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LSI INDUSTRIES INC - Quarter Report: 2020 December (Form 10-Q)

lyts20201231_10q.htm
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

_________________________

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2020 OR

 

 

 

 

 

 

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

logo.jpg
 

LSI Industries Inc.

(Exact name of registrant as specified in its charter)

 

Ohio

 

31-0888951

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

10000 Alliance Road, Cincinnati, Ohio

 

45242

(Address of principal executive offices)

 

(Zip Code)

(513) 793-3200

Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, no par value

LYTS

NASDAQ Global Select Market

 

Indicate by checkmark whether the registrant:  (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 ☒   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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒    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 ☒

 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 ☒

 

As of January 22, 2021, there were 26,435,719 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, 2020

 

INDEX

 

 

 

Begins on Page

PART I.  Financial Information

  

  

  

  

  

  

  

  

ITEM 1.

Financial Statements (Unaudited)

  

  

  

  

  

  

  

  

  

Condensed Consolidated Statements of Operations

  

3

   

Condensed Consolidated Statements of Comprehensive Income 

 

4

  

  

Condensed Consolidated Balance Sheets

  

5

   

Condensed Consolidated Statements of Shareholders’ Equity

 

7

  

  

Condensed Consolidated Statements of Cash Flows

  

8

  

  

  

  

  

  

  

Notes to Condensed Consolidated Financial Statements

  

9

  

  

  

  

  

  

ITEM 2.

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

  

 21

  

  

  

  

  

  

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

  

30

  

  

  

  

  

  

ITEM 4.

Controls and Procedures

  

30

  

  

  

  

  

PART II.  Other Information

  

  

  

  

  

  

  

  ITEM 5. Other Information   30
 

 

 

 

 

  

ITEM 6.

Exhibits

  

32

  

  

  

  

  

Signatures

 

33

 

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)

 

2020

   

2019

   

2020

   

2019

 
                                 

Net Sales

  $ 76,387     $ 82,377     $ 146,393     $ 171,078  
                                 

Cost of products and services sold

    56,676       62,136       108,407       128,724  
                                 

Severance costs

    5       -       5       -  
                                 

Restructuring costs

    -       277       3       535  
                                 

Gross profit

    19,706       19,964       37,978       41,819  
                                 

Selling and administrative expenses

    17,004       18,151       33,074       38,013  
                                 

Severance costs

    16       54       16       54  
                                 

Restructuring gains

    -       (1 )     -       (4,847 )
                                 

Operating income

    2,686       1,760       4,888       8,599  
                                 

Interest (income)

    (1 )     (1 )     (2 )     (2 )
                                 

Interest expense

    63       234       121       666  
                                 

Other (income) expense

    (135 )     (91 )     (240 )     (9 )
                                 

Income before income taxes

    2,759       1,618       5,009       7,944  
                                 

Income tax expense (benefit)

    551       (125 )     811       1,726  
                                 

Net income

  $ 2,208     $ 1,743     $ 4,198     $ 6,218  
                                 
                                 

Earnings per common share (see Note 4)

                               

Basic

  $ 0.08     $ 0.07     $ 0.16     $ 0.24  

Diluted

  $ 0.08     $ 0.07     $ 0.15     $ 0.24  
                                 
                                 

Weighted average common shares outstanding

                               

Basic

    26,639       26,280       26,580       26,257  

Diluted

    27,360       26,534       27,161       26,364  

 

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

 

Page 3

 

LSI INDUSTRIES INC.

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

December 31

   

December 31

 

(In thousands)

 

2020

   

2019

   

2020

   

2019

 
                                 

Net Income

  $ 2,208     $ 1,743     $ 4,198     $ 6,218  
                                 

Foreign currency translation adjustment

    102       29       147       6  
                                 

Comprehensive Income

  $ 2,310     $ 1,772     $ 4,345     $ 6,224  

 

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)

 

2020

  

2020

 
         

ASSETS

        
         

Current assets

        
         

Cash and cash equivalents

 $13,584  $3,517 
         

Accounts receivable, less allowance for doubtful accounts of $336 and $273, respectively

  44,475   37,836 
         

Inventories

  34,825   38,752 
         

Refundable income tax

  3,319   2,776 
         

Other current assets

  3,214   2,977 
         

Total current assets

  99,417   85,858 
         

Property, Plant and Equipment, at cost

        

Land

  3,943   3,933 

Buildings

  20,663   20,638 

Machinery and equipment

  68,298   67,796 

Buildings under finance leases

  2,033   2,033 

Construction in progress

  418   440 
   95,355   94,840 

Less accumulated depreciation

  (70,599)  (68,305)

Net property, plant and equipment

  24,756   26,535 
         

Goodwill

  10,373   10,373 
         

Other Intangible Assets, net

  28,619   29,960 
         

Operating Lease Right-of-Use Assets

  7,684   8,663 
         

Other Long-Term Assets, net

  10,432   10,874 
         

Total assets

 $181,281  $172,263 

 

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

 

Page 5

 

LSI INDUSTRIES INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

  

December 31,

  

June 30,

 

(In thousands, except shares)

 

2020

  

2020

 
         

LIABILITIES & SHAREHOLDERS' EQUITY

        
         

Current liabilities

        

Accounts payable

 $18,499  $14,216 

Accrued expenses

  22,737   20,433 
         

Total current liabilities

  41,236   34,649 
         

Long-Term Debt

  -   - 
         

Finance Lease Liabilities

  1,631   1,755 
         

Operating Lease Liabilities

  8,118   9,021 
         

Other Long-Term Liabilities

  1,023   1,138 
         

Commitments and Contingencies (Note 12)

  -   - 
         

Shareholders' Equity

        

Preferred shares, without par value; Authorized 1,000,000 shares, none issued

  -   - 

Common shares, without par value; Authorized 40,000,000 shares; Outstanding 26,385,721 and 26,286,009 shares, respectively

  129,622   127,713 

Treasury shares, without par value

  (1,692)  (1,121)

Deferred compensation plan

  1,692   1,121 

Retained (loss)

  (403)  (1,920)

Accumulated other comprehensive income (loss)

  54   (93)
         

Total shareholders' equity

  129,273   125,700 
         

Total liabilities & shareholders' equity

 $181,281  $172,263 

 

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

   

Page 6

 

LSI INDUSTRIES INC.

 

 

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

 

  

Common Shares

  

Treasury Shares

  

Key Executive

  

Accumulated

Other

  

Retained

  

Total

 
  

Number Of

      

Number Of

      

Compensation

  

Comprehensive

  

Earnings

  

Shareholders'

 

(In thousands, except per share data)

 

Shares

  

Amount

  

Shares

  

Amount

  

Amount

  Income  

(Loss)

  Equity 
                                 

Balance at June 30, 2019

  26,176  $125,729   (209) $(1,468) $1,468   16  $(5,808) $119,937 
                                 

Net Income

  -   -   -   -   -   -   6,218   6,218 

Other comprehensive income

  -   -   -   -   -   6   -   6 

Stock compensation awards

  36   150   -   -   -   -   -   150 

Restricted stock units issued

  18   -   -   -   -   -   -   - 

Shares issued for deferred compensation

  10   47   -   -   -   -   -   47 

Activity of treasury shares, net

  -   -   87   660   -   -   -   660 

Deferred stock compensation

  -   -   -   -   (660)  -   -   (660)

Stock compensation expense

  -   597   -   -   -   -   -   597 

Stock options exercised, net

  6   29   -   -   -   -   -   29 

Dividends — $0.20 per share

  -   -   -   -   -   -   (2,643)  (2,643)

Cumulative effect of adoption of accounting guidance

  -   -   -   -   -   -   (428)  (428)
                                 

Balance at December 31, 2019

  26,246  $126,552   (122) $(808) $808  $22  $(2,661) $123,913 

 

 

  

Common Shares

  

Treasury Shares

  

Key Executive

  

Accumulated

Other

  

Retained

  

Total

 
  

Number Of

      

Number Of

      

Compensation

  

Comprehensive

  

Earnings

  

Shareholders'

 
  

Shares

  

Amount

  

Shares

  

Amount

  

Amount

   Income (Loss)   

(Loss)

    Equity 
                                 

Balance at June 30, 2020

  26,466  $127,713   (180) $(1,121) $1,121   (93) $(1,920) $125,700 
                                 

Net Income

  -   -   -   -   -   -   4,198   4,198 

Other comprehensive income

  -   -   -   -   -   147   -   147 

Stock compensation awards

  25   150   -   -   -   -   -   150 

Restricted stock units issued

  28   -   -   -   -   -   -   - 

Shares issued for deferred compensation

  96   679   -   -   -   -   -   679 

Activity of treasury shares, net

  -   -   (83)  (571)  -   -   -   (571)

Deferred stock compensation

  -   -   -   -   571   -   -   571 

Stock compensation expense

  -   902   -   -   -   -   -   902 

Stock options exercised, net

  33   178   -   -   -   -   -   178 

Dividends — $0.20 per share

  -   -   -   -   -   -   (2,681)  (2,681)
                                 

Balance at December 31, 2020

  26,648  $129,622   (263) $(1,692) $1,692  $54  $(403) $129,273 

 

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

 

Page 7

 

LSI INDUSTRIES INC.

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Six Months Ended

 
   

December 31

 

(In thousands)

 

2020

   

2019

 
                 

Cash Flows from Operating Activities

               

Net income

  $ 4,198     $ 6,218  

Non-cash items included in net income

               

Depreciation and amortization

    4,023       4,551  

Deferred income taxes

    315       1,893  

Deferred compensation plan

    679       47  

Stock compensation expense

    902       597  

Issuance of common shares as compensation

    150       150  

Gain on disposition of fixed assets

    -       (4,753 )

Allowance for doubtful accounts

    96       (356 )

Inventory obsolescence reserve

    817       (212 )
                 

Changes in certain assets and liabilities

               

Accounts receivable

    (6,476 )     10,552  

Inventories

    3,195       413  

Refundable income taxes

    (522 )     (112 )

Accounts payable

    3,933       1,864  

Accrued expenses and other

    834       406  

Customer prepayments

    1,273       (355 )

Net cash flows provided by operating activities

    13,417       20,903  
                 

Cash Flows from Investing Activities

               

Purchases of property, plant and equipment

    (880 )     (1,119 )

Proceeds from the sale of fixed assets

    -       12,340  

Net cash flows (used in) provided by investing activities

    (880 )     11,221  
                 

Cash Flows from Financing Activities

               

Payments of long-term debt

    -       (99,746 )

Borrowings of long-term debt

    -       70,642  

Cash dividends paid

    (2,639 )     (2,643 )

Shares withheld for employees' taxes

    (28 )     (124 )

Payments on financing lease obligations

    (118 )     -  

Proceeds from stock option exercises

    178       29  

Net cash flows used in financing activities

    (2,607 )     (31,842 )
                 

Change related to foreign currency

    137       -  
                 

Increase in cash and cash equivalents

    10,067       282  
                 

Cash and cash equivalents at beginning of period

    3,517       966  
                 

Cash and cash equivalents at end of period

  $ 13,584     $ 1,248  

 

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

  

Page 8

 

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, 2020, the results of its operations for the three and six month periods ended December 31, 2020 and 2019, and its cash flows for the six month periods ended December 31, 2020 and 2019. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2020 Annual Report on Form 10-K. Financial information as of June 30, 2020 has been derived from the Company’s audited consolidated financial statements.

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Consolidation:

 

A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2020 Annual Report on Form 10-K. Significant changes to our accounting policies as a result of adopting Accounting Standards Update (“ASU”) 2016-02 (“ASU 2016-02”), “Leases (Topic 842)” (ASC 842) in the first quarter of fiscal 2020 are discussed below.

 

Revenue Recognition:

 

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

 

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

 

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

 

 

Customer specific print graphics branding

 

Electrical components based on customer specifications

 

Digital signage and related media content

 

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

 

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

 

Page 9

 

Disaggregation of Revenue

 

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

 

  

Three Months Ended

  

Six Months Ended

 

(In thousands)

 

December 31, 2020

  

December 31, 2020

 
  

Lighting

Segment

  

Graphics

Segment

  

Lighting

Segment

  

Graphics

Segment

 

Timing of revenue recognition

                

Products and services transferred at a point in time

 $39,941  $15,987  $79,981  $30,441 

Products and services transferred over time

  5,185   15,274   10,550   25,421 
  $45,126  $31,261  $90,531  $55,862 

 

 

  

Three Months Ended

  

Six Months Ended

 
  

December 31, 2020

  

December 31, 2020

 
  

Lighting Segment

  

Graphics Segment

  

Lighting Segment

  

Graphics Segment

 

Type of Product and Services

                

LED lighting, digital signage solutions, electronic circuit boards

 $40,514  $6,870  $78,383  $11,951 

Poles, printed graphics, non-LED lighting

  4,154   15,392   11,228   29,717 

Project management, installation services, shipping and handling

  458   8,999   920   14,194 
  $45,126  $31,261  $90,531  $55,862 

 

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 has 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, 2019, the Company adopted ASU 2016-02 using a modified-retrospective transition method, under which it elected not to adjust comparative periods. The Company elected the package of practical expedients permitted under the new guidance. In addition, the Company elected accounting policies to not record short-term leases on the balance sheet and to not separate lease and non-lease components.

 

The Company’s most significant leases are those related to certain manufacturing facilities along with a small office space. Besides these real estate leases, most other leases are insignificant and consist of leases related to a vehicle, forklifts and various office equipment. The adoption of the new lease standard resulted in the recognition of right-of-use assets (“ROU assets”) of $10.4 million, lease liabilities of $10.8 million which includes the impact of existing deferred rents and tenant improvement allowances and a $0.4 million adjustment to retained earnings on the consolidated balance sheets as of July 1, 2019 for the Company’s real estate leases. The adoption of the standard resulted in no material impact to the consolidated statements of operations or consolidated statements of cash flow.

 

Page 10

 

On July 1, 2020, the Company adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (ASC 326 or "CECL"), which amended the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. The adoption of ASU 2016-13 did not have a material impact on the consolidated financial statements and related disclosures.

 

Subsequent Events:

 

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

 

 

NOTE 3 - SEGMENT REPORTING INFORMATION 

 

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

 

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

 

The Graphics Segment designs, manufactures and installs exterior and interior visual image elements such as traditional graphics, interior branding, electrical and architectural signage, active digital signage along with the management of media content related to digital signage and menu board systems that are either digital or print by design. These products are used in visual image programs in several markets including the petroleum/convenience store market, quick-service restaurant market, the grocery store and pharmacy markets, as well as customers with multi-site retail operations. The Graphics Segment implements, installs and provides program management services related to products sold by the Graphics Segment and by the Lighting Segment.

 

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

 

There was no concentration of consolidated net sales in the three and six months ended December 31, 2020 and 2019. There was no concentration of accounts receivable at December 31, 2020 or June 30, 2020. 

 

Page 11

 

Summarized financial information for the Company’s operating segments is provided for the indicated periods and as of December 31, 2020 and December 31, 2019:

 

  

Three Months Ended

  

Six Months Ended

 

(In thousands)

 

December 31

  

December 31

 
  

2020

  

2019

  

2020

  

2019

 

Net Sales:

                

Lighting Segment

 $45,126  $53,436  $90,531  $116,627 

Graphics Segment

  31,261   28,941   55,862   54,451 
  $76,387  $82,377  $146,393  $171,078 
                 

Operating Income (Loss):

                

Lighting Segment

 $2,134  $3,150  $5,722  $12,309 

Graphics Segment

  3,143   1,362   4,966   2,379 

Corporate and Eliminations

  (2,591)  (2,752)  (5,800)  (6,089)
  $2,686  $1,760  $4,888  $8,599 
                 

Capital Expenditures:

                

Lighting Segment

 $275  $557  $644  $887 

Graphics Segment

  40   45   67   45 

Corporate and Eliminations

  160   162   169   187 
  $475  $764  $880  $1,119 
                 

Depreciation and Amortization:

                

Lighting Segment

 $1,610  $1,661  $3,229  $3,439 

Graphics Segment

  304   374   662   760 

Corporate and Eliminations

  76   117   132   352 
  $1,990  $2,152  $4,023  $4,551 

 

 

  

December 31,
2020

  

June 30,
2020

 

Identifiable Assets:

        

Lighting Segment

 $115,265  $118,819 

Graphics Segment

  37,085   35,021 

Corporate and Eliminations

  28,931   18,423 
  $181,281  $172,263 

 

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

 

(In thousands)

 

December 31

  

December 31

 
  

2020

  

2019

  

2020

  

2019

 

Lighting Segment inter-segment net sales

 $5,038  $860  $9,118  $1,671 
                 

Graphics Segment inter-segment net sales

 $75  $74  $113  $98 

 

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 12

 
 

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

 
   

2020

   

2019

   

2020

   

2019

 
                                 

BASIC EARNINGS PER SHARE

                               
                                 

Net income

  $ 2,208     $ 1,743     $ 4,198     $ 6,218  
                                 

Weighted average shares outstanding during the period, net of treasury shares

    26,367       26,101       26,343       26,063  

Weighted average vested restricted stock units outstanding

    20       39       15       31  

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

    252       140       222       163  

Weighted average shares outstanding

    26,639       26,280       26,580       26,257  
                                 

Basic income per share

  $ 0.08     $ 0.07     $ 0.16     $ 0.24  
                                 
                                 

DILUTED EARNINGS PER SHARE

                               
                                 

Net income

  $ 2,208     $ 1,743     $ 4,198     $ 6,218  
                                 

Weighted average shares outstanding:

                               
                                 

Basic

    26,639       26,280       26,580       26,257  
                                 

Effect of dilutive securities (a):

                               

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

    721       254       581       107  

Weighted average shares outstanding

    27,360       26,534       27,161       26,364  
                                 

Diluted income per share

  $ 0.08     $ 0.07     $ 0.15     $ 0.24  
                                 
                                 

Anti-dilutive securities (b)

    1,062       1,904       1,101       2,506  

 

 

(a)

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

 

 

(b)

Anti-dilutive securities were excluded from the computation of diluted net income per share for the three and six months ended December 31, 2020 and December 31, 2019 because the exercise price was greater than the average fair market price of the common shares or because the assumed proceeds from the award’s exercise or vesting was greater than the average fair market price of the common shares.

 

Page 13

 
 

NOTE 5 - INVENTORIES

 

The following information is provided as of the dates indicated:

 

 

   

December 31,

   

June 30,

 

(In thousands)

 

2020

   

2020

 
                 

Inventories:

               

Raw materials

  $ 25,541     $ 27,331  

Work-in-progress

    1,189       1,566  

Finished goods

    8,095       9,855  

Total Inventories

  $ 34,825     $ 38,752  

 

 

 

NOTE 6 - ACCRUED EXPENSES

 

The following information is provided as of the dates indicated:

 

   

December 31,

   

June 30,

 

(In thousands)

 

2020

   

2020

 
                 

Accrued Expenses:

               

Accrued warranty

  $ 6,275     $ 6,956  

Compensation and benefits

    4,754       5,271  

Customer prepayments

    2,985       1,698  

Accrued FICA

    2,189       730  

Accrued sales commissions

    1,757       1,289  

Operating lease liabilities

    298       376  

Finance lease liabilities

    245       239  

Other accrued expenses

    4,234       3,874  

Total Accrued Expenses

  $ 22,737     $ 20,433  

 

 

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 two reporting units that contain goodwill. There is one reporting unit 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.

 

Page 14

 

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 December 31, 2020

                       

Goodwill

  $ 70,971     $ 28,690     $ 99,661  

Accumulated impairment losses

    (61,763 )     (27,525 )     (89,288 )

Goodwill, net as of December 31, 2020

  $ 9,208     $ 1,165     $ 10,373  
                         

Balance as of June 30, 2020

                       

Goodwill

  $ 86,711     $ 28,690     $ 115,401  

Accumulated impairment losses

    (77,503 )     (27,525 )     (105,028 )

Goodwill, net as of June 30, 2020

  $ 9,208     $ 1,165     $ 10,373  

 

In the second quarter of fiscal 2021, the Company wrote-off the goodwill and impairment loss for a dissolved entity. The net impact to the consolidated financial statements, including the goodwill, net balance, was zero.

 

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

 

Other Intangible Assets

 

December 31, 2020

 

(In thousands)

 

Gross

                 
   

Carrying

   

Accumulated

   

Net

 
   

Amount

   

Amortization

   

Amount

 

Amortized Intangible Assets

                       

Customer relationships

  $ 30,163     $ 9,758     $ 20,405  

Patents

    268       222       46  

LED technology firmware, software

    16,066       13,094       2,972  

Trade name

    2,658       884       1,774  

Total Amortized Intangible Assets

    49,155       23,958       25,197  
                         

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

  $ 52,577     $ 23,958     $ 28,619  

 

Other Intangible Assets

 

June 30, 2020

 

(In thousands)

 

Gross

                 
   

Carrying

   

Accumulated

   

Net

 
   

Amount

   

Amortization

   

Amount

 

Amortized Intangible Assets

                       

Customer relationships

  $ 35,563     $ 14,129     $ 21,434  

Patents

    338       277       61  

LED technology firmware, software

    16,066       12,852       3,214  

Trade name

    2,658       829       1,829  

Total Amortized Intangible Assets

    54,625       28,087       26,538  
                         

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     $ 28,087     $ 29,960  

 

Page 15

 

In the second quarter of fiscal 2021, the Company wrote-off intangible assets’ gross carrying amount and accumulated amortization for a dissolved entity. The net impact to the consolidated financial statements, including the total other intangible assets, was zero.

 

   

Three Months Ended

   

Six Months Ended

 
   

December 31

   

December 31

 

(In thousands)

 

2020

   

2019

   

2020

   

2019

 
                                 

Amortization Expense of Other Intangible Assets

  $ 670     $ 671     $ 1,341     $ 1,346  

 

The Company expects to record annual amortization expense as follows:

 

(In thousands)

       
         

2021

  $ 2,682  

2022

  $ 2,461  

2023

  $ 2,412  

2024

  $ 2,412  

2025

  $ 2,412  

After 2025

  $ 14,159  

 

 

NOTE 8 - REVOLVING LINE OF CREDIT

 

The Company has a $75 million secured line of credit that 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 125 basis points for the third quarter of fiscal 2021. The Company expects to seek additional provisions for alternative interest rates when certain interbank offered rates are no longer available. The fee on the unused balance of the $75 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, 2020, there were no borrowings against the line of credit, and $75.0 million was available as of that date.

 

The Company is in compliance with all of its loan covenants as of December 31, 2020.

 

 

NOTE 9 - CASH DIVIDENDS

 

The Company paid cash dividends of $2.6 million in both the six months ended December 31, 2020 and December 31, 2019. Dividends on restricted stock units in the amount of $104,346 and $52,383 were accrued as of December 31, 2020 and 2019, respectively. These dividends will be paid upon the vesting of the restricted stock units when shares are issued to the award recipients. In January 2021, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable February 9, 2021 to shareholders of record as of February 1, 2021. The indicated annual cash dividend rate is $0.20 per share.

 

 

NOTE 10 – EQUITY COMPENSATION

 

In November 2019, the Company’s shareholders approved the 2019 Omnibus Award Plan (“2019 Omnibus Plan”). The purpose of the 2019 Omnibus Plan is to provide a means through which the Company may attract and retain key personnel and to provide a means by which directors, officers, and employees can acquire and maintain an equity interest in the Company. The number of shares that remain reserved for issuance under the 2019 Omnibus Plan is 2,839,677 as of December 31, 2020. The 2019 Omnibus Plan implements the use of a fungible share ratio that consumes 2.5 available shares for every full value share awarded by the Company as stock compensation. The 2019 Omnibus Plan allows for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units (“RSUs”), performance stock units (“PSUs”) and other stock-based awards.

 

In the first half of fiscal 2021, the Company granted 318,406 non-qualified stock options with a weighted average exercise price of $6.86, 134,017 PSUs with a weighted average fair value of $6.80 and 133,126 RSUs with a weighted average fair value of $6.81. Stock compensation expense was $0.4 million and $0.2 million for the three months ended December 31, 2020 and 2019, respectively, and $0.9 million and $0.6 million for the six months ended December 31, 2020 and 2019, respectively.

 

Page 16

 
 

NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION

 

   

Six Months Ended

 

(In thousands)

 

December 31

 
   

2020

   

2019

 

Cash Payments:

               

Interest

  $ 48     $ 742  

Income taxes

  $ 1,123     $ -  
                 

Non-cash investing and financing activities

               

Issuance of common shares as compensation

  $ 150     $ 150  

Issuance of common shares to fund deferred compensation plan

  $ 679     $ 47  

 

 

NOTE 12 - COMMITMENTS AND CONTINGENCIES

 

The Company is party to various negotiations, customer bankruptcies, and legal proceedings arising in the normal course of business. The Company provides reserves for these matters when a loss is probable and reasonably estimable. The Company does not disclose a range of potential loss because the likelihood of such a loss is remote. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations, cash flows or liquidity.

 

The Company may occasionally issue a standby letter of credit in favor of third parties. As of December 31, 2020, there were no such standby letters of credit issued.

 

 

NOTE 13 – SEVERANCE COSTS

The activity in the Company’s accrued severance liability is as follows for the periods indicated:

 

   

Six Months

   

Six Months

   

Fiscal Year

 
   

Ended

   

Ended

   

Ended

 
   

December 31,

   

December 31,

   

June 30,

 

(In thousands)

 

2020

   

2019

   

2020

 
                         

Balance at beginning of period

  $ 639     $ 1,134     $ 1,134  

Accrual of expense

    21       46       344  

Payments

    (392 )     (319 )     (839 )

Balance at end of period

  $ 268     $ 861     $ 639  

 

The $0.3 million severance reserve reported as of December 31, 2020 has been classified as a current liability and will be paid out over the next twelve months.

 

 

NOTE 14 – RESTRUCTURING COSTS

 

In the first quarter of fiscal 2020, the Company sold its New Windsor, New York facility. The net proceeds from the sale were $12.3 million resulting in a gain of $4.8 million. The Company also incurred additional restructuring costs totaling $0.2 million in the first quarter of fiscal 2020 related to the closure of the New Windsor facility, which impacted both the Lighting and Graphics segment.

 

Restructuring costs incurred in the second quarter of fiscal 2020 related to the realignment of the Company’s manufacturing footprint at its Houston, Texas facility, which impacted the Graphics segment.

 

Page 17

 

The following table presents information about restructuring costs for the periods indicated:

 

   

Three Months Ended

   

Six Months Ended

 
   

December 31

   

December 31

 

(In thousands)

 

2020

   

2019

   

2020

   

2019

 
                                 

Exit costs

  $ -     $ -     $ 3     $ 184  

Impairment of fixed assets and accelerated depreciation

    -       -       -       49  

Gain on sale of facility

    -       -       -       (4,821 )

Manufacturing realignment costs

    -       276       -       276  

Total

  $ -     $ 276     $ 3     $ (4,312 )

 

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

 

   

Balance as of

                           

Balance as of

 
   

June 30,

   

Restructuring

                   

December 31,

 

(In thousands)

 

2020

   

Expense

   

Payments

   

Adjustments

   

2020

 
                                         

Severance and termination benefits

  $ 27     $ -     $ -     $ -     $ 27  

Other restructuring costs

    -       3       (3 )     -     $ -  

Total

  $ 27     $ 3     $ (3 )   $ -     $ 27  

 

 

NOTE 15 - LEASES

 

The Company leases certain manufacturing facilities along with a small office space, a company vehicle, several forklifts, several small tooling items, and various items of office equipment. All but one of the Company’s leases are operating leases. Leases have a remaining term of one to seven years some of which have an option to renew. The Company does not assume renewals in determining the lease term unless the renewals are deemed reasonably certain. The lease agreements do not contain any material residual guarantees or material variable lease payments.

 

The Company has periodically entered into short-term operating leases with an initial term of twelve months or less. The Company elected not to record these leases on the balance sheet. For the three and six months ended December 31, 2020 and 2019, the rent expense for these leases is immaterial.

 

The Company has certain leases that contain lease and non-lease components and has elected to utilize the practical expedient to account for these components together as a single lease component.

 

Lease expense is recognized on a straight-line basis over the lease term. The Company used its incremental borrowing rate when determining the present value of lease payments. The adoption of the new lease standard resulted in the recognition of ROU assets of $10.4 million and lease liabilities of $10.8 million which includes the impact of existing deferred rents and tenant improvement allowances on the consolidated balance sheets as of July 1, 2019 for the Company’s real estate leases. The adoption of the new standard resulted in no material impact to the consolidated statements of operations or consolidated statements of cash flow.

 

   

Three months ended

   

Six months ended

 
   

December 31

   

December 31

 

(In thousands)

 

2020

   

2019

   

2020

   

2019

 
                                 

Operating lease cost

  $ 565     $ 575     $ 1,138     $ 1,162  

Financing lease cost:

                               

Amortization of right of use assets

    72       -       145       -  

Interest on lease liabilities

    23       -       47       -  

Variable lease cost

    1       -       2       -  

Total lease cost

  $ 661     $ 575     $ 1,332     $ 1,162  

 

Page 18

 

Supplemental Cash Flow Information:

               
                 
   

December 31

 

(In thousands)

 

2020

   

2019

 
                 

Cash flows from operating leases

               

Fixed payments - operating cash flows

  $ 1,141     $ 1,139  

Liability reduction - operating cash flows

  $ 929     $ 885  
                 

Cash flows from finance leases

               

Interest - operating cash flows

  $ 47     $ -  

Repayments of principal portion - financing cash flows

  $ 118     $ -  

 

Operating Leases:

 

December 31,

   

June 30,

 
     2020     

2020

 
                 

Total operating right-of-use assets

  $ 7,684     $ 8,663  
                 

Accrued expenses (Current liabilities)

  $ 298     $ 376  

Long-term operating lease liability

    8,118       9,021  

Total operating lease liabilities

  $ 8,416     $ 9,397  
                 

Weighted Average remaining Lease Term (in years)

    4.13       4.59  
                 

Weighted Average Discount Rate

    4.85 %     4.85 %

 

Finance Leases:

 

December 31,

   

June 30,

 
    2020    

2020

 
                 

Buildings under finance leases

  $ 2,033     $ 2,033  

Accumulated depreciation

    (194 )     (48 )

Total finance lease assets, net

  $ 1,839     $ 1,985  
                 

Accrued expenses (Current liabilities)

  $ 245     $ 239  

Long-term finance lease liability

    1,631       1,755  

Total finance lease liabilities

  $ 1,876     $ 1,994  
                 

Weighted Average remaining Lease Term (in years)

    6.33       6.83  
                 

Weighted Average Discount Rate

    4.86 %     4.86 %

 

Page 19

 

Maturities of Lease Liability:

 

Operating
Lease
Liabilities

   

Finance
Lease
Liabilities

 

2021

  $ 1,387     $ 210  

2022

    2,278       329  

2023

    2,227       329  

2024

    1,913       335  

2025

    1,345       362  

Thereafter

    357       664  

Total lease payments

    9,507       2,229  

Less: Interest

    (1,091 )     (353 )

Present Value of Lease Liabilities

  $ 8,416     $ 1,876  

 

 

NOTE 16 – INCOME TAXES

 

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

 

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law in March 2020. The CARES Act allows the Company to carry back a federal net operating loss to prior tax years, offset taxable income in those earlier tax years and obtain a refund of income taxes that were paid at a higher statutory tax rate. During the first quarter of fiscal 2021, the IRS issued Treasury Regulations resulting in an increase to the expected net operating loss that can be carried back and the Company recognized an additional tax benefit of $0.4 million.

 

In the first quarter of fiscal 2020, the Company sold its New Windsor facility resulting in a book gain of $4.8 million. The Company was able to utilize a deferred tax asset of $0.9 million related to the sale of the facility.

 

   

Three Months Ended

   

Six Months Ended

 
   

December 31

   

December 31

 
   

2020

   

2019

   

2020

   

2019

 

Reconciliation of effective tax rate:

                               
                                 

Provision for income taxes at the anticipated annual tax rate

    25.0

%

    (2.6

)%

    24.5

%

    18.1

%

Uncertain tax positions

    (4.8 )     (5.5 )     (2.2 )     (0.7 )

Tax rate changes

    -       -       (7.0 )     -  

Shared-based compensation

    (0.2 )     0.3       0.9       3.5  

Other

    -       -       -       0.8  

Effective tax rate

    20.0

%

    (7.8

)%

    16.2

%

    21.7

%

 

Page 20

 
 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Note About Forward-Looking Statements

 

This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including this section. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in in our Annual Report on Form 10-K in the following sections: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures about Market Risk,” and “Risk Factors.” All of those risks and uncertainties are incorporated herein by reference. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of LSI Industries Inc. MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended June 30, 2020, and our financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

Our condensed consolidated financial statements, accompanying notes and the “Safe Harbor” Statement, each as appearing earlier in this report, should be referred to in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

COVID-19 Pandemic

 

The COVID-19 pandemic continues to impact business activity across industries in the U.S. and worldwide. We remain committed to taking actions to address the health, safety and welfare of our employees, customers, agents and suppliers. Future developments, such as the actions taken by governmental authorities in response to future outbreaks are highly uncertain and unpredictable, will determine the extent to which COVID-19 continues to impact our results of operations and financial conditions. See the risk factor captioned “Our financial condition and results of operations for fiscal 2021 and future periods may be adversely affected by the recent novel coronavirus disease (“COVID-19”) outbreak or other outbreaks of infectious disease or similar public health threats and the resulting economic impact” in Item 1A, Risk Factors, included in Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 for an additional discussion of risks related to COVID-19.

 

Net Sales by Business Segment

                               
   

Three Months Ended

   

Six Months Ended

 
   

December 31

   

December 31

 

(In thousands)

 

2020

   

2019

   

2020

   

2019

 
                                 

Lighting Segment

  $ 45,126     $ 53,436     $ 90,531     $ 116,627  

Graphics Segment

    31,261       28,941       55,862       54,451  
    $ 76,387     $ 82,377     $ 146,393     $ 171,078  

 

Operating Income (Loss) by Business Segment

                               
   

Three Months Ended

   

Six Months Ended

 
   

December 31

   

December 31

 

(In thousands)

 

2020

   

2019

   

2020

   

2019

 
                                 

Lighting Segment

  $ 2,134     $ 3,150     $ 5,722     $ 12,309  

Graphics Segment

    3,143       1,362       4,966       2,379  

Corporate and Eliminations

    (2,591 )     (2,752 )     (5,800 )     (6,089 )
    $ 2,686     $ 1,760     $ 4,888     $ 8,599  

 

Page 21

 

Summary of Consolidated Results

 

Net sales of $76.4 million for the three months ended December 31, 2020 decreased $6.0 million or 7% as compared to net sales of $82.4 million for the three months ended December 31, 2019. Net sales were unfavorably influenced by decreased net sales of the Lighting Segment (a decrease of $8.3 million or 16%), partially offset by increased net sales of the Graphics Segment (an increase of $2.3 million or 8%).

 

Net sales of $146.4 million for the six months ended December 31, 2020 decreased $24.7 million or 14% as compared to net sales of $171.1 million for the six months ended December 31, 2019. Net sales were unfavorably influenced by decreased net sales of the Lighting Segment (a decrease of $26.1 million or 22%), partially offset by increased net sales of the Graphics Segment (an increase of $1.4 million or 3%).

 

Operating income of $2.7 million for the three months ended December 31, 2020 represents a $0.9 million increase from operating income of $1.8 million in the three months ended December 31, 2019. When the impact of restructuring and plant closure costs, stock compensation expense and severance costs are removed from the operating results, adjusted operating income, a Non-GAAP measure, was $3.1 million in the three months ended December 31, 2020 compared to $2.3 million in the three months ended December 31, 2019. Refer to “Non-GAAP Financial Measures” below.

 

Operating income of $4.9 million for the six months ended December 31, 2020 represents a $3.7 million decrease from operating income of $8.6 million in the six months ended December 31, 2019. The $3.7 million decrease from fiscal 2020 was impacted by the sale of the New Windsor, New York facility in the first quarter of fiscal 2020 which favorably resulted in a pre-tax gain of $4.8 million. When the impact of the sale of the New Windsor facility, other restructuring and plant closure costs, stock compensation expense and severance costs are removed from the operating results, adjusted operating income, a Non-GAAP measure, was $5.8 million in the six months ended December 31, 2020 compared to $4.9 million in the six months ended December 31, 2019. Refer to “Non-GAAP Financial Measures” below.

 

As of December 31, 2020, we reported a cash balance of $13.6 million and no long-term debt. We believe that our liquidity position is adequate to meet our projected needs in the reasonably foreseeable future.

 

Non-GAAP Financial Measures

 

We believe it is appropriate to evaluate our performance after making adjustments to the as-reported U.S. GAAP operating income, net income, and earnings per share. Adjusted operating income, net income and earnings per share, which exclude the impact of restructuring and plant closure costs (gains), stock compensation expense and severance costs are Non-GAAP financial measures. Also included below are Non-GAAP financial measures including Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA and Adjusted EBITDA), Free Cash Flow and Net Debt. We believe that these adjusted supplemental measures are useful in assessing the operating performance of our business. These supplemental measures are used by our management, including our chief operating decision maker, to evaluate business results. Although the impacts of some of these items have been recognized in prior periods and could recur in future periods, we exclude these items because they provide greater comparability and enhanced visibility into our results of operations. Below is a reconciliation of these Non-GAAP measures to operating income, net income, and earnings per share for the periods indicated along with the calculation of EBITDA and Adjusted EBITDA, Free Cash Flow and Net Debt.

 

Reconciliation of operating income to adjusted operating income:

               
   

Three Months Ended

 
   

December 31

 

(In thousands)

 

2020

   

2019

 
                 

Operating Income as reported

  $ 2,686     $ 1,760  
                 

Stock compensation expense

    397       199  
                 

Severance costs

    21       54  
                 

Restructuring and plant closure costs

    -       276  
                 

Adjusted Operating Income

  $ 3,104     $ 2,289  

 

Page 22

 

Reconciliation of net income to adjusted net income

                                   
   

Three Months Ended

 
   

December 31

 

(In thousands, except per share data)

 

2020

   

2019

 
             

Diluted EPS

             

Diluted EPS

 
                                     

Net Income as reported

  $ 2,208       $ 0.08     $ 1,743       $ 0.07  
                                     

Stock compensation expense

    318   (1)     0.01       161   (3)     0.01  
                                     

Severance costs

    17   (2)     -       44   (4)     -  
                                     

Restructuring and plant closure costs

    -         -       223   (5)     0.01  
                                     

Tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes

    -         -       (436 )       (0.02 )
                                     

Net Income adjusted

  $ 2,543       $ 0.09     $ 1,735       $ 0.07  

 

The following represents the income tax effects of the adjustments in the tables above, which were calculated using the estimated combined U.S. and Mexico effective income tax rates for the periods indicated (in thousands):

 

(1) $79

(2) $4

(3) $38

(4) $10

(5) $53

 

Reconciliation of operating income to adjusted operating income:

               
   

Six Months Ended

 
   

December 31

 

(In thousands)

 

2020

   

2019

 
                 

Operating Income as reported

  $ 4,888     $ 8,599  
                 

Stock compensation expense

    902       597  
                 

Severance costs

    21       54  
                 

Restructuring, plant closure costs (gains) and related inventory write-downs

    3       (4,312 )
                 

Adjusted Operating Income

  $ 5,814     $ 4,938  

 

Reconciliation of net income to adjusted net income

                                   
   

Six Months Ended

 
   

December 31

 

(In thousands, except per share data)

 

2020

   

2019

 
             

Diluted EPS

             

Diluted EPS

 
                                     

Net Income as reported

  $ 4,198       $ 0.15     $ 6,218       $ 0.24  
                                     
Stock compensation expense     698    (1)     0.03       460    (4)     0.02  
                                     

Severance costs

    17    (2)     -       44    (5)     -  
                                     

Restructuring, plant closure costs (gains) and related inventory write-downs

    2    (3)     -       (3,223 )  (6)     (0.12 )
                                     

Tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes

    (297 )       (0.01 )     (160 )       (0.01 )
                                     

Net Income adjusted

  $ 4,618       $ 0.17     $ 3,339       $ 0.13  

 

Page 23

 

The following represents the income tax effects of the adjustments in the tables above, which were calculated using the estimated combined U.S. and Mexico effective income tax rates for the periods indicated (in thousands):

 

(1) $204

(2) $4

(3) $1

(4) $137

(5) $10

(6) ($1,089)

 

The reconciliation of reported net income and earnings per share to adjusted net income and earnings per share may not agree due to rounding differences and due to the difference between basic and dilutive weighted average shares outstanding in the computation of earnings per share.

 

Reconciliation of operating income to EBITDA and Adjusted EBITDA

                               
   

Three Months Ended

   

Six Months Ended

 
   

December 31

   

December 31

 

(In thousands)

 

2020

   

2019

   

2020

   

2019

 
                                 

Operating Income as reported

  $ 2,686     $ 1,760     $ 4,888     $ 8,599  
                                 

Depreciation and Amortization

    1,990       2,152       4,023       4,551  
                                 

EBITDA

  $ 4,676     $ 3,912     $ 8,911     $ 13,150  
                                 

Stock compensation expense

    397       199       902       597  
                                 

Severance costs

    21       54       21       54  
                                 

Restructuring, plant closure costs (gains) and related inventory write-downs

    -       276       3       (4,312 )
                                 

Adjusted EBITDA

  $ 5,094     $ 4,441     $ 9,837     $ 9,489  

 

Reconciliation of cash flow from operations to free cash flow

                               
   

Three Months Ended

   

Six Months Ended

 
   

December 31

   

December 31

 

(In thousands)

 

2020

   

2019

   

2020

   

2019

 
                                 

Cash Flow from Operations

  $ 5,778     $ 14,544     $ 13,417     $ 20,903  
                                 

Proceeds from sale of fixed assets

    -       -       -       12,332  
                                 

Capital expenditures

    (475 )     (764 )     (880 )     (1,119 )
                                 

Free Cash Flow

  $ 5,303     $ 13,780     $ 12,537     $ 32,116  

 

Reconciliation of Net Debt

               
   

December 31,

   

June 30,

 

(In thousands)

 

2020

   

2020

 
                 

Long-Term Debt as reported

  $ -     $ -  
                 

Less:

               

Cash and cash equivalents as reported

    13,584       3,517  
                 

Net Debt

  $ (13,584 )   $ (3,517 )

 

Page 24

 

Results of Operations

 

THREE MONTHS ENDED DECEMBER 31, 2020 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2019

 

Lighting Segment

               
   

Three Months Ended

 
   

December 31

 

(In thousands)

 

2020

   

2019

 
                 

Net Sales

  $ 45,126     $ 53,436  

Gross Profit

  $ 13,704     $ 15,501  

Operating Income

  $ 2,134     $ 3,150  

 

Lighting Segment net sales of $45.1 million in the three months ended December 31, 2020 decreased 16% from net sales of $53.4 million in the same period in fiscal 2020. The impact of COVID-19 disruptions on construction markets continued to adversely affect sales in the Lighting segment.

 

Gross profit of $13.7 million in the three months ended December 31, 2020 decreased $1.8 million or 12% from the same period of fiscal 2020. Gross profit as a percentage of net sales was 30.4% in the three months ended December 31, 2020 compared to 29.0% in the same period of fiscal 2020. The growth in gross profit as a percentage of net sales reflects the ongoing impact of our focus on higher-value market applications and cost management.

 

Selling and administrative expenses of $11.6 million in the three months ended December 31, 2020 decreased $0.8 million from the same period of fiscal 2020, primarily driven by programs to reduce spending as a result of the pandemic.

 

Lighting Segment operating income of $2.1 million for the three months ended December 31, 2020 decreased $1.0 million from operating income of $3.1 million in the same period of fiscal 2020 primarily due to lower sales partially offset by lower operating expenses.

 

Graphics Segment

               
   

Three Months Ended

 
   

December 31

 

(In thousands)

 

2020

   

2019

 
                 

Net Sales

  $ 31,261     $ 28,941  

Gross Profit

  $ 6,006     $ 4,465  

Operating Income

  $ 3,143     $ 1,362  

 

Graphics Segment net sales of $31.3 million in the three months ended December 31, 2020 increased $2.3 million or 8% from net sales of $28.9 million in the same period in fiscal 2020. The increase in sales is due to growth in our Grocery and Quick-Service Restaurants verticals.

 

Gross profit of $6.0 million in the three months ended December 31, 2020 increased $1.5 million or 35% from the same period of fiscal 2020. Gross profit as a percentage of net sales increased to 19.2% in the three months ended December 31, 2020 compared to 15.4% in the same period in fiscal 2020, primarily within the Petroleum and Grocery verticals.

 

Selling and administrative expenses of $2.9 million decreased $0.2 million from $3.1 million in the same period of fiscal 2020. The decrease in selling and administrative expenses was due to programs to reduce spending as a result of the pandemic.

 

Graphics Segment operating income of $3.1 million in the three months ended December 31, 2020 increased $1.8 million from operating income of $1.4 million in the same period of fiscal 2020. The increase of $1.8 million was primarily due to improved gross profit margin and a reduction in operating expenses.

 

Page 25

 

Corporate and Eliminations

               
   

Three Months Ended

 
   

December 31

 

(In thousands)

 

2020

   

2019

 
                 

Gross Profit (Loss)

  $ (4 )   $ (2 )

Operating (Loss)

  $ (2,591 )   $ (2,752 )

 

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

 

Administrative expenses of $2.6 million in the three months ended December 31, 2020 decreased $0.2 million or 6% from the same period of fiscal 2020. The net decrease was the result of programs to contain and reduce costs during the pandemic.

 

Consolidated Results

 

We reported $0.1 million net interest expense in the three months ended December 31, 2020 compared to $0.2 million net interest expense in the three months ended December 31, 2019. The decrease in interest expense from fiscal 2020 to fiscal 2021 is the result of lower levels of debt outstanding on our line of credit. We also recorded other income of $0.1 million in both the three months ended December 31, 2020 and 2019, both of which are related to net foreign exchange currency transaction gains and losses through our Mexican subsidiary.

 

The $0.6 million income tax expense in the three months ended December 31, 2020 represents a consolidated effective tax rate of 20.0%. This compares to a $0.1 million income tax benefit in the three months ended December 31, 2019 due to the utilization of a capital loss carryforward related to the capital gain on the sale of the North Canton, Ohio facility. 

 

We reported net income of $2.2 million in the three months ended December 31, 2020 compared to net income of $1.7 million in the three months ended December 31, 2019. Non-GAAP adjusted net income was $2.5 million for the three months ended December 31, 2020 compared to adjusted net income of $1.7 million for the three months ended December 31, 2019 (Refer to the Non-GAAP tables above). The increase in Non-GAAP adjusted net income is primarily the net result of an improved gross profit margin, reduction in operating expenses and decreased interest expense, partially offset by decreased net sales. Diluted earnings per share of $0.08 was reported in the three months ended December 31, 2020 as compared to $0.07 diluted earnings per share in the same period of fiscal 2020. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the three months ended December 31, 2020 were 27,360,000 shares as compared to 26,534,000 shares in the same period last year.

 

SIX MONTHS ENDED DECEMBER 31, 2020 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2019

 

Lighting Segment

               
   

Six Months Ended

 
   

December 31

 

(In thousands)

 

2020

   

2019

 
                 

Net Sales

  $ 90,531     $ 116,627  

Gross Profit

  $ 27,530     $ 32,720  

Operating Income

  $ 5,722     $ 12,309  

 

Lighting Segment net sales of $90.5 million in the six months ended December 31, 2020 decreased 22% from net sales of $116.6 million in the same period in fiscal 2020. The impact of COVID-19 disruptions on construction markets continues to adversely affect sales in the Lighting segment.

 

Gross profit of $27.5 million in the six months ended December 31, 2020 decreased $5.2 million or 16% from the same period of fiscal 2020. Gross profit as a percentage of net sales was 30.4% in the six months ended December 31, 2020 compared to 28.1% in the same period of fiscal 2020. The growth in gross profit as a percentage of net sales reflects the ongoing impact of our focus on higher-value market applications and cost management.

 

Selling and administrative expenses of $21.8 million in the six months ended December 31, 2020 increased $1.4 million from the same period of fiscal 2020, primarily due to the $4.8 million pre-tax gain on the sale of the New Windsor facility in the prior year, partially offset by programs to reduce spending as a result of the pandemic

 

Page 26

 

Lighting Segment operating income of $5.7 million for the six months ended December 31, 2020 decreased $6.6 million from operating income of $12.3 million in the same period of fiscal 2020 primarily due to the $4.8 million pre-tax gain on the sale of the New Windsor facility in the first half of fiscal 2020. Non-GAAP adjusted operating income was $5.9 million in the six months ended December 31, 2020 compared to adjusted operating income of $7.7 million in the six months ended December 31, 2019 (refer to the Non-GAAP table below for a reconciliation of Lighting Segment operating income to adjusted operating income).

 

Reconciliation of Lighting Segment operating income to adjusted operating income:

               
   

Six Months Ended

 
   

December 31

 

(In thousands)

 

2020

   

2019

 
                 

Operating Income

  $ 5,722     $ 12,309  

Stock compensation expense

    175       75  

Severance

    2       18  

Restructuring and plant closure costs (gains)

    -       (4,651 )

Adjusted operating income

  $ 5,899     $ 7,751  

 

Graphics Segment

               
   

Six Months Ended

 
   

December 31

 

(In thousands)

 

2020

   

2019

 
                 

Net Sales

  $ 55,862     $ 54,451  

Gross Profit

  $ 10,448     $ 9,091  

Operating Income

  $ 4,966     $ 2,379  

 

Graphics Segment net sales of $55.9 million in the six months ended December 31, 2020 increased $1.4 million or 3% from net sales of $54.5 million in the same period in fiscal 2020. The increase in sales is from growth in our Grocery and Quick-Service Restaurants verticals partially offset by a reduction in our Petroleum vertical.

 

Gross profit of $10.4 million in the six months ended December 31, 2020 increased $1.4 million or 15% from the same period of fiscal 2020. Gross profit as a percentage of net sales increased to 18.7 % in the six months ended December 31, 2020 compared to 16.7% in the same period in fiscal 2020, primarily within our Petroleum and Grocery verticals.

 

Selling and administrative expenses of $5.5 million decreased $1.2 million from $6.7 million in the same period of fiscal 2020. The decrease in selling and administrative expenses was due to lower operating costs as a result of an organizational restructuring executed in the second half of fiscal 2020 and a program to reduce spending as a result of the pandemic.

 

Graphics Segment operating income of $5.0 million in the six months ended December 31, 2020 increased $2.6 million from operating income of $2.4 million in the same period of fiscal 2020. The increase of $2.6 million was primarily due to improved gross profit margin and a reduction in operating expenses.

 

Corporate and Eliminations

               
   

Six Months Ended

 
   

December 31

 

(In thousands)

 

2020

   

2019

 
                 

Gross Profit (Loss)

  $ -     $ 8  

Operating (Loss)

  $ (5,800 )   $ (6,089 )

 

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

 

Administrative expenses of $5.8 million in the six months ended December 31, 2020 decreased $0.3 million or 5% from the same period of fiscal 2020. The net decrease was the result of conscientious efforts to contain and reduce costs during the pandemic.

 

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Consolidated Results

 

We reported $0.1 million net interest expense in the six months ended December 31, 2020 compared to $0.7 million net interest expense in the six months ended December 31, 2019. The decrease in interest expense from fiscal 2020 to fiscal 2021 is the result of lower levels of debt outstanding on our line of credit. We also recorded other income of $0.2 million in the six months ended December 31, 2020 compared to other income of $9,000 in the six months ended December 31, 2019, both of which are related to net foreign exchange currency transaction gains and losses through our Mexican subsidiary.

 

The $0.8 million income tax expense in the six months ended December 31, 2020 represents a consolidated effective tax rate of 16.2% and was driven by a favorable deferred tax asset adjustment related to a net operating loss carryback from the CARES Act. The $1.7 million income tax expense in the six months ended December 31, 2019 represents a consolidated effective tax rate of 21.7% influenced mostly by a discrete item related to stock-based compensation expense and the utilization of a capital loss carryforward related to the capital gain on the sale of the North Canton, Ohio facility.

 

We reported net income of $4.2 million in the six months ended December 31, 2020 compared to net income of $6.2 million in the six months ended December 31, 2019. Non-GAAP adjusted net income was $4.6 million for the six months ended December 31, 2020 compared to adjusted net income of $3.3 million for the six months ended December 31, 2019 (Refer to the Non-GAAP tables above). The increase in Non-GAAP adjusted net income is primarily the net result of an improved gross profit margin, decreased interest expense and a lower effective tax rate, partially offset by decreased net sales. Diluted earnings per share of $0.15 was reported in the six months ended December 31, 2020 as compared to $0.24 diluted earnings per share in the same period of fiscal 2020. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the six months ended December 31, 2020 were 27,161,000 shares as compared to 26,364,000 shares in the same period last year.

 

Liquidity and Capital Resources 

 

We consider our level of cash on hand, borrowing capacity, current ratio and working capital levels to be our most important measures of short-term liquidity. For long-term liquidity indicators, we believe our ratio of long-term debt to equity and our historical levels of net cash flows from operating activities to be the most important measures.

 

At December 31, 2020, we had working capital of $58.2 million compared to $51.2 million at June 30, 2020. The ratio of current assets to current liabilities was 2.41 to 1 as compared to a ratio of 2.48 to 1 at June 30, 2020. The $7.0 million increase in working capital from June 30, 2020 to December 31, 2020 is primarily driven by a $10.1 million increase in cash. While working capital has increased, non-cash working capital decreased as we continue to effectively manage it in the face of constantly changing market conditions due to COVID-19.

 

Net accounts receivable was $44.5 million and $37.8 million at December 31, 2020 and June 30, 2020, respectively. DSO decreased to 52 days at December 31, 2020 from 56 days at June 30, 2020. We believe that our receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.

 

Net inventories of $34.8 million at December 31, 2020 decreased $3.9 million from $38.8 million at June 30, 2020. The decrease of $3.9 million is the result of a decrease in gross inventory of $3.6 million and an increase in obsolescence reserves of $0.3 million. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory decreased $4.2 million in the six months ended December 31, 2020 in the Lighting Segment which was partially offset by an increase in net inventory in the Graphics Segment of $0.3 million.

 

Cash generated from operations and borrowing capacity under our line of credit is our primary source of liquidity. We have a secured $75 million revolving line of credit with our bank, with $75 million of the credit line available as of January 22, 2021. This line of credit is a $75 million five-year credit line expiring in the third quarter of fiscal 2022. We are in compliance with all of our loan covenants. We believe that our $75 million line of credit plus cash flows from operating activities are adequate for fiscal 2021 operational and capital expenditure needs. However, as the impact of COVID-19 on the economy and our operations evolves, we will continue to assess our liquidity needs.

 

We generated $13.4 million of cash from operating activities in the six months ended December 31, 2020 as compared to $20.9 million in the same period of fiscal 2020. This $7.5 million decrease in net cash flows from operating activities is the result of a $10.2 million decrease in accounts receivable in the six months ended December 31, 2019, partially offset by our improved earnings in the current year period.

 

Page 28

 

We used $0.9 million of cash related to investing activities in the six months ended December 31, 2020 as compared to $11.2 million of cash provided by investing activities in the same period of fiscal 2020, resulting in a decrease of $12.1 million. Capital expenditures were $0.9 million in the six months ended December 31, 2020 compared to $1.1 million in the same period in fiscal 2020. We sold our New Windsor manufacturing facility for $12.3 million in the six months ended December 31, 2019, which was the primary contributing factor to the decrease in cash flow from investing activities from fiscal 2020 to fiscal 2021.

 

We used $2.6 million of cash related to financing activities in the six months ended December 31, 2020 compared to $31.8 million in the six months ended December 31, 2019. The $29.2 million change in cash flow was primarily the net result of payments of long-term debt in excess of borrowings which was primarily driven by cash flow from operations and cash flow from investments due to the sale of the New Windsor facility.

 

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

 

Off-Balance Sheet Arrangements

 

We have no financial instruments with off-balance sheet risk and have no off-balance sheet arrangements.

 

Cash Dividends

 

In January 2021, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable February 9, 2021 to shareholders of record as of February 1, 2021. The indicated annual cash dividend rate for fiscal 2021 is $0.20 per share. The Board of Directors has adopted a policy regarding dividends which indicates that dividends will be determined by the Board of Directors in its discretion based upon its evaluation of earnings, cash flow requirements, financial condition, debt levels, stock repurchases, future business developments and opportunities, and other factors deemed relevant.

 

Critical Accounting Policies and Estimates

 

A summary of our significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2020 Annual Report on Form 10-K. 

 

Page 29

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Except for the broad effects of the COVID-19 pandemic as a result of its negative impact on the global economy and major financial markets, there have been no material changes in our exposure to market risk since June 30, 2020. Additional information can be found in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, which appears on page 12 of the Annual Report on Form 10-K for the fiscal year ended June 30, 2020.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

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

 

We conducted, under the supervision of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2020, our disclosure controls and procedures were effective. Management believes that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly presented in all material respects in accordance with GAAP for interim financial statements, and the Company’s Chief Executive Officer and Chief Financial Officer have certified that, based on their knowledge, the condensed consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for each of the periods presented in this report.

 

Changes in Internal Control

 

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 5. OTHER INFORMATION

 

Effective January 26, 2021, the Company entered into Change in Control Agreements and Supplemental Benefits Agreements with each of the following executive officers: James A. Clark, Chief Executive Officer; James E. Galeese, Executive Vice President and Chief Financial Officer; and Thomas A. Caneris, Senior Vice President, Human Resources and General Counsel.

 

The Change in Control Agreements provide that if the executive’s employment terminates during a change in control period (generally defined as the twenty-four months after a change in control) other than in connection with death, disability, “cause” or “good reason,” (each as defined in such agreements), he is entitled to a severance payment equal to a multiple of his then-current base salary plus his target bonus for the severance period. The multiple for Mr. Clark is two and one-half times (2.5x); the multiple for each of Mr. Galeese and Mr. Caneris is two times (2.0x). The agreements provide for continued participation in medical and dental plans, with full COBRA payments to be paid by the Company. The agreements also provide that in the event of a change in control and upon a subsequent qualifying termination of employment, unless the successor company agrees to assume, replace or substitute the executive’s stock options, restricted stock awards, and/or restricted stock unit awards (“RSUs”), such awards shall become vested in full and exercisable in their entirety. The agreements further provide that in the event of a change in control all performance stock units granted to the executive will convert at the target performance level into time-based RSUs vesting in equal installments over three years.

 

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The Supplemental Benefits Agreements provide that if the executive’s employment is terminated by the Company without “cause” or the executive terminates his employment for “good reason” (each as defined in such agreements), at any time outside of a change in control period (generally defined as the twenty-four months after a change in control), the executive is entitled to a severance payment equal to a multiple of the sum of one year of base salary and his annual target bonus. The multiple for Mr. Clark is one and one-half times (1.5x); the multiple for each of Mr. Galeese and Mr. Caneris is one time (1.0x). The agreements provide that if the executive’s employment is terminated by the Company without “cause,” the executive terminates his employment for “good reason” or in the event of the executive’s retirement when the executive satisfies applicable retirement criteria, or in the event of executive’s death or disability: (A) all unvested stock options (other than stock options that may vest upon the achievement of performance conditions) shall immediately and without further action become fully vested; and (B) all unvested stock options that may vest upon the achievement of performance conditions, all unvested restricted stock unit awards, all unvested restricted stock awards and all unvested performance stock unit awards shall continue to vest pursuant to their original vesting schedules. The agreements also provide for continuation of coverage under group health plans maintained by the Company, additional cash COBRA payments for six months (in the case of Mr. Clark only) and non-competition covenants.

 

The description above of the change in control agreements is qualified in its entirety by the Form of Change in Control Agreement filed with this report as Exhibit 10.1 which is incorporated herein by reference. The description above of the supplemental benefits agreements is qualified in its entirety by the Form of Supplemental Benefits Agreement filed with this report as Exhibit 10.2 which is incorporated herein by reference.

 

This information included in this Item 5 is provided pursuant to Form 8-K Item 1.01 and Item 5.02.

 

Page 31

 

ITEM 6.  EXHIBITS

 

Exhibits:

 

10.1 Form of Change in Control Agreement*
   
10.2 Form of Supplemental Benefits Agreement*
   
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 Inline XBRL Instance Document

 

101.SCH Inline XBRL Taxonomy Extension Schema Document

 

101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

104

Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)

 

*Management compensatory agreement

 

Page 32

 

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 Vice President and Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

January 29, 2021