ | 5,801 | $ | 47,626 | $ | 12,551 | ||||||||
Poles, printed graphics, display fixtures | 11,632 | 41,683 | 9,079 | 31,127 | ||||||||||||
Project management, installation services, shipping and handling | 791 | 14,487 | 571 | 10,189 | ||||||||||||
$ | 66,833 | $ | 61,971 | $ | 57,276 | $ | 53,867 |
Six Months Ended | ||||||||||||||||
(In thousands) | December 31, 2022 | December 31, 2021 | ||||||||||||||
Lighting Segment | Display Solutions Segment | Lighting Segment | Display Solutions Segment | |||||||||||||
Type of Product and Services | ||||||||||||||||
LED lighting, digital signage solutions, electronic circuit boards | $ | 109,945 | $ | 12,976 | $ | 89,505 | $ | 24,979 | ||||||||
Poles, printed graphics, display fixtures | 22,761 | 83,154 | 18,045 | 64,429 | ||||||||||||
Project management, installation services, shipping and handling | 1,660 | 25,377 | 986 | 19,596 | ||||||||||||
$ | 134,366 | $ | 121,507 | $ | 108,536 | $ | 109,004 |
Practical Expedients and Exemptions
● | The
|
● | Shipping costs that are not material in context of the delivery of products are expensed as incurred. |
● | The Company’s accounts receivable balance represents the Company’s unconditional right to receive payment from its customers with contracts. Payments are generally due within 30 to 90 days of completion of the performance obligation and invoicing; therefore, payments do not contain significant financing components. |
● | The Company collects sales |
New Accounting Pronouncements:
In October 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” creating an exception to the recognition and measurement principles in ASC 805. The amendment requires that entities apply ASC 606, “Revenue from Contracts with Customers,” rather than using fair value, to recognize and measure contracts assets and contract liabilities from contracts with customers acquired in a business combination. The ASU is effective for fiscal years beginning after December 15, 2022, and interim periods therein. Early adoption is permitted, including adoption in an interim period, regardless of whether a business combination occurs in that period. The guidance should be applied prospectively; however, an entity that elects to early adopt in an interim period should apply the amendments to all business combinations that occurred during the fiscal year that includes that interim period. The Company is evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.
In December 2019, the Financial Accounting Standards Board ("FASB") issued ASU 2019-12, "Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740)." This guidance removes certain exceptions to the general principles in ASC 740 such as recognizing deferred taxes for equity investments, the incremental approach to performing intra-period tax allocation and calculating income taxes in interim periods. The standard also simplifies accounting for income taxes under U.S. GAAP by clarifying and amending existing guidance, including the recognition of deferred taxes for goodwill, the allocation of taxes to members of a consolidated group and requiring that an entity reflect the effect of enacted changes in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The Company adopted ASC 2019-12 effective July 1, 2021, which did not have a material impact on its consolidated financial statements or disclosures.
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 Display Solutions (formerly known as the Graphics Segment), with one executive team under the organizational structure reporting directly to the CODM with responsibilities for managing each segment. Corporate and Eliminations, which captures the Company’s corporate administrative activities, is also reported in the segment information.
The Lighting Segment includes non-residential outdoor and indoor lighting fixtures utilizing LED light sources that have been fabricated and assembled for the Company’s markets, primarily the refueling and convenience store markets, parking lot and garage markets, quick-service restaurant market, retail and grocery store markets, the automotive market, the warehouse market, and the sports court and field market. The Company also offers a variety of lighting controls to complement its lighting fixtures which include sensors, photocontrols, dimmers, motion detection and Bluetooth systems. The Company also services lighting product customers through the commercial and industrial project, 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 Display Solutions Segment manufactures, sells and installs exterior and interior visual image and display elements, including printed graphics, structural graphics, digital signage, menu board systems, display fixtures, refrigerated displays, and custom display elements. These products are used in visual image programs in several markets including the refueling and convenience store markets, parking lot and garage markets, quick-service restaurant market, retail and grocery store markets, the automotive market, the warehouse market, and the sports court and field market. The Display Solutions Segment also provides a variety of project management services to complement our display elements, such as installation management, site surveys, permitting, and content management which are offered to our customers to support our digital signage.
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 were no customers or customer programs representing a concentration of 10% or more of the Company’s consolidated net sales in the three and six months ended December 31, 2022. One customer program in the Display Solutions Segment represents $11.4 million, or 10.3%, and $23.7 million, or 10.9%, of the Company’s net sales in the three and six months ended December 31, 2021, respectively. There was no concentration of accounts receivable at December 31, 2022. One customer in the Display Solutions Segment represents $8.5 million or 10.9% of the Company’s accounts receivable at June 30, 2022.
Summarized financial information for the Company’s operating segments is provided for the indicated periods and as of December 31, 2022 and December 31, 2021:
Three Months Ended | Six Months Ended | |||||||||||||||
(In thousands) | December 31 | December 31 | ||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Net Sales: | ||||||||||||||||
Lighting Segment | $ | 66,833 | $ | 57,276 | $ | 134,366 | $ | 108,536 | ||||||||
Display Solutions Segment | 61,971 | 53,867 | 121,507 | 109,004 | ||||||||||||
$ | 128,804 | $ | 111,143 | $ | 255,873 | $ | 217,540 | |||||||||
Operating Income (Loss): | ||||||||||||||||
Lighting Segment | $ | 6,754 | $ | 4,623 | $ | 15,912 | $ | 8,962 | ||||||||
Display Solutions Segment | 7,762 | 3,837 | 14,258 | 7,586 | ||||||||||||
Corporate and Eliminations | (5,478 | ) | (4,038 | ) | (11,111 | ) | (7,682 | ) | ||||||||
$ | 9,038 | $ | 4,422 | $ | 19,059 | $ | 8,866 | |||||||||
Capital Expenditures: | ||||||||||||||||
Lighting Segment | $ | 74 | $ | 172 | $ | 323 | $ | 352 | ||||||||
Display Solutions Segment | 539 | 254 | 700 | 475 | ||||||||||||
Corporate and Eliminations | (52 | ) | 22 | (28 | ) | (82 | ) | |||||||||
$ | 561 | $ | 448 | $ | 995 | $ | 745 | |||||||||
Depreciation and Amortization: | ||||||||||||||||
Lighting Segment | $ | 1,382 | $ | 1,450 | $ | 2,769 | $ | 2,911 | ||||||||
Display Solutions Segment | 975 | 1,016 | 1,949 | 2,047 | ||||||||||||
Corporate and Eliminations | 62 | 72 | 122 | 143 | ||||||||||||
$ | 2,419 | $ | 2,538 | $ | 4,840 | $ | 5,101 |
December 31, | June 30, | |||||||
Identifiable Assets: | ||||||||
Lighting Segment | $ | 143,741 | $ | 152,431 | ||||
Display Solutions Segment | 145,722 | 152,302 | ||||||
Corporate and Eliminations | 6,820 | 6,347 | ||||||
$ | 296,283 | $ | 311,080 |
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:
Inter-segment sales | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
(In thousands) | December 31 | December 31 | ||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Lighting Segment inter-segment net sales | $ | 5,067 | $ | 11,266 | $ | 11,210 | $ | 21,723 | ||||||||
Display Solutions Segment inter-segment net sales | $ | 30 | $ | 72 | $ | 36 | $ | 235 |
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 | Six Months Ended | |||||||||||||||
December 31 | December 31 | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
BASIC EARNINGS PER SHARE | ||||||||||||||||
Net income | $ | 6,417 | $ | 3,105 | $ | 12,678 | $ | 6,238 | ||||||||
Weighted average shares outstanding during the period, net of treasury shares | 27,005 | 26,625 | 26,890 | 26,589 | ||||||||||||
Weighted average vested restricted stock units outstanding | 117 | 30 | 81 | 24 | ||||||||||||
Weighted average shares outstanding in the Deferred Compensation Plan during the period | 956 | 637 | 903 | 531 | ||||||||||||
Weighted average shares outstanding | 28,078 | 27,292 | 27,874 | 27,144 | ||||||||||||
Basic income per share | $ | 0.23 | $ | 0.11 | $ | 0.45 | $ | 0.23 | ||||||||
DILUTED EARNINGS PER SHARE | ||||||||||||||||
Net income | $ | 6,417 | $ | 3,105 | $ | 12,678 | $ | 6,238 | ||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 28,078 | 27,292 | 27,874 | 27,144 | ||||||||||||
Effect of dilutive securities (a): | ||||||||||||||||
Impact of common shares to be issued under stock option plans, and contingently issuable shares, if any | 1,126 | 775 | 892 | 751 | ||||||||||||
Weighted average shares outstanding | 29,204 | 28,067 | 28,766 | 27,895 | ||||||||||||
Diluted income per share | $ | 0.22 | $ | 0.11 | $ | 0.44 | $ | 0.22 | ||||||||
Anti-dilutive securities (b) | 85 | 981 | 452 | 984 |
In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases.” The amended guidance requires an entity to recognize assets and liabilities that arise from leases. The amended guidance is effective for financial statements issued for fiscal and interim periods within those years, beginning after December 15, 2018, or the Company’s fiscal 2020, with early adoption permitted. The Company has not yet determined the impact the amended guidance will have on its financial statements.
In March 2016, the Financial Accounting Standards Board issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This amended guidance simplifies several aspects of the accounting for share-based payment award transactions. The amended guidance is effective for financial statements issued for fiscal and interim periods within those years, beginning after December 15, 2016, or the Company’s fiscal 2018. We adopted this standard on July 1, 2017 and recognized excess tax benefits of $87,354 in income tax expense during the six months ended December 31, 2017. The amount may not necessarily be indicative of future amounts that may be recognized as any excess tax benefits recognized would be dependent on future stock price, employee exercise behavior and applicable tax rates. Prior to July 1, 2017, excess tax benefits were recognized in additional paid-in capital. Additionally, excess tax benefits are now included in net cash flows provided by operating activities rather than net cash flows provided by financing activities in the Company’s Consolidated Statement of Cash Flows. The treatment of forfeitures has not changed, as the Company is electing to continue the current process of estimating forfeiture at the time of grant. The Company had no unrecognized excess tax benefits from prior periods to record upon the adoption of this ASU.
In January 2017, the Financial Accounting Standards Board issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment”, which simplifies the testing for goodwill impairment by eliminating a previously required step. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2019, or the Company’s fiscal 2021. Early adoption of the accounting standard is permitted, and the Company elected to adopt this standard early. (See Footnote 7)
Comprehensive Income:
The Company does not have any comprehensive income items other than net income.
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.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
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. In the first quarter of fiscal 2018, the Company merged its Technology Segment with the Lighting Segment to be in alignment with the financial information received by the Chief Executive Officer and how the business is managed. The Company’s two operating segments are Lighting and Graphics, each of which has a president who is responsible for that business and reports to the CODM. 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 commercial/industrial market, the petroleum / convenience store market, the automotive dealership market, the quick service restaurant market, along with other markets the Company serves. 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.
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, stock option expense for options 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 and six months ended December 31, 2017 or 2016. There was no concentration of accounts receivable at December 31, 2017 or June 30, 2017.
Summarized financial information for the Company’s operating segments is provided for the indicated periods and as of December 31, 2017 and December 31, 2016:
Three Months Ended | Six Months Ended | |||||||||||||||
(In thousands) | December 31 | December 31 | ||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net Sales: | ||||||||||||||||
Lighting Segment | $ | 69,174 | $ | 65,076 | $ | 137,602 | $ | 130,341 | ||||||||
Graphics Segment | 23,131 | 20,582 | 42,169 | 39,476 | ||||||||||||
$ | 92,305 | $ | 85,658 | $ | 179,771 | $ | 169,817 | |||||||||
Operating Income (Loss): | ||||||||||||||||
Lighting Segment | $ | 5,275 | $ | 3,761 | $ | (17,655 | ) | $ | 6,852 | |||||||
Graphics Segment | 2,255 | 1,174 | 3,731 | 2,191 | ||||||||||||
Corporate and Eliminations | (2,983 | ) | (2,117 | ) | (6,343 | ) | (5,159 | ) | ||||||||
$ | 4,547 | $ | 2,818 | $ | (20,267 | ) | $ | 3,884 | ||||||||
Capital Expenditures: | ||||||||||||||||
Lighting Segment | $ | 499 | $ | 205 | $ | 760 | $ | 1,301 | ||||||||
Graphics Segment | 157 | 459 | 339 | 825 | ||||||||||||
Corporate and Eliminations | 36 | 120 | 91 | 618 | ||||||||||||
$ | 692 | $ | 784 | $ | 1,190 | $ | 2,744 | |||||||||
Depreciation and Amortization: | ||||||||||||||||
Lighting Segment | $ | 1,885 | $ | 1,115 | $ | 3,786 | $ | 2,307 | ||||||||
Graphics Segment | 384 | 376 | 763 | 736 | ||||||||||||
Corporate and Eliminations | 283 | 279 | 575 | 562 | ||||||||||||
$ | 2,552 | $ | 1,770 | $ | 5,124 | $ | 3,605 |
December 31, 2017 | June 30, 2017 | |||||||
Identifiable Assets: | ||||||||
Lighting Segment | $ | 182,680 | $ | 214,070 | ||||
Graphics Segment | 39,394 | 33,144 | ||||||
Corporate and Eliminations | 16,300 | 9,466 | ||||||
$ | 238,374 | $ | 256,680 |
The segment net sales reported above represent sales to external customers. Segment operating income, which is used in management’s evaluation of segment performance, represents net sales less all operating expenses. Identifiable assets are those assets used by each segment in its operations.
The Company records a 10% mark-up on intersegment revenues. Any intersegment profit in inventory is eliminated in consolidation. Intersegment revenues were eliminated in consolidation as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
December 31 | December 31 | |||||||||||||||
(In thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Lighting Segment inter-segment net sales | $ | 992 | $ | 700 | $ | 1,707 | $ | 1,453 | ||||||||
Graphics Segment inter-segment net sales | $ | 1,040 | $ | 680 | $ | 1,071 | $ | 812 |
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):
Three Months Ended | Six Months Ended | |||||||||||||||
December 31 | December 31 | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
BASIC EARNINGS PER SHARE | ||||||||||||||||
Net (loss) income | $ | (1,468 | ) | $ | 2,006 | $ | (17,097 | ) | $ | 2,835 | ||||||
Weighted average shares outstanding during the period, net of treasury shares (a) | 25,551 | 25,016 | 25,528 | 25,007 | ||||||||||||
Weighted average vested restricted stock units outstanding | 63 | 37 | 52 | 37 | ||||||||||||
Weighted average shares outstanding in the Deferred Compensation Plan during the period | 244 | 261 | 244 | 250 | ||||||||||||
Weighted average shares outstanding | 25,858 | 25,314 | 25,824 | 25,294 | ||||||||||||
Basic (loss) earnings per share | $ | (0.06 | ) | $ | 0.08 | $ | (0.66 | ) | $ | 0.11 | ||||||
DILUTED EARNINGS PER SHARE | ||||||||||||||||
Net (loss) income | $ | (1,468 | ) | $ | 2,006 | $ | (17,097 | ) | $ | 2,835 | ||||||
Weighted average shares outstanding | ||||||||||||||||
Basic | 25,858 | 25,314 | 25,824 | 25,294 | ||||||||||||
Effect of dilutive securities (b): | ||||||||||||||||
Impact of common shares to be issued under stock option plans, and contingently issuable shares, if any | -- | 489 | -- | 565 | ||||||||||||
Weighted average shares outstanding (c) | 25,858 | 25,803 | 25,824 | 25,859 | ||||||||||||
Diluted (loss) earnings per share | $ | (0.06 | ) | $ | 0.08 | $ | (0.66 | ) | $ | 0.11 |
(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) |
|
NOTE 5 – INVENTORIES, NET
The following information is provided as of the dates indicated:
December 31, | June 30, | |||||||
(In thousands) | 2022 | 2022 | ||||||
Inventories: | ||||||||
Raw materials | $ | 51,532 | $ | 51,637 | ||||
Work-in-progress | 6,844 | 3,029 | ||||||
Finished goods | 14,829 | 19,755 | ||||||
Total Inventories | $ | 73,205 | $ | 74,421 |
NOTE 6- ACCRUED EXPENSES
The following information is provided as of the dates indicated:
December 31, | June 30, | |||||||
(In thousands) | 2022 | 2022 | ||||||
Accrued Expenses: | ||||||||
Customer prepayments | $ | 3,940 | $ | 6,416 | ||||
Compensation and benefits | 9,865 | 9,611 | ||||||
Accrued warranty | 4,516 | 4,491 | ||||||
Operating lease liabilities | 1,347 | 1,274 | ||||||
Accrued sales commissions | 3,528 | 4,783 | ||||||
Accrued Freight | 3,348 | 3,680 | ||||||
Accrued FICA | 396 | 1,122 | ||||||
Finance lease liabilities | 281 | 275 | ||||||
Accrued income tax | - | 109 | ||||||
Other accrued expenses | 6,049 | 4,503 | ||||||
Total Accrued Expenses | $ | 33,270 | $ | 36,264 |
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. One reporting unit is within the Lighting Segment and two reporting units are within the Display Solutions Segment. The tradename intangible assets have an indefinite life and are also tested separately on an annual basis. The Company relies upon a number of factors, judgments and estimates when conducting its impairment testing including, but not limited to, the Company’s stock price, operating results, forecasts, anticipated future cash flows and marketplace data. There are inherent uncertainties related to these factors and judgments in applying them to the analysis of goodwill impairment.
The following table presents information about the Company's goodwill on the dates or for the periods indicated:
Goodwill | ||||||||||||
(In thousands) | Display | |||||||||||
Lighting | Solutions | |||||||||||
Segment | Segment | Total | ||||||||||
Balance as of December 31, 2022 | ||||||||||||
Goodwill | $ | 70,971 | $ | 63,347 | $ | 134,318 | ||||||
Accumulated impairment losses | (61,763 | ) | (27,525 | ) | (89,288 | ) | ||||||
Goodwill, net as of December 31, 2022 | $ | 9,208 | $ | 35,822 | $ | 45,030 | ||||||
Balance as of June 30, 2022 | ||||||||||||
Goodwill | $ | 70,971 | $ | 63,347 | $ | 134,318 | ||||||
Accumulated impairment losses | (61,763 | ) | (27,525 | ) | (89,288 | ) | ||||||
Goodwill, net as of June 30, 2022 | $ | 9,208 | $ | 35,822 | $ | 45,030 |
The gross carrying amount and accumulated amortization by each major intangible asset class is as follows:
Other Intangible Assets | ||||||||||||
December 31, 2022 | ||||||||||||
(In thousands) | Gross | |||||||||||
Carrying | Accumulated | Net | ||||||||||
Amount | Amortization | Amount | ||||||||||
Amortized Intangible Assets | ||||||||||||
Customer relationships | $ | 62,083 | $ | 16,108 | $ | 45,975 | ||||||
Patents | 268 | 268 | - | |||||||||
LED technology firmware, software | 20,966 | 15,191 | 5,775 | |||||||||
Trade name | 2,658 | 1,102 | 1,556 | |||||||||
Non-compete | 260 | 84 | 176 | |||||||||
Total Amortized Intangible Assets | 86,235 | 32,753 | 53,482 | |||||||||
Indefinite-lived Intangible Assets | ||||||||||||
Trademarks and trade names | 12,102 | - | 12,102 | |||||||||
Total indefinite-lived Intangible Assets | 12,102 | - | 12,102 | |||||||||
Total Other Intangible Assets | $ | 98,337 | $ | 32,753 | $ | 65,584 |
Other Intangible Assets | ||||||||||||
June 30, 2022 | ||||||||||||
(In thousands) | Gross | |||||||||||
Carrying | Accumulated | Net | ||||||||||
Amount | Amortization | Amount | ||||||||||
Amortized Intangible Assets | ||||||||||||
Customer relationships | $ | 62,083 | $ | 14,400 | $ | 47,683 | ||||||
Patents | 268 | 268 | - | |||||||||
LED technology firmware, software | 20,966 | 14,598 | 6,368 | |||||||||
Trade name | 2,658 | 1,049 | 1,609 | |||||||||
Non-compete | 260 | 58 | 202 | |||||||||
Total Amortized Intangible Assets | 86,235 | 30,373 | 55,862 | |||||||||
Indefinite-lived Intangible Assets | ||||||||||||
Trademarks and trade names | 12,102 | - | 12,102 | |||||||||
Total indefinite-lived Intangible Assets | 12,102 | - | 12,102 | |||||||||
Total Other Intangible Assets | $ | 98,337 | $ | 30,373 | $ | 67,964 |
Three Months Ended | Six Months Ended | |||||||||||||||
December 31 | December 31 | |||||||||||||||
(In thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Amortization Expense of Other Intangible Assets | $ | 1,190 | $ | 1,198 | $ | 2,380 | $ | 2,413 |
The Company expects to record annual amortization expense as follows:
(In thousands) | ||||
2023 | $ | 4,808 | ||
2024 | 4,760 | |||
2025 | 4,760 | |||
2026 | 4,760 | |||
2027 | 4,754 | |||
After 2027 | 32,020 |
NOTE 8-DEBT
The Company’s long-term debt as of September 30, 2022, and June 30, 2022, consisted of the following:
December 31, | June 30, | |||||||
(In thousands) | 2022 | 2022 | ||||||
Secured line of credit | $ | 42,310 | $ | 57,275 | ||||
Term loan, net of debt issuance costs of $26 and $30, respectively | 20,511 | 22,321 | ||||||
Total debt | 62,821 | 79,596 | ||||||
Less: amounts due within one year | 3,571 | 3,571 | ||||||
Total amounts due after one tear, net | $ | 59,250 | $ | 76,025 |
In September 2021, the Company amended its existing $100 million secured line of credit, to a $25 million term loan and $75 million remaining as a secured revolving line of credit. Both facilities expire in the third quarter of fiscal 2026. The principal of the term loan is repaid annually in the amount of $3.6 million over a five-year period with a balloon payment of the remaining balance due on the last month. Interest on both the revolving line of credit and the term loan is charged based upon an increment over the LIBOR rate or a base rate, at the Company’s option. The base rate is calculated as the highest of (a) the Prime rate, (b) the sum of the Overnight Funding Rate plus 50 basis points and (c) the sum of the Daily LIBOR Rate plus 100 basis points as long as a Daily LIBOR rate is offered, ascertainable and not unlawful. The increment over the LIBOR borrowing rate fluctuates between 100 and 225 basis points, and the increment over the Base Rate fluctuates between 0 and 125 basis points, both of which depend upon the ratio of indebtedness to earnings before interest, taxes, depreciation, and amortization (“EBITDA”), as defined in the line of credit agreement. As of December 31, 2022, the Company’s borrowing rate against its revolving line of credit was 6.1%. The increment over LIBOR borrowing rate will be 125 basis points for the third quarter of fiscal 2023. As a result of a reduction of the Company’s leverage ratio, the increment over LIBOR was lowered 25 basis points for each of the previous two consecutive quarters. The fee on the unused balance of the $75 million committed line of credit fluctuates between 15 and 25 basis points. Under the terms of this line of credit, the Company has agreed to a negative pledge of real estate assets and is required to comply with financial covenants that limit the ratio of indebtedness to EBITDA and require a minimum fixed charge ratio. As of December 31, 2022, there was $32.7 million available for borrowing under the $75 million line of credit.
The Company is in compliance with all of its loan covenants as of December 31, 2022.
NOTE 9-CASH DIVIDENDS
The Company paid cash dividends of $2.7 million in both the six months ended December 31, 2022, and December 31, 2021. In January 2023, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable February 14, 2023, to shareholders of record as of February 6, 2023. The indicated annual cash dividend rate is $0.20 per share.
NOTE 10 – EQUITY COMPENSATION
In November 2022, the Company’s shareholders approved the amendment and restatement of the 2019 Omnibus Award Plan (“2019 Omnibus Plan”) which increased the number of shares authorized for issuance under the plan by 2,350,000 and removed the Plan’s fungible share counting feature. The purpose of the 2019 Omnibus Plan is to provide a means to attract and retain key personnel and to align the interests of the directors, officers, and employees with the Company’s shareholders. The plan also provides a vehicle whereby directors and officers may acquire shares in order to meet the ownership requirements under the Company’s Stock Ownership Policy. Except for Restricted Stock Unit (“RSU”) grants which are time-based, participants in the Company’s Long-Term Equity Compensation Plans are awarded the opportunity to acquire shares over a three-year performance measurement period tied to specific company performance metrics. The number of shares that remain reserved for issuance under the 2019 Omnibus Plan equates to 2,637,095 as of December 31, 2022. The 2019 Omnibus Plan allows for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units RSUs, performance stock units (“PSUs”) and other awards.
In the first quarter of fiscal 2023, the Company granted 164,348 PSU’s and 197,915 RSU’s, both with a weighted average market value of $6.90. Stock compensation expense was $0.8 million and $1.1 million for the three months ended December 31, 2022, and 2021, respectively, and $1.4 million and $1.7 million in the six months ended December 31, 2022, and 2021, respectively.
NOTE 11-SUPPLEMENTAL CASH FLOW INFORMATION
Six Months Ended | ||||||||
(In thousands) | December 31 | |||||||
2022 | 2021 | |||||||
Cash Payments: | ||||||||
Interest | $ | 1,689 | $ | 627 | ||||
Income taxes | $ | 4,299 | $ | 2,820 | ||||
Non-cash investing and financing activities | ||||||||
Issuance of common shares as compensation | $ | 173 | $ | 150 | ||||
Issuance of common shares to fund deferred compensation plan | $ | 1,087 | $ | 2,569 |
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company is party to various negotiations, customer bankruptcies, and legal proceedings arising in the normal course of business. The Company provides reserves for these matters when a loss is probable and reasonably estimable. The Company does not disclose a range of potential loss because the likelihood of such a loss is remote. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations, cash flows or liquidity.
The Company may occasionally issue a standby letter of credit in favor of third parties. As of December 31, 2022, there were no such standby letters of credit issued.
NOTE 13 - LEASES
The Company leases certain manufacturing facilities along with a small office space, several forklifts, several small tooling items, and various items of office equipment. The Company also acquired buildings, machinery, and forklift leases with the acquisition of JSI, as well as one sublease. All but two of the Company’s leases are operating leases. Leases have a remaining term of one to seven years some of which have an option to renew. The Company does not assume renewals in determining the lease term unless the renewals are deemed reasonably certain. The lease agreements do not contain any material residual guarantees or material variable lease payments.
The Company has periodically entered into short-term operating leases with an initial term of twelve months or less. The Company elected not to record these leases on the balance sheet. For the three and six months ended December 31, 2022, and 2021, the rent expense for these leases is immaterial.
The Company has certain leases that contain lease and non-lease components and has elected to utilize the practical expedient to account for these components together as a single lease component.
Lease expense is recognized on a straight-line basis over the lease term. The Company used its incremental borrowing rate when determining the present value of lease payments.
Three Months Ended | Six Months Ended | |||||||||||||||
December 31 | December 31 | |||||||||||||||
(In thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Operating lease cost | $ | 885 | $ | 870 | $ | 1,776 | $ | 1,749 | ||||||||
Financing lease cost: | ||||||||||||||||
Amortization of right of use assets | 74 | 74 | 148 | 148 | ||||||||||||
Interest on lease liabilities | 17 | 20 | 35 | 41 | ||||||||||||
Variable lease cost | 22 | 22 | 44 | 44 | ||||||||||||
Sublease income | (116 | ) | (94 | ) | (232 | ) | (188 | ) | ||||||||
Total lease cost | $ | 882 | $ | 892 | $ | 1,771 | $ | 1,794 |
Three Months Ended | ||||||||
December 31, | ||||||||
(In thousands) | 2022 | 2021 | ||||||
Cash flows from operating leases | ||||||||
Fixed payments - operating cash flows | $ | 1,832 | $ | 1,778 | ||||
Liability reduction - operating cash flows | $ | 1,618 | $ | 1,502 | ||||
Cash flows from finance leases | ||||||||
Interest - operating cash flows | $ | 35 | $ | 42 | ||||
Repayments of principal portion - financing cash flows | $ | 123 | $ | 129 |
Operating Leases: | December 31, | June 30, | ||||||
2022 | 2022 | |||||||
Total operating right-of-use assets | $ | 7,548 | $ | 8,664 | ||||
Accrued expenses (Current liabilities) | $ | 1,347 | $ | 1,274 | ||||
Long-term operating lease liability | 6,957 | 8,240 | ||||||
Total operating lease liabilities | $ | 8,304 | $ | 9,514 | ||||
Weighted Average remaining Lease Term (in years) | 2.72 | 3.05 | ||||||
Weighted Average Discount Rate | 4.82 | % | 4.81 | % |
Finance Leases: | December 31, | June 30, | ||||||
2022 | 2022 | |||||||
Buildings under finance leases | $ | 2,033 | $ | 2,033 | ||||
Equipment under finance leases | 30 | 11 | ||||||
Accumulated depreciation | (793 | ) | (634 | ) | ||||
Total finance lease assets, net | $ | 1,270 | $ | 1,410 | ||||
Accrued expenses (Current liabilities) | $ | 281 | $ | 275 | ||||
Long-term finance lease liability | 1,105 | 1,246 | ||||||
Total finance lease liabilities | $ | 1,386 | $ | 1,521 | ||||
Weighted Average remaining Lease Term (in years) | 4.30 | 4.80 | ||||||
Weighted Average Discount Rate | 4.86 | % | 4.86 | % |
Maturities of Lease Liability: | Operating Lease Liabilities | Finance Lease Liabilities | Operating Subleases | Net Lease Commitments | ||||||||||||
2023 | $ | 2,134 | $ | 207 | $ | (189 | ) | $ | 2,152 | |||||||
2024 | 3,399 | 337 | (377 | ) | 3,359 | |||||||||||
2025 | 2,253 | 362 | (31 | ) | 2,584 | |||||||||||
2026 | 952 | 362 | - | 1,314 | ||||||||||||
2027 | 323 | 303 | - | 626 | ||||||||||||
Thereafter | 4 | - | - | 4 | ||||||||||||
Total lease payments | $ | 9,065 | $ | 1,571 | $ | (597 | ) | $ | 10,039 | |||||||
Less: Interest | (761 | ) | (185 | ) | (946 | ) | ||||||||||
Present Value of Lease Liabilities | $ | 8,304 | $ | 1,386 | $ | 9,093 |
NOTE 14 – 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.
Three Months Ended | Six Months Ended | |||||||||||||||
December 31 | December 31 | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Reconciliation of effective tax rate: | ||||||||||||||||
Provision for income taxes at the anticipated annual tax rate | 21.5 | % | 23.8 | % | 24.0 | % | 24.0 | % | ||||||||
Uncertain tax positions | (1.2 | ) | (3.9 | ) | - | (1.5 | ) | |||||||||
Tax rate changes | (1.9 | ) | - | - | - | |||||||||||
Share-based compensation | (0.3 | ) | 0.1 | 0.8 | (0.3 | ) | ||||||||||
Effective tax rate | 18.1 | % | 20.0 | % | 24.8 | % | 22.2 | % |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note About Forward-Looking Statements
This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including this section. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “focus,” “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, 2022, and our financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).
Our condensed consolidated financial statements, accompanying notes and the “Safe Harbor” Statement, each as appearing earlier in this report, should be referred to in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Summary of Consolidated Results
Net Sales by Business Segment | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
December 31 | December 31 | |||||||||||||||
(In thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Lighting Segment | $ | 66,833 | $ | 57,276 | $ | 134,366 | $ | 108,536 | ||||||||
Display Solutions Segment | 61,971 | 53,867 | 121,507 | 109,004 | ||||||||||||
$ | 128,804 | $ | 111,143 | $ | 255,873 | $ | 217,540 |
Operating Income (Loss) by Business Segment | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
December 31 | December 31 | |||||||||||||||
(In thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Lighting Segment | $ | 6,754 | $ | 4,623 | $ | 15,912 | $ | 8,962 | ||||||||
Display Solutions Segment | 7,762 | 3,837 | 14,258 | 7,586 | ||||||||||||
Corporate and Eliminations | (5,478 | ) | (4,038 | ) | (11,111 | ) | (7,682 | ) | ||||||||
$ | 9,038 | $ | 4,422 | $ | 19,059 | $ | 8,866 |
Net sales of $128.8 million for the three months ended December 31, 2022, increased $17.7 million or 16% as compared to net sales of $111.1 million for the three months ended December 31, 2021. Net sales were driven by increased net sales of the Lighting Segment (an increase of $9.6 million or 17%) and increased net sales of the Display Solutions Segment (an increase of $8.1 million or 15%). Double digit growth in both reportable segments reflects the ongoing strength in demand levels from our key vertical markets, focusing on higher-value applications where our differentiated products and solutions meet the unique requirements of our customers.
Net sales of $255.9 million for the six months ended December 31, 2022, increased $38.3 million or 18% as compared to net sales of $217.5 million for the six months ended December 31, 2021. Net sales were driven by increased net sales of the Lighting Segment (an increase of $25.8 million or 24%) and increased net sales of the Display Solutions Segment (an increase of $12.5 million or 12%).
Operating income of $9.0 million for the three months ended December 31, 2022, represents a $4.6 million increase from operating income of $4.4 million in the three months ended December 31, 2021. Adjusted operating income, a Non-GAAP measure, was $10.6 million in the three months ended December 31, 2022, compared to $5.9 million in the three months ended December 31, 2021. Refer to “Non-GAAP Financial Measures” below for a reconciliation of Non-GAAP financial measures to U.S. GAAP measures. The increase in operating income was the result of increased volume leveraged by a higher value sales mix, continued price discipline, and continued effective cost management. The Company continues to focus on actions which increase its value and importance to customers in verticals where the Company sees profitable growth.
Operating income of $19.1 million for the six months ended December 31, 2022, represents a $10.2 million increase from operating income of $8.9 million in the six months ended December 31, 2021. Adjusted operating income, a Non-GAAP financial measure, was $21.4 million in the six months ended December 31, 2022, compared to $10.9 million in the six months ended December 31, 2021. Refer to “Non-GAAP Financial Measures” below for a reconciliation of Non-GAAP financial measures to U.S. GAAP measures.
Non-GAAP Financial Measures
We believe it is appropriate to evaluate our performance after making adjustments to the as-reported U.S. GAAP operating income, net income, and earnings per share. Adjusted operating income, net income, and earnings per share, which exclude the impact of stock compensation expense, severance costs, and consulting expense related to commercial growth initiatives, 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 to Adjusted EBITDA. We believe that these adjusted supplemental measures are useful in assessing the operating performance of our business. These supplemental measures are used by our management, including our chief operating decision maker, to evaluate business results. Although the impacts of some of these items have been recognized in prior periods and could recur in future periods, we exclude these items because they provide greater comparability and enhanced visibility into our results of operations. These non-GAAP measures may be different from non-GAAP measures used by other companies. In addition, the non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations, in that they do not reflect all amounts associated with our results as determined in accordance with U.S. GAAP. Therefore, these measures should be used only to evaluate our results in conjunction with corresponding GAAP measures. Below is a reconciliation of these Non-GAAP measures to operating income, net income, and earnings per share for the periods indicated along with the calculation of EBITDA and Adjusted EBITDA, Free Cash Flow, and Net Debt to Adjusted EBITDA.
Reconciliation of operating income to adjusted operating income: | ||||||||
Three Months Ended | ||||||||
December 31 | ||||||||
(In thousands) | 2022 | 2021 | ||||||
Operating Income as reported | $ | 9,038 | $ | 4,422 | ||||
Stock compensation expense | 1,002 | 1,130 | ||||||
Consulting expense: Commercial Growth Initiatives | 486 | - | ||||||
Acquisition Costs | - | 340 | ||||||
Severance costs | 33 | - | ||||||
Adjusted Operating Income | $ | 10,559 | $ | 5,892 |
Reconciliation of net income to adjusted net income | ||||||||||||||||||
Three Months Ended | ||||||||||||||||||
December 31 | ||||||||||||||||||
(In thousands, except per share data) | 2022 | 2021 | ||||||||||||||||
Diluted EPS | Diluted EPS | |||||||||||||||||
Net Income as reported | $ | 6,417 | $ | 0.22 | $ | 3,105 | $ | 0.11 | ||||||||||
Stock compensation expense | 785 | (1) | 0.03 | 867 | (4) | 0.03 | ||||||||||||
Consulting expense: Commercial Growth Initiatives | 399 | (2) | 0.01 | - | - | |||||||||||||
Acquisition Costs | - | - | 269 | (5) | 0.01 | |||||||||||||
Severance costs | 26 | (3) | - | - | - | |||||||||||||
Net Income adjusted | $ | 7,627 | $ | 0.26 | $ | 4,241 | $ | 0.15 |
The following represents the income tax effects of the adjustments in the tables above, which were calculated using the estimated combined U.S., Canada and Mexico effective income tax rates for the periods indicated (in thousands):
(1) $217
(2) $87
(3) $7
(4) $263
(5) $71
Reconciliation of operating income to adjusted operating income: | ||||||||
Six Months Ended | ||||||||
December 31 | ||||||||
(In thousands) | 2022 | 2021 | ||||||
Operating Income as reported | $ | 19,059 | $ | 8,866 | ||||
Stock compensation expense | 1,553 | 1,686 | ||||||
Consulting expense: Commercial Growth Initiatives | 789 | - | ||||||
Acquisition costs | - | 340 | ||||||
Severance costs | 46 | - | ||||||
Adjusted Operating Income | $ | 21,447 | $ | 10,892 |
Reconciliation of net income to adjusted net income | ||||||||||||||||||
Six Months Ended | ||||||||||||||||||
December 31 | ||||||||||||||||||
(In thousands, except per share data) | 2022 | 2021 | ||||||||||||||||
Diluted EPS | Diluted EPS | |||||||||||||||||
Net Income as reported | $ | 12,678 | $ | 0.44 | $ | 6,238 | $ | 0.22 | ||||||||||
Stock compensation expense | 1,341 | (1) | 0.05 | 1,274 | (4) | 0.05 | ||||||||||||
Consulting expense: Commercial Growth Initiatives | 647 | (2) | 0.02 | - | - | |||||||||||||
Acquisition costs | - | - | 269 | (5) | 0.01 | |||||||||||||
Severance costs | 38 | (3) | - | - | - | |||||||||||||
Net Income adjusted | $ | 14,704 | $ | 0.51 | $ | 7,781 | $ | 0.28 |
The following represents the income tax effects of the adjustments in the tables above, which were calculated using the estimated combined U.S., Canada and Mexico effective income tax rates for the periods indicated (in thousands):
(1) $212
(2) $142
(3) $8
(4) $412
(5) $71
Reconciliation of operating income to EBITDA and Adjusted EBITDA | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
December 31 | December 31 | |||||||||||||||
(In thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Operating Income as reported | $ | 9,038 | $ | 4,422 | $ | 19,059 | $ | 8,866 | ||||||||
Depreciation and Amortization | 2,419 | 2,538 | 4,840 | 5,101 | ||||||||||||
EBITDA | $ | 11,457 | $ | 6,960 | $ | 23,899 | $ | 13,967 | ||||||||
Stock compensation expense | 1,002 | 1,130 | 1,553 | 1,686 | ||||||||||||
Consulting Expense - Commercial Growth Initiatives | 486 | 789 | ||||||||||||||
Acquisition Costs | - | 340 | - | 340 | ||||||||||||
Severance costs | 33 | - | 46 | - | ||||||||||||
Adjusted EBITDA | $ | 12,978 | $ | 8,430 | $ | 26,287 | $ | 15,993 |
Reconciliation of cash flow from operations to free cash flow | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
December 31 | December 31 | |||||||||||||||
(In thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Cash Flow from Operations | $ | 9,481 | $ | (8,654 | ) | $ | 20,064 | $ | (16,543 | ) | ||||||
Capital expenditures | (561 | ) | (448 | ) | (994 | ) | (745 | ) | ||||||||
Free Cash Flow | $ | 8,920 | $ | (9,102 | ) | $ | 19,070 | $ | (17,288 | ) |
Net Debt to Adjusted EBITDA | ||||||||
December 31, | June 30, | |||||||
(In thousands) | 2022 | 2022 | ||||||
Current portion and long-term debt as reported | $ | 3,571 | $ | 3,571 | ||||
Long-Term Debt | 59,250 | 76,025 | ||||||
Total Debt | 62,821 | 79,596 | ||||||
Less: Cash and cash equivalents | (2,765 | ) | (2,462 | ) | ||||
Net Debt | $ | 60,056 | $ | 77,134 | ||||
Adjusted EBITDA - Trailing 12 Months | $ | 45,387 | $ | 35,091 | ||||
Net Debt to Adjusted EBITDA | 1.3 | 2.2 |
Results of Operations
THREE MONTHS ENDED DECEMBER 31, 2022, COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2021
Lighting Segment | ||||||||
Three Months Ended | ||||||||
December 31 | ||||||||
(In thousands) | 2022 | 2021 | ||||||
Net Sales | $ | 66,833 | $ | 57,276 | ||||
Gross Profit | $ | 20,457 | $ | 16,898 | ||||
Operating Income | $ | 6,754 | $ | 4,623 |
Lighting Segment net sales of $66.8 million in the three months ended December 31, 2022, increased 17% from net sales of $57.3 million in the same period in fiscal 2022. Sales growth was broad-based, with significant increases in all vertical market applications. The Company’s efforts over the last two years to strengthen its lighting offering for select vertical market applications coupled with the Company’s enhanced product offering, continues to position LSI to win additional business.
Gross profit of $20.5 million in the three months ended December 31, 2022, increased $3.6 million or 21% from the same period of fiscal 2022. Gross profit as a percentage of net sales was 30.6% in the three months ended December 31, 2022, compared to 29.5% in the same period of fiscal 2022. The improvement in gross profit as a percentage of sales was driven by the increase in net sales resulting from the Company’s continued focus on verticals where it competes coupled with enhanced product offerings, and continued price disciplines, all of which in turn result in improved margins.
Operating expenses of $13.7 millionin the three months ended December 31, 2022, increased $1.4 million from the same period of fiscal 2022, primarily driven by higher commission expense as a result of higher net sales.
Lighting Segment operating income of $6.8 million for the three months ended December 31, 2022, increased $2.1 million from operating income of $4.6 million in the same period of fiscal 2022 primarily driven by sales volume and by an improvement in gross profit as a percentage of sales.
Display Solutions Segment | ||||||||
Three Months Ended | ||||||||
December 31 | ||||||||
(In thousands) | 2022 | 2021 | ||||||
Net Sales | $ | 61,971 | $ | 53,867 | ||||
Gross Profit | $ | 13,681 | $ | 8,559 | ||||
Operating Income | $ | 7,762 | $ | 3,837 |
Display Solutions Segment net sales of $62.0 million in the three months ended December 31, 2022, increased $8.1 million or 15% from net sales of $53.9 million in the same period in fiscal 2022. The sales increase is primarily the result of growth in both the grocery and refueling/convenience-store verticals.
Gross profit of $13.7 million in the three months ended December 31, 2022, increased $5.1 million or 60% from the same period of fiscal 2022. Gross profit as a percentage of net sales in the three months ended December 31, 2022, was 22.1% compared to 15.9% in the same period of fiscal 2022. The improvement in gross profit as a percentage of sales was driven by the increase in net sales, improved program pricing, and favorable sales mix.
Operating expenses of $5.9 million in the three months ended December 31, 2022, increased $1.2 million from $4.7 million in the same period of fiscal 2022. The increase of $1.2 million was driven by investments in commercial resources to support sales growth along with an increase in short-term performance-based incentive plan expense driven by improved business performance.
Display Solutions Segment operating income of $7.8 million in the three months ended December 31, 2022, increased $3.9 million from operating income of $3.8 million in the same period of fiscal 2022. The increase of $3.9 million was primarily driven by an increase in sales and an improvement of gross profit as a percentage of sales.
Corporate and Eliminations | ||||||||
Three Months Ended | ||||||||
December 31 | ||||||||
(In thousands) | 2022 | 2021 | ||||||
Gross Profit (Loss) | $ | 2 | $ | (9 | ) | |||
Operating (Loss) | $ | (5,478 | ) | $ | (4,038 | ) |
The gross profit/(loss) relates to the change in the intercompany profit in inventory elimination.
Operating expenses of $5.5 million in the three months ended December 31, 2022, increased $1.5 million from the same period of fiscal 2022. The increase was primarily the result of an increase in short-term and long-term performance-based incentive plan expense driven by improved business performance and by commercial growth initiative consulting expense of $0.5 million for which there was no comparable expense in the second fiscal 2022.
Consolidated Results
The Company reported $1.3 million and $0.5 million of net interest expense in the three months ended December 31, 2022, and December 31, 2021, respectively. The increase in interest expense is the results of increased borrowing costs. The Company also recorded other (income) of ($0.1) million and a nominal amount of expense in the three months ended December 31, 2022, and December 31, 2021, respectively, both of which is related to net foreign exchange currency transaction losses through our Mexican and Canadian subsidiaries.
The $1.4 million of income tax expense in the three months ended December 31, 2022, represents a consolidated effective tax rate of 18.1%. The $0.7 million of income tax expense in the three months ended December 31, 2021, represents a consolidated effective tax rate of 20.1%.
The Company reported net income of $6.4 million in the three months ended December 31, 2022, compared to net income of $3.1 million in the three months ended December 31, 2021. Non-GAAP adjusted net income was $7.6 million for the three months ended December 31, 2022, compared to adjusted net income of $4.2 million for the three months ended December 31, 2021 (Refer to the Non-GAAP tables above). The increase in Non-GAAP adjusted net income is primarily the net result of an increase in sales and an increase in the gross profit as a percentage of sales. Diluted earnings per share of $0.22 was reported in the three months ended December 31, 2022, as compared to $0.11 diluted earnings per share in the same period of fiscal 2022. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the three months ended December 31, 2022, were 29,204,000 shares compared to 28,067,000 shares in the same period last year.
SIX MONTHS ENDED DECEMBER 31, 2022, COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2021
Lighting Segment | ||||||||
Six Months Ended | ||||||||
December 31 | ||||||||
(In thousands) | 2022 | 2021 | ||||||
Net Sales | $ | 134,366 | $ | 108,536 | ||||
Gross Profit | $ | 42,737 | $ | 32,355 | ||||
Operating Income | $ | 15,912 | $ | 8,962 |
Lighting Segment net sales of $134.4 million in the six months ended December 31, 2022, increased 24% from net sales of $108.5 million in the same period in fiscal 2022. Sales growth was broad-based, with significant increases in all vertical market applications. The Company’s efforts over the last two years to strengthen its lighting offering for select vertical market applications continues to position LSI to win additional business.
Gross profit of $42.7 million in the six months ended December 31, 2022, increased $10.4 million or 32% from the same period of fiscal 2022. Gross profit as a percentage of net sales was 31.8% in the six months ended December 31, 2022, compared to 29.8% in the same period of fiscal 2022. The improvement in gross profit as a percentage of sales was driven by the increase in net sales resulting from the Company’s continued focus on verticals where it competes coupled with enhanced product offerings, and continued price disciplines, all of which in turn result in improved margins.
Operating expenses of $26.8 millionin the six months ended December 31, 2022, increased $3.4 million from the same period of fiscal 2022, primarily driven by higher commission expense as a result of higher net sales.
Lighting Segment operating income of $15.9 million for the six months ended December 31, 2022, increased $7.0 million from operating income of $9.0 million in the same period of fiscal 2022 primarily driven by sales volume and by an improvement in gross profit as a percentage of sales.
Display Solutions Segment | ||||||||
Six Months Ended | ||||||||
December 31 | ||||||||
(In thousands) | 2022 | 2021 | ||||||
Net Sales | $ | 121,507 | $ | 109,004 | ||||
Gross Profit | $ | 26,134 | $ | 17,595 | ||||
Operating Income | $ | 14,258 | $ | 7,586 |
Display Solutions Segment net sales of $121.5 million in the six months ended December 31, 2022, increased $12.5 million or 12% from net sales of $109.0 million in the same period in fiscal 2022. The sales increase is primarily the result of growth in both the grocery and refueling/convenience-store verticals.
Gross profit of $26.1 million in the six months ended December 31, 2022, increased $8.5 million or 49% from the same period of fiscal 2022. Gross profit as a percentage of net sales in the six months ended December 31, 2022, was 21.5% compared to 16.1% in the same period of fiscal 2022. The improvement in gross profit as a percentage of sales was driven by the increase in net sales, improved program pricing, and favorable sales mix.
Operating expenses of $11.9 million in the six months ended December 31, 2022, increased $1.9 million from $10.0 million in the same period of fiscal 2022. The increase of $1.9 million was driven by investments in commercial resources to support sales growth along with an increase in short-term performance-based incentive plan expense driven by improved business performance.
Display Solutions Segment operating income of $14.3 million in the six months ended December 31, 2022, increased $6.7 million or 88% from operating income of $7.6 million in the same period of fiscal 2022. The increase was primarily driven by an increase in sales and an improvement of gross profit as a percentage of sales.
Corporate and Eliminations | ||||||||
Six Months Ended | ||||||||
December 31 | ||||||||
(In thousands) | 2022 | 2021 | ||||||
Gross Profit (Loss) | $ | 7 | $ | 8 | ||||
Operating (Loss) | $ | (11,111 | ) | $ | (7,682 | ) |
The gross profit relates to the change in the intercompany profit in inventory elimination.
Operating expenses of $11.1 million in the six months ended December 31, 2022, increased $3.4 million from the same period of fiscal 2022. The increase was primarily the result of an increase in short-term and long-term performance-based incentive plan expense driven by improved business performance and by commercial growth initiative consulting expense of $0.8 million for which there was no comparable expense in the first half fiscal 2022.
Consolidated Results
The Company reported $2.0 million and $0.8 million of net interest expense in the six months ended December 31, 2022, and December 31, 2021, respectively. The increase in interest expense is primarily the results of increased borrowing costs. The Company also recorded other expense of $0.2 and $0.1 in the six months ended December 31, 2022, and December 31, 2021, respectively, related to net foreign exchange currency transaction losses and gains through our Mexican and Canadian subsidiaries.
The $4.2 million of income tax expense in the six months ended December 31, 2022, represents a consolidated effective tax rate of 24.8%. The $1.8 million income tax expense in the six months ended December 31, 2021, represents a consolidated effective tax rate of 22.2%.
The Company reported net income of $12.7 million in the six months ended December 31, 2022, compared to net income of $6.2 million in the six months ended December 31, 2021. Non-GAAP adjusted net income was $14.7 million for the six months ended December 31, 2022, compared to adjusted net income of $7.8 million for the six months ended December 31, 2021 (Refer to the Non-GAAP tables above). The increase in Non-GAAP adjusted net income is primarily the net result of an increase in sales and an increase in the gross profit as a percentage of sales. Diluted earnings per share of $0.44 was reported in the six months ended December 31, 2022, as compared to $0.22 diluted earnings per share in the same period of fiscal 2022. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the six months ended December 31, 2022, were 28,766,000 shares compared to 27,895,000 shares in the same period last year.
Liquidity and Capital Resources
The Company considers its level of cash on hand, borrowing capacity, current ratio and working capital levels to be its most important measures of short-term liquidity. For long-term liquidity indicators, the Company believes its ratio of long-term debt to equity and our historical levels of net cash flows from operating activities to be the most important measures.
At December 31, 2022, the Company had working capital of $84.9 million compared to $84.3 million at June 30, 2022. The ratio of current assets to current liabilities was 2.32 to 1 at December 31, 2022, and 2.13 at June 30, 2022. The marginal increase in working capital from June 30, 2022, to December 31, 2022, is primarily driven by a $10.4 million decrease in net accounts receivable more than offset by a $7.5 million decrease in accounts payable and a $3.0 million decrease in accrued expenses. Also contributing to the change in working capital was a $1.2 million decrease in net inventory, partially offset by a $0.3 million increase in cash and a $1.4 million increase in refundable income taxes and other current assets.
Net accounts receivable was $67.4 million and $77.8 million at December 31, 2022, and June 30, 2022, respectively. DSO decreased to 52 days at December 31, 2022, from 55 days at June 30, 2022.
Net inventories of $73.2 million at December 31, 2022, decreased $1.2 million from $74.4 million at June 30, 2022. The decrease of $1.2 million is the result of a decrease in net inventory of $0.4 million in the Lighting Segment and a $0.8 decrease in net inventory in the Display Solutions Segment.
Cash generated from operations and borrowing capacity under the Company’s line of credit is its primary source of liquidity. In September 2021, the Company amended its existing $100 million secured line of credit, to a $25 million term loan and $75 million remaining as a secured revolving line of credit. Both facilities expire in the third quarter of fiscal 2026. As of December 31, 2022, $32.7 million of the credit line was available. The Company is in compliance with all of its loan covenants. The $100 million credit facility plus cash flows from operating activities are adequate for operational and capital expenditure needs for the remainder of fiscal 2023..
The Company had a source of $20.1 million of cash from operating activities in the six months ended December 31, 2022, compared to a use of cash of $16.5 million in the six months ended December 31, 2021. The increase in net cash flows from operating activities is primarily the result of effective management of the Company’s working capital and from improved earnings.
The Company used $1.0 million and $.2 million of cash related to investing activities in the six months ended December 31, 2022, and December 31, 2021, respectively.
The Company had a use of cash of $18.8 million related to financing activities in the six months ended December 31, 2022, compared to a source of cash of $15.4 million in the six months ended December 31, 2021. The $34.2 million change in cash flow was primarily the result of cash generated from improved working capital management and from improved earnings, which was used to pay down the Company’s line of credit in the first half of fiscal 2023. Also contributing to the reduction of debt was $1.3 million of cash received from the exercise of stock options in the second quarter of fiscal 2023.
The Company has on its balance sheet financial instruments consisting primarily of cash and cash equivalents, short-term investments, revolving lines of credit, and long-term debt. The fair value of these financial instruments approximates carrying value because of their short-term maturity and/or variable, market-driven interest rates.
Off-Balance Sheet Arrangements
The Company has no financial instruments with off-balance sheet risk and have no off-balance sheet arrangements.
Cash Dividends
In January 2023, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable February 14, 2023, to shareholders of record as of February 6, 2023. The indicated annual cash dividend rate for fiscal 2023 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 2022 Annual Report on Form 10-K.
Carrying values for long-lived tangible assets and definite-lived intangible assets, excluding goodwill and indefinite-lived intangible assets, are reviewed for possible impairment as circumstances warrant. Impairment reviews are conducted at the judgment of Company management when it believes that a change in circumstances in the business or external factors warrants a review. Circumstances such as the discontinuation of a product or product line, a sudden or consistent decline in the forecast for a product, changes in technology or in the way an asset is being used, a history of negative operating cash flow, or an adverse change in legal factors or in the business climate, among others, may trigger an impairment review. The Company’s initial impairment review to determine if a potential impairment charge is required is based on an undiscounted cash flow analysis at the lowest level for which identifiable cash flows exist. The analysis requires judgment with respect to changes in technology, the continued success of product lines and future volume, revenue and expense growth rates, and discount rates.
Credit and Collections
The Company maintains allowances for doubtful accounts receivable for probable estimated losses resulting from either customer disputes or the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against income. The Company determines its allowance for doubtful accounts by first considering all known collectability problems of customers’ accounts, and then applying certain percentages against the various aging categories based on the due date of the remaining receivables. The resulting allowance for doubtful accounts receivable is an estimate based upon the Company’s knowledge of its business and customer base, and historical trends. The amount ultimately not collected may differ from the reserve established, particularly in the case where percentages are applied against aging categories. In all cases, it is management’s goal to carry a reserve against the Company’s accounts receivable which is adequate based upon the information available at that time so that net accounts receivable is properly stated. The Company also establishes allowances, at the time revenue is recognized, for returns and allowances, discounts, pricing and other possible customer deductions. These allowances are based upon contractual terms and historical trends.
Warranty Reserves
The Company offers a limited warranty that its products are free from defects in workmanship and materials. The specific terms and conditions vary somewhat by product line, but generally cover defective products returned within one to five years, with some exceptions where the terms extend to ten years, from the date of shipment. The Company records warranty liabilities to cover the estimated future costs for repair or replacement of defective returned products as well as products that need to be repaired or replaced in the field after installation. The Company calculates its liability for warranty claims by applying estimates based upon historical claims as a percentage of sales to cover unknown claims, as well as estimating the total amount to be incurred for known warranty issues. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Inventory Reserves
The Company maintains an inventory reserve for probable obsolete and excess inventory. The Company first determines its obsolete inventory reserve by considering specific known obsolete items, and then by applying certain percentages to specific inventory categories based upon inventory turns. The Company uses various tools, in addition to inventory turns, to identify which inventory items have the potential to become obsolete. A combination of financial modeling and qualitative input factors are used to establish excess and obsolete inventory reserves and management adjusts these reserves as more information becomes available about the ultimate disposition of the inventory item. Management values inventory at lower of cost or market.
The Company is required to make estimates and judgments in the preparation of its financial statements that affect the reported amounts of assets, liabilities, revenues and expenses, and related footnote disclosures. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The Company continually reviews these estimates and their underlying assumptions to ensure they remain appropriate. The Company believes the items discussed below are among its most significant accounting policies because they utilize estimates about the effect of matters that are inherently uncertain and therefore are based on management’s judgment. Significant changes in the estimates or assumptions related to any of the following critical accounting policies could possibly have a material impact on the financial statements.
New Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board issued ASU 2014-09, “Revenue from Contracts with Customers.” This amended guidance supersedes and replaces all existing U.S. GAAP revenue recognition guidance. The guidance established a new revenue recognition model, changes the basis for deciding when revenue is recognized, provides new and more detailed guidance on specific revenue topics, and expands and improves disclosures about revenue. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing.” In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers: Narrow Scope Improvements and Practical Expedients.” In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” These three standards clarify or improve guidance from ASU 2014-09 and are effective for fiscal and interim periods within those years, beginning after December 15, 2017, or the Company’s fiscal 2019. The Company will adopt these standards no later than July 1, 2018, using the modified retrospective transition method. The Company is reviewing accounting policies and evaluating disclosures in the financial statements related to the new standard. The Company is also assessing potential changes to the business processes, internal controls, and information systems related to the adoption of the new standard. While the Company is currently assessing the impact of the new standard, the Company’s revenue is primarily generated from the sale of finished products to customers. Those sales predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risks, and rewards transfer. The recognition of revenue from most product sales is largely unaffected by the new standard. However, with respect to certain product sales requiring installation, revenue is currently not recognized until the installation is complete. While the Company does not expect this new guidance to have a material impact on the amount of overall sales recognized, the timing of recognition of revenues from sales on certain projects may be affected. Our initial conclusions may change as we finalize our assessment and select a transition method during the next six months.
In July 2015, the Financial Accounting Standards Board issued ASU 2015-11, “Simplifying the Measurement of Inventory.” The amended guidance requires an entity to measure in scope inventory at lower of cost and net realizable value. The amended guidance is effective for fiscal years beginning after December 15, 2016, or the Company’s fiscal 2018. We adopted the new accounting standard in the first quarter of fiscal 2018 and there was no material impact on the Company’s consolidated financial statements.
In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases.” The amended guidance requires an entity to recognize assets and liabilities that arise from leases. The amended guidance is effective for financial statements issued for fiscal and interim periods within those years, beginning after December 15, 2018, or the Company’s fiscal 2020, with early adoption permitted. The Company has not yet determined the impact the amended guidance will have on its financial statements.
In March 2016, the Financial Accounting Standards Board issued ASU 2016-08, “Principal versus Agent Considerations.” The amendment is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The amended guidance is effective for financial statements issued for fiscal and interim periods within those years, beginning after December 15, 2017, or the Company’s fiscal 2019, with early adoption permitted in fiscal years beginning after December 15, 2016. The Company has determined the amended guidance will have an immaterial impact on its financial statements.
In March 2016, the Financial Accounting Standards Board issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This amended guidance simplifies several aspects of the accounting for share-based payment award transactions. The amended guidance is effective for financial statements issued for fiscal and interim periods within those years, beginning after December 15, 2016, or the Company’s fiscal 2018. We adopted this standard on July 1, 2017 and recognized excess tax benefits of $81,010 in income tax expense during the three months ended September 30, 2017. The amount may not necessarily be indicative of future amounts that may be recognized as any excess tax benefits recognized would be dependent on future stock price, employee exercise behavior and applicable tax rates. Prior to July 1, 2017, excess tax benefits were recognized in additional paid-in capital. Additionally, excess tax benefits are now included in net cash flows provided by operating activities rather than net cash flows provided by financing activities in the Company’s Consolidated Statement of Cash Flows. The treatment of forfeitures has not changed, as the Company is electing to continue the current process of estimating forfeiture at the time of grant. The Company had no unrecognized excess tax benefits from prior periods to record upon the adoption of this ASU.
In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” This amendment provides additional guidance on the measurement of expected credit losses for financial assets based on historical experience, current conditions, and supportable forecasts. The amended guidance is effective for financial statements issued for fiscal and interim periods within those years, beginning after December 15, 2019, or the Company’s fiscal 2021. The Company is evaluating the impact of the amended guidance and the anticipated impact to the financial statements is not material.
In August 2016, the Financial Accounting Standards Board issued ASU 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments,” which provides cash flow classification guidance for certain cash receipts and cash payments. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, or the Company’s fiscal 2019. The Company is evaluating the impact the amended guidance will have on its financial statements.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company’sour exposure to market risk since June 30, 2017.2022. Additional information can be found in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, which appears on page 1318 of the Annual Report on Form 10-K for the fiscal year ended June 30, 2017.2022.
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintainsWe 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 Securities Exchange Act of 1934.Act. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017,2022, 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.
The Company acquired Atlas Lighting Products, Inc. (“Atlas”) on February 21, 2017. Management excluded Atlas from its evaluation of the effectiveness of the internal control over financial reporting as of December 31, 2017. Atlas represented 31% of the Company’s total consolidated assets as of December 31, 2017, and 14% of the Company’s total consolidated sales for the fiscal year ended December 31, 2017.
Changes in Internal Control
There have been no changes in the Company’sour internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscalsecond quarter ended December 31, 2017,2022, that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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ISSUER PURCHASES OF EQUITY SECURITIESPART II.OTHER INFORMATION
ITEM 5. OTHER INFORMATION |
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ITEM 6.EXHIBITS
Exhibits:
31.1 | Certification of Principal Executive Officer required by Rule 13a-14(a) |
31.2 | Certification of Principal |
| Section 1350 Certification of Principal |
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101.INS Inline XBRL Instance Document
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LSI Industries Inc. | |||||
By: | /s/ | ||||
James A. Clark |
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Chief Executive Officer and President | |||||
(Principal Executive Officer) | |||||
By: | /s/ James E. Galeese | ||||
James E. Galeese | |||||
Executive Vice President and Chief Financial Officer | |||||
( | |||||
February 7, |