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LSI INDUSTRIES INC - Quarter Report: 2018 December (Form 10-Q)

lyts20181231_10q.htm
 

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, DC  20549

 

FORM 10-Q

 

X

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2018.

 

 

 

 

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO ________________.

 

 

Commission File No. 0-13375

 

LSI Industries Inc.

 

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

 

10000 Alliance Road

 

Cincinnati, Ohio  45242

 

(513) 793-3200

 

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

 

Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).

YES    X      NO ____

 

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

 

 

Large accelerated filer [    ]  

 

Accelerated filer [ X ]                  Emerging growth company [    ]

 

Non-accelerated filer [    ] 

 

Smaller reporting company [    ]

 

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

 

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

 

As of January 27, 2019 there were 25,888,975 shares of the registrant's common stock, no par value per share, outstanding.

 

 

 

  

 

LSI INDUSTRIES INC.

FORM 10-Q

FOR THE QUARTER ENDED DECEMBER 31, 2018

 

INDEX

 

PART I.  Financial Information

  

Begins on Page  

  

  

  

  

  

  

ITEM 1.

Financial Statements (Unaudited)

  

  

  

  

  

  

  

  

  

Condensed Consolidated Statements of Operations

  

3

  

  

Condensed Consolidated Balance Sheets

  

4

  

  

Condensed Consolidated Statements of Cash Flows

  

6

  

  

  

  

  

  

  

Notes to Condensed Consolidated Financial Statements

  

7

  

  

  

  

  

  

ITEM 2.

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

  

17

  

  

  

  

  

  

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

  

25

  

  

  

  

  

  

ITEM 4.

Controls and Procedures

  

25

  

  

  

  

  

PART II.  Other Information

  

  

  

  

  

  

  

  ITEM 1A. Risk Factors   26
         

  

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

  

26

  

  

  

  

  

  

ITEM 6.

Exhibits

  

26

  

  

  

  

  

Signatures

 

26

 

“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 following: the impact of competitive products and services; product and pricing demands, and market acceptance risks; potential costs associated with litigation and regulatory compliance; the Company’s ability to develop, produce and market quality products that meet customers’ needs; additional restructuring costs or a failure to realize anticipated savings or benefits from past or future cost reduction actions; failure to realize all of the anticipated benefits from initiatives to increase our productivity, efficiency and cash flow and to reduce costs; inventory management decisions and sourcing practices; compliance with financial and other restrictive covenants in debt agreements; information technology security threats and computer crime; 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; failure of an acquisition or acquired company to achieve its plans or objectives generally; unexpected difficulties in integrating acquired businesses; the ability to retain key employees, including key employees of acquired businesses; unfavorable economic and market conditions; the results of asset impairment assessments; the ability to maintain an effective system of internal control over financial reporting; the ability to remediate any material witnesses in internal control over financial reporting; and the other risk factors that are identified herein.  You are cautioned to not place undue reliance on these forward-looking statements.  In addition to the factors described in this paragraph, the risk factors identified in our Form 10-K and other filings the Company may make with the SEC constitute risks and uncertainties that may affect the financial performance of the Company and are incorporated herein by reference.  The Company does not undertake and hereby disclaims any duty to update any forward-looking statements to reflect subsequent events or circumstances.

 

Page 2

 

  

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

 

LSI INDUSTRIES INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

December 31

   

December 31

 

(In thousands, except per share data)

 

2018

   

2017

   

2018

   

2017

 
                                 

Net sales

  $ 89,541     $ 92,305     $ 174,498     $ 179,771  
                                 

Cost of products and services sold

    69,486       66,998       133,027       130,761  
                                 

Restructuring costs

    376       --       531       --  
                                 

Severance costs

    23       --       23       --  
                                 

Gross profit

    19,656       25,307       40,917       49,010  
                                 

Selling and administrative expenses

    19,148       20,677       37,475       41,194  
                                 

Impairment of goodwill

    20,165       --       20,165       28,000  
                                 

Transition and realignment costs

    120       --       120       --  
                                 

Severance costs

    469       83       469       83  
                                 

Restructuring costs

    25       --       25       --  
                                 

Operating (loss) income

    (20,271

)

    4,547       (17,337

)

    (20,267

)

                                 

Interest (income)

    (17

)

    (8

)

    (31

)

    (16

)

                                 

Interest expense

    632       425       1,164       836  
                                 

(Loss) income before income taxes

    (20,886

)

    4,130       (18,470

)

    (21,087

)

                                 

Income tax (benefit) expense

    (5,104

)

    5,598       (4,437

)

    (3,990

)

                                 

Net loss

  $ (15,782

)

  $ (1,468

)

  $ (14,033

)

  $ (17,097

)

                                 
                                 

Loss per common share (see Note 4)

                               

Basic

  $ (0.61

)

  $ (0.06

)

  $ (0.54

)

  $ (0.66

)

Diluted

  $ (0.61

)

  $ (0.06

)

  $ (0.54

)

  $ (0.66

)

                                 
                                 

Weighted average common shares outstanding

                               

Basic

    26,083       25,858       26,058       25,824  

Diluted

    26,083       25,858       26,058       25,824  

 

 

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

 

Page 3

 

  

 

LSI INDUSTRIES INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In thousands, except shares)

 

December 31,

   

June 30,

 
   

2018

   

2018

 
                 

ASSETS

               
                 

Current Assets

               
                 

Cash and cash equivalents

  $ 9,563     $ 3,178  
                 

Accounts receivable, less allowance for doubtful accounts of $301 and $409, respectively

    56,430       50,609  
                 

Inventories

    54,093       50,994  
                 

Refundable income tax

    1,000       1,784  
                 

Other current assets

    3,936       3,516  
                 

Total current assets

    125,022       110,081  
                 

Property, Plant and Equipment, at cost

               

Land

    6,770       6,470  

Buildings

    35,608       35,961  

Machinery and equipment

    77,865       77,108  

Construction in progress

    1,135       1,340  
      121,378       120,879  

Less accumulated depreciation

    (80,129

)

    (77,176

)

Net property, plant and equipment

    41,249       43,703  
                 

Goodwill

    10,373       30,538  
                 

Other Intangible Assets, net

    34,029       35,409  
                 

Other Long-Term Assets, net

    14,405       9,786  
                 

Total assets

  $ 225,078     $ 229,517  

 

 

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

 

Page 4

 

 

LSI INDUSTRIES INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   

December 31,

   

June 30,

 

(In thousands, except shares)

 

2018

   

2018

 
                 

LIABILITIES & SHAREHOLDERS’ EQUITY

               
                 

Current Liabilities

               

Accounts payable

  $ 26,679     $ 17,927  

Accrued expenses

    23,730       24,272  
                 

Total current liabilities

    50,409       42,199  
                 

Long-Term Debt

    48,372       45,360  
                 

Other Long-Term Liabilities

    1,972       2,707  
                 

Commitments and Contingencies (Note 11)

    --       --  
                 

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 25,861,114 and 25,641,913 shares, respectively

    125,200       124,104  

Treasury shares, without par value

    (1,561

)

    (2,110

)

Deferred compensation plan

    1,591       2,133  

Retained earnings

    (905

)

    15,124  
                 

Total shareholders’ equity

    124,325       139,251  
                 

Total liabilities & shareholders’ equity

  $ 225,078     $ 229,517  

 

 

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

   

Page 5

 

 

 

LSI INDUSTRIES INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

(In thousands)

 

Six Months Ended

 
   

December 31

 
   

2018

   

2017

 

Cash Flows from Operating Activities

               

Net (loss)

  $ (14,033

)

  $ (17,097

)

Non-cash items included in net income

               

Depreciation and amortization

    5,235       5,124  

Deferred income taxes

    (4,701

)

    (5,667

)

Impairment of goodwill

    20,165       28,000  

Deferred compensation plan

    196       224  

Stock compensation expense

    727       1,463  

Issuance of common shares as compensation

    180       156  

Gain on disposition of fixed assets

    (10

)

    (29

)

Allowance for doubtful accounts

    256       115  

Inventory obsolescence reserve

    2,043       1,033  
                 

Changes in certain assets and liabilities:

               

Accounts receivable

    (1,142

)

    (10,975

)

Inventories

    (9,309

)

    313  

Refundable income taxes

    784       775  

Accounts payable

    8,704       (2,626

)

Accrued expenses and other

    (1,873

)

    (631

)

Customer prepayments

    406       (221

)

Net cash flows provided by (used in) operating activities

    7,628       (43

)

                 

Cash Flows from Investing Activities

               

Purchases of property, plant and equipment

    (1,579

)

    (1,190

)

Proceeds from sale of fixed assets

    10       1,527  

Net cash flows (used in) provided by investing activities

    (1,569

)

    337  
                 

Cash Flows from Financing Activities

               

Payments of long-term debt

    (52,066

)

    (48,553

)

Borrowings of long-term debt

    55,078       51,004  

Cash dividends paid

    (2,587

)

    (2,564

)

Exercise of stock options

    --       175  

Purchase of treasury shares

    --       (107

)

Shares withheld for employee taxes

    (99

)

    (111

)

Net cash flows provided by (used in) financing activities

    326       (156

)

                 

Increase in cash and cash equivalents

    6,385       138  
                 

Cash and cash equivalents at beginning of period

    3,178       3,039  
                 

Cash and cash equivalents at end of period

  $ 9,563     $ 3,177  

 

 

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

  

Page 6

 

 

LSI INDUSTRIES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The interim condensed consolidated financial statements are unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the interim financial statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of December 31, 2018, the results of its operations for the three and six month periods ended December 31, 2018 and 2017, and its cash flows for the six month periods ended December 31, 2018 and 2017. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2018 Annual Report on Form 10-K.  Financial information as of June 30, 2018 has been derived from the Company’s audited consolidated financial statements.

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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 2018 Annual Report on Form 10-K. Significant changes to our accounting policies as a result of adopting ASU-2014-09 “Revenue from Contracts with Customers” (Topic 606) are discussed below.

 

Revenue Recognition:

 

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

 

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

 

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

 

 

Customer specific print graphics branding

 

Electrical components based on customer specifications

 

Digital signage and related media content

 

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

 

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

 

Page 7

 

 

Disaggregation of Revenue

 

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

 

   

Three Months Ended

   

Six Months Ended

 

(In thousands)

 

December 31

   

December 31

 
   

Lighting

Segment

   

Graphics

Segment

   

Lighting

Segment

   

Graphics

Segment

 

Timing of revenue recognition

                               

Products and services transferred at a point in time

  $  57,318     $ 14,758     $  111,567     $  32,452  

Products and services transferred over time

    6,336        11,129       13,519       16,960  
    $ 63,654     $ 25,887     $ 125,086     $ 49,412  
                                 

Type of Product and Services

                               

New technology products

  $ 56,271     $ 2,349     $ 107,576     $ 4,751  

Legacy products

    6,947       18,222       16,023       34,186  

Turnkey services and other

    436       5,316       1,487       10,475  
    $ 63,654     $ 25,887     $ 125,086     $ 49,412  

 

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

 

Practical Expedients and Exemptions

 

 

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

 

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

 

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

 

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

 

New Accounting Pronouncements:

 

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

 

(In thousands)  

Balance as of

June 30, 2018

   

Adjustments

   

Opening Balance as

of July 1, 2018

 

Assets:

                       

Accounts receivable, net

  $ 50,609     $ 4,935     $ 55,544  

Inventories, net

  $ 50,994     $ (4,167

)

  $ 46,827  

Other long-term assets, net

  $ 9,786     $ (177

)

  $ 9,609  

Stockholders' Equity:

                       

Retained earnings

  $ 15,124     $ 591     $ 15,715  

 

Page 8

 

 

In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases.” The amended guidance requires an entity to recognize assets and liabilities that arise from leases. The amended guidance is effective for financial statements issued for fiscal years and interim periods within those years, beginning after December 15, 2018, or the Company’s fiscal year 2020, with early adoption permitted. The Company has an implementation team tasked with reviewing our lease obligations and determining the impact of the new standard to its financial statements. The implementation team has completed a qualitative assessment of the Company’s active leases and is compiling related data in a central repository. The Company will continue to evaluate the new standard’s impact to its financial statements.  

 

Subsequent Events:

 

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

  

On January 16, 2019, the Company appointed Michael C. Beck as the Company’s Senior Vice President - Operations. Mr. Beck entered into an Employment Offer Letter as of January 11, 2019 which provides that his employment with the Company shall begin on February 11, 2019. The Employment Offer Letter also defines his compensation and benefit package.

 

Reclassifications:

 

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

 

 

NOTE 3 - SEGMENT REPORTING INFORMATION 

 

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

 

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

 

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

 

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

 

There was no concentration of consolidated net sales in the three and six months ended December 31, 2018 or 2017.  There was no concentration of accounts receivable at December 31, 2018 or June 30, 2018.

 

Page 9

 

 

Summarized financial information for the Company’s operating segments is provided for the indicated periods and as of December 31, 2018 and December 31, 2017:

 

   

Three Months Ended

   

Six Months Ended

 

(In thousands)

 

December 31

   

December 31

 
   

2018

   

2017

   

2018

   

2017

 

Net Sales:

                               

Lighting Segment

  $ 63,654     $ 69,174     $ 125,086     $ 137,602  

Graphics Segment

    25,887       23,131       49,412       42,169  
    $ 89,541     $ 92,305     $ 174,498     $ 179,771  

Operating (Loss) Income:

                               

Lighting Segment

  $ (18,452

)

  $ 5,275     $ (14,602

)

  $ (17,655

)

Graphics Segment

    861       2,255       3,248       3,731  

Corporate and Eliminations

    (2,680

)

    (2,983

)

    (5,983

)

    (6,343

)

    $ (20,271

)

  $ 4,547     $ (17,337

)

  $ (20,267

)

Capital Expenditures:

                               

Lighting Segment

  $ 588     $ 499     $ 864     $ 760  

Graphics Segment

    249       157       515       339  

Corporate and Eliminations

    94       36       200       91  
    $ 931     $ 692     $ 1,579     $ 1,190  

Depreciation and Amortization:

                               

Lighting Segment

  $ 1,952     $ 1,885     $ 3,942     $ 3,786  

Graphics Segment

    397       384       792       763  

Corporate and Eliminations

    243       283       501       575  
    $ 2,592     $ 2,552     $ 5,235     $ 5,124  

 

   

December 31,

2018

   

June 30,

2018

 

Identifiable Assets:

               

Lighting Segment

  $ 152,586     $ 172,799  

Graphics Segment

    46,878       39,881  

Corporate and Eliminations

    25,614       16,837  
    $ 225,078     $ 229,517  

 

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

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

December 31

   

December 31

 

(In thousands)

 

2018

   

2017

   

2018

   

2017

 
                                 

Lighting Segment inter-segment net sales

  $ 870     $ 992     $ 1,279     $ 1,707  
                                 

Graphics Segment inter-segment net sales

  $ 44     $ 1,040     $ 75     $ 1,071  

 

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.

 

Page 10

 

 

 

NOTE 4 - EARNINGS PER COMMON SHARE

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

December 31

   

December 31

 
   

2018

   

2017

   

2018

   

2017

 
                                 

BASIC EARNINGS PER SHARE

                               
                                 

Net (loss)

  $ (15,782

)

  $ (1,468

)

  $ (14,033

)

  $ (17,097

)

                                 

Weighted average shares outstanding during the period, net of treasury shares (a)

    25,838       25,551       25,795       25,528  

Weighted average vested restricted stock units outstanding

    33       63       43       52  

Weighted average shares outstanding in the Deferred Compensation Plan during the period

    212       244       220       244  

Weighted average shares outstanding

    26,083       25,858       26,058       25,824  
                                 

Basic loss per share

  $ (0.61

)

  $ (0.06

)

  $ (0.54

)

  $ (0.66

)

                                 

DILUTED EARNINGS PER SHARE

                               
                                 

Net (loss)

  $ (15,782

)

  $ (1,468

)

  $ (14,033

)

  $ (17,097

)

                                 

Weighted average shares outstanding

                               
                                 

Basic

    26,083       25,858       26,058       25,824  
                                 

Effect of dilutive securities (b):

                               

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

    --       --       --       --  
                                 

Weighted average shares outstanding (c)

    26,083       25,858       26,058       25,824  
                                 

Diluted (loss) per share

  $ (0.61

)

  $ (0.06

)

  $ (0.54

)

  $ (0.66

)

 

 

(a)

Includes shares accounted for like treasury stock.

 

 

(b)

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

 

 

(c)

Options to purchase 3,536,732 common shares and 3,569,762 common shares for the three months ended December 31, 2018 and 2017, respectively, were not included in the computation of the three month diluted loss per share because the exercise price was greater than the average fair market value of the common shares. Additionally, options to purchase 3,356,101 common shares and 3,549,705 common shares for the six months ended at December 31, 2018 and 2017, respectively, were not included in the computation of the six month diluted loss per share because the exercise price was greater than the average fair market value of the common shares. For the three months ended and the six months ended in December 31, 2018 and December 31, 2017, the effect of dilutive securities was not included in the calculation of diluted loss per share because there was a net loss for the period.

 

Page 11

 

 

 

NOTE 5 - INVENTORIES

 

The following information is provided as of the dates indicated:

 

   

December 31,

   

June 30,

 

(In thousands)

 

2018

   

2018

 
                 

Inventories:

               

Raw materials

  $ 33,467     $ 31,795  

Work-in-process

    2,116       3,833  

Finished goods

    18,510       15,366  

Total Inventories

  $ 54,093     $ 50,994  

 

 

NOTE 6 - ACCRUED EXPENSES

 

The following information is provided as of the dates indicated:

   

December 31,

   

June 30,

 

(In thousands)

 

2018

   

2018

 
                 

Accrued Expenses:

               

Compensation and benefits

  $ 6,842     $ 9,394  

Customer prepayments

    1,476       1,070  

Accrued sales commissions

    1,702       2,274  

Accrued warranty

    7,136       6,876  

Other accrued expenses

    6,574       4,658  

Total Accrued Expenses

  $ 23,730     $ 24,272  

 

 

NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS

 

The carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment.  The Company may first assess qualitative factors in order to determine if goodwill and indefinite-lived intangible assets are impaired. If through the qualitative assessment it is determined that it is more likely than not that goodwill and indefinite-lived assets are not impaired, no further testing is required. If it is determined more likely than not that goodwill and indefinite-lived assets are impaired, or if the Company elects not to first assess qualitative factors, the Company’s impairment testing continues with the estimation of the fair value of the reporting unit using a combination of a market approach and an income (discounted cash flow) approach, at the reporting unit level.  The estimation of the fair value of reporting unit requires significant management judgment with respect to revenue and expense growth rates, changes in working capital and the selection and use of an appropriate discount rate.  The estimates of the fair value of reporting units are based on the best information available as of the date of the assessment.  The fair value measurements of the reporting units are based on significant inputs not observable in the market and thus represent Level 3 measurements as defined by ASC 820 “Fair Value Measurements.”  The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease an impairment charge.  Company management uses its judgment in assessing whether assets may have become impaired between annual impairment tests.  Indicators such as adverse business conditions, economic factors and technological change or competitive activities may signal that an asset has become impaired.

 

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

 

A sustained and significant decline in the Company’s stock price in the second quarter of fiscal 2019 led management to believe that a triggering event occurred and that an interim goodwill impairment test was required for one of the reporting units in the Lighting Segment that contains goodwill, as of December 31, 2018. In accordance with ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which was adopted in a prior period, the requirement to perform step 2 in the impairment test was not required. The result of the impairment test on the reporting unit in the Lighting Segment indicated that goodwill was impaired by $20,165,000.

 

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

 

Goodwill

                       

(In thousands)

 

Lighting

   

Graphics

         
   

Segment

   

Segment

   

Total

 

Balance as of June 30, 2018

                       

Goodwill

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

Accumulated impairment losses

    (65,191

)

    (27,525

)

    (92,716

)

Goodwill, net as of June 30, 2018

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

Goodwill Impairment

  $ (20,165

)

  $ --     $ (20,165

)

                         

Balance as of December 31, 2018

                       

Goodwill

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

Accumulated impairment losses

    (85,356

)

    (27,525

)

    (112,881

)

Goodwill, net as of December 31, 2018

  $ 9,208     $ 1,165     $ 10,373  

 

Page 12

 

 

The following table presents the gross carrying amount and accumulated amortization by each major asset class:

 

   

December 31, 2018

 

Other Intangible Assets

 

Gross

                 

(In thousands)

 

Carrying

   

Accumulated

   

Net

 
   

Amount

   

Amortization

   

Amount

 

Amortized Intangible Assets

                       

Customer relationships

  $ 35,563     $ 11,040     $ 24,523  

Patents

    338       231       107  

LED technology firmware, software

    16,066       12,083       3,983  

Trade name

    2,658       664       1,994  
                         

Total Amortized Intangible Assets

    54,625       24,018       30,607  
                         

Indefinite-lived Intangible Assets

                       

Trademarks and trade names

    3,422       --       3,422  

Total Indefinite-lived Intangible Assets

    3,422       --       3,422  

Total Other Intangible Assets

  $ 58,047     $ 24,018     $ 34,029  

 

   

June 30, 2018

 

Other Intangible Assets

 

Gross

                 
(In thousands)  

Carrying

   

Accumulated

   

Net

 

 

 

Amount

   

Amortization

   

Amount

 

Amortized Intangible Assets

                       

Customer relationships

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

Patents

    338       217       121  

LED technology firmware, software

    16,066       11,801       4,265  

Trade name

    2,658       609       2,049  

Total Amortized Intangible Assets

    54,625       22,638       31,987  
                         

Indefinite-lived Intangible Assets

                       

Trademarks and trade names

    3,422       --       3,422  

Total Indefinite-lived Intangible Assets

    3,422       --       3,422  
                         

Total Other Intangible Assets

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

 

Amortization expense for intangible assets was $689,000 and $690,000 for the three months ended December 31, 2018 and 2017, respectively, and $1,380 and $1,380 for the six months ended December 31, 2018 and 2017, respectively. Future amortization expense (in thousands) associated with these intangible assets is expected to be $2,761 in 2019, $2,687 in 2020, $2,682 in 2021, $2,460 in 2022, $2,412 in 2023, and $18,985 after 2023.

 

 

NOTE 8 - REVOLVING LINE OF CREDIT

 

In February 2017, the Company amended its secured line of credit to a $100 million facility. The line of credit expires in the third quarter of fiscal 2022. Interest on the revolving line of credit is charged based upon an increment over the LIBOR rate as periodically determined, or at the bank’s base lending rate, at the Company’s option.  The increment over the LIBOR borrowing rate, as periodically determined, fluctuates between 125 and 250 basis points depending upon the ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA”), as defined in the line of credit agreement. The increment over LIBOR borrowing rate will be 200 basis points for the third quarter. The fee on the unused balance of the $100 million committed line of credit is 20 basis points.  Under the terms of this line of credit, the Company has agreed to a negative pledge of real estate assets and is required to comply with financial covenants that limit the ratio of indebtedness to EBITDA and require a minimum fixed charge coverage ratio. As of December 31, 2018, there was $48.4 million borrowed against the line of credit, and $51.6 million was available as of that date. Based on the terms of the line of credit and the maturity date, the debt has been classified as long term.

 

Page 13

 

 

The Company is in compliance with all of its loan covenants as of December 31, 2018.

 

 

NOTE 9 - CASH DIVIDENDS

 

The Company paid cash dividends of $2,587,000 and $2,564,000 in the six months ended December 31, 2018 and 2017, respectively. Dividends on restricted stock units in the amount of $34,631 and $38,463 were accrued as of December 31, 2018 and 2017, respectively. These dividends will be paid upon the vesting of the restricted stock units when shares are issued to the award recipients. In January 2019, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable February 12, 2019 to shareholders of record as of February 4, 2019. The indicated annual cash dividend rate is $0.20 per share.

 

 

NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION

 

(In thousands)

 

Six Months Ended

December 31

 
   

2018

   

2017

 

Cash payments:

               

Interest

  $ 1,133     $ 767  

Income taxes

  $ 3     $ 1,232  
                 

Non-cash investing and finance activities:

               

Issuance of common shares as compensation

  $ 180     $ 156  

Issuance of common shares to fund deferred compensation plan

  $ 190     $ 261  

 

 

NOTE 11 - 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, 2018, there were no standby letter of credit agreements.

 

 

NOTE 12 – SEVERANCE COSTS

 

The Company recorded severance expense of $492,000 and $83,000 in the six months ended December 31, 2018 and 2017, respectively. This severance expense was related to reductions in staffing not related to plant restructuring. See further discussion of restructuring expenses in Note 13.

 

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,

 
   

2018

   

2017

   

2018

 
                         

Balance at beginning of the period

  $ 1,772     $ 235     $ 235  

Accrual of expense

    492       83       1,900  

Payments

    (549

)

    (218

)

    (363

)

Adjustments

    --       (14

)

    --  

Balance at end of the period

  $ 1,715     $ 86     $ 1,772  

 

Of the total $1,715,000 severance reserve reported as of December 31, 2018, $869,000 has been classified as a current liability and will be paid out over the next twelve months. The remaining $846,000 has been classified as a long-term liability.

 

Page 14

 

 

 

NOTE 13 – RESTRUCTURING COSTS

 

On October 29, 2018, the Company announced plans to close its lighting facility in New Windsor, New York. The closure is part of ongoing actions to align the Company’s supply chain to more cost effectively serve the changing requirements of the lighting market. The Company will move production to its other existing facilities. The closure will allow the Company to improve utilization of existing manufacturing capacity, and will generate annual savings of approximately $4.0 million. The Company will record an estimated range of restructuring costs of $0.8 million to $1.5 million mostly over the next two quarters and up until the time the facility is ultimately sold.  The transfer of production is expected to be completed by June 30, 2019. As of December 31, 2018, the Company has incurred restructuring costs of $401,000 related to the closure of the New Windsor facility. The Company also incurred $919,000 of expense to write-down inventory which is not included in the tables below.

 

In the first quarter of fiscal 2019, management approved the closure of its 12,000 square foot leased facility in Hawthorne, California. The facility was used as a warehouse and for light assembly of light fixtures. The Company has moved the light assembly to its Blue Ash, Ohio facility. The restructuring charges consist primarily of transportation costs to move inventory to Blue Ash, the impairment of equipment, costs to restore the leased facility, and severance benefits. As of December 31, 2018, the Company has incurred restructuring costs of $155,000 related to the closure of the Hawthorne facility. The Company also incurred $148,000 of expense to write-down inventory which is a re-valuation of the previous estimate and which is not included in the tables below.

 

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,

 
   

2018

   

2018

   

2017

   

2017

 
                                 

Severance and other termination benefits

  $ 202     $ 221     $ --     $ --  

Facility repairs

    7       47       --       --  

Impairment of fixed assets and accelerated depreciation

    185       228       --       --  

Other restructuring costs

    7       60       --       --  

Total

  $ 401     $ 556     $ --     $ --  

 

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

 
   

2018

   

2018

 
                 

Cost of Goods Sold

  $ 376     $ 531  

Operating Expenses

    25       25  

Total

  $ 401     $ 556  

 

Additionally, the above tables do not include expense of $632,000 and $1,067,000 recorded during the three months ended and during the six months ended December 31, 2018, respectively, related to the write-down of inventory included as cost of sales as part of facility closures.

 

Page 15

 

 

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

 

(In thousands)

                                       
   

Balance as of

June 30,

2018

   

Restructuring

Expense

   

Payments

   

Adjustments

   

Balance as of

December 31,

2018

 
                                         

Severance and termination benefits

  $ --     $ 221     $ (21

)

  $ --     $ 200  

Facility Repairs

    --       47       (8

)

    --       39  

Other restructuring costs

    --       60       (52

)

    --       8  

Total

  $ --     $ 328     $ (81

)

  $ --     $ 247  

 

The above table does not include fixed asset impairment and accelerated depreciation expense of $228,000 recorded in the first six months of fiscal 2019.

 

Refer to Note 12 for information regarding additional severance expenses that are not included in the restructuring costs identified in this footnote.

 

 

NOTE 14 – INCOME TAXES

 

The Company's effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year's taxable income as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions. In the second quarter of fiscal 2019, a deferred tax asset of $4.8 million was created as a result of the impairment of goodwill in the Lighting reporting unit. In the first quarter of fiscal 2018, a deferred tax asset of $10.7 million was created as a result of the impairment of goodwill in the Lighting reporting unit.

 

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

 

 

   

Three Months Ended

   

Six Months Ended

 
   

December 31

   

December 31

 
   

2018

   

2017

   

2018

   

2017

 

Reconciliation to effective tax rate:

                               
                                 

Provision for income taxes at the anticipated annual tax rate

    23.0

%

    28.9

%

    23.0

%

    28.9

%

Enactment of tax law changes

    --       111.2       --       (22.2

)

Uncertain tax positions

    0.8       (4.8

)

    0.8       0.5  

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

    0.6       --       0.7       12.1  

Tax impact related to share based compensation

    --       0.3       (0.5

)

    (0.4

)

Effective tax rate

    24.4

%

    135.6

%

    24.0

%

    18.9

%

 

Page 16

 

 

 

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

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Lighting Segment

  $ 63,654     $ 69,174     $ 125,086     $ 137,602  

Graphics Segment

    25,887       23,131       49,412       42,169  
    $ 89,541     $ 92,305     $ 174,498     $ 179,771  

 

 

Operating (Loss) Income by Business Segment

                               

(In thousands)

 

Three Months Ended

   

Six Months Ended

 
   

December 31

   

December 31

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Lighting Segment

  $ (18,452

)

  $ 5,275     $ (14,602

)

  $ (17,655

)

Graphics Segment

    861       2,255       3,248       3,731  

Corporate and Eliminations

    (2,680

)

    (2,983

)

    (5,983

)

    (6,343

)

    $ (20,271

)

  $ 4,547     $ (17,337

)

  $ (20,267

)

 

Summary Comments

 

We are in the business of designing, manufacturing and marketing lighting, graphics and technology solutions for both indoor and outdoor applications. Historically, sales of our products have been subject to cyclical variations caused by competitive pressures that affect selling prices, changes in general economic conditions, and other factors. Our operating results in the fiscal 2019 second quarter reflect the continued softness and competitiveness in both our project and stock and flow markets, a shift in focus to pursue higher value-add customer opportunities, a mix of new larger customers, a shift in product mix, and pricing below prior year levels for the quarter driven by select price moves in key vertical markets and meeting specific competitive levels. This combination of factors resulted in lower gross margins and operating earnings compared to prior year. The cyclical nature of our business could continue to adversely affect our liquidity and financial results.

 

Fiscal 2019 second quarter net sales of $89,541,000 decreased $2.8 million or 3% as compared to second quarter fiscal 2018 net sales of $92,305,000. Net sales were favorably influenced by increased net sales of the Graphics Segment (up $2.8 million or 12%) more than offset by decreased net sales of the Lighting Segment (down $5.5 million or 8%).

 

Fiscal 2019 first half net sales of $174,498,000 decreased $5.3 million or 3% as compared to first half fiscal 2018 net sales of $179,771,000. Net sales were favorably influenced by increased net sales of the Graphics Segment (up $7.2 million or 17%) more than offset by decreased net sales of the Lighting Segment (down $12.5 million or 9%).

 

Fiscal 2019 second quarter operating loss of $(20.3) million represents a $24.8 million change from operating income of $4.6 million in the second quarter of fiscal 2018. The $24.8 million change from operating income in fiscal 2018 to an operating loss in fiscal 2019 was mostly the result of a pre-tax $20.2 million goodwill impairment charge in the Lighting Segment in the second quarter of fiscal 2019. Adjusted fiscal 2019 second quarter operating income of $1.5 million decreased $3.1 million or 66% from adjusted fiscal 2018 operating income of $4.6 million. Refer to “Non-GAAP Financial Measures” below. The decrease in adjusted operating income was the result of decreased net sales and decreased gross profit slightly offset by a decrease in selling and administrative expenses.

 

Fiscal 2019 first half operating loss of $(17.3) million represents a $2.9 million improvement from an operating loss of $(20.3) million in the first half of fiscal 2018. Both fiscal years recorded goodwill impairment charges in the Lighting Segment. There was a $20.2 million goodwill impairment charge in fiscal 2019 and a $28 million goodwill impairment charge in fiscal 2018. Adjusted first half fiscal 2019 operating income of $5.1 million decreased $2.8 million or 35% from adjusted fiscal 2018 operating income of $7.8 million. Refer to “Non-GAAP Financial Measures” below. The decrease in adjusted operating income was the result of decreased net sales and decreased gross profit slightly offset by a decrease in selling and administrative expenses. Also contributing to the period-over-period results is a one-time adjustment to the Company’s paid-time-off policy in fiscal 2019 which resulted in a favorable pre-tax adjustment to earnings of $1.2 million.    

 

Page 17

 

 

Non-GAAP Financial Measures

 

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

 

(in thousands, unaudited)

 

Second Quarter

 
   

FY 2019

   

FY 2018

 

Reconciliation of operating (loss) income to adjusted operating income:

               
                 

Operating (loss) income as reported

  $ (20,271

)

  $ 4,547  
                 

Adjustment for goodwill impairment

    20,165       --  
                 

Adjustment for severance cost

    492       83  
                 

Adjustment for transition and re-alignment costs

    120       --  
                 

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

    1,033       --  
                 

Adjusted operating income

  $ 1,539     $ 4,630  

 

 

(in thousands, except per share data; unaudited)

 

Second Quarter

 

 

 

FY 2019

 

 

Diluted

EPS

 

 

FY 2018

 

 

Diluted

EPS

 

Reconciliation of net loss to adjusted net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(15,782

)

 

$

(0.61

)

 

$

(1,468

)

 

$

(0.06

)

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Adjustment for goodwill impairment, inclusive of the income tax effect

 

 

15,361

(1) 

 

 

0.60

 

 

 

--

 

 

 

--

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Adjustment for severance costs, inclusive of the income tax effect

   

385

(2) 

   

0.01

     

59

(5) 

   

--

 
                                 

Adjustment for transition and re-alignment costs, inclusive of the income tax effect

   

94

(3) 

   

--

     

--

     

--

 
                                 

Tax impact from the reduction of the deferred tax assets

   

--

     

--

     

4,676

     

0.18

 
                                 

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

 

 

817

(4) 

 

 

0.03

 

 

 

--

 

 

 

--

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted net income and earnings per share

 

$

875

 

 

$

0.03

 

 

$

3,267

 

 

$

0.12

 

 

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

 

(1) 4,804

(2) 107

(3) 26

(4) 216

(5) 24

 

Page 18

 

 

(in thousands, unaudited)

 

First Half

 
   

FY 2019

   

FY 2018

 

Reconciliation of operating loss to adjusted operating income:

               
                 

Operating (loss) as reported

  $ (17,337

)

  $ (20,267

)

                 

Adjustment for goodwill impairment

    20,165       28,000  
                 

Adjustment for severance cost

    492       83  
                 

Adjustment for transition and re-alignment costs

    120       --  
                 

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

    1,623       --  
                 

Adjusted operating income

  $ 5,063     $ 7,816  

 

 

(in thousands, except per share data; unaudited)

 

First Half

 

 

 

FY 2019

 

 

Diluted

EPS

 

 

FY 2018

 

 

Diluted

EPS

 

Reconciliation of net loss to adjusted net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(14,033

)

 

$

(0.54

)

 

$

(17,097

)

 

$

(0.66

)

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Adjustment for goodwill impairment, inclusive of the income tax effect

 

 

15,361

(1) 

 

 

0.60

 

 

 

17,361

(5) 

 

 

0.67

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Adjustment for severance costs, inclusive of the income tax effect

   

385

(2) 

   

0.01

     

59

(6) 

   

--

 
                                 

Adjustment for transition and re-alignment costs, inclusive of the income tax effect

   

94

(3) 

   

--

     

--

     

--

 
                                 

Tax impact from the reduction of the deferred tax assets

   

--

     

--

     

4,676

     

0.18

 
                                 

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

 

 

1,271

(4) 

 

 

0.05

 

 

 

--

 

 

 

--

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted net income and earnings per share

 

$

3,078

 

 

$

0.12

 

 

$

5,001

 

 

$

0.19

 

 

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

 

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

 

(1) 4,804

(2) 107

(3) 26

(4) 352

(5) 10,639

(6) 24

 

Page 19

 

 

Results of Operations

 

THREE MONTHS ENDED DECEMBER 31, 2018 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2017

 

Lighting Segment

 

(In thousands)

 

Three Months Ended

 
   

December 31

 
   

2018

   

2017

 
                 

Net Sales

  $ 63,654     $ 69,174  

Gross Profit

  $ 4,742     $ 19,259  

Operating (Loss) Income

  $ (18,452 )   $ 5,275  

 

 

Lighting Segment net sales of $63,654,000 in the second quarter of fiscal 2019 decreased 8% from fiscal 2018 same period net sales of $69,174,000. The 8% drop in sales is attributed to continued softness and competitiveness in the Company’s project and stock and flow markets.

 

Gross profit of $14,742,000 in the second quarter of fiscal 2019 decreased $4.5 million or 23% from the same period of fiscal 2018, and decreased from 27.4% to 22.8% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The Company incurred restructuring and plant closure costs that were recorded in cost of sales related to the closure of its New Windsor, New York facility of $1,008,000 in fiscal 2019 with no comparable costs in fiscal 2018. The remaining decrease in amount of gross profit is due to the effect of reduced sales volume, competitive pricing pressures, and inflationary pressures of certain commodities, partially offset by manufacturing efficiencies as a result of the Company’s lean initiatives.

 

Selling and administrative expenses of $33,194,000 in the second quarter of fiscal year 2019 increased $19.2 million from the same period of fiscal 2018 selling and administrative expenses of $13,984,000, primarily due to the $20.2 million goodwill impairment charge in the second quarter of fiscal 2019. When the goodwill impairment charge is removed from fiscal 2019 results, there was a $1.0 million or 7% reduction in selling and administrative expenses. The reduction in selling and administrative expenses is mostly driven by lower commission expense due to lower sales volume.

 

The Lighting Segment second quarter fiscal 2019 operating loss of $(18,452,000) decreased $23.7 million from operating income of $5,275,000 in the same period of fiscal 2018 primarily due to a $20.2 million pre-tax goodwill impairment charge. When the impact of the goodwill charge and the restructuring and plant closure costs of $1,033,000 ($1,008,000 in cost of sales and $25,000 in selling and administrative expenses) are removed from the fiscal 2019 results, fiscal 2019 adjusted operating income of $2,929,000 was $2.3 million lower than fiscal 2018 adjusted operating income of $5,275,000. The reduction in sales volume and gross profit was partially offset by lower selling and administrative expenses.

 

Graphics Segment

 

(In thousands)

 

Three Months Ended

 
   

December 31

 
   

2018

   

2017

 
                 

Net Sales

  $ 25,887     $ 23,131  

Gross Profit

  $ 4,927     $ 6,046  

Operating Income

  $ 861     $ 2,255  

 

Graphics Segment net sales of $25,887,000 in the second quarter of fiscal 2019 increased $2.8 million or 12% from fiscal 2018 same period net sales of $23,131,000. Most of the increase in sales is from growth in sales to the Petroleum market.

 

Gross profit of $4,927,000 in the second quarter of fiscal 2019 decreased $1.1 million or 19% from the same period of fiscal 2018. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 25% in the second quarter of fiscal 2018 to 19% in the second quarter of fiscal 2019. The reduction in gross profit on higher sales is partially due to a mix shift to large customers in both the print and digital technology applications. These large projects, with lengthy life cycles, are competitive and initially generate lower margins. The business will work to improve the margins on these projects over its life cycle.  

 

Selling and administrative expenses of $4,066,000 in the second quarter of fiscal 2019 increased $0.3 million or 7% from the same period of fiscal 2018 primarily as a result of an increase in outside service expense and bad debt expense.

 

Page 20

 

 

The Graphics Segment second quarter fiscal 2019 operating income of $861,000 decreased $1.4 million or 62% from operating income of $2,255,000 in the same period of fiscal 2018. The decrease of $1.4 million was primarily the net result of a shift in customer mix on higher sales and an increase in selling and administrative expenses.

 

Corporate and Eliminations

 

(In thousands)

 

Three Months Ended

 
   

December 31

 
   

2018

   

2017

 

Gross (Loss) Profit

  $ (13 )   $ 2  

Operating (Loss)

  $ (2,680 )   $ (2,983 )

 

The gross (loss) profit relates to the change in the intercompany profit in inventory elimination.

 

Administrative expenses of $2,667,000 in the second quarter of fiscal 2019 decreased $0.3 million from the same period of the prior year. The change is primarily the result of a reduction in wage and benefit expense partially offset by an increase in legal and professional fees.

 

Consolidated Results

 

The Company reported $615,000 net interest expense in the second quarter of fiscal 2019 compared to $417,000 net interest expense in the second quarter of fiscal 2018. The change in interest expense from fiscal 2018 to fiscal 2019 is the result of higher interest rates on the Company’s line of credit and higher commitment fees on its unused portion of the line of credit.

 

The $5,104,000 income tax benefit in the second quarter of fiscal 2019 represents a consolidated effective tax rate of 24.4%, which is slightly higher than the expected annual rate of 23% due to the goodwill impairment. The second quarter FY 2018 effective tax rate of 135.6% and income tax expense of $5,598,000 was caused by a $4.7 million re-valuation of the Company’s deferred tax assets for the US tax rate change on the enactment date of the Tax Cut and Jobs Act in the quarter.

 

The Company reported a net loss of $(15,782,000) in the second quarter of fiscal 2019 compared to net loss of $(1,468,000) in the same period of the prior year. The change in the net loss in fiscal 2018 to the net loss in the second quarter of fiscal 2019 is mostly driven by the $20.2 million goodwill impairment charge in the second quarter of fiscal 2019 with no comparable charge in the second quarter of fiscal 2018. Also contributing to the quarter-over-quarter change is a $4.7 million charge in the second quarter of fiscal 2018 related to the re-valuation of the Company’s deferred tax assets with no comparable charge in fiscal 2019. To a lesser degree, there were other non-GAAP charges in both fiscal years besides the goodwill impairment and the re-valuation of the deferred tax assets impacting the comparable quarter-over-quarter results (refer to the non-GAAP tables above.) When the impact of all non-GAAP charges is removed from both fiscal years, the fiscal 2019 adjusted net income of $875,000 decreased $2.4 million from fiscal 2018 adjusted net income of $3,267,000. The change in adjusted net income is primarily the net result of decreased net sales, decreased gross profit, decreased selling and administrative expenses, increased interest expense, and a lower tax rate. Diluted loss per share of $(0.61) was reported in the second quarter of fiscal 2019 as compared to $(0.06) diluted loss per share in the same period of fiscal 2018. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the second quarter of fiscal 2019 were 26,083,000 shares as compared to 25,858,000 shares in the same period last year.

 

Page 21

 

 

SIX MONTHS ENDED DECEMBER 31, 2018 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2017

 

Lighting Segment

 

(In thousands)

 

Six Months Ended

 
   

December 31

 
   

2018

   

2017

 
                 

Net Sales

  $ 125,086     $ 137,602  

Gross Profit

  $ 30,217     $ 37,932  

Operating (Loss)

  $ (14,602 )   $ (17,655 )

 

Lighting Segment net sales of $125,086,000 in the second half of fiscal 2019 decreased 9% from fiscal 2018 same period net sales of $137,602,000. The 9% drop in sales is attributed to continued softness and competitiveness in the Company’s project and stock and flow markets.

 

Gross profit of $30,217,000 in the first half of fiscal 2019 decreased $7.7 million or 20% from the same period of fiscal 2018 and decreased from 27.2% to 23.9% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The Company incurred restructuring and plant closure costs that were recorded in cost of sales related to the closure of its Hawthorne, California and New Windsor, New York facilities of $1,598,000 in fiscal 2019 with no comparable costs in fiscal 2018. The remaining decrease in amount of gross profit is due to the effect of reduced sales volume, competitive pricing pressures, and inflationary pressures of certain commodities, partially offset by manufacturing efficiencies as a result of the Company’s lean initiatives.

 

Selling and administrative expenses of $44,819,000 in the first half of fiscal year 2019 decreased $10.8 million from the same period of fiscal 2018 selling and administrative expenses of $55,587,000, primarily due to the $20.2 million and $28 million goodwill impairment charges in the first half of fiscal 2019 and fiscal 2018 respectively. When the goodwill impairment charges are removed from both fiscal year results, there was a $2.9 million or 12% reduction in selling and administrative expenses. The reduction in selling and administrative expenses is mostly driven by lower commission expense which is due to lower sales volume.

 

The Lighting Segment first half fiscal 2019 operating loss of $(14,602,000) increased $3.1 million from an operating loss of $(17,655,000) in the same period of fiscal 2018 primarily due to a $20.2 million pre-tax goodwill impairment charge in fiscal 2019 compared to a $28 million pre-tax goodwill impairment charge in fiscal 2018. When the goodwill impairment charges and the restructuring charges of $1,623,000 ($1,598,000 in cost of sales and $25,000 in selling and administrative expenses) are removed from both fiscal years, fiscal 2019 adjusted operating income of $7,369,000 was $3.0 million lower than fiscal 2018 adjusted operating income of $10,345,000. The reduction in sales volume and gross profit was partially offset by lower selling and administrative expenses.

 

Graphics Segment

 

(In thousands)

 

Six Months Ended

 
   

December 31

 
   

2018

   

2017

 
                 

Net Sales

  $ 49,412     $ 42,169  

Gross Profit

  $ 10,709     $ 11,109  

Operating Income

  $ 3,248     $ 3,731  

 

Graphics Segment net sales of $49,412,000 in the first half of fiscal 2019 increased $7.2 million or 17% from fiscal 2018 same period net sales of $42,169,000. Most of the increase in sales is from growth in sales to the Petroleum and Quick Service Restaurant markets including digital technology.

 

Gross profit of $10,709,000 in the first half of fiscal 2019 decreased $0.4 million or 4% from the same period of fiscal 2018. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 25.7% in the second quarter of fiscal 2018 to 21.6% in the first half of fiscal 2019. The reduction in gross profit on higher sales is partially due to a mix shift to large customers in both the print and digital technology applications. These large projects, with lengthy life cycles, are competitive and initially generate lower margins. The business will work to improve the margins on these projects over its life cycle.  

 

Selling and administrative expenses of $7,461,000 in the first half of fiscal 2019 increased $0.1 million or 1% from the same period of fiscal 2018. A reduction in wage and benefit was offset by an increase in bad debt expense and outside service expense.

 

Page 22

 

 

The Graphics Segment first half fiscal 2019 operating income of $3,248,000 decreased $0.5 million or 13% from operating income of $3,731,000 in the same period of fiscal 2018. The decrease of $0.5 million was primarily the net result of a shift in customer mix on higher sales and a modest increase in selling and administrative expenses.

 

Corporate and Eliminations

 

(In thousands)

 

Six Months Ended

 
   

December 31

 
   

2018

   

2017

 

Gross (Loss)

  $ (9 )   $ (31 )

Operating (Loss)

  $ (5,983 )   $ (6,343 )

 

The gross (loss) relates to the change in the intercompany profit in inventory elimination.

 

Administrative expenses of $5,974,000 in the first half of fiscal 2019 decreased $0.3 million from the same period of the prior year. The change is primarily the result of a reduction in wage and benefit expense partially offset by an increase in legal and professional fees.

 

Consolidated Results

 

The Company reported $1,133,000 net interest expense in the first half of fiscal 2019 compared to $820,000 net interest expense in the first half of fiscal 2019. The change in interest expense from fiscal 2018 to fiscal 2019 is the result of higher interest rates on the Company’s line of credit and higher commitment fees on its unused portion of the line of credit.

 

The $4,437,000 income tax benefit in the first half of fiscal 2019 represents a consolidated effective tax rate of 24.0%, which is slightly higher than the expected annual rate of 23% due to the goodwill impairment. The first half  FY 2018 effective tax rate of 18.9% and income tax benefit of $3,990,000 was most notably influenced by the first quarter goodwill impairment partially offset by a $4.7 million re-valuation of the Company’s deferred tax assets for the US tax rate change on the enactment date of the Tax Cut and Jobs Act.

 

The Company reported a net loss of $(14,033,000) in the first half of fiscal 2019 compared to net loss of $(17,097,000) in the same period of the prior year. The change from the net loss in fiscal 2018 to the net loss in the second half of fiscal 2019 is mostly driven by the $20.2 million and the $28 million goodwill impairment charges in the first of fiscal 2019 and fiscal 2018, respectively. Also contributing to the year-over-year change is a $4.7 million charge in the first half of fiscal 2018 related to the re-valuation of the Company’s deferred tax assets with no comparable charge in fiscal 2019. To a lesser degree, there were other non-GAAP charges in both fiscal years besides the goodwill impairment and the re-valuation of the deferred tax assets impacting the comparable year-over-year results. (Refer to the non-GAAP tables above.) When the impact of all non-GAAP charges is removed from both fiscal years, the fiscal 2019 adjusted net income of $3,078,000 decreased $1.9 million from fiscal 2018 adjusted net income of $5,001,000. The change in adjusted net income is primarily the net result of decreased net sales, decreased gross profit, decreased selling and administrative expenses, increased interest expense, and a larger tax benefit. Diluted loss per share of $(0.54) was reported in the first half of fiscal 2019 as compared to $(0.66) diluted loss per share in the same period of fiscal 2018. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first half of fiscal 2019 were 26,058,000 shares as compared to 25,824,000 shares in the same period last year.

 

Liquidity and Capital Resources 

 

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

 

At December 31, 2018, the Company had working capital of $74.8 million, compared to $67.9 million at June 30, 2018.  The ratio of current assets to current liabilities was 2.49 to 1 as compared to a ratio of 2.61 to 1 at June 30, 2018.  The $6.9 million increase in working capital from June 30, 2018 to December 31, 2018 was primarily related to the net effect of increased cash and cash equivalents ($6.4 million), increased net accounts receivable ($5.8 million), increased net inventory ($3.1 million), an increase in accrued expenses ($0.7 million), a decrease in refundable income taxes ($0.8 million), and an increase in accounts payable ($8.8 million). Of the $5.8 million increase in accounts receivable, $5.3 million is attributed to the adoption of the new revenue guidance. The Company proactively manages its working capital, including reduction of the accounts receivable days sales outstanding (DSO) and reduction of inventory levels, without reducing service to its customers.

 

Page 23

 

 

The Company generated $7.6 million of cash from operating activities in the first half of fiscal 2019 as compared to a use of cash of $43,000 in the same period of the prior year. This $7.7 million increase in net cash flows from operating activities is primarily the net result of an increase rather than a decrease in accounts payable (favorable change of $11.3 million), a smaller increase in net accounts receivable (favorable change of $9.8 million), an increase rather than a decrease in net inventory (unfavorable change of $9.6 million), a greater decrease in accrued expenses and other (unfavorable change of $1.2 million), and an improvement in net loss from fiscal 2018 to fiscal 2019 more than offset by several non-cash add-backs to the net loss in both fiscal years (unfavorable change of $3.3 million).

 

Net accounts receivable were $56.4 million and $50.6 million at December 31, 2018 and June 30, 2018, respectively. DSO was 53 days at December 31, 2018 and June 30, 2018. The Company believes that its receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.

 

Net inventories of $54.1 million at December 31, 2018 increased $3.1 million from $51.0 million at June 30, 2018. The increase of $3.1 million is the result of an increase in gross inventory of $3.8 million and an increase in obsolescence reserves of $0.7 million. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory increased 4.8 million in the first half of fiscal 2019 in the Graphics Segment which was partially offset by a decrease in net inventory in the Lighting Segment of $1.7 million.

 

Cash generated from operations and borrowing capacity under the Company’s line of credit is the Company’s primary source of liquidity. The Company has a secured $100 million revolving line of credit with its bank, with $48.4 million of the credit line available as of January 28, 2019. This line of credit is a $100 million five-year credit line expiring in the third quarter of fiscal 2022. The Company believes that its $100 million line of credit plus cash flows from operating activities are adequate for the Company’s fiscal 2019 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.

 

The Company used cash of $1.6 million related to investing activities in the first half of fiscal 2019 as compared to a source of $0.3 million in the same period of the prior year, resulting in an unfavorable change of $1.9 million. Capital expenditures for the first half of fiscal 2019 increased $0.4 million to $1.6 million from the same period in fiscal 2018. The Company sold its Woonsocket manufacturing facility for $1.5 million in the first half of fiscal 2018 which contributed to the change in cash flow from investing activities from fiscal 2018 to fiscal 2019.

 

The Company had a $0.3 million source of cash related to financing activities in the first half of fiscal 2019 compared to a use of cash of $0.2 million in the first half of fiscal 2018. The $0.5 million favorable change in cash flow was primarily the net result of borrowings in excess of payments of long-term debt.

 

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

 

Off-Balance Sheet Arrangements

 

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

 

Cash Dividends

 

In January 2019, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable February 12, 2019 to shareholders of record as of February 4, 2019. The indicated annual cash dividend rate for fiscal 2019 is $0.20 per share. The Board of Directors has adopted a policy regarding dividends which indicates that dividends will be determined by the Board of Directors in its discretion based upon its evaluation of earnings, cash flow requirements, financial condition, debt levels, stock repurchases, future business developments and opportunities, and other factors deemed relevant. 

 

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Critical Accounting Policies and Estimates

 

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

 

New Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases.” The amended guidance requires an entity to recognize assets and liabilities that arise from leases. The amended guidance is effective for financial statements issued for fiscal and interim periods within those years, beginning after December 15, 2018, or the Company’s fiscal 2020, with early adoption permitted. The Company has an implementation team tasked with reviewing our lease obligations and determining the impact of the new standard to its financial statements. The implementation team has completed a qualitative assessment of the Company’s active leases and is compiling related data in a central repository. The Company will continue to evaluate the new standard’s impact on its financial statements. 

 

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

 

 ITEM 4.  CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

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

 

We conducted, under the supervision of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2018, our disclosure controls and procedures were effective. Management believes that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly presented in all material respects in accordance with GAAP for interim financial statements, and the Company’s Chief Executive Officer and Chief Financial Officer have certified that, based on their knowledge, the condensed consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for each of the periods presented in this report.

 

 

Changes in Internal Control

 

During the first six months ended December 31, 2018, the Company enacted additional controls related to the adoption of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, except as otherwise described in this Item 4.

 

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PART II.  OTHER INFORMATION

 

ITEM 1A.  RISK FACTORS

 

The following risk factor is added to the risk factors included in Item 1A of Part I of the Company’s Annual Report on Form 10-K:

 

Our stock price has experienced a significant decline, which could further adversely affect our ability to raise additional capital.

 

The market price of our common stock has experienced a significant decline from which it has not fully recovered. During the last twelve months, the sales price of our common stock, as reported on the Nasdaq Global Select Market, declined from a high of $8.69 in February 2018 to a low of $3.17 on January 30, 2019. Most recently, on February 1, 2019, the market price of our common stock, as reported on the Nasdaq Global Select Market, closed at a price of $3.20 per share. Our progress in developing and commercializing our products, our quarterly operating results, announcements of new products by us or our competitors, our perceived prospects, changes in general conditions in the economy or the financial markets, adverse events related to our strategic relationships, and other developments affecting us or our competitors could cause the market price of our common stock to fluctuate substantially. In addition, in recent years, including in the first half of fiscal 2019, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. These market fluctuations, regardless of the cause, may materially and adversely affect our stock price, regardless of our operating results.

 

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

 

NONE

 

ITEM 6.  EXHIBITS

 

Exhibits:

 

10.1 LSI Industries Inc. Employment Offer Letter with Michael C. Beck dated January 11, 2019 (incorporated by reference from the registrant’s Current Report on Form 8-K filed on January 16, 2019)
   

31.1

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

 

31.2

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

 

32.1

Section 1350 Certification of Principal Executive Officer

 

32.2

Section 1350 Certification of Principal Financial Officer

 

101.INS XBRL Instance Document

 

101.SCH XBRL Taxonomy Extension Schema Document

 

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

   

 

SIGNATURES

 

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

 

 

LSI Industries Inc.

 

 

 

 

 

       

 

By:

/s/ James A. Clark

 

 

 

James A. Clark

 

 

 

Chief Executive Officer and President

 

 

 

(Principal Executive Officer)

 

 

 

 

 

       

 

By:

/s/ James E. Galeese

 

 

 

James E. Galeese

 

 

 

Executive President and Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

February 6, 2019

 

 

 

 

 

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