UNITED STATES
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, 2018April 28, 2023, there were 25,574,45728,367,653 shares of the Registrant'sregistrant's common stock, no par value per share, outstanding.
LSI INDUSTRIES INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBERMarch 31, 20172023
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| FINANCIAL INFORMATION | 3 | |||
ITEM 1. FINANCIAL STATEMENTS |
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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
ITEM 1. FINANCIAL STATEMENTS
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)3
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
4
Three Months Ended | Six Months Ended | |||||||||||||||
December 31 | December 31 | |||||||||||||||
(In thousands, except per share data) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Net sales | $ | 92,305 | $ | 85,658 | $ | 179,771 | $ | 169,817 | ||||||||
Cost of products and services sold | 66,998 | 63,611 | 130,761 | 126,432 | ||||||||||||
Restructuring costs | -- | 640 | -- | 1,143 | ||||||||||||
Gross profit | 25,307 | 21,407 | 49,010 | 42,242 | ||||||||||||
Restructuring costs | -- | 57 | -- | 210 | ||||||||||||
Impairment of goodwill | -- | -- | 28,000 | -- | ||||||||||||
Selling and administrative expenses | 20,760 | 18,532 | 41,277 | 38,148 | ||||||||||||
Operating income (loss) | 4,547 | 2,818 | (20,267 | ) | 3,884 | |||||||||||
Interest (income) | (8 | ) | (28 | ) | (16 | ) | (55 | ) | ||||||||
Interest expense | 425 | 8 | 836 | 21 | ||||||||||||
Income (loss) before income taxes | 4,130 | 2,838 | (21,087 | ) | 3,918 | |||||||||||
Income tax expense (benefit) | 5,598 | 832 | (3,990 | ) | 1,083 | |||||||||||
Net (loss) income | $ | (1,468 | ) | $ | 2,006 | $ | (17,097 | ) | $ | 2,835 | ||||||
(Loss) Earnings per common share (see Note 4) | ||||||||||||||||
Basic | $ | (0.06 | ) | $ | 0.08 | $ | (0.66 | ) | $ | 0.11 | ||||||
Diluted | $ | (0.06 | ) | $ | 0.08 | $ | (0.66 | ) | $ | 0.11 | ||||||
Weighted average common shares outstanding | ||||||||||||||||
Basic | 25,858 | 25,314 | 25,824 | 25,294 | ||||||||||||
Diluted | 25,858 | 25,803 | 25,824 | 25,859 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)5
(In thousands, except shares) | December 31, | June 30, | ||||||
2017 | 2017 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 3,177 | $ | 3,039 | ||||
Accounts receivable, less allowance for doubtful accounts of $475 and $506, respectively | 59,740 | 48,880 | ||||||
Inventories | 48,662 | 50,008 | ||||||
Refundable income tax | -- | 775 | ||||||
Assets held for sale | -- | 1,463 | ||||||
Other current assets | 3,712 | 2,964 | ||||||
Total current assets | 115,291 | 107,129 | ||||||
Property, Plant and Equipment, at cost | ||||||||
Land | 6,469 | 6,429 | ||||||
Buildings | 35,855 | 35,463 | ||||||
Machinery and equipment | 82,152 | 78,804 | ||||||
Construction in progress | 796 | 3,805 | ||||||
125,272 | 124,501 | |||||||
Less accumulated depreciation | (80,409 | ) | (77,147 | ) | ||||
Net property, plant and equipment | 44,863 | 47,354 | ||||||
Goodwill | 30,538 | 58,538 | ||||||
Other Intangible Assets, net | 36,789 | 38,169 | ||||||
Other Long-Term Assets, net | 10,893 | 5,490 | ||||||
Total assets | $ | 238,374 | $ | 256,680 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)6
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
7
December 31, | June 30, | |||||||
(In thousands, except shares) | 2017 | 2017 | ||||||
LIABILITIES & SHAREHOLDERS’ EQUITY | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 16,828 | $ | 19,356 | ||||
Accrued expenses | 25,713 | 26,069 | ||||||
Total current liabilities | 42,541 | 45,425 | ||||||
Long-Term Debt | 52,149 | 49,698 | ||||||
Other Long-Term Liabilities | 1,356 | 1,479 | ||||||
Commitments and Contingencies (Note 12) | -- | -- | ||||||
Shareholders’ Equity | ||||||||
Preferred shares, without par value; Authorized 1,000,000 shares, none issued | -- | -- | ||||||
Common shares, without par value; Authorized 40,000,000 shares; Outstanding 25,562,003 and 24,429,223 shares, respectively | 122,170 | 120,259 | ||||||
Retained earnings | 20,158 | 39,819 | ||||||
Total shareholders’ equity | 142,328 | 160,078 | ||||||
Total liabilities & shareholders’ equity | $ | 238,374 | $ | 256,680 |
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)8
(In thousands) | Six Months Ended | |||||||
December 31 | ||||||||
2017 | 2016 | |||||||
Cash Flows from Operating Activities | ||||||||
Net (loss) income | $ | (17,097 | ) | $ | 2,835 | |||
Non-cash items included in net income | ||||||||
Depreciation and amortization | 5,124 | 3,605 | ||||||
Deferred income taxes | (5,667 | ) | (962 | ) | ||||
Impairment of goodwill | 28,000 | -- | ||||||
Deferred compensation plan | (413 | ) | 237 | |||||
Stock compensation expense | 1,463 | 1,688 | ||||||
Issuance of common shares as compensation | 156 | 228 | ||||||
Loss (gain) on disposition of fixed assets | (29 | ) | 53 | |||||
Fixed asset impairment and accelerated depreciation | -- | 354 | ||||||
Allowance for doubtful accounts | 115 | 205 | ||||||
Inventory obsolescence reserve | 1,033 | 758 | ||||||
Changes in certain assets and liabilities: | ||||||||
Accounts receivable | (10,975 | ) | (2,771 | ) | ||||
Inventories | 313 | 979 | ||||||
Refundable income taxes | 775 | -- | ||||||
Accounts payable | (2,626 | ) | (176 | ) | ||||
Accrued expenses and other | (742 | ) | (2,630 | ) | ||||
Customer prepayments | (221 | ) | 216 | |||||
Net cash flows (used in) provided by operating activities | (791 | ) | 4,619 | |||||
Cash Flows from Investing Activities | ||||||||
Purchases of property, plant and equipment | (1,190 | ) | (2,744 | ) | ||||
Proceeds from sale of fixed assets | 1,527 | 1 | ||||||
Net cash flows provided by (used in) investing activities | 337 | (2,743 | ) | |||||
Cash Flows from Financing Activities | ||||||||
Payments of long-term debt | (48,553 | ) | -- | |||||
Borrowings of long-term debt | 51,004 | -- | ||||||
Cash dividends paid | (2,564 | ) | (2,513 | ) | ||||
Exercise of stock options | 175 | 171 | ||||||
Purchase of treasury shares | (107 | ) | (390 | ) | ||||
Acquisition of common stock for tax withholding related to share based compensation | 183 | -- | ||||||
Issuance of treasury shares | 454 | 44 | ||||||
Net cash flows provided by (used in) financing activities | 592 | (2,688 | ) | |||||
Increase (decrease) in cash and cash equivalents | 138 | (812 | ) | |||||
Cash and cash equivalents at beginning of period | 3,039 | 33,835 | ||||||
Cash and cash equivalents at end of period | $ | 3,177 | $ | 33,023 |
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
9
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II.OTHER INFORMATION
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
SIGNATURES
PART I.FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
(In thousands, except per share data) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Net Sales | $ | 117,470 | $ | 110,111 | $ | 373,343 | $ | 327,651 | ||||||||
Cost of products and services sold | 85,266 | 83,318 | 272,230 | 250,900 | ||||||||||||
Severence Costs | - | - | 31 | - | ||||||||||||
Gross profit | 32,204 | 26,793 | 101,082 | 76,751 | ||||||||||||
Selling and administrative expenses | 24,472 | 21,632 | 74,291 | 62,724 | ||||||||||||
Operating income | 7,732 | 5,161 | 26,791 | 14,027 | ||||||||||||
Interest expense | 877 | 524 | 2,924 | 1,287 | ||||||||||||
Other (income) expense | (71 | ) | (55 | ) | 86 | 33 | ||||||||||
Income before income taxes | 6,926 | 4,692 | 23,781 | 12,707 | ||||||||||||
Income tax expense | 2,257 | 1,074 | 6,434 | 2,851 | ||||||||||||
Net income | $ | 4,669 | $ | 3,618 | $ | 17,347 | $ | 9,856 | ||||||||
Earnings per common share (see Note 4) | ||||||||||||||||
Basic | $ | 0.16 | $ | 0.13 | $ | 0.62 | $ | 0.36 | ||||||||
Diluted | $ | 0.16 | $ | 0.13 | $ | 0.60 | $ | 0.35 | ||||||||
Weighted average common shares outstanding | ||||||||||||||||
Basic | 28,306 | 27,378 | 28,012 | 27,220 | ||||||||||||
Diluted | 29,611 | 28,083 | 29,055 | 27,945 |
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 | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
(In thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Net Income | $ | 4,669 | $ | 3,618 | $ | 17,347 | $ | 9,856 | ||||||||
Foreign currency translation adjustment | 117 | 46 | 192 | 11 | ||||||||||||
Comprehensive Income | $ | 4,786 | $ | 3,664 | $ | 17,539 | $ | 9,867 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, | June 30, | |||||||
(In thousands, except shares) | 2023 | 2022 | ||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 1,350 | $ | 2,462 | ||||
Accounts receivable, less allowance for credit losses of $386 and $499, respectively | 69,288 | 77,750 | ||||||
Inventories | 67,661 | 74,421 | ||||||
Refundable income taxes | 2,906 | 1,041 | ||||||
Other current assets | 4,617 | 3,243 | ||||||
Total current assets | 145,822 | 158,917 | ||||||
Property, Plant and Equipment, at cost | ||||||||
Land | 4,010 | 4,010 | ||||||
Buildings | 24,624 | 24,495 | ||||||
Machinery and equipment | 68,075 | 66,762 | ||||||
Buildings under finance leases | 2,033 | 2,033 | ||||||
Construction in progress | 720 | 618 | ||||||
99,462 | 97,918 | |||||||
Less accumulated depreciation | (74,198 | ) | (70,760 | ) | ||||
Net property, plant and equipment | 25,264 | 27,158 | ||||||
Goodwill | 45,030 | 45,030 | ||||||
Other intangible assets, net | 64,394 | 67,964 | ||||||
Operating lease right-of-use assets | 6,770 | 8,664 | ||||||
Other long-term assets, net | 3,739 | 3,347 | ||||||
Total assets | $ | 291,019 | $ | 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)
March 31, | June 30, | |||||||
(In thousands, except shares) | 2023 | 2022 | ||||||
LIABILITIES & SHAREHOLDERS' EQUITY | ||||||||
Current liabilities | ||||||||
Current maturities of long-term debt | $ | 3,571 | $ | 3,571 | ||||
Accounts payable | 24,749 | 34,783 | ||||||
Accrued expenses | 37,717 | 36,264 | ||||||
Total current liabilities | 66,037 | 74,618 | ||||||
Long-term debt | 46,002 | 76,025 | ||||||
Finance lease liabilities | 1,036 | 1,246 | ||||||
Operating lease liabilities | 6,115 | 8,240 | ||||||
Other long-term liabilities | 4,086 | 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 28,349,720 and 27,484,514 shares, respectively | 146,000 | 139,500 | ||||||
Treasury shares, without par value | (6,736 | ) | (5,927 | ) | ||||
Deferred compensation plan | 6,736 | 5,927 | ||||||
Retained earnings | 21,506 | 8,224 | ||||||
Accumulated other comprehensive income | 237 | 45 | ||||||
Total shareholders' equity | 167,743 | 147,769 | ||||||
Total liabilities & shareholders' equity | $ | 291,019 | $ | 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)
Accumulated | ||||||||||||||||||||||||||||||||
Common Shares | Treasury Shares | Key Executive | Other | Retained | Total | |||||||||||||||||||||||||||
Number Of | Number Of | Compensation | Comprehensive | Earnings | Shareholders' | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Amount | Income | (Loss) | Equity | |||||||||||||||||||||||||
Balance at June 30, 2021 | 26,863 | $ | 132,526 | (346 | ) | $ | (2,450 | ) | $ | 2,450 | $ | 49 | $ | (1,405 | ) | $ | 131,170 | |||||||||||||||
Net Income | - | - | - | - | - | - | 9,856 | 9,856 | ||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | 11 | - | 11 | ||||||||||||||||||||||||
Stock compensation awards | 30 | 225 | - | - | - | - | - | 225 | ||||||||||||||||||||||||
Restricted stock units issued, net of shares withheld for tax withholdings | 80 | (250 | ) | - | - | - | - | - | (250 | ) | ||||||||||||||||||||||
Shares issued for deferred compensation | 412 | 3,089 | - | - | - | - | - | 3,089 | ||||||||||||||||||||||||
Activity of treasury shares, net | - | - | (401 | ) | (3,007 | ) | - | - | - | (3,007 | ) | |||||||||||||||||||||
Deferred stock compensation | - | - | - | - | 3,007 | - | - | 3,007 | ||||||||||||||||||||||||
Stock compensation expense | - | 2,466 | - | - | - | - | - | 2,466 | ||||||||||||||||||||||||
Stock options exercised, net | 5 | 26 | - | - | - | - | - | 26 | ||||||||||||||||||||||||
Dividends — $0.20 per share | - | - | - | - | - | - | (4,048 | ) | (4,048 | ) | ||||||||||||||||||||||
Balance at March 31, 2022 | 27,390 | $ | 138,082 | (747 | ) | $ | (5,457 | ) | $ | 5,457 | $ | 60 | $ | 4,403 | $ | 142,545 |
Accumulated | ||||||||||||||||||||||||||||||||
Common Shares | Treasury Shares | Key Executive | Other | Total | ||||||||||||||||||||||||||||
Number Of | Number Of | Compensation | Comprehensive | Retained | Shareholders' | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Amount | Income | Earnings | Equity | |||||||||||||||||||||||||
Balance at June 30, 2022 | 27,484 | $ | 139,500 | (822 | ) | $ | (5,927 | ) | $ | 5,927 | $ | 45 | $ | 8,224 | $ | 147,769 | ||||||||||||||||
Net Income | - | - | - | - | - | - | 17,347 | 17,347 | ||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | - | 192 | - | 192 | ||||||||||||||||||||||||
Stock compensation awards | 37 | 270 | - | - | - | - | - | 270 | ||||||||||||||||||||||||
ESPP Stock Awards | 10 | 97 | - | - | - | - | - | 97 | ||||||||||||||||||||||||
Restricted stock units issued, net of shares withheld for tax withholdings | 301 | (844 | ) | - | - | - | - | - | (844 | ) | ||||||||||||||||||||||
Shares issued for deferred compensation | 168 | 1,530 | - | - | - | - | - | 1,530 | ||||||||||||||||||||||||
Activity of treasury shares, net | - | - | (69 | ) | (809 | ) | - | - | - | (809 | ) | |||||||||||||||||||||
Deferred stock compensation | - | - | - | - | 809 | - | - | 809 | ||||||||||||||||||||||||
Stock compensation expense | 2,308 | - | - | - | - | - | 2,308 | |||||||||||||||||||||||||
Stock options exercised, net | 349 | 3,139 | - | - | - | - | - | 3,139 | ||||||||||||||||||||||||
Dividends — $0.20 per share | - | - | - | - | - | - | (4,065 | ) | (4,065 | ) | ||||||||||||||||||||||
Balance at March 31, 2023 | 28,349 | $ | 146,000 | (891 | ) | $ | (6,736 | ) | $ | 6,736 | $ | 237 | $ | 21,506 | $ | 167,743 |
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)
Nine Months Ended | ||||||||
March 31 | ||||||||
(In thousands) | 2023 | 2022 | ||||||
Cash Flows from Operating Activities | ||||||||
Net income | $ | 17,347 | $ | 9,856 | ||||
Non-cash items included in net income | ||||||||
Depreciation and amortization | 7,295 | 7,632 | ||||||
Deferred income taxes | 59 | 26 | ||||||
Deferred compensation plan | 1,530 | 3,089 | ||||||
Stock compensation expense | 2,308 | 2,466 | ||||||
Employee Stock Purchase Plan Discount | 97 | - | ||||||
Issuance of common shares as compensation | 270 | 225 | ||||||
Loss on disposition of fixed assets | 37 | 57 | ||||||
Allowance for doubtful accounts | (80 | ) | 205 | |||||
Inventory obsolescence reserve | 740 | 752 | ||||||
Changes in certain assets and liabilities | ||||||||
Accounts receivable | 8,542 | (16,104 | ) | |||||
Inventories | 6,020 | (20,175 | ) | |||||
Refundable income taxes | (1,865 | ) | 247 | |||||
Accounts payable | (10,034 | ) | 5,695 | |||||
Accrued expenses and other | 2,830 | (3,708 | ) | |||||
Customer prepayments | (2,548 | ) | (2,931 | ) | ||||
Net cash flows provided by (used in) operating activities | 32,548 | (12,668 | ) | |||||
Cash Flows from Investing Activities | ||||||||
Purchases of property, plant and equipment | (1,754 | ) | (1,276 | ) | ||||
Adjustment to JSI acquisition purchase price | - | 500 | ||||||
Proceeds from the sale of fixed assets | 1 | - | ||||||
Net cash flows (used in) investing activities | (1,753 | ) | (776 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Payments of long-term debt | (150,547 | ) | (113,195 | ) | ||||
Borrowings of long-term debt | 120,524 | 130,006 | ||||||
Cash dividends paid | (4,065 | ) | (3,989 | ) | ||||
Shares withheld for employees' taxes | (844 | ) | (250 | ) | ||||
Payments on financing lease obligations | (192 | ) | (196 | ) | ||||
Proceeds from stock option exercises | 3,139 | 26 | ||||||
Net cash flows (used in) provided by financing activities | (31,985 | ) | 12,402 | |||||
Change related to foreign currency | 78 | 8 | ||||||
(Decrease) in cash and cash equivalents | (1,112 | ) | (1,034 | ) | ||||
Cash and cash equivalents at beginning of period | 2,462 | 2,282 | ||||||
Cash and cash equivalents at end of period | $ | 1,350 | $ | 1,248 |
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 March 31, 2023, the results of its operations for the three and nine-month periods ended March 31, 2023, and 2022, and its cash flows for the nine-month periods ended March 31, 2023, and 2022. 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
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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) | March 31, 2023 | March 31, 2022 | ||||||||||||||
Display | Display | |||||||||||||||
Lighting | Solutions | Lighting | Solutions | |||||||||||||
Segment | Segment | Segment | Segment | |||||||||||||
Timing of revenue recognition | ||||||||||||||||
Products and services transferred at a point in time | $ | 57,249 | $ | 42,378 | $ | 49,283 | $ | 41,231 | ||||||||
Products and services transferred over time | 9,458 | 8,385 | 7,843 | 11,754 | ||||||||||||
$ | 66,707 | $ | 50,763 | $ | 57,126 | $ | 52,985 |
Nine Months Ended | ||||||||||||||||
March 31, 2023 | March 31, 2022 | |||||||||||||||
Display | Display | |||||||||||||||
Lighting | Solutions | Lighting | Solutions | |||||||||||||
Segment | Segment | Segment | Segment | |||||||||||||
Timing of revenue recognition | ||||||||||||||||
Products and services transferred at a point in time | $ | 173,917 | $ | 136,894 | $ | 144,006 | $ | 114,099 | ||||||||
Products and services transferred over time | 27,157 | 35,375 | 21,656 | 47,890 | ||||||||||||
$ | 201,074 | $ | 172,269 | $ | 165,662 | $ | 161,989 |
Three Months Ended | ||||||||||||||||
March 31, 2023 | March 31, 2022 | |||||||||||||||
Display | Display | |||||||||||||||
Lighting | Solutions | Lighting | Solutions | |||||||||||||
Segment | Segment | Segment | Segment | |||||||||||||
Type of Product and Services | ||||||||||||||||
LED lighting, digital signage solutions, electronic circuit boards | $ | 55,894 | $ | 4,907 | $ | 47,196 | $ | 6,906 | ||||||||
Poles, printed graphics, display fixtures | 9,920 | 37,019 | 9,358 | 35,536 | ||||||||||||
Project management, installation services, shipping and handling | 893 | 8,837 | 572 | 10,543 | ||||||||||||
$ | 66,707 | $ | 50,763 | $ | 57,126 | $ | 52,985 |
Nine Months Ended | ||||||||||||||||
March 31, 2023 | March 31, 2022 | |||||||||||||||
Display | Display | |||||||||||||||
Lighting | Solutions | Lighting | Solutions | |||||||||||||
Segment | Segment | Segment | Segment | |||||||||||||
Type of Product and Services | ||||||||||||||||
LED lighting, digital signage solutions, electronic circuit boards | $ | 165,839 | $ | 17,883 | $ | 136,701 | $ | 31,885 | ||||||||
Poles, printed graphics, display fixtures | 32,681 | 120,173 | 27,403 | 99,965 | ||||||||||||
Project management, installation services, shipping and handling | 2,554 | 34,213 | 1,558 | 30,139 | ||||||||||||
$ | 201,074 | $ | 172,269 | $ | 165,662 | $ | 161,989 |
Practical Expedients and Exemptions
● | The
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● | The
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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 services lighting product customers through the commercial and industrial project, stock and flow, and renovation channels. In addition to the manufacture and sale of lighting fixtures, the Company offers a variety of lighting controls to complement its lighting fixtures which include sensors, photocontrols, dimmers, motion detection and Bluetooth systems. 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 nine months ended March 31, 2023, or March 31, 2022. There was no concentration of accounts receivable at March 31, 2023. 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 March 31, 2023, and March 31, 2022:
Three Months Ended | Nine Months Ended | |||||||||||||||
(In thousands) | March 31 | March 31 | ||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Net Sales: | ||||||||||||||||
Lighting Segment | $ | 66,707 | $ | 57,126 | $ | 201,074 | $ | 165,662 | ||||||||
Display Solutions Segment | 50,763 | 52,985 | 172,269 | 161,989 | ||||||||||||
$ | 117,470 | $ | 110,111 | $ | 373,343 | $ | 327,651 |
Operating Income (Loss): | ||||||||||||||||
Lighting Segment | $ | 6,529 | $ | 4,959 | $ | 22,441 | $ | 13,921 | ||||||||
Display Solutions Segment | 5,501 | 4,556 | 19,759 | 12,142 | ||||||||||||
Corporate and Eliminations | (4,298 | ) | (4,354 | ) | (15,409 | ) | (12,036 | ) | ||||||||
$ | 7,732 | $ | 5,161 | $ | 26,791 | $ | 14,027 |
Capital Expenditures: | ||||||||||||||||
Lighting Segment | $ | 402 | $ | 272 | $ | 725 | $ | 624 | ||||||||
Display Solutions Segment | 338 | 185 | 1,038 | 660 | ||||||||||||
Corporate and Eliminations | 19 | 74 | (9 | ) | (8 | ) | ||||||||||
$ | 759 | $ | 531 | $ | 1,754 | $ | 1,276 |
Depreciation and Amortization: | ||||||||||||||||
Lighting Segment | $ | 1,344 | $ | 1,450 | $ | 4,113 | $ | 4,361 | ||||||||
Display Solutions Segment | 1,044 | 1,021 | 2,993 | 3,068 | ||||||||||||
Corporate and Eliminations | 67 | 60 | 189 | 203 | ||||||||||||
$ | 2,455 | $ | 2,531 | $ | 7,295 | $ | 7,632 |
March 31, | June 30, | |||||||
Identifiable Assets: | ||||||||
Lighting Segment | $ | 142,656 | $ | 152,431 | ||||
Display Solutions Segment | 140,666 | 152,302 | ||||||
Corporate and Eliminations | 7,697 | 6,347 | ||||||
$ | 291,019 | $ | 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 | Nine Months Ended | |||||||||||||||
(In thousands) | March 31 | March 31 | ||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Lighting Segment inter-segment net sales | $ | 5,101 | $ | 5,683 | $ | 16,312 | $ | 27,406 | ||||||||
Display Solutions Segment inter-segment net sales | $ | 175 | $ | 54 | $ | 139 | $ | 289 |
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 | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
BASIC EARNINGS PER SHARE | ||||||||||||||||
Net income | $ | 4,669 | $ | 3,618 | $ | 17,347 | $ | 9,856 | ||||||||
Weighted average shares outstanding during the period, net of treasury shares | 27,376 | 26,642 | 27,050 | 26,606 | ||||||||||||
Weighted average vested restricted stock units outstanding | 52 | 31 | 70 | 26 | ||||||||||||
Weighted average shares outstanding in the Deferred Compensation Plan during the period | 878 | 705 | 892 | 588 | ||||||||||||
Weighted average shares outstanding | 28,306 | 27,378 | 28,012 | 27,220 | ||||||||||||
Basic income per share | $ | 0.16 | $ | 0.13 | $ | 0.62 | $ | 0.36 | ||||||||
DILUTED EARNINGS PER SHARE | ||||||||||||||||
Net income | $ | 4,669 | $ | 3,618 | $ | 17,347 | $ | 9,856 | ||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 28,306 | 27,378 | 28,012 | 27,220 | ||||||||||||
Effect of dilutive securities (a): | ||||||||||||||||
Impact of common shares to be issued under stock option plans, and contingently issuable shares, if any | 1,305 | 705 | 1,043 | 725 | ||||||||||||
Weighted average shares outstanding | 29,611 | 28,083 | 29,055 | 27,945 | ||||||||||||
Diluted income per share | $ | 0.16 | $ | 0.13 | $ | 0.60 | $ | 0.35 | ||||||||
Anti-dilutive securities (b) | - | 1,427 | 181 | 1,043 |
(a) |
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| 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)
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NOTE 5 – INVENTORIES, NET
The following information is provided as of the dates indicated:
March 31, | June 30, | |||||||
(In thousands) | 2023 | 2022 | ||||||
Inventories: | ||||||||
Raw materials | $ | 49,946 | $ | 51,637 | ||||
Work-in-progress | 7,800 | 3,029 | ||||||
Finished goods | 9,915 | 19,755 | ||||||
Total Inventories | $ | 67,661 | $ | 74,421 |
NOTE 6- ACCRUED EXPENSES
The following information is provided as of the dates indicated:
March 31, | June 30, | |||||||
(In thousands) | 2023 | 2022 | ||||||
Accrued Expenses: | ||||||||
Customer prepayments | $ | 3,847 | $ | 6,416 | ||||
Compensation and benefits | 12,683 | 9,611 | ||||||
Accrued warranty | 5,127 | 4,491 | ||||||
Operating lease liabilities | 1,290 | 1,274 | ||||||
Accrued sales commissions | 5,629 | 4,783 | ||||||
Accrued freight | 3,625 | 3,680 | ||||||
Accrued FICA | 546 | 1,122 | ||||||
Finance lease liabilities | 325 | 275 | ||||||
Accrued income tax | - | 109 | ||||||
Other accrued expenses | 4,645 | 4,503 | ||||||
Total Accrued Expenses | $ | 37,717 | $ | 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.
As of March 1, 2023, the Company performed its annual preliminary goodwill impairment test on the three reporting units that contain goodwill. The preliminary goodwill impairment test of the reporting unit in the Lighting Segment passed with a business enterprise value of $34.4 million or 21% above the carrying value of the reporting unit including goodwill. The preliminary goodwill impairment test of one reporting unit with goodwill in the Display Solutions Segment passed with an estimated business enterprise value of $13.6 million or 5,426% above the carrying value of the reporting unit including goodwill. The preliminary goodwill impairment test of the second reporting unit with goodwill in the Display Solutions Segment passed with an estimated business enterprise value of $99.4 million or 15% above the carrying value of the reporting unit including goodwill. The definitive impairment test is expected to be completed in the fourth quarter of fiscal 2023. It is anticipated that the results of the definitive test will not change when the test is complete
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 March 31, 2023 | ||||||||||||
Goodwill | $ | 70,971 | $ | 63,347 | $ | 134,318 | ||||||
Accumulated impairment losses | (61,763 | ) | (27,525 | ) | (89,288 | ) | ||||||
Goodwill, net as of March 31, 2023 | $ | 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 Company has two indefinite-lived intangible assets. The Company performed its annual review of indefinite-lived intangible assets as of March 1, 2023, and determined there was no impairment. The preliminary impairment test of the first indefinite-lived intangible asset passed with a fair market value of $17.0 million or 399% above its carrying value. The preliminary impairment test of the second indefinite-lived intangible asset passed with a fair market value of and $10.5 million or 21% above its carrying value. The definitive indefinite-lived impairment test is expected to be completed in the fourth quarter of fiscal 2023. It is anticipated that the results of the definitive test will not change when the test is complete.
The gross carrying amount and accumulated amortization by each major intangible asset class is as follows:
Other Intangible Assets | ||||||||||||
March 31, 2023 | ||||||||||||
(In thousands) | Gross | |||||||||||
Carrying | Accumulated | Net | ||||||||||
Amount | Amortization | Amount | ||||||||||
Amortized Intangible Assets | ||||||||||||
Customer relationships | $ | 62,083 | $ | 16,962 | $ | 45,121 | ||||||
Patents | 268 | 268 | - | |||||||||
LED technology firmware, software | 20,966 | 15,486 | 5,480 | |||||||||
Trade name | 2,658 | 1,129 | 1,529 | |||||||||
Non-compete | 260 | 98 | 162 | |||||||||
Total Amortized Intangible Assets | 86,235 | 33,943 | 52,292 | |||||||||
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 | $ | 33,943 | $ | 64,394 |
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 | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
(In thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Amortization Expense of Other Intangible Assets | $ | 1,190 | $ | 1,198 | $ | 3,570 | $ | 3,611 |
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 March 31, 2023, and June 30, 2022, consisted of the following:
March 31, | June 30, | |||||||
(In thousands) | 2023 | 2022 | ||||||
Secured line of credit | $ | 29,930 | $ | 57,275 | ||||
Term loan, net of debt issuance costs of $22 and $30, respectively | 19,643 | 22,321 | ||||||
Total debt | 49,573 | 79,596 | ||||||
Less: amounts due within one year | 3,571 | 3,571 | ||||||
Total amounts due after one year, net | $ | 46,002 | $ | 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 March 31, 2023, the Company’s borrowing rate against its revolving line of credit was 6.3%. The increment over LIBOR borrowing rate will be 125 basis points for the fourth quarter of fiscal 2023. 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 March 31, 2023, there was $45.1 million available for borrowing under the $75 million line of credit.
The Company is in compliance with all of its loan covenants as of March 31, 2023.
NOTE 9-CASH DIVIDENDS
The Company paid cash dividends of $4.1 million and $4.0 million for the nine months ended March 31, 2023, and March 31, 2022, respectively. In April 2023, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable May 16, 2023, to shareholders of record as of May 8, 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. 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. 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 2,463,673 as of March 31, 2023.
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 $0.9 million and $0.8 million for the three months ended March 31, 2023, and 2022, respectively, and $2.3 million and $2.5 million in the nine months ended March 31, 2023, and 2022, respectively.
NOTE 11-SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months Ended | ||||||||
(In thousands) | March 31 | |||||||
2023 | 2022 | |||||||
Cash Payments: | ||||||||
Interest | $ | 2,325 | $ | 1,067 | ||||
Income taxes | $ | 7,808 | $ | 3,581 | ||||
Non-cash investing and financing activities | ||||||||
Issuance of common shares as compensation | $ | 270 | $ | 225 | ||||
Issuance of common shares to fund deferred compensation plan | $ | 1,530 | $ | 3,089 | ||||
Issuance of common shares to fund ESPP plan | $ | 97 | $ | - |
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. Because it is not possible to predict with certainty the outcome or costs of these matters, the Company does not disclose a range of potential losses. 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 March 31, 2023, 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 nine months ended March 31, 2023, and 2022, 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 | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
(In thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Operating lease cost | $ | 884 | $ | 868 | $ | 2,661 | $ | 2,617 | ||||||||
Financing lease cost: | ||||||||||||||||
Amortization of right of use assets | 74 | 74 | 221 | 221 | ||||||||||||
Interest on lease liabilities | 16 | 19 | 51 | 61 | ||||||||||||
Variable lease cost | 22 | 22 | 65 | 65 | ||||||||||||
Sublease income | (116 | ) | (94 | ) | (348 | ) | (283 | ) | ||||||||
Total lease cost | $ | 880 | $ | 889 | $ | 2,650 | $ | 2,681 |
Supplemental Cash Flow Information: | ||||||||
Nine Months Ended | ||||||||
March 31 | ||||||||
(In thousands) | 2023 | 2022 | ||||||
Cash flows from operating leases | ||||||||
Fixed payments - operating cash flows | $ | 2,754 | $ | 2,669 | ||||
Liability reduction - operating cash flows | $ | 2,451 | $ | 2,271 | ||||
Cash flows from finance leases | ||||||||
Interest - operating cash flows | $ | 51 | $ | 61 | ||||
Repayments of principal portion - financing cash flows | $ | 192 | $ | 196 |
Operating Leases: | March 31, | June 30, | ||||||
2023 | 2022 | |||||||
Total operating right-of-use assets | $ | 6,770 | $ | 8,664 | ||||
Accrued expenses (Current liabilities) | $ | 1,290 | $ | 1,274 | ||||
Long-term operating lease liability | 6,115 | 8,240 | ||||||
Total operating lease liabilities | $ | 7,405 | $ | 9,514 | ||||
Weighted Average remaining Lease Term (in years) | 2.52 | 3.05 | ||||||
Weighted Average Discount Rate | 4.82 | % | 4.81 | % |
Finance Leases: | March 31, | June 30, | ||||||
2023 | 2022 | |||||||
Buildings under finance leases | $ | 2,033 | $ | 2,033 | ||||
Equipment under finance leases | 30 | 11 | ||||||
Accumulated depreciation | (867 | ) | (634 | ) | ||||
Total finance lease assets, net | $ | 1,196 | $ | 1,410 | ||||
Accrued expenses (Current liabilities) | $ | 325 | $ | 275 | ||||
Long-term finance lease liability | 1,036 | 1,246 | ||||||
Total finance lease liabilities | $ | 1,361 | $ | 1,521 | ||||
Weighted Average remaining Lease Term (in years) | 4.06 | 4.80 | ||||||
Weighted Average Discount Rate | 4.86 | % | 4.86 | % |
Operating | ||||||||||||||||
Lease | Finance Lease | Operating | Net Lease | |||||||||||||
Maturities of Lease Liability: | Liabilities | Liabilities | Subleases | Commitments | ||||||||||||
2023 | $ | 1,235 | $ | 182 | $ | (94 | ) | $ | 1,323 | |||||||
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 | $ | 8,166 | $ | 1,546 | $ | (502 | ) | $ | 9,210 | |||||||
Less: Interest | (761 | ) | (185 | ) | (946 | ) | ||||||||||
Present Value of Lease Liabilities | $ | 7,405 | $ | 1,361 | $ | 8,264 |
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. The Company operated in the United States of America, Canada, Mexico and Puerto Rico for the nine months ended March 31, 2023, and the Company operated in the United States of America, Canada, and Mexico for the nine months ended March 31, 2022. 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 | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Reconciliation of effective tax rate: | ||||||||||||||||
Provision for income taxes at the anticipated annual tax rate | 30.5 | % | 22.4 | % | 25.9 | % | 23.4 | % | ||||||||
Uncertain tax positions | 1.2 | 0.5 | 0.3 | (0.8 | ) | |||||||||||
Other | 0.7 | - | 0.2 | - | ||||||||||||
Share-based compensation | 0.2 | - | 0.6 | (0.2 | ) | |||||||||||
Effective tax rate | 32.6 | % | 22.9 | % | 27.0 | % | 22.4 | % |
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 | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
(In thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Lighting Segment | $ | 66,707 | $ | 57,126 | $ | 201,074 | $ | 165,662 | ||||||||
Display Solutions Segment | 50,763 | 52,985 | 172,269 | 161,989 | ||||||||||||
$ | 117,470 | $ | 110,111 | $ | 373,343 | $ | 327,651 |
Operating Income (Loss) by Business Segment | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
(In thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Lighting Segment | $ | 6,529 | $ | 4,959 | $ | 22,441 | $ | 13,921 | ||||||||
Display Solutions Segment | 5,501 | 4,556 | 19,759 | 12,142 | ||||||||||||
Corporate and Eliminations | (4,298 | ) | (4,354 | ) | (15,409 | ) | (12,036 | ) | ||||||||
$ | 7,732 | $ | 5,161 | $ | 26,791 | $ | 14,027 |
Net sales of $117.5 million for the three months ended March 31, 2023, increased $7.4 million or 7% as compared to net sales of $110.1 million for the three months ended March 31, 2022. Net sales were driven by increased net sales of the Lighting Segment (an increase of $9.6 million or 17%) partially offset by decreased net sales of the Display Solutions Segment (a decrease of $2.2 million or 4%). The 17% growth in the Lighting Segment was driven by continued growth in both indoor and outdoor applications, across multiple verticals. The 4% decline in the Display Solutions Segment was due to changes in the timing of shipments and completion of several large digital signage programs, while transitioning to new programs.
Net sales of $373.3 million for the nine months ended March 31, 2023, increased $45.7 million or 14% as compared to net sales of $327.7 million for the nine months ended March 31, 2022. Net sales were driven by increased net sales in both Lighting Segment (an increase of $35.4 million or 21%) and the Display Solutions Segment (an increase of $10.3 million or 6%). The Company continues to make progress on its key growth initiatives, including cross selling products to grow existing customers as well as programs to attain new customers.
Operating income of $7.7 million for the three months ended March 31, 2023, represents a $2.6 million increase from operating income of $5.1 million in the three months ended March 31, 2022. Adjusted operating income, a Non-GAAP measure, was $8.8 million in the three months ended March 31, 2023, compared to $6.0 million in the three months ended March 31, 2022. 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 coupled with improved program pricing, and continued effective cost management.
Operating income of $26.8 million for the nine months ended March 31, 2023, represents a $12.8 million increase from operating income of $14.0 million in the nine months ended March 31, 2022. Adjusted operating income, a Non-GAAP financial measure, was $30.2 million in the nine months ended March 31, 2023, compared to $16.9 million in the nine months ended March 31, 2022. Refer to “Non-GAAP Financial Measures” below for a reconciliation of Non-GAAP financial measures to U.S. GAAP measures. The Company continues to focus on actions such as the introduction of new products and the cross selling of existing products, which increase its value and importance to customers in verticals where the Company sees profitable growth.
The following table presents information related to RSUs:
Shares | Weighted-Average Grant Date Fair Value | |||||||
Unvested at June 30, 2017 | 133,335 | $ | 10.38 | |||||
Awarded | 91,490 | $ | 5.92 | |||||
Shares Issued | (30,675 | ) | $ | 10.30 | ||||
Shares Forfeited | (7,000 | ) | $ | 10.46 | ||||
Unvested at December 31, 2017 | 187,150 | $ | 8.21 |
As of December 31, 2017, the 187,150 RSUs had a remaining contractual life of between 2.5 and 3.5 years. Of the 187,150 RSUs outstanding as of December 31, 2017, 176,073 RSUs are vested or expected to vest in the future. An estimated forfeiture rate of 8.5% was used in the calculation of expense related to the RSUs. The Company recorded $81,895 and $337,310 of expense related to RSUs in the three and six month periods ended December 31, 2017, respectively.
As of December 31, 2016, the 118,575 RSUs had a remaining contractual life of between 2.5 and 3.5 years. Of the 118,575 RSUs outstanding as of December 31, 2016, 114,531 RSUs are vested or expected to vest in the future. An estimated forfeiture rate of 3.4% was used in the calculation of expense related to the RSUs. The Company recorded $89,896 and $392,197 of expense related to RSUs in the three and six month periods ended December 31, 2016, respectively.
Director and Employee Stock Compensation Awards
The Company awarded a total of 19,920 and 21,199 common shares in the six months ended December 31, 2017 and 2016, respectively, as stock compensation awards. These common shares were valued at their approximate $155,974 and $228,000 fair market values based on their stock price at dates of issuance multiplied by the number of common shares awarded, respectively, pursuant to the compensation programs for non-employee directors who receive a portion of their compensation as an award of Company stock and for employees who received a nominal recognition award in the form of Company stock. Stock compensation awards are made in the form of newly issued common shares of the Company.
Deferred Compensation Plan
The Company has a non-qualified deferred compensation plan providing for both Company contributions and participant deferrals of compensation. This plan is fully funded in a Rabbi Trust. All plan investments are in common shares of the Company. As of December 31, 2017 there were 38 participants, all with fully vested account balances. A total of 245,732 common shares with a cost of $2,187,811, and 257,898 common shares with a cost of $2,456,875 were held in the plan as of December 31, 2017 and June 30,2017, respectively, and, accordingly, have been recorded as treasury shares. The change in the number of shares held by this plan is the net result of share purchases and sales on the open stock market for compensation deferred into the plan; shares newly issued for compensation deferred into the plan, and for distributions to terminated employees. The Company issued 42,280 new common shares for purposes of the non-qualified deferred compensation plan as of December 31, 2017 and the company did not issue new common shares for plan in fiscal 2017. The Company used approximately $106,537 and $390,288 to purchase 15,225 and 39,487 common shares of the Company in the open stock market during the six months ended December 31, 2017 and 2016, respectively, for either employee salary deferrals or Company contributions into the non-qualified deferred compensation plan.
The Company’s non-qualified deferred compensation is no longer funded by purchases in the open market of LSI stock as of September 30, 2017. This plan is now solely funded by newly issued shares that are authorized from the Company’s 2012 Stock Incentive Plan.
NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION
(In thousands) | Six Months Ended December 31 | |||||||
2017 | 2016 | |||||||
Cash payments: | ||||||||
Interest | $ | 767 | $ | 21 | ||||
Income taxes | $ | 1,232 | $ | 2,381 | ||||
Non-cash investing and finance activities: | ||||||||
Issuance of common shares as compensation | $ | 156 | $ | 228 | ||||
Issuance of common shares to fund deferred compensation plan | $ | 261 | $ | -- |
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, 2017, there were no standby letter of credit agreements.
NOTE 13 – SEVERANCE COSTS
The Company recorded severance expense of $83,000 and $173,000 in the six months ended December 31, 2017 and 2016, respectively. This severance expense was related to reductions in staffing not related to plant restructuring. See further discussion of restructuring expenses in Note 14.
The activity in the Company’s accrued severance liability is as follows for the periods indicated:
Six | Six | Fiscal | ||||||||||
Months Ended | Months Ended | Year Ended | ||||||||||
(In thousands) | December 31, | December 31, | June 30, | |||||||||
2017 | 2016 | 2017 | ||||||||||
Balance at beginning of the period | $ | 235 | $ | 39 | $ | 39 | ||||||
Accrual of expense | 83 | 173 | 523 | |||||||||
Payments | (218 | ) | (205 | ) | (313 | ) | ||||||
Adjustments | (14 | ) | -- | (14 | ) | |||||||
Balance at end of the period | $ | 86 | $ | 7 | $ | 235 |
NOTE 14 – RESTRUCTURING COSTS
On September 22, 2016, the Company announced plans to close its lighting facility in Kansas City, Kansas. The decision was based upon the market shift away from fluorescent and other technologies and the rapid movement to LED lighting which is produced at other LSI facilities. The Company expects to continue to meet the demand for products containing fluorescent light sources as long as these products are commercially viable. All operations at the Kansas City facility ceased prior to December 31, 2016. Fiscal 2017 restructuring costs related to the closure of the Kansas City facility were $944,000. There have been no restructuring costs in fiscal 2018. These costs primarily included employee-related costs (primarily severance), the impairment of manufacturing equipment, plant shut down costs, costs related to the preparation of the facility for sale, legal costs, and other related costs. In addition, there was also an inventory write-down of $485,000 recorded in fiscal 2017. The write-down was related to inventory that was previously realizable until the decision in the first quarter of fiscal 2017 to close the Kanas City plant due to the planned curtailment of the manufacturing of fluorescent light fixtures. The Company owned the facility in Kansas City and realized a $1,361,000 gain when the facility was sold.
The Company also announced the consolidation of the Beaverton, Oregon facility into other LSI facilities. The light assembly of products in the Beaverton facility was moved to the Company’s Columbus, Ohio facility, and administration and engineering functions were moved to the Company’s Cincinnati, Ohio facility. This consolidation was completed September 30, 2016. As a result of this consolidation, restructuring charges of $377,000 were recorded in fiscal 2017, with the majority of this representing the costs related to the remaining period of the facility’s lease and severance costs for employees who formerly worked in the Beaverton facility. There were no restructuring charges in fiscal 2018.
In November 2016, the Company announced the consolidation of the Woonsocket, Rhode Island manufacturing operation into its North Canton, Ohio operation. The manufacturing operations in Woonsocket ceased prior to December 31, 2016. The Company owned the facility in Woonsocket and realized a small gain when the facility was sold in September 2017. Total restructuring costs related to the consolidation of the Woonsocket facility were $452,000 in fiscal 2017. These costs primarily include employee-related costs (severance), plant shut down costs, costs related to the preparation of the facility for sale, legal costs, and other related costs. There have been no restructuring charges in fiscal 2018.
Management does not expect any significant restructuring charges for fiscal 2018. All previously announced restructuring projects were completed in fiscal 2017 and all restructuring charges were recorded in fiscal 2017.
The following table presents information about restructuring costs for the periods indicated:
Three | Six Months | Three | Six Months | |||||||||||||
Months Ended | Ended | Months Ended | Ended | |||||||||||||
(In thousands) | December 31, | December 31, | December 31, | December 31, | ||||||||||||
2017 | 2017 | 2016 | 2016 | |||||||||||||
Severance and other termination benefits | $ | -- | $ | -- | $ | 526 | $ | 691 | ||||||||
Lease obligation | -- | -- | -- | 213 | ||||||||||||
Impairment of fixed assets and accelerated depreciation | -- | -- | 80 | 353 | ||||||||||||
Other | -- | -- | 91 | 96 | ||||||||||||
Total | $ | -- | $ | -- | $ | 697 | $ | 1,353 |
The following table presents restructuring costs incurred by line item in the consolidated statement of operations in which the costs are included:
Three Months Ended | Six Months Ended | |||||||
(In thousands) | December 31 | December 31 | ||||||
2016 | 2016 | |||||||
Cost of Goods Sold | $ | 640 | $ | 1,143 | ||||
Operating Expenses | 57 | 210 | ||||||
Total | $ | 697 | $ | 1,353 |
The following table presents information about restructuring costs by segment for the periods indicated:
Three | Six Months | Three | Six Months | |||||||||||||
Months Ended | Ended | Months Ended | Ended | |||||||||||||
(In thousands) | December 31, | December 31, | December 31, | December 31, | ||||||||||||
2017 | 2017 | 2016 | 2016 | |||||||||||||
Lighting Segment | $ | -- | $ | -- | $ | 476 | $ | 1,021 | ||||||||
Graphics Segment | -- | -- | 221 | 221 | ||||||||||||
Corporate and Eliminations | -- | -- | -- | 111 | ||||||||||||
Total | $ | -- | $ | -- | $ | 697 | $ | 1,353 |
The above tables exclude the gain on the sale of the Kansas City and Woonsocket facilities. Additionally, the above tables do not include expense of $400,000 recorded during the first quarter of fiscal 2017 related to the write-down of inventory included as cost of sales as part of the Kansas City facility closure.
The following table presents a roll forward of the beginning and ending liability balances related to the restructuring costs:
(In thousands) | ||||||||||||||||||||
Balance as of June 30, 2017 | Restructuring Expense | Payments | Adjustments | Balance as of December 31, 2017 | ||||||||||||||||
Severance and termination benefits | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||||
Lease obligation | 85 | -- | (85 | ) | -- | -- | ||||||||||||||
Other | -- | -- | -- | -- | -- | |||||||||||||||
Total | $ | 85 | $ | -- | $ | (85 | ) | $ | -- | $ | -- |
Refer to Note 13 for information regarding additional severance expenses that are not included in the restructuring costs identified in this footnote.
NOTE 15– INCOME TAXES
The Company's effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year's taxable income on a periodic basis as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions.
The Tax Cuts and Jobs Act was signed into law on December 22nd,2017 and makes numerous changes to the Internal Revenue Code. Among other changes, the Act reduces the US corporate income tax rate to 21% effective January 1, 2018. Because the Act became effective mid-way through the Company’s tax year, the Company will have a US statutory income tax rate of 27.7% for the fiscal 2018, and will have a 21% US statutory income tax rate for fiscal years thereafter. During the quarter ended December 31, 2017, the Company re-valued the deferred tax balances because of the change in US tax rate resulting in a one-time deferred tax expense of $4,676,578. The Company revised its full year projected effective tax rate to incorporate the fiscal 2018 statutory rate of 27.7%. The Company completed its accounting for the income tax effects of the Act during the quarter.
Three Months Ended | Six Months Ended | |||||||||||||||
December 31 | December 31 | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Reconciliation to effective tax rate: | ||||||||||||||||
Provision for income taxes at the anticipated annual tax rate | 28.9 | % | 30.4 | % | 28.9 | % | 30.8 | % | ||||||||
Enactment of tax law changes | 111.2 | -- | (22.2 | ) | -- | |||||||||||
Uncertain tax positions | (4.8 | ) | (0.6 | ) | 0.5 | (0.8 | ) | |||||||||
Difference between deferred and current tax rate related to the impairment of goodwill | -- | -- | 12.1 | -- | ||||||||||||
Other | -- | -- | -- | (1.8 | ) | |||||||||||
Tax impact related to share based compensation | 0.3 | (0.5 | ) | (0.4 | ) | (0.6 | ) | |||||||||
Effective tax rate | 135.6 | % | 29.3 | % | 18.9 | % | 27.6 | % |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company’s condensed consolidated financial statements, accompanying notes and the “Safe Harbor” Statement, each as appearing earlier in this report, should be referred to in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Net Sales by Business Segment | ||||||||||||||||
(In thousands) | Three Months Ended | Six Months Ended | ||||||||||||||
December 31 | December 31 | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
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) by Business Segment | ||||||||||||||||
(In thousands) | Three Months Ended | Six Months Ended | ||||||||||||||
December 31 | December 31 | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
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 |
Summary Comments
Fiscal 2018 second quarter net sales of $92,305,000 increased $6.6 million or 7.8% as compared to second quarter fiscal 2017 net sales of $85,658,000. Net sales were favorably influenced by increased net sales of the Lighting Segment (up $4.1 million or 6.3%) and increased net sales of the Graphics Segment (up $2.5 million or 12.4%). Comparable fiscal 2018 net sales excluding net sales from Atlas Lighting Products, Inc. (“Atlas”) decreased by $7.3 million or 8.5% compared to fiscal 2017 net sales. The Company acquired Atlas on February 21, 2017.
Fiscal 2018 first half net sales of $179,771,000 increased $10 million or 5.9% as compared to first half fiscal 2017 net sales of $169,817,000. Net sales were favorably influenced by increased net sales of the Lighting Segment (up $7.3 million or 5.5%) and increased net sales of the Graphics Segment (up $2.7 million or 6.8%). Comparable fiscal 2018 net sales excluding net sales from Atlas decreased by $15.0 million or 8.8% compared to fiscal 2017 net sales.
Fiscal 2018 second quarter operating income of $4,547,000 increased $1.7 million or 61.4% from operating income of $2,818,000 in the second quarter of fiscal 2017. The increase in adjusted operating income was the net result of increased net sales, increased gross profit and increased gross profit as a percentage of sales, and an increase in selling and administrative expenses. The Company also recorded restructuring costs of $697,000 in the second quarter of fiscal 2017 with no corresponding cost in fiscal 2018.
Fiscal 2018 first half operating loss of $(20,267,000) represents a $24.2 million change from operating income of $3,884,000 in the first half of fiscal 2017. The change from operating income in fiscal 2017 to an operating loss in fiscal 2018 is primarily the result of a $28 million goodwill impairment in the first quarter of fiscal 2018. Also contributing to the year-over-year change in operating income is the net result of increased net sales, increased gross profit and increased gross profit as a percentage of sales, and an increase in selling and administrative expenses. The Company also recorded restructuring costs of $1,753,000 in the first half of fiscal 2017 with no corresponding cost in fiscal 2018.
Non-GAAP Financial Measures
The Company believesWe believe it is appropriate to evaluate itsour 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 a goodwill impairment, a tax chargelong-term performance based compensation expense, severance costs, acquisition costs, and consulting expense related to the revaluation of deferred tax assets, restructuringcommercial growth initiatives, are Non-GAAP financial measures. Also included below are Non-GAAP financial measures including Earnings before Interest, Taxes, Depreciation and plant closure costs,Amortization (EBITDA and other severance costs, are non-GAAP financial measures.Adjusted EBITDA), Free Cash Flow, Net Debt to Adjusted EBITDA, and free cash flow. 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. WeAlthough 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 representativebased on any comprehensive set of the ongoingaccounting rules or principles. Non-GAAP measures have limitations, in that they do not reflect all amounts associated with our results of operations ofas determined in accordance with U.S. GAAP. Therefore, these measures should be used only to evaluate our business.results in conjunction with corresponding GAAP measures. Below is a reconciliation of these non-GAAPNon-GAAP measures to operating income, net income, and earnings per share for the periods indicated.indicated along with the calculation of EBITDA and Adjusted EBITDA, Free Cash Flow, and Net Debt to Adjusted EBITDA.
(in thousands, unaudited) | Second Quarter | |||||||
FY 2018 | FY 2017 | |||||||
Reconciliation of operating income to adjusted operating income: | ||||||||
Operating income as reported | $ | 4,547 | $ | 2,818 | ||||
Adjustment for restructuring and plant closure costs | -- | 697 | ||||||
Adjustment for other severance costs | 83 | 28 | ||||||
Adjusted operating income | $ | 4,630 | $ | 3,543 |
Reconciliation of operating income to adjusted operating income:
Three Months Ended | ||||||||
March 31 | ||||||||
(In thousands) | 2023 | 2022 | ||||||
Operating Income as reported | $ | 7,732 | $ | 5,161 | ||||
Long-Term Performance Based Compensation | 968 | 780 | ||||||
Consulting expense: Commercial Growth Initiatives | 75 | - | ||||||
Acquisition Costs | - | 21 | ||||||
Severance costs | - | 5 | ||||||
Adjusted Operating Income | $ | 8,775 | $ | 5,967 |
Reconciliation of operating income to adjusted net income:
(in thousands, except per share data; unaudited) | Second Quarter | |||||||||||||||
Diluted | Diluted | |||||||||||||||
FY 2018 | EPS | FY 2017 | EPS | |||||||||||||
Reconciliation of net income (loss) to adjusted net income: | ||||||||||||||||
Net income (loss) and earnings (loss) per share as reported | $ | (1,468 | ) | $ | (0.06 | ) | $ | 2,006 | $ | 0.08 | ||||||
Tax impact from the reduction of the deferred tax assets | 4,676 | 0.18 | -- | -- | ||||||||||||
Adjustment for restructuring and plant closure costs, inclusive of the income tax effect | -- | -- | 448 | (1) | 0.02 | |||||||||||
Adjustment for severance costs, inclusive of the income tax effect | 59 | (3) | -- | 23 | (2) | -- | ||||||||||
Adjusted net income and earnings per share | $ | 3,267 | $ | 0.12 | $ | 2,477 | $ | 0.10 |
Three Months Ended | |||||||||||||||
March 31 | |||||||||||||||
(In thousands, except per share data) | 2023 | 2022 | |||||||||||||
Diluted EPS | Diluted EPS | ||||||||||||||
Net Income as reported | $ | 4,669 | $ | 0.16 | $ | 3,618 | $ | 0.13 | |||||||
Long-Term Performance Based Compensation | 769 | (1) | 0.03 | 576 | (3) | 0.02 | |||||||||
Consulting expense: Commercial Growth Initiatives | 59 | (2) | - | - | - | ||||||||||
Acquisition Costs | - | - | 16 | (4) | - | ||||||||||
Severance costs | - | - | 4 | (5) | - | ||||||||||
Net Income adjusted | $ | 5,497 | $ | 0.19 | $ | 4,214 | $ | 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 re-computed after considering non-GAAP adjustments for the periods indicated. The income tax effects were as followsindicated (in thousands):
(1) 249$199
(2) 5$16
(3) 24$204
(4) $5
(5) $1
Reconciliation of operating income to adjusted operating income:
Nine Months Ended | ||||||||
March 31 | ||||||||
(In thousands) | 2023 | 2022 | ||||||
Operating Income as reported | $ | 26,791 | $ | 14,027 | ||||
Long-Term Performance Based Compensation | 2,521 | 2,466 | ||||||
Consulting expense: Commercial Growth Initiatives | 864 | - | ||||||
Acquisition costs | - | 361 | ||||||
Severance costs | 46 | 5 | ||||||
Adjusted Operating Income | $ | 30,222 | $ | 16,859 |
(in thousands, unaudited) | First Half | |||||||
FY 2018 | FY 2017 | |||||||
Reconciliation of operating income (loss) to adjusted operating income: | ||||||||
Operating income (loss) as reported | $ | (20,267 | ) | $ | 3,884 | |||
Adjustment for goodwill impairment | 28,000 | -- | ||||||
Adjustment for restructuring, plant closure costs, and related inventory write-downs | -- | 1,753 | ||||||
Adjustment for other severance costs | 83 | 173 | ||||||
Adjusted operating income | $ | 7,816 | $ | 5,810 |
Reconciliation of operating income to adjusted net income:
(in thousands, except per share data; unaudited) | First Half | |||||||||||||||
Diluted | Diluted | |||||||||||||||
FY 2018 | EPS | FY 2017 | EPS | |||||||||||||
Reconciliation of net income (loss) to adjusted net income: | ||||||||||||||||
Net income (loss) and earnings (loss) per share as reported | $ | (17,097 | ) | $ | (0.66 | ) | $ | 2,835 | $ | 0.11 | ||||||
Adjustment for goodwill impairment, inclusive of the income tax effect | 17,361 | (4) | 0.67 | |||||||||||||
Tax impact from the reduction of the deferred tax assets | 4,676 | 0.18 | -- | -- | ||||||||||||
Adjustment for restructuring and plant closure costs, inclusive of the income tax effect | -- | -- | 1,143 | (1) | 0.04 | |||||||||||
Adjustment for other severance costs, inclusive of the income tax effect | 59 | (3) | -- | 120 | (2) | -- | ||||||||||
Adjusted net income and earnings per share | $ | 5,001 | $ | 0.19 | $ | 4,098 | $ | 0.16 |
Nine Months Ended | |||||||||||||||
March 31 | |||||||||||||||
(In thousands, except per share data) | 2023 | 2022 | |||||||||||||
Diluted EPS | Diluted EPS | ||||||||||||||
Net Income as reported | $ | 17,347 | $ | 0.60 | $ | 9,856 | $ | 0.35 | |||||||
Long-Term Performance Based Compensation | 2,107 | (1) | 0.08 | 1,850 | (4) | 0.07 | |||||||||
Consulting expense: Commercial Growth Initiatives | 708 | (2) | 0.02 | - | - | ||||||||||
Acquisition costs | - | - | 285 | (5) | 0.01 | ||||||||||
Severance costs | 38 | (3) | - | 4 | (6) | - | |||||||||
Net Income adjusted | $ | 20,200 | $ | 0.70 | $ | 11,995 | $ | 0.43 |
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 re-computed after considering non-GAAP adjustments for the periods indicated. The income tax effects were as followsindicated (in thousands):
(1) 610$414
(2) 53$156
(3) 24$8
(4) 10,639$616
(5) $76
(6) $1
The reconciliation of reported net income and earnings per share to adjusted net income and earnings per share may not agree due to rounding differences and due to the difference between basic and dilutive weighted average shares outstanding in the computation of earnings per share.
Reconciliation of operating income to EBITDA and Adjusted EBITDA | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
(In thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Net Income as reported | $ | 4,669 | $ | 3,618 | $ | 17,347 | $ | 9,856 | ||||||||
Income Tax | 2,257 | 1,074 | 6,434 | 2,851 | ||||||||||||
Interest Expense, net | 877 | 524 | 2,924 | 1,287 | ||||||||||||
Other expense (income) | (71 | ) | (55 | ) | 86 | 33 | ||||||||||
Operating Income as reported | $ | 7,732 | $ | 5,161 | $ | 26,791 | $ | 14,027 | ||||||||
Depreciation and Amortization | 2,455 | 2,531 | 7,295 | 7,632 | ||||||||||||
EBITDA | $ | 10,187 | $ | 7,692 | $ | 34,086 | $ | 21,659 | ||||||||
Long-term performance based compensation | 968 | 780 | 2,521 | 2,466 | ||||||||||||
Consulting Expense - Commercial Growth Initiatives | 75 | - | 864 | - | ||||||||||||
Acquisition Costs | - | 21 | - | 361 | ||||||||||||
Severance costs | - | 5 | 46 | 5 | ||||||||||||
Adjusted EBITDA | $ | 11,230 | $ | 8,498 | $ | 37,517 | $ | 24,491 |
Reconciliation of cash flow from operations to free cash flow | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
(In thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Cash Flow from Operations | $ | 12,486 | $ | 3,875 | $ | 32,548 | $ | (12,668 | ) | |||||||
Capital expenditures | (759 | ) | (531 | ) | (1,754 | ) | (1,276 | ) | ||||||||
Free Cash Flow | $ | 11,727 | $ | 3,344 | $ | 30,794 | $ | (13,944 | ) |
Net Debt to Adjusted EBITDA | ||||||||
March 31, | March 31, | |||||||
(In thousands) | 2023 | 2022 | ||||||
Current portion and long-term debt as reported | $ | 3,571 | $ | 3,571 | ||||
Long-Term Debt | 46,002 | 81,387 | ||||||
Total Debt | 49,573 | 84,958 | ||||||
Less: Cash and cash equivalents | (1,350 | ) | (1,248 | ) | ||||
Net Debt | $ | 48,223 | $ | 83,710 | ||||
Adjusted EBITDA - Trailing 12 Months | $ | 48,117 | $ | 31,309 | ||||
Net Debt to Adjusted EBITDA | 1.0 | 2.7 |
Results of Operations
THREE MONTHS ENDED DECEMBERMARCH 31, 20172023, COMPARED TO THREE MONTHS ENDED DECEMBERMARCH 31, 20162022
Lighting Segment
(In thousands) | Three Months Ended | |||||||||||||||
Lighting Segment | ||||||||||||||||
December 31 | Three Months Ended | |||||||||||||||
2017 | 2016 | March 31 | ||||||||||||||
(In thousands) | 2023 | 2022 | ||||||||||||||
Net Sales | $ | 69,174 | $ | 65,076 | $ | 66,707 | $ | 57,126 | ||||||||
Gross Profit | $ | 19,259 | $ | 16,493 | $ | 20,278 | $ | 16,654 | ||||||||
Operating Income | $ | 5,275 | $ | 3,761 | $ | 6,529 | $ | 4,959 |
Lighting Segment net sales of $69,174,000$66.7 million in the second quarter of fiscal 2018three months ended March 31, 2023, increased 6.3%17% from fiscal 2017 same period net sales of $65,076,000. Comparable fiscal 2018 net sales excluding net sales from Atlas decreased by $9.8 million or 15.1% from fiscal 2017 second quarter sales. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $57.7$57.1 million in the second quarter ofsame period in fiscal 2018, representing an $11.6 million or 25.1% increase from fiscal 2017 second quarter net sales of solid-state LED light fixtures of $46.1 million. Light fixtures having solid-state LED technology represent 91.7% of total lighting product net2022. The 17% growth in the Lighting Segment was driven by continued growth in both indoor and outdoor applications, across multiple verticals. The Company continues to make progress in the market by increasing sales in all major verticals it serves with the second quarterintroduction of fiscal 2018 comparednew products, providing customers to 78.2% of total lighting product net sales in the second quarter of fiscal 2017. Total lighting product net sales excludes sales related to installationselect from multiple features and shipping and handling. There was a reduction in the Company’s traditional lighting sales (metal halide and fluorescent light sources) from fiscal 2017 to fiscal 2018 as customers continue to convert from traditional lighting to light fixtures having solid-state LED technology.
Lighting Segment total net sales of solid-state LED technology in light fixtures have been recorded as indicated in the table below.
LED Net Sales | ||||||||||||
(In thousands) | FY 2018 | FY 2017 | % Change | |||||||||
First Quarter | $ | 52,956 | $ | 43,146 | 22.7 | % | ||||||
Second Quarter | 57,726 | 46,137 | 25.1 | % | ||||||||
First Half | 110,682 | 89,283 | 24.0 | % | ||||||||
Third Quarter | 44,946 | |||||||||||
Nine Months | 134,229 | |||||||||||
Fourth Quarter | 52,303 | |||||||||||
Full Year | $ | 186,532 |
price-points, based on their unique requirements.
Gross profit of $19,259,000$20.3 million in the second quarter of fiscal 2018three months ended March 31, 2023, increased $2.8$3.6 million or 16.8%22% from the same period of fiscal 2017, and increased from 25.1% to 27.4%2022. Gross profit as a percentage of Lighting Segment net sales (customer plus inter-segment net sales).was 30.4% in the three months ended March 31, 2023, compared to 29.2% in the same period of fiscal 2022. The Company incurred restructuring and plant closure costs that were recordedimprovement in costgross profit as a percentage of sales related towas driven by the closure of the Kansas City, Kansas manufacturing facility of $429,000 with no comparable costs in fiscal 2018. The remaining increase in amount of gross profit is due to the net effect of improved product mix, net sales resulting from Atlas for which there were no comparable sales in fiscal 2017, manufacturing efficiencies as a result of the Company’s lean initiatives, continued inflationary pressuresfocus on verticals where it competes coupled with new product offerings, and continued price discipline, all of which in certain commodities, competitive pricing pressures, continued softnessturn result in the lighting industry, and cost savings related to the closure of the Kansas City manufacturing facility.improved margins.
Selling and administrativeOperating expenses of $13,984,000$13.7 million in the second quarter of fiscal 2018three months ended March 31, 2023, increased $1.3$2.0 million or 9.9% from the same period of fiscal 2017,2022, primarily driven by higher commission expense to its agent network as the neta result of acquiring Atlas. Our comparable selling and administrative expenses excluding Atlas decreased 16.2%higher net sales.
Lighting Segment operating income of $6.5 million for the three months ended March 31, 2023, increased $1.5 million from operating income of $5.0 million in the second quartersame period of fiscal 20182022 primarily driven by sales volume and by an improvement in gross profit as a percentage of sales.
Display Solutions Segment | ||||||||
Three Months Ended | ||||||||
March 31 | ||||||||
(In thousands) | 2023 | 2022 | ||||||
Net Sales | $ | 50,763 | $ | 52,985 | ||||
Gross Profit | $ | 11,927 | $ | 10,171 | ||||
Operating Income | $ | 5,501 | $ | 4,556 |
Display Solutions Segment net sales of $50.8 million in the three months ended March 31, 2023, decreased $2.2 million or 4% from net sales of $53.0 million in the same period in fiscal 2022. The 4% decline in the Display Solutions Segment was driven by changes in the timing of shipments and completion of several large digital signage programs, while transitioning to new programs.
Gross profit of $11.9 million in the three months ended March 31, 2022, increased $1.8 million or 17% from the same period of fiscal 2017. The more notable quarter-over-quarter changes impacting2022. Gross profit as a percentage of net sales in the $1.3 million increase in selling and administrative expenses are increased employee compensation and benefits expense ($0.8 million), decreased commission expense ($1.1 million), and increased amortization expense ($0.6 million).
The Lighting Segment second quarter fiscal 2018 operating income of $5,275,000 increased $1.5 million or 40.3% from operating income of $3,761,000three months ended March 31, 2023, was 23.5% compared to 19.2% in the same period of fiscal 2017. The $1.5 million increase2022. While sales were lower compared to the same period in operating income was the net result of increased net sales, an increase inprior fiscal year, gross profit and gross profit as a percentage of sales increased selling and administrative expenses, and plant closure costsimproved. The improvement in fiscal 2017 with no comparable expenses in fiscal 2018.
Graphics Segment
(In thousands) | Three Months Ended | |||||||
December 31 | ||||||||
2017 | 2016 | |||||||
Net Sales | $ | 23,131 | $ | 20,582 | ||||
Gross Profit | $ | 6,046 | $ | 4,918 | ||||
Operating Income | $ | 2,255 | $ | 1,174 |
Graphics Segment net sales of $23,131,000 in the second quarter of fiscal 2018 increased $2.5 million or 12.4% from fiscal 2017 same period net sales of $20,582,000. Sales to the Retail and QSR markets increased in the second quarter of fiscal 2018 compared the second quarter of fiscal 2017, followed by a modest increase in sales to the Petroleum market.
Gross profit of $6,046,000 in the second quarter of fiscal 2018 increased $1.1 million or 23.0% from the same period of fiscal 2017. Grossgross profit as a percentage of segment net sales (customer plus inter-segment net sales) increased from 23.1%was driven by improved program pricing and a favorable project mix.
Operating expenses of $6.4 million in the second quarter of fiscal 2017 to 25.0% in the second quarter of fiscal 2018. The change in amount of gross profit is due to the net effect ofthree months ended March 31, 2023, increased net sales (customer plus inter-segment net sales), improved gross profit margin on shipping and handling sales, and decreased employee compensation and benefit expense ($0.1 million). The Company incurred $211,000 in the second quarter of fiscal 2017 related to the closure of its Woonsocket, Rhode Island facility with no comparable expense in fiscal 2018.
Selling and administrative expenses of $3,791,000 in the second quarter of fiscal 2018 increased slightly$0.8 million from fiscal 2017 selling and administrative expenses of $3,744,000. There were only modest increases and offsetting decreases in several cost categories.
The Graphics Segment second quarter fiscal 2018 operating income of $2,255,000 increased $1.1$5.6 million or 92.1% from operating income of $1,174,000 in the same period of fiscal 2017.2022. The increase of $1.1$0.8 million was driven by several factors including compensation, benefits, and commercial sales and marketing programs costs to support sales growth initiatives.
Display Solutions Segment operating income of $5.5 million in the three months ended March 31, 2023, increased $0.9 million from operating income of $4.6 million in the same period of fiscal 2022. The increase of $0.9 million was primarily the net result of increased net sales, increaseddriven by an improvement in gross profit and increased gross profit margin as a percentage of sales, and a small increase in selling and administrative costs.sales.
Corporate and Eliminations
Corporate and Eliminations | ||||||||||||||||
Three Months Ended | ||||||||||||||||
March 31 | ||||||||||||||||
(In thousands) | Three Months Ended | 2023 | 2022 | |||||||||||||
December 31 | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Gross Profit (Loss) | $ | 2 | $ | (4 | ) | $ | (1 | ) | $ | (32 | ) | |||||
Operating (Loss) | $ | (2,983 | ) | $ | (2,117 | ) | $ | (4,298 | ) | $ | (4,354 | ) |
The gross profit (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expensesOperating expenses of $2,985,000$4.3 million in the second quarter of fiscal 2018 increased $0.9 million or 41.0%three months ended March 31, 2023, remained flat from the same period of the prior year. The $0.9 million increase is thefiscal 2022 as a result of increased employee compensation and benefit expense ($1.1 million increase) partially offset by a reduction in the cost of outside services expense such as legal expenses ($0.2 million decrease). Most of the increase in employee compensation and benefit expense is the result of the reduction of incentive-based compensation in the second quarter of fiscal 2017 which was driven by the operating results of the Company. There was no similar reduction in incentive-based compensation in fiscal 2018.efforts to contain costs.
Consolidated Results
The Company reported $417,000$0.9 million and $0.5 million of net interest expense in the second quarter of fiscal 2018 compared to netthree months ended March 31, 2023, and March 31, 2022, respectively. The increase in interest income of $20,000 in the second quarter of fiscal 2017. The change from interest income in fiscal 2017 to interest expense in fiscal 2018 is the result of increased borrowing againstcosts. The Company also recorded other (income) of ($0.1) million in the Company’s linethree months ended March 31, 2023, and March 31, 2022, respectively, both of credit. Commitment feeswhich are related to the unused portion of the Company’s line of creditnet foreign exchange currency transaction gains through our Mexican and interest income on invested cash are included in both fiscal years.Canadian subsidiaries.
The $5,598,000$2.3 million of income tax expense in the second quarter of fiscal 2018 was most notably impacted by a $4.7 million tax adjustment related to the revaluation of the Company’s deferred tax assets partially offset by a favorable tax impact related to the re-alignment of the Company’s tax expense to a lower effective tax rate, both related to the recently enacted “Tax Cut and Jobs Act” (“TCJA”) legislation. The $832,000 income tax expense in the second quarter of fiscal 2017three months ended March 31, 2023, represents a consolidated effective tax rate of 29.3%32.6%. This isThe $1.1 million of income tax expense in the net result of an incomethree months ended March 31, 2022, represents a consolidated effective tax rate of 30.8% influenced22.9%. The increase in the effective tax rate is primarily driven by certain permanent book-tax differencesan increase in pre-tax profits in the higher taxing jurisdictions of Puerto Rico and by a benefit related to uncertain incomeCanada along with unfavorable discrete tax positions.adjustments.
The Company reported a net lossincome of $(1,468,000)$4.7 million in the second quarter of fiscal 2018 asthree months ended March 31, 2023, compared to net income of $2,006,000$3.6 million in the same period of the prior year. The change betweenthree months ended March 31, 2022. Non-GAAP adjusted net income in fiscal 2017was $5.5 million for the three months ended March 31, 2023, compared to aadjusted net loss in fiscal 2018 is mostly driven byincome of $4.2 million for the $4.7 million charge in fiscal 2018 relatedthree months ended March 31, 2022 (Refer to the re-valuation of the Company’s deferred tax assets. Also contributing to the quarter-over-quarter net changeNon-GAAP tables above). The increase in Non-GAAP adjusted net income are increased netis primarily the result of an increase in sales increased gross profit and an improvement ofincrease in the gross profit as a percentage of sales, increased selling and administrative expenses, and restructuring and plant closure costs in fiscal 2017 with no comparable costs in fiscal 2018.sales. Diluted lossearnings per share of $(0.06)$0.16 was reported in the second quarter of fiscal 2018three months ended March 31, 2023, as compared to $0.08$0.13 diluted earnings per share in the same period of fiscal 2017.2022. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the second quarter of fiscal 2018three months ended March 31, 2023, were 25,858,00029,611,000 shares as compared to 25,803,00028,083,000 shares in the same period last year.
SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20172023, COMPARED TO SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20162022
Lighting Segment | ||||||||
Nine Months Ended | ||||||||
March 31 | ||||||||
(In thousands) | 2023 | 2022 | ||||||
Net Sales | $ | 201,074 | $ | 165,662 | ||||
Gross Profit | $ | 63,015 | $ | 49,009 | ||||
Operating Income | $ | 22,441 | $ | 13,921 |
Lighting Segment | ||||||||
(In thousands) | Six Months Ended | |||||||
December 31 | ||||||||
2017 | 2016 | |||||||
Net Sales | $ | 137,602 | $ | 130,341 | ||||
Gross Profit | $ | 37,932 | $ | 32,383 | ||||
Operating (Loss) Income | $ | (17,655 | ) | $ | 6,852 |
Lighting Segment net sales of $137,602,000$201.1 million in the first half of fiscal 2018nine months ended March 31, 2023, increased 5.5%21% from fiscal 2017 same period net sales of $130,341,000. Comparable fiscal 2018 net sales excluding net sales from Atlas decreased by $17.7 million or 13.6% from fiscal 2017 second quarter sales. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $110.7$165.7 million in the first half ofsame period in fiscal 2018, representing a $21.4 million or 24.0% increase from fiscal 2017 first half net sales of solid-state LED light fixtures of $89.3 million. Light fixtures having solid-state LED technology represent 88.3% of total lighting product net sales2022. The 21% growth in the first half of fiscal 2018 comparedLighting Segment was driven by continued growth in both indoor and outdoor applications, across multiple verticals. Sales growth was broad-based, with significant increases in all vertical market applications. The Company’s continued efforts over the last two years to 75.2% of totalstrengthen its lighting product net sales in the first half of fiscal 2017. Total lighting product net sales excludes sales relatedoffering for select vertical market applications continues to installation and shipping and handling. There was a reduction in the Company’s traditional lighting sales (metal halide and fluorescent light sources) from fiscal 2017position LSI to fiscal 2018 as customers continue to convert from traditional lighting to light fixtures having solid-state LED technology.win additional business.
Gross profit of $37,932,000$63.0 million in the first half of fiscal 2018nine months ended March 31, 2023, increased $5.5$14.0 million or 17.1%29% from the same period of fiscal 2017, and increased from 24.6% to 27.2%2022. Gross profit as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The Company incurred restructuring and plant closure costs that were recorded in cost of sales related to the closure of the Kansas City, Kansas manufacturing facility and the Beaverton, Oregon facility of $932,000 and plant closure costs related to an inventory write-down of $400,000 as the Company exited the manufacturing of fluorescent lighting fixtures with no comparable costs in fiscal 2018. The remaining increase in amount of gross profit is due to the net effect of improved product mix, net sales from Atlas for which there were no comparable sales in fiscal 2017, manufacturing efficiencies as a result of the Company’s lean initiatives, continued inflationary pressures in certain commodities, competitive pricing pressures, continued softnesswas 31.3% in the lighting industry, and cost savings relatednine months ended March 31, 2023, compared to the closure of the Kansas City and Beaverton facilities.
Selling and administrative expenses of $27,587,000in the first half of fiscal 2018 excluding the $28 million goodwill impairment charge, increased $2.1 million or 8.1% from the same period of fiscal 2017 primarily as the net result of acquiring Atlas. Our comparable selling and administrative expenses excluding Atlas decreased 17.5% in the first half of fiscal 2018 from the same period of fiscal 2017. The more notable year-over-year changes impacting the $2.1 million increase in selling and administrative expenses are increased employee compensation and benefits expense ($1.3 million), increased research and development expense ($0.2 million), decreased commission expense ($1.6 million), and increased amortization expense ($1.2 million). The Company recorded a $28 million goodwill impairment charge in fiscal 2018 with no comparable expense in fiscal 2017. The Company will perform an impairment analysis in the third quarter of fiscal 2018 in conjunction with its annual impairment test.
The Lighting Segment first half fiscal 2018 operating loss of $(17,655,000) represents a $24,507,000 change from operating income of $6,852,00029.6% in the same period of fiscal 2017 primarily due to a $28 million pre-tax goodwill impairment charge.2022. The year-over-year change was also the net result of increased net sales, an increaseimprovement in gross profit and gross profit as a percentage of sales increased selling and administrative expenses, and plant closure costswas driven by the increase in fiscal 2017 with no comparable expenses in fiscal 2018.
Graphics Segment | ||||||||
(In thousands) | Six Months Ended | |||||||
December 31 | ||||||||
2017 | 2016 | |||||||
Net Sales | $ | 42,169 | $ | 39,476 | ||||
Gross Profit | $ | 11,109 | $ | 9,358 | ||||
Operating Income | $ | 3,731 | $ | 2,191 |
Graphics Segment net sales resulting from the Company’s continued focus on verticals where it competes coupled with new product offerings, and continued price discipline, all of $42,169,000which in the first half of fiscal 2018 increased $2.7 million or 6.8% from fiscal 2017 same period net sales of $39,476,000. Sales to the Retail and QSR markets increasedturn result in the first half of fiscal 2018 compared to fiscal 2017 which more than offset a decline in sales to the Petroleum market over the same period.improved margins.
Gross profitOperating expenses of $11,109,000 $40.6 millionin the first half of fiscal 2018nine months ended March 31, 2023, increased $1.8$5.5 million or 18.7%16% from the same period of fiscal 2017.2022, primarily driven by higher commission expense paid to its agent network as a result of higher net sales.
Lighting Segment operating income of $22.4 million for the nine months ended March 31, 2023, increased $8.5 million from operating income of $13.9 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 | ||||||||
Nine Months Ended | ||||||||
March 31 | ||||||||
(In thousands) | 2023 | 2022 | ||||||
Net Sales | $ | 172,269 | $ | 161,989 | ||||
Gross Profit | $ | 38,061 | $ | 27,766 | ||||
Operating Income | $ | 19,759 | $ | 12,142 |
Display Solutions Segment net sales of $172.3 million in the nine months ended March 31, 2023, increased $10.3 million or 6% from net sales of $162.0 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 $38.1 million in the nine months ended March 31, 2023, increased $10.3 million or 37% from the same period of fiscal 2022. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) increased from 23.2% in the first half of fiscal 2017nine months ended March 31, 2023, was 22.1% compared to 25.7% in the first half of fiscal 2018. The change in amount of gross profit is due to the net effect of increased net sales (customer plus inter-segment net sales), an improvement in the gross profit margin of installation and shipping and handling sales, and decreased employee compensation and benefit expense ($0.5 million). The Company incurred $211,000 in the first half of fiscal 2017 related to the closure of its Woonsocket, Rhode Island facility with no comparable expense in fiscal 2018.
Selling and administrative expenses of $7,378,000 in the first half of fiscal 2018 increased 2.9% or $0.2 million from fiscal 2017 selling and administrative expenses of $7,167,000. There were only modest increases and offsetting decreases in several cost categories.
The Graphics Segment first half fiscal 2018 operating income of $3,731,000 increased $1.5 million or 70.3% from operating income of $2,191,00017.1% in the same period of fiscal 2017.2022. The increase of $1.5 million was primarily the net result of increased net sales, increasedimprovement in gross profit and increased gross profit margin as a percentage of sales and a smallwas driven by the increase in sellingnet sales, improved program pricing, and administrative costs.favorable sales mix.
Operating expenses of $18.3 million in the nine months ended March 31, 2023, increased $2.7 million from $15.6 million in the same period of fiscal 2022. The increase of $2.7 million was driven by several factors including compensation, benefits, and commercial sales and marketing programs costs to support sales growth, along with an increase in short-term performance-based incentive plan expense driven by improved business performance.
Corporate and Eliminations | ||||||||
(In thousands) | Six Months Ended | |||||||
December 31 | ||||||||
2017 | 2016 | |||||||
Gross Profit (Loss) | $ | (31 | ) | $ | 501 | |||
Operating (Loss) | $ | (6,343 | ) | $ | (5,159 | ) |
Display Solutions Segment operating income of $19.8 million in the nine months ended March 31, 2023, increased $7.7 million or 63% from operating income of $12.1 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 | ||||||||
Nine Months Ended | ||||||||
March 31 | ||||||||
(In thousands) | 2023 | 2022 | ||||||
Gross Profit (Loss) | $ | 6 | $ | (24 | ) | |||
Operating (Loss) | $ | (15,409 | ) | $ | (12,036 | ) |
The gross profit profit/(loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expensesOperating expenses of $6,312,000$15.4 million in the first half of fiscal 2018nine months ended March 31, 2023, increased $0.7$3.4 million or 11.5% from the same period of the prior year.fiscal 2022. The $0.7 million increase iswas primarily the result of increased employee compensationan increase in short-term and benefitlong-term performance-based incentive plan expense ($0.5 million increase)driven by improved business performance and by a net increase in other cost categories. Mostcommercial growth initiative consulting expense of the increase in employee compensation and benefit$0.9 million for which there was no comparable expense is the result of the reduction of incentive-based compensation in the second quarterfirst nine months of fiscal 2017 which is driven by the operating results of the Company. There was no similar reduction in incentive-based compensation in fiscal 2018. Also contributing to the net change in administrative expenses are restructuring costs of $0.1 million recorded in fiscal 2017 related to the consolidation of its Beaverton, Oregon facility into other LSI facilities, with no comparable costs in fiscal 2018.2022.
Consolidated Results
The Company reported $820,000$2.9 million and $1.3 million of net interest expense in the first halfnine months ended March 31, 2023, and March 31, 2022, respectively. The increase in interest expense is primarily the results of fiscal 2018 comparedincreased borrowing costs. The Company also recorded other expense of $0.1 million and a negligible amount in the nine months ended March 31, 2023, and March 31, 2022, respectively, related to net interest income of $34,000 in the first half of fiscal 2017. The change from interest income in fiscal 2017 to interest expense in fiscal 2018 is the result of borrowing against the Company’s line of credit. Commitment fees related to the unused portion of the Company’s line of creditforeign exchange currency transaction net losses through our Mexican and interest income on invested cash are included in both fiscal years.Canadian subsidiaries.
The $3,990,000 tax benefit in the first half$6.4 million of fiscal 2018 represents a consolidated overall tax rate of 135.6%. This is a result of an effective tax rate of 58.2% influenced most notably by the first quarter goodwill impairment, and by a $4.7 million tax adjustment related to the revaluation of the Company’s deferred tax assets partially offset by a favorable tax impact related to the re-alignment of the Company’s tax expense to a lower effective tax rate, both related to the recently enacted TCJA legislation. The $1,083,000 income tax expense in the first half of fiscal 2017nine months ended March 31, 2023, represents a consolidated effective tax rate of 18.9%27.0%. This isThe $2.9 million income tax expense in the net result of an incomenine months ended March 31, 2022, represents a consolidated effective tax rate of 28.9% influenced22.4%. The increase in the effective tax rate is primarily driven by certain permanent book-tax differences, by a benefit related to uncertain incomean increase in pre-tax profits in the higher taxing jurisdictions of Puerto Rico and Canada along with unfavorable discreate tax positions, and by a favorable adjustment to a deferred tax asset.adjustments.
The Company reported a net lossincome of $(17,097,000)$17.3 million in the first half of fiscal 2018 asnine months ended March 31, 2023, compared to net income of $2,835,000$9.9 million in the same period of the prior year. The change betweennine months ended March 31, 2022. Non-GAAP adjusted net income in fiscal 2017was $20.2 million for the nine months ended March 31, 2023, compared to aadjusted net loss in fiscal 2018 is mostly driven byincome of $12.0 million for the $4.7 million charge in fiscal 2018 relatednine months ended March 31, 2022 (Refer to the re-valuation of the Company’s deferred tax assets and by the first quarter goodwill impairment. Also contributing to the quarter-over-quarter net changeNon-GAAP tables above). The increase in Non-GAAP adjusted net income are increased netis primarily the result of an increase in sales increased gross profit and an improvement ofincrease in the gross profit as a percentage of sales, increased selling and administrative expenses, and restructuring and plant closure costs in fiscal 2017 with no comparable costs in fiscal 2018.sales. Diluted lossearnings per share of $(0.66)$0.60 was reported in the first half of fiscal 2018nine months ended March 31, 2023, as compared to $0.11$0.35 diluted earnings per share in the same period of fiscal 2017.2022. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first half of fiscal 2018nine months ended March 31, 2023, were 25,824,00029,055,000 shares as compared to 25,859,00027,945,000 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 itsour historical levels of net cash flows from operating activities to be the most important measures.
At DecemberMarch 31, 2017,2023, the Company had working capital of $72.8$79.8 million compared to $61.7$84.3 million at June 30, 2017.2022. The ratio of current assets to current liabilities was 2.712.2 to 1 as compared to a ratio of 2.36 to 11.0 at March 31, 2023, and 2.1 at June 30, 2017.2022. The $11.1 million increasedecrease in working capital from June 30, 20172022, to DecemberMarch 31, 2017 was2023, is primarily driven by an increasea $8.5 million decrease in net accounts receivable ($10.9 million). The other offsetting changes to working capital are as follow: decreasedand a $6.7 million decrease in net inventories ($1.3 million); a reduction in the asset held for sale ($1.5 million); ainventory partially offset by $10.0 million decrease in accounts payable ($2.6 million);payable. Also contributing to the change in working capital was an increase in refundable income taxes and other current assets of $3.2 million, an increase in accrued expenses ($0.4 million). The Company hasof $1.4 million, and a strategy of aggressively managing working capital, including reduction of the accounts receivable days sales outstanding (“DSO”) and reduction of inventory levels, without reducing service to its customers.
The Company used $0.8 million of cash from operating activities in the first half of fiscal 2018 as compared to a source of cash of $4.6 million in the same period of the prior year. This $5.4$1.1 million decrease in cash and cash equivalents, resulting in a net cash flows from operating activities is primarily the net result of a larger increase in accounts receivable (unfavorable change of $8.2 million), a larger decrease in accounts payable (unfavorable change of $2.4 million), a decrease rather than an increase in customer prepayments (unfavorable change of $0.4 million), a smaller decrease in net inventory (unfavorable changeto working capital, of $0.7 million), a smaller decrease in accrued expenses and other (favorable change of $1.9 million), a decrease in refundable income taxes (favorable change of $0.8 million), and a change from net income in fiscal 2017 to a net loss in fiscal 2018 more than offset by an increase in non-cash items (favorable change of $3.7 million).million.
Net accounts receivable were $59.7was $69.3 million and $48.9$77.8 million at DecemberMarch 31, 20172023, and June 30, 2017,2022, respectively. DSO increased to 56remained the same at 54 days at DecemberMarch 31, 2017 from 52 days2023, and at June 30, 2017. The Company believes that its receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.2022.
Net inventories of $48.7$67.7 million at DecemberMarch 31, 20172023, decreased $1.4$6.7 million from $50.0$74.4 million at June 30, 2017.2022, is due to ongoing improvement in the supply chain. The decrease of $1.4$6.7 million is the result of a decrease in grossnet inventory of $1.0$3.8 million and an increase in obsolescence reserves of $0.4 million. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory increases occurred in the first half of fiscal 2018 in the GraphicsLighting Segment of approximately $0.9and a $2.9 million which was more than offset by a decrease in net inventory in the Lighting Segment of $2.2 million.Display Solutions Segment.
Cash generated from operations and borrowing capacity under the Company’s line of credit is the Company’sits primary source of liquidity. TheIn September 2021, the Company hasamended its existing $100 million secured line of credit, to a $25 million term loan and $75 million remaining as a secured $100 million revolving line of credit with its bank, with $56.8 million of the credit line available as of January 25, 2018. This line of credit is a $100 million five year credit line expiringcredit. Both facilities expire in the third quarter of fiscal 2022. The Company believes that its $1002026. As of March 31, 2023, $45.1 million of the credit line of credit plus cash flows from operating activities are adequate for the Company’s fiscal 2018 operational and capital expenditure needs.was available. The Company is in compliance with all of its loan covenants.
The Company generated$100 million credit facility plus cash of $0.3 million related to investingflows from operating activities inare adequate for operational and capital expenditure needs for the halfremainder of fiscal 2018 as compared to a use of $2.7 million in the same period from the prior year, resulting in a favorable change of $3.1 million. Capital expenditures for the first half of fiscal 2018 decreased $1.6 million to $1.2 million from the same period in fiscal 2017. The Company sold its Woonsocket manufacturing facility for $1.5 million which contributed to the change in cash flow from investing activities from fiscal 2017 to fiscal 2018.2023.
The Company generated $0.6had a source of $32.5 million of cash related to financingfrom operating activities in the first half of fiscal 2018nine months ended March 31, 2023, compared to a use of cash of $2.7$12.7 million in the first halfnine months ended March 31, 2022. The increase in net cash flows from operating activities is primarily the result of fiscal 2017. effective management of the Company’s working capital and from improved earnings.
The $3.3Company used $1.8 million favorableand $0.8 million of cash related to investing activities to support the Company’s various capital initiatives, in the nine months ended March 31, 2023, and March 31, 2022, respectively. Capital expenditures increased from $1.3 million in the nine months ended March 31, 2022, to $1.8 million in the nine months ended March 31, 2023. We received $0.5 million of cash related to the settlement of working capital adjustments from the acquisition of JSI in the nine months ended March 31, 2022.
The Company had a use of cash of $32.0 million related to financing activities in the nine months ended March 31, 2023, compared to a source of cash of $12.4 million in the nine months ended March 31, 2022. The $44.4 million change in cash flow was primarily the net result of borrowings in excesscash generated from improved working capital management and from improved earnings, which was used to pay down the Company’s line of payments of long term debt of $2.5 million, and a decreasecredit in the purchasefirst nine months of treasury shares coupled with an increasefiscal 2023. Also contributing to the reduction of debt was $3.1 million of cash received from the exercise of stock options in the distributionsecond and third quarters of treasury shares (favorable change of $0.7 million).fiscal 2023.
The Company has or could have, on its balance sheet financial instruments consisting primarily of cash and cash equivalents, short-term investments, revolving lines of credit, and long-term debt. The fair value of these financial instruments approximates carrying value because of their short-term maturity and/or variable, market-driven interest rates.
Off-Balance Sheet Arrangements
The Company has no financial instruments with off-balance sheet risk and hashave no off-balance sheet arrangements, except for various operating leases.arrangements.
Cash Dividends
In January 2018,April 2023, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable February 13, 2018May 16, 2023, to shareholders of record as of February 5, 2018.May 8, 2023. The indicated annual cash dividend rate for fiscal 20182023 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
The Company is required to make estimates and judgments in the preparationA summary 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 mostour significant accounting policies because they utilize estimates aboutis included in Note 1 to 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 anyaudited consolidated financial statements of the following critical accounting policies could possibly have a material impactCompany’s fiscal 2022 Annual Report on the financial statements.Form 10-K.
Revenue Recognition
Revenue is recognized when title to goods and risk of loss have passed to the customer, there is persuasive evidence of a purchase arrangement, delivery has occurred or services have been rendered, and collectability is reasonably assured. Sales are recorded net of estimated returns, rebates and discounts. Amounts received from customers prior to the recognition of revenue are accounted for as customer pre-payments and are included in accrued expenses.
The Company has multiple sources of revenue: revenue from product sales; revenue from installation of products; service revenue generated from providing integrated design, project and construction management, site engineering and site permitting, and commissioning of lighting controls; revenue from the management of media content and digital hardware related to active digital signage; and revenue from shipping and handling.
Product revenue is recognized on product-only orders upon passing of title and risk of loss, generally at time of shipment. In certain arrangements with customers, as is the case with the sale of some of our solid-state LED video screens, revenue is recognized upon customer acceptance of the video screen at the job site. Product revenue related to orders where the customer requires the Company to install the product is recognized when the product is installed. The company provides product warranties and certain post-shipment service, support and maintenance of certain solid-state LED video screens and billboards.
Installation revenue is recognized when the products have been fully installed. The Company is not always responsible for installation of products it sells and has no post-installation responsibilities, other than normal warranties.
Service revenue from integrated design, project and construction management, and site permitting is recognized when all products at a customer site have been installed.
Revenue from the management of media content and digital hardware related to active digital signage is recognized evenly over the service period with the customer. Media content service periods with most customers range from 1 month to 1 year.
Shipping and handling revenue coincides with the recognition of revenue from the sale of the product.
In situations where the Company is responsible for re-imaging programs with multiple sites, each site is viewed as a separate unit of accounting and has stand-alone value to the customer. Revenue is recognized upon the Company’s complete performance at the location, which may include a site survey, graphics products, lighting products, and installation of products. The selling price assigned to each site is based upon an agreed upon price between the Company and its customer and reflects the estimated selling price for that site relative to the selling price for sites with similar image requirements.
The Company also evaluates the appropriateness of revenue recognition in accordance with the accounting standard on software revenue recognition. Our solid-state LED video screens, billboards and active digital signage contain software elements which the Company has determined are incidental.
Income Taxes
The Company accounts for income taxes in accordance with the accounting guidance for income taxes. Accordingly, deferred income taxes are provided on items that are reported as either income or expense in different time periods for financial reporting purposes than they are for income tax purposes. Deferred income tax assets and liabilities are reported on the Company’s balance sheet. Significant management judgment is required in developing the Company’s income tax provision, including the estimation of taxable income and the effective income tax rates in the multiple taxing jurisdictions in which the Company operates, the estimation of the liability for uncertain income tax positions, the determination of deferred tax assets and liabilities, and any valuation allowances that might be required against deferred tax assets. The Company has adopted ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.” As a result of early adoption of this accounting guidance, prior periods have been re-classified, which only affected the financial statement presentation and not the measurement of deferred tax liabilities and assets.
The Company operates in multiple taxing jurisdictions and is subject to audit in these jurisdictions. The Internal Revenue Service and other tax authorities routinely review the Company’s tax returns. These audits can involve complex issues which may require an extended period of time to resolve. In management’s opinion, adequate provision has been made for potential adjustments arising from these audits.
The Company is recording estimated interest and penalties related to potential underpayment of income taxes as a component of tax expense in the Condensed Consolidated Statements of Operations. The reserve for uncertain tax positions is not expected to change significantly in the next twelve months.
The Tax Cuts and Jobs Act was signed into law on December 22nd, 2017 and makes numerous changes to the Internal Revenue Code. Among other changes, the Act reduces the US corporate income tax rate to 21% effective January 1, 2018. Because the Act became effective mid-way through the Company’s tax year, the Company will have a US statutory income tax rate of 27.7% for the fiscal 2018, and will have a 21% US statutory income tax rate for fiscal years thereafter. During the quarter ended December 31, 2017, the Company re-valued the deferred tax balances because of the change in US tax rate resulting in a one-time deferred tax expense of $4,676,578.
Asset Impairment
Carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment in accordance with the accounting guidance on goodwill and intangible assets. The Company may first assess qualitative factors in order to determine if goodwill is impaired. If through the qualitative assessment it is determined that it is more likely than not that goodwill is not impaired, no further testing is required. If it is determined that it is more likely than not that goodwill is impaired, or if the Company elects not to first assess qualitative factors, the Company’s impairment testing continues at the reporting unit level with the estimation of the fair value of goodwill and indefinite-lived intangible assets using a combination of a market approach and an income (discounted cash flow) approach. The estimation of the fair value of goodwill and indefinite-lived intangible assets 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 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, a sustained drop in the Company’s stock price, economic factors and technological change or competitive activities may signal that an asset has become impaired.
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 DecemberMarch 31, 2017,2023, 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 DecemberMarch 31, 2017,2023, 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 PROCEEDS5. OTHER INFORMATION
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ISSUER PURCHASES OF EQUITY SECURITIES
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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) |
* Management compensatory agreement.
++ Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K. The omitted information is not material and would likely cause competitive harm to the Registrant if publicly disclosed. The Registrant hereby agrees to furnish a copy of any omitted portion to the SEC upon request.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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 | |||||
(Principal Financial Officer) | |||||
May 5, 2023 |
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