UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_________________________
FORM
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED |
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO ________________. |
Commission File No.
| LSI Industries Inc. |
| (Exact name of registrant as specified in its charter) |
| | | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | | |
| (Address of principal executive offices) | (Zip Code) | |
| ( | ||
| 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 |
| | | |
Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large 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
As of October 29, 2021, there were
LSI INDUSTRIES INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2021
INDEX
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| PART I. Financial Information |
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ITEM 1. |
Financial Statements (Unaudited) |
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Condensed Consolidated Statements of Operations |
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| Condensed Consolidated Statements of Comprehensive Income |
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Condensed Consolidated Balance Sheets |
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| Condensed Consolidated Statements of Shareholders’ Equity |
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Condensed Consolidated Statements of Cash Flows |
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8 |
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Notes to Condensed Consolidated Financial Statements |
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ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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21 |
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ITEM 3. |
Quantitative and Qualitative Disclosures About Market Risk |
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27 |
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ITEM 4. |
Controls and Procedures |
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27 |
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| PART II. Other Information |
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| ITEM 5. |
Other Information |
28 |
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ITEM 6. |
Exhibits |
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28 |
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| Signatures |
29 |
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended |
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| September 30 |
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| (In thousands, except per share data) |
2021 |
2020 |
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| Net Sales |
$ | $ | ||||||
| Cost of products and services sold |
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| Restructuring costs |
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| Gross profit |
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| Selling and administrative expenses |
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| Operating income |
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| Interest (income) |
( |
) | ||||||
| Interest expense |
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| Other expense (income) |
( |
) | ||||||
| Income before income taxes |
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| Income tax expense |
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| Net income |
$ | $ | ||||||
| Earnings per common share (see Note 5) |
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| Basic |
$ | $ | ||||||
| Diluted |
$ | $ | ||||||
| Weighted average common shares outstanding |
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| Basic |
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| Diluted |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Three Months Ended |
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| September 30 |
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| (In thousands) |
2021 |
2020 |
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| Net Income |
$ | $ | ||||||
| Foreign currency translation adjustment |
( |
) | ||||||
| Comprehensive Income |
$ | $ | ||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, | June 30, | |||||||
| (In thousands, except shares) | 2021 | 2021 | ||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, less allowance for credit losses of and , respectively | ||||||||
| Inventories | ||||||||
| Refundable income taxes | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property, Plant and Equipment, at cost | ||||||||
| Land | ||||||||
| Buildings | ||||||||
| Machinery and equipment | ||||||||
| Buildings under finance leases | ||||||||
| Construction in progress | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Net property, plant and equipment | ||||||||
| Goodwill | ||||||||
| Other intangible assets, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Other long-term assets, net | ||||||||
| Total assets | $ | $ | ||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| (In thousands, except shares) | 2021 | 2021 | ||||||
| LIABILITIES & SHAREHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Current maturities of long-term debt | $ | $ | ||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Total current liabilities | ||||||||
| Long-term debt | ||||||||
| Finance lease liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Other long-term liabilities | ||||||||
| Commitments and contingencies (Note 13) | ||||||||
| Shareholders' Equity | ||||||||
| Preferred shares, par value; Authorized shares, issued | ||||||||
| Common shares, par value; Authorized shares; Outstanding and shares, respectively | ||||||||
| Treasury shares, without par value | ( | ) | ( | ) | ||||
| Deferred compensation plan | ||||||||
| Retained earnings (loss) | ( | ) | ||||||
| Accumulated other comprehensive income | ||||||||
| Total shareholders' equity | ||||||||
| Total liabilities & shareholders' equity | $ | $ | ||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
| Common Shares | Treasury Shares | Key Executive | Accumulated Other | Retained | Total | |||||||||||||||||||||||||||
| Number Of | Number Of | Compensation | Comprehensive | Earnings | Shareholders' | |||||||||||||||||||||||||||
| (In thousands, except per share data) | Shares | Amount | Shares | Amount | Amount | Income (Loss) | (Loss) | Equity | ||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net Income | - | - | ||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | ||||||||||||||||||||||||||||||
| Stock compensation awards | ||||||||||||||||||||||||||||||||
| Restricted stock units issued | ||||||||||||||||||||||||||||||||
| Shares issued for deferred compensation | ||||||||||||||||||||||||||||||||
| Activity of treasury shares, net | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Deferred stock compensation | - | - | ||||||||||||||||||||||||||||||
| Stock compensation expense | - | - | ||||||||||||||||||||||||||||||
| Stock options exercised, net | ||||||||||||||||||||||||||||||||
| Dividends — per share | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Common Shares | Treasury Shares | Key Executive | Accumulated Other | Retained | Total | |||||||||||||||||||||||||||
| Number Of | Number Of | Compensation | Comprehensive | Earnings | Shareholders' | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Amount | Income (Loss) | (Loss) | Equity | |||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
| Net Income | - | - | ||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Stock compensation awards | ||||||||||||||||||||||||||||||||
| Restricted stock units issued, net of shares withheld for tax withholdings | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Shares issued for deferred compensation | ||||||||||||||||||||||||||||||||
| Activity of treasury shares, net | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Deferred stock compensation | - | - | ||||||||||||||||||||||||||||||
| Stock compensation expense | - | - | ||||||||||||||||||||||||||||||
| Stock options exercised, net | ||||||||||||||||||||||||||||||||
| Dividends — per share | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended |
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| September 30 |
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| (In thousands) |
2021 |
2020 |
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| Cash Flows from Operating Activities |
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| Net income |
$ | $ | ||||||
| Non-cash items included in net income |
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| Depreciation and amortization |
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| Deferred income taxes |
( |
) | ||||||
| Deferred compensation plan |
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| Stock compensation expense |
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| Issuance of common shares as compensation |
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| Loss on disposition of fixed assets |
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| Allowance for doubtful accounts |
( |
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| Inventory obsolescence reserve |
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| Changes in certain assets and liabilities |
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| Accounts receivable |
( |
) | ( |
) | ||||
| Inventories |
( |
) | ||||||
| Refundable income taxes |
( |
) | ||||||
| Accounts payable |
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| Accrued expenses and other |
( |
) | ( |
) | ||||
| Customer prepayments |
( |
) | ||||||
| Net cash flows (used in) provided by operating activities |
( |
) | ||||||
| Cash Flows from Investing Activities |
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| Purchases of property, plant and equipment |
( |
) | ( |
) | ||||
| Net cash flows used in investing activities |
( |
) | ( |
) | ||||
| Cash Flows from Financing Activities |
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| Payments of long-term debt |
( |
) | ||||||
| Borrowings of long-term debt |
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| Cash dividends paid |
( |
) | ( |
) | ||||
| Shares withheld for employees' taxes |
( |
) | ( |
) | ||||
| Payments on financing lease obligations |
( |
) | ( |
) | ||||
| Proceeds from stock option exercises |
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| Net cash flows provided by (used in) financing activities |
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| Change related to foreign currency |
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| Increase in cash and cash equivalents |
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| Cash and cash equivalents at beginning of period |
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| Cash and cash equivalents at end of period |
$ | $ | ||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The interim condensed consolidated financial statements are unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the interim financial statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of September 30, 2021, the results of its operations for the three-month periods ended September 30, 2021 and 2020, and its cash flows for the three-month periods ended September 30, 2021 and 2020. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2021 Annual Report on Form 10-K. Financial information as of June 30, 2021 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 2021 Annual Report on Form 10-K.
Revenue Recognition:
The Company recognizes revenue when it satisfies the performance obligation in its customer contracts or purchase orders. Most of the Company’s products have a single performance obligation which is satisfied at a point in time when control is transferred to the customer. Control is generally transferred at time of shipment when title and risk of ownership passes to the customer. For customer contracts with multiple performance obligations, the Company allocates the transaction price and any discounts to each performance obligation based on relative standalone selling prices. Payment terms are typically within 30 to 90 days from the shipping date, depending on the terms with the customer. The Company offers standard warranties that do not represent separate performance obligations.
Installation is a separate performance obligation, except for the Company’s digital signage products. For digital signage products, installation is not a separate performance obligation as the product and installation is the combined item promised in digital signage contracts. The Company is not always responsible for installation of products it sells and has no post-installation responsibilities other than standard warranties.
A number of the Company's display solutions and select lighting products are 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 branded print graphics |
| ● | Electrical components based on customer specifications |
| ● | Digital signage and related media content |
The Company also offers installation services for its display solutions elements and select lighting products. Installation revenue is recognized over time as the customer simultaneously receives and consumes the benefits provided through the installation process.
For these customized products and installation services, revenue is recognized using a cost-based input method: recognizing revenue and gross profit as work is performed based on the relationship between the actual cost incurred and the total estimated cost for the performance obligation.
Disaggregation of Revenue
The Company disaggregates the revenue from contracts with customers by the timing of revenue recognition because the Company believes it best depicts the nature, amount, and timing of its revenue and cash flows. The table below presents a reconciliation of the disaggregation by reportable segments:
| Three Months Ended | ||||||||||||||||
| (In thousands) | September 30, 2021 | September 30, 2020 | ||||||||||||||
| Lighting Segment | Display Solutions Segment | Lighting Segment | Display Solutions Segment | |||||||||||||
| Timing of revenue recognition | ||||||||||||||||
| Products and services transferred at a point in time | $ | $ | $ | $ | ||||||||||||
| Products and services transferred over time | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Three Months Ended | ||||||||||||||||
| September 30, 2021 | September 30, 2020 | |||||||||||||||
| Lighting Segment | Display Solutions Segment | Lighting Segment | Display Solutions Segment | |||||||||||||
| Type of Product and Services | ||||||||||||||||
| LED lighting, digital signage solutions, electronic circuit boards | $ | $ | $ | $ | ||||||||||||
| Poles, other display solution elements | ||||||||||||||||
| Project management, installation services, shipping and handling | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
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, 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.
In March 2020 and January 2021, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and ASU 2021-01, “Reference Rate Reform: Scope,” respectively. Together, the ASUs provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures, if adopted.
NOTE 3 — ACQUISITION OF JSI STORE FIXTURES
On May 21, 2021, the Company acquired
The Company accounted for this transaction as a business combination. The Company has preliminarily allocated the purchase price of approximately $
| (In thousands) | ||||
| Cash and cash equivalents | $ | |||
| Accounts receivable, net | ||||
| Inventories | ||||
| Property, plant and equipment | ||||
| Other assets | ||||
| Intangible assets | ||||
| Accounts payable | ( | ) | ||
| Accrued liabilities | ( | ) | ||
| Deferred tax liability | ( | ) | ||
| Identifiable assets | ||||
| Goodwill | ||||
| Net purchase consideration | $ |
The gross amount of accounts receivable is $
Goodwill recorded from the acquisition of JSI is attributable to the impact of the positive cash flow from JSI in addition to expected synergies from the business combination. The intangible assets include amounts recognized for the fair value of the trade name, technology assets, non-compete agreements and customer relationships. The fair value of the intangible assets was determined based upon the income (discounted cash flow) approach. The following table presents the details of the intangible assets acquired at the date of acquisition:
| Estimated | Estimated Useful | |||||||
| (In thousands) | Fair Value | Life (Years) | ||||||
| Tradename | $ | Indefinite life | ||||||
| Technology asset | ||||||||
| Non-compete | ||||||||
| Customer relationship | ||||||||
| $ | ||||||||
The fair market value write-up of the property, plant, and equipment totaled $
Pro Forma Impact of the Acquisition of JSI (unaudited)
The following table represents unaudited pro forma results of operations and gives effect to the acquisition of JSI as if the transaction had occurred on July 1, 2019. The unaudited pro forma results of operations have been prepared for comparative purposes only and are not necessarily indicative of what would have occurred had the business combination been completed at the beginning of the period or the results that may occur in the future. Furthermore, the unaudited pro forma financial information does not reflect the impact of any synergies or operating efficiencies resulting from the acquisition of JSI.
The unaudited pro forma financial information for the twelve months ended June 30, 2021 and June 30, 2020 is prepared using the acquisition method of accounting and has been adjusted to give effect to the pro forma events that are: (1) directly attributable to the acquisition; (2) factually supportable; and (3) expected to have a continuing impact on the combined results. The unaudited pro forma operating income of $
| Twelve Months Ended | ||||||||
| June 30 | ||||||||
| (In thousands, unaudited) | 2021 | 2020 | ||||||
| Net sales | $ | $ | ||||||
| Gross profit | $ | $ | ||||||
| Operating income | $ | $ | ||||||
NOTE 4 - 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 operating segments are Lighting and Display Solutions (formerly known as the Graphics Segment), with one executive team under the organizational structure reporting directly to the CODM with responsibilities for managing each segment. Corporate and Eliminations, which captures the Company’s corporate administrative activities, is also reported in the segment information.
The Lighting Segment includes non-residential outdoor and indoor lighting utilizing LED light sources that have been fabricated and assembled for the Company’s markets, primarily the petroleum/convenience markets, parking lot and garage markets, quick-service restaurant market, retail and grocery store markets, the automotive market, the warehouse market, and the sports complex market. The Company also offers a variety of lighting controls to complement its lighting fixtures which include sensors, photocontrols, dimmers, motion detection and Bluetooth systems. The Company also services lighting product customers through the commercial 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 Company acquired JSI in the fourth quarter of fiscal 2021, and consolidated it into the former Graphics Segment, which has been rebranded as the Display Solutions Segment, to more closely align the Company’s comprehensive product offering with the markets it serves. The Display Solutions Segment manufactures, sells and installs exterior and interior visual image and display elements, including printed graphics, structural graphics, digital signage, menu board systems, display fixtures, refrigerated displays, and custom display elements. These products are used in visual image programs in several markets including the petroleum/convenience markets, parking lot and garage markets, quick-service restaurant market, retail and grocery store markets, the automotive market, the warehouse market, and the sports complex market. The Display Solutions Segment implements, installs and provides program management services related to products sold by the Display Solutions Segment and by the Lighting Segment.
The Company’s corporate administration activities are reported in the Corporate and Eliminations line item. These activities primarily include intercompany profit in inventory eliminations, expense related to certain corporate officers and support staff, the Company’s internal audit staff, expense related to the Company’s Board of Directors, equity compensation expense for various equity awards granted to corporate administration employees, certain consulting expenses, investor relations activities, and a portion of the Company’s legal, auditing and professional fee expenses. Corporate identifiable assets primarily consist of cash, invested cash (if any), refundable income taxes (if any), and deferred income taxes.
customer program in the Display Solutions Segment represents $
Summarized financial information for the Company’s operating segments is provided for the indicated periods and as of September 30, 2021 and September 30, 2020:
| Three Months Ended | ||||||||
| (In thousands) | September 30 | |||||||
| 2021 | 2020 | |||||||
| Net Sales: | ||||||||
| Lighting Segment | $ | $ | ||||||
| Display Solutions Segment | ||||||||
| $ | $ | |||||||
| Operating Income (Loss): | ||||||||
| Lighting Segment | $ | $ | ||||||
| Display Solutions Segment | ||||||||
| Corporate and Eliminations | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| Capital Expenditures: | ||||||||
| Lighting Segment | $ | $ | ||||||
| Display Solutions Segment | ||||||||
| Corporate and Eliminations | ( | ) | ||||||
| $ | $ | |||||||
| Depreciation and Amortization: | ||||||||
| Lighting Segment | $ | $ | ||||||
| Display Solutions Segment | ||||||||
| Corporate and Eliminations | ||||||||
| $ | $ | |||||||
| September 30, | June 30, | |||||||
| Identifiable Assets: | ||||||||
| Lighting Segment | $ | $ | ||||||
| Display Solutions Segment | ||||||||
| Corporate and Eliminations | ||||||||
| $ | $ | |||||||
The segment net sales reported above represent sales to external customers. Segment operating income, which is used in management’s evaluation of segment performance, represents net sales less all operating expenses. Identifiable assets are those assets used by each segment in its operations.
The Company records a
| Three Months Ended | ||||||||
| (In thousands) | September 30 | |||||||
| 2021 | 2020 | |||||||
| Lighting Segment inter-segment net sales | $ | $ | ||||||
| Display Solutions Segment inter-segment net sales | $ | $ | ||||||
The Company’s operations are located solely within North America. As a result, the geographic distribution of the Company’s net sales and long-lived assets originate within North America.
NOTE 5 - EARNINGS PER COMMON SHARE
The following table presents the amounts used to compute basic and diluted earnings per common share, as well as the effect of dilutive potential common shares on weighted average shares outstanding (in thousands, except per share data):
| Three Months Ended | ||||||||
| September 30 | ||||||||
| 2021 | 2020 | |||||||
| BASIC EARNINGS PER SHARE | ||||||||
| Net income | $ | $ | ||||||
| Weighted average shares outstanding during the period, net of treasury shares | ||||||||
| Weighted average vested restricted stock units outstanding | ||||||||
| Weighted average shares outstanding in the Deferred Compensation Plan during the period | ||||||||
| Weighted average shares outstanding | ||||||||
| Basic income per share | $ | $ | ||||||
| DILUTED EARNINGS PER SHARE | ||||||||
| Net income | $ | $ | ||||||
| Weighted average shares outstanding: | ||||||||
| Basic | ||||||||
| Effect of dilutive securities (a): | ||||||||
| Impact of common shares to be issued under stock option plans, and contingently issuable shares, if any | ||||||||
| Weighted average shares outstanding | ||||||||
| Diluted income per share | $ | $ | ||||||
| Anti-dilutive securities (b) | ||||||||
| (a) | Calculated using the “Treasury Stock” method as if dilutive securities were exercised and the funds were used to purchase common shares at the average market price during the period. |
| (b) | Anti-dilutive securities were excluded from the computation of diluted net income per share for the three months ended September 30, 2021 and September 30, 2020 because the exercise price was greater than the average fair market price of the common shares or because the assumed proceeds from the award’s exercise or vesting was greater than the average fair market price of the common shares. |
NOTE 6 – INVENTORIES, NET
The following information is provided as of the dates indicated:
| September 30, |
June 30, |
|||||||
| (In thousands) |
2021 |
2021 |
||||||
| Inventories: |
||||||||
| Raw materials |
$ | $ | ||||||
| Work-in-progress |
||||||||
| Finished goods |
||||||||
| Total Inventories |
$ | $ | ||||||
NOTE 7 - ACCRUED EXPENSES
The following information is provided as of the dates indicated:
| September 30, |
June 30, |
|||||||
| (In thousands) |
2021 |
2021 |
||||||
| Accrued Expenses: |
||||||||
| Customer prepayments |
$ | $ | ||||||
| Compensation and benefits |
||||||||
| Accrued warranty |
||||||||
| Operating lease liabilities |
||||||||
| Accrued sales commissions |
||||||||
| Accrued FICA |
||||||||
| Finance lease liabilities |
||||||||
| Accrued income tax |
||||||||
| Other accrued expenses |
||||||||
| Total Accrued Expenses |
$ | $ | ||||||
NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment. The Company may first assess qualitative factors in order to determine if goodwill and indefinite-lived intangible assets are impaired. If through the qualitative assessment it is determined that it is more likely than not that goodwill and indefinite-lived assets are not impaired, no further testing is required. If it is determined more likely than not that goodwill and indefinite-lived assets are impaired, or if the Company elects not to first assess qualitative factors, the Company’s impairment testing continues with the estimation of the fair value of the reporting unit using a combination of a market approach and an income (discounted cash flow) approach, at the reporting unit level. The estimation of the fair value of reporting unit requires significant management judgment with respect to revenue and expense growth rates, changes in working capital and the selection and use of an appropriate discount rate. The estimates of the fair value of reporting units are based on the best information available as of the date of the assessment. The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease an impairment charge. Company management uses its judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as adverse business conditions, economic factors and technological change or competitive activities may signal that an asset has become impaired.
The Company identified its reporting units in conjunction with its annual goodwill impairment testing. Prior to the acquisition of JSI, the Company had reporting units that contain goodwill. One reporting unit is within the Lighting Segment and reporting unit is within the Display Solutions Segment. The tradename intangible asset has an indefinite life and is also tested separately on an annual basis. The Company relies upon a number of factors, judgments and estimates when conducting its impairment testing including, but not limited to, the Company’s stock price, operating results, forecasts, anticipated future cash flows and marketplace data. There are inherent uncertainties related to these factors and judgments in applying them to the analysis of goodwill impairment.
The following table presents information about the Company's goodwill on the dates or for the periods indicated:
| (In thousands) | Display | |||||||||||
| Lighting | Solutions | |||||||||||
| Segment | Segment | Total | ||||||||||
| Balance as of September 30, 2021 | ||||||||||||
| Goodwill | $ | $ | $ | |||||||||
| Accumulated impairment losses | ( | ) | ( | ) | ( | ) | ||||||
| Goodwill, net as of September 30, 2021 | $ | $ | $ | |||||||||
| Balance as of June 30, 2021 | ||||||||||||
| Goodwill | $ | $ | $ | |||||||||
| Goodwill acquired | ||||||||||||
| Accumulated impairment losses | ( | ) | ( | ) | ( | ) | ||||||
| Goodwill, net as of June 30, 2021 | $ | $ | $ | |||||||||
The gross carrying amount and accumulated amortization by each major intangible asset class is as follows:
| September 30, 2021 | ||||||||||||
| (In thousands) | Gross | |||||||||||
| Carrying | Accumulated | Net | ||||||||||
| Amount | Amortization | Amount | ||||||||||
| Amortized Intangible Assets | ||||||||||||
| Customer relationships | $ | $ | $ | |||||||||
| Patents | ||||||||||||
| LED technology firmware, software | ||||||||||||
| Trade name | ||||||||||||
| Non-compete | ||||||||||||
| Total Amortized Intangible Assets | ||||||||||||
| Indefinite-lived Intangible Assets | ||||||||||||
| Trademarks and trade names | - | |||||||||||
| Total indefinite-lived Intangible Assets | - | |||||||||||
| Total Other Intangible Assets | $ | $ | $ | |||||||||
| June 30, 2021 | ||||||||||||
| (In thousands) | Gross | |||||||||||
| Carrying | Accumulated | Net | ||||||||||
| Amount | Amortization | Amount | ||||||||||
| Amortized Intangible Assets | ||||||||||||
| Customer relationships | $ | $ | $ | |||||||||
| Patents | ||||||||||||
| LED technology firmware, software | ||||||||||||
| Trade name | ||||||||||||
| Non-compete | ||||||||||||
| Total Amortized Intangible Assets | ||||||||||||
| Indefinite-lived Intangible Assets | ||||||||||||
| Trademarks and trade names | - | |||||||||||
| Total indefinite-lived Intangible Assets | - | |||||||||||
| Total Other Intangible Assets | $ | $ | $ | |||||||||
| Three Months Ended | ||||||||
| September 30 | ||||||||
| (In thousands) | 2021 | 2020 | ||||||
| Amortization Expense of Other Intangible Assets | $ | $ | ||||||
The Company expects to record annual amortization expense as follows:
| (In thousands) | ||||
| 2022 | $ | |||
| 2023 | $ | |||
| 2024 | $ | |||
| 2025 | $ | |||
| 2026 | $ | |||
| After 2026 | $ |
NOTE 9 - DEBT
The Company’s long-term debt as of September 30, 2021 and June 30, 2021 consisted of the following:
| September 30, | June 30, | |||||||
| (In thousands) | 2021 | 2021 | ||||||
| Secured line of credit | $ | $ | ||||||
| Term loan, net of debt issuance costs of and , respectively | ||||||||
| Total debt | ||||||||
| Less: amounts due within one year | ||||||||
| Total amounts due after one year, net | $ | $ | ||||||
In September 2021, the Company amended its existing $
The Company is in compliance with all of its loan covenants as of September 30, 2021.
NOTE 10 - CASH DIVIDENDS
The Company paid cash dividends of $
NOTE 11 – 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 equates to
There were
NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION
| Three Months Ended | ||||||||
| (In thousands) | September 30 | |||||||
| 2021 | 2020 | |||||||
| Cash Payments: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Non-cash investing and financing activities | ||||||||
| Issuance of common shares as compensation | $ | $ | ||||||
| Issuance of common shares to fund deferred compensation plan | $ | $ | ||||||
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Company is party to various negotiations, customer bankruptcies, and legal proceedings arising in the normal course of business. The Company provides reserves for these matters when a loss is probable and reasonably estimable. The Company does not disclose a range of potential loss because the likelihood of such a loss is remote. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations, cash flows or liquidity.
The Company may occasionally issue a standby letter of credit in favor of third parties. As of September 30, 2021, there were
NOTE 14 – SEVERANCE COSTS
The activity in the Company’s accrued severance liability is as follows for the periods indicated:
| Three Months | Three Months | Fiscal Year | ||||||||||
| Ended | Ended | Ended | ||||||||||
| September 30, | September 30, | June 30, | ||||||||||
| (In thousands) | 2021 | 2020 | 2021 | |||||||||
| Balance at beginning of period | $ | $ | $ | |||||||||
| Accrual of expense | ||||||||||||
| Payments | ( | ) | ( | ) | ( | ) | ||||||
| Balance at end of period | $ | $ | $ | |||||||||
NOTE 15 - LEASES
The Company leases certain manufacturing facilities along with a small office space, several forklifts, several small tooling items and various items of office equipment. The Company also acquired buildings, machinery and forklift leases with the acquisition of JSI, as well as one sublease. All but two of the Company’s leases are operating leases. Leases have a remaining term of to years some of which have an option to renew. The Company does not assume renewals in determining the lease term unless the renewals are deemed reasonably certain. The lease agreements do not contain any material residual guarantees or material variable lease payments.
The Company has periodically entered into short-term operating leases with an initial term of twelve months or less. The Company elected not to record these leases on the balance sheet. For the three months ended September 30, 2021 and 2020, the rent expense for these leases is immaterial.
The Company has certain leases that contain lease and non-lease components and has elected to utilize the practical expedient to account for these components together as a single lease component.
Lease expense is recognized on a straight-line basis over the lease term. The Company used its incremental borrowing rate when determining the present value of lease payments.
| Three Months Ended | ||||||||
| September 30 | ||||||||
| (In thousands) | 2021 | 2020 | ||||||
| Operating lease cost | $ | $ | ||||||
| Financing lease cost: | ||||||||
| Amortization of right of use assets | ||||||||
| Interest on lease liabilities | ||||||||
| Variable lease cost | ||||||||
| Sublease income | ( | ) | ||||||
| Total lease cost | $ | $ | ||||||
| Three Months Ended | ||||||||
| September 30 | ||||||||
| (In thousands) | 2021 | 2020 | ||||||
| Cash flows from operating leases | ||||||||
| Fixed payments - operating cash flows | $ | $ | ||||||
| Liability reduction - operating cash flows | $ | $ | ||||||
| Cash flows from finance leases | ||||||||
| Interest - operating cash flows | $ | $ | ||||||
| Repayments of principal portion - financing cash flows | $ | $ | ||||||
Operating Leases:
| September 30, | June 30, | |||||||
| 2021 | 2021 | |||||||
| Total operating right-of-use assets | $ | $ | ||||||
| Accrued expenses (Current liabilities) | $ | $ | ||||||
| Long-term operating lease liability | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Weighted Average remaining Lease Term (in years) | ||||||||
| Weighted Average Discount Rate | % | % | ||||||
Finance Leases:
|
| September 30, | June 30, | ||||||
| 2021 | 2021 | |||||||
| Buildings under finance leases | $ | $ | ||||||
| Equipment under finance leases | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Total finance lease assets, net | $ | $ | ||||||
| Accrued expenses (Current liabilities) | $ | $ | ||||||
| Long-term finance lease liability | ||||||||
| Total finance lease liabilities | $ | $ | ||||||
| Weighted Average remaining Lease Term (in years) | ||||||||
| Weighted Average Discount Rate | % | % | ||||||
| Maturities of Lease Liability: | Operating Lease Liabilities | Finance Lease Liabilities | Operating Subleases | Net Lease Commitments | ||||||||||||
| 2022 | $ | $ | $ | ( | ) | $ | ||||||||||
| 2023 | ( | ) | ||||||||||||||
| 2024 | ( | ) | ||||||||||||||
| 2025 | ( | ) | ||||||||||||||
| 2026 | ||||||||||||||||
| Thereafter | ||||||||||||||||
| Total lease payments | $ | $ | $ | ( | ) | $ | ||||||||||
| Less: Interest | ( | ) | ( | ) | ( | ) | ||||||||||
| Present Value of Lease Liabilities | $ | $ | $ | |||||||||||||
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 allowed the Company to carry back a federal net operating loss to prior tax years, offset taxable income in those earlier tax years and request a refund of income taxes that were paid at a higher statutory tax rate. The Company recognized tax benefits of $
| Three Months Ended | ||||||||
| September 30 | ||||||||
| 2021 | 2020 | |||||||
| Reconciliation of effective tax rate: | ||||||||
| Provision for income taxes at the anticipated annual tax rate | % | % | ||||||
| Uncertain tax positions | ||||||||
| Tax rate changes | ( | ) | ||||||
| Share-based compensation | ( | ) | ||||||
| Effective tax rate | % | % | ||||||
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, 2021, and our financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).
Our condensed consolidated financial statements, accompanying notes and the “Safe Harbor” Statement, each as appearing earlier in this report, should be referred to in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Summary of Consolidated Results
| Net Sales by Business Segment |
||||||||
| Three Months Ended |
||||||||
| September 30 |
||||||||
| (In thousands) |
2021 |
2020 |
||||||
| Lighting Segment |
$ | 51,260 | $ | 45,405 | ||||
| Display Solutions Segment |
55,137 | 24,601 | ||||||
| $ | 106,397 | $ | 70,006 | |||||
| Operating Income (Loss) by Business Segment |
||||||||
| Three Months Ended |
||||||||
| September 30 |
||||||||
| (In thousands) |
2021 |
2020 |
||||||
| Lighting Segment |
$ | 4,339 | $ | 3,588 | ||||
| Display Solutions Segment |
3,749 | 1,823 | ||||||
| Corporate and Eliminations |
(3,644 | ) | (3,209 | ) | ||||
| $ | 4,444 | $ | 2,202 | |||||
Net sales of $106.4 million for the three months ended September 30, 2021 increased $36.4 million or 52% as compared to net sales of $70.0 million for the three months ended September 30, 2020. Net sales were driven by increased net sales of the Display Solutions Segment (an increase of $30.5 million or 124%) and increased net sales of the Lighting Segment (an increase of $5.9 million or 13%).
Operating income of $4.4 million for the three months ended September 30, 2021 represents a $2.2 million increase from operating income of $2.2 million in the three months ended September 30, 2020. Adjusted operating income, a Non-GAAP measure, was $5.0 million in the three months ended September 30, 2021 compared to $2.7 million in the three months ended September 30, 2020. Refer to “Non-GAAP Financial Measures” below for a reconciliation of Non-GAAP financial measures to U.S. GAAP measures.
Non-GAAP Financial Measures
We believe it is appropriate to evaluate our performance after making adjustments to the as-reported U.S. GAAP operating income, net income, and earnings per share. Adjusted operating income, net income and earnings per share, which exclude the impact of stock compensation expense and restructuring 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, Net Debt and Organic Net Sales. We believe that these adjusted supplemental measures are useful in assessing the operating performance of our business. These supplemental measures are used by our management, including our chief operating decision maker, to evaluate business results. Although the impacts of some of these items have been recognized in prior periods and could recur in future periods, we exclude these items because they provide greater comparability and enhanced visibility into our results of operations. These non-GAAP measures may be different from non-GAAP measures used by other companies. In addition, the non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations, in that they do not reflect all amounts associated with our results as determined in accordance with U.S. GAAP. Therefore, these measures should be used only to evaluate our results in conjunction with corresponding GAAP measures. Below is a reconciliation of these Non-GAAP measures to operating income, net income, and earnings per share for the periods indicated along with the calculation of EBITDA and Adjusted EBITDA, Free Cash Flow, Net Debt and Organic Net Sales.
| Reconciliation of operating income to adjusted operating income: |
||||||||
| Three Months Ended |
||||||||
| September 30 |
||||||||
| (In thousands) |
2021 |
2020 |
||||||
| Operating Income as reported |
$ | 4,444 | $ | 2,202 | ||||
| Stock compensation expense |
556 | 505 | ||||||
| Restructuring costs |
- | 3 | ||||||
| Adjusted Operating Income |
$ | 5,000 | $ | 2,710 | ||||
| Reconciliation of net income to adjusted net income |
||||||||||||||||
| Three Months Ended |
||||||||||||||||
| September 30 |
||||||||||||||||
| (In thousands, except per share data) |
2021 |
2020 |
||||||||||||||
| Diluted EPS |
Diluted EPS |
|||||||||||||||
| Net Income as reported |
$ | 3,133 | $ | 0.11 | $ | 1,990 | $ | 0.07 | ||||||||
| Stock compensation expense |
407 | (1) | 0.01 | 380 | (2) | 0.01 | ||||||||||
| (3) | ||||||||||||||||
| Restructuring costs |
- | - | 2 | - | ||||||||||||
| Tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes |
- | - | (297 | ) | (0.01 | ) | ||||||||||
| Net Income adjusted |
$ | 3,540 | $ | 0.13 | $ | 2,075 | $ | 0.08 | ||||||||
The following represents the income tax effects of the adjustments in the tables above, which were calculated using the estimated combined U.S., Canada and Mexico effective income tax rates for the periods indicated (in thousands):
(1) $149
(2) $125
(3) $1
The reconciliation of reported net income and earnings per share to adjusted net income and earnings per share may not agree due to rounding differences and due to the difference between basic and dilutive weighted average shares outstanding in the computation of earnings per share.
| Reconciliation of operating income to EBITDA and Adjusted EBITDA |
||||||||
| Three Months Ended |
||||||||
| September 30 |
||||||||
| (In thousands) |
2021 |
2020 |
||||||
| Operating Income as reported |
$ | 4,444 | $ | 2,202 | ||||
| Depreciation and Amortization |
2,563 | 2,033 | ||||||
| EBITDA |
$ | 7,007 | $ | 4,235 | ||||
| Stock compensation expense |
556 | 505 | ||||||
| Restructuring costs |
- | 3 | ||||||
| Adjusted EBITDA |
$ | 7,563 | $ | 4,743 | ||||
| Reconciliation of cash flow from operations to free cash flow |
||||||||
| Three Months Ended |
||||||||
| September 30 |
||||||||
| (In thousands) |
2021 |
2020 |
||||||
| Cash Flow from Operations |
$ | (7,889 | ) | $ | 7,639 | |||
| Capital expenditures |
(297 | ) | (405 | ) | ||||
| Free Cash Flow |
$ | (8,186 | ) | $ | 7,234 | |||
| Reconciliation of Net Debt |
||||||||
| September 30, |
June 30, |
|||||||
| (In thousands) |
2021 |
2021 |
||||||
| Current portion and long-term debt as reported |
$ | 78,271 | $ | 68,178 | ||||
| Less: |
||||||||
| Cash and cash equivalents as reported |
2,570 | 2,282 | ||||||
| Net Debt |
$ | 75,701 | $ | 65,896 | ||||
| Reconciliation of net sales to organic net sales |
||||||||
| Three Months Ended |
||||||||
| September 30 |
||||||||
| (In thousands) |
2021 |
2020 |
||||||
| Lighting Segment |
$ | 51,260 | $ | 45,405 | ||||
| Display Solutions Segment |
55,137 | 24,601 | ||||||
| Total net sales |
106,397 | 70,006 | ||||||
| Less: |
||||||||
| JSI |
23,347 | - | ||||||
| Total organic net sales |
$ | 83,050 | $ | 70,006 | ||||
Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2020
| Lighting Segment |
||||||||
| Three Months Ended |
||||||||
| September 30 |
||||||||
| (In thousands) |
2021 |
2020 |
||||||
| Net Sales |
$ | 51,260 | $ | 45,405 | ||||
| Gross Profit |
$ | 15,457 | $ | 13,826 | ||||
| Operating Income |
$ | 4,339 | $ | 3,588 | ||||
Lighting Segment net sales of $51.3 million in the three months ended September 30, 2021 increased 13% from net sales of $45.4 million in the same period in fiscal 2021. The increase is due to an increase in project business with sales improving in parking, automotive and warehousing verticals.
Gross profit of $15.5 million in the three months ended September 30, 2021 increased $1.6 million or 12% from the same period of fiscal 2021. Gross profit as a percentage of net sales was 30.2% in the three months ended September 30, 2021 compared to 30.5% in the same period of fiscal 2021. Gross profit as a percentage of net sales has been impacted by material and supply chain cost increases. We were successful in adjusting selling prices and driving productivity to mitigate these cost increases.
Operating expenses of $11.1 million in the three months ended September 30, 2021 increased $0.9 million from the same period of fiscal 2021, primarily driven by higher commission expense as a result of higher sales and non-recurring cost savings in the prior year quarter.
Lighting Segment operating income of $4.3 million for the three months ended September 30, 2021 increased $0.7 million from operating income of $3.6 million in the same period of fiscal 2021 primarily driven by sales volume.
| Display Solutions Segment |
||||||||
| Three Months Ended |
||||||||
| September 30 |
||||||||
| (In thousands) |
2021 |
2020 |
||||||
| Net Sales |
$ | 55,137 | $ | 24,601 | ||||
| Gross Profit |
$ | 9,036 | $ | 4,442 | ||||
| Operating Income |
$ | 3,749 | $ | 1,823 | ||||
Display Solutions Segment net sales of $55.1 million in the three months ended September 30, 2021 increased $30.5 million or 124% from net sales of $24.6 million in the same period in fiscal 2021. The increase is driven by the inclusion of three months of results for JSI and growth in our Quick-Service Restaurants vertical.
Gross profit of $9.0 million in the three months ended September 30, 2021 increased $4.6 million or 103% from the same period of fiscal 2021. Gross profit as a percentage of net sales in the three months ended September 30, 2021 was 16.4% compared to 18.1% in the same period of fiscal 2021. We secured customer acceptance for price adjustments on national, multi-site Display Solutions programs, some of which are multi-year, but due to the size and significance of these program decisions, the duration of the pricing discussions limited price realization in the first quarter. Higher level pricing will be realized throughout the second quarter and more aligned with input costs by the end of the second quarter.
Operating expenses of $5.3 million in the three months ended September 30, 2021 increased $2.7 million from $2.6 million in the same period of fiscal 2021, primarily driven by the inclusion of three months of results for JSI and non-recurring cost savings in the prior year quarter.
Display Solutions Segment operating income of $3.7 million in the three months ended September 30, 2021 increased $1.9 million from operating income of $1.8 million in the same period of fiscal 2021. The increase of $1.9 million was primarily driven by an increase in sales.
| Corporate and Eliminations |
||||||||
| Three Months Ended |
||||||||
| September 30 |
||||||||
| (In thousands) |
2021 |
2020 |
||||||
| Gross Profit |
$ | 17 | $ | 4 | ||||
| Operating (Loss) |
$ | (3,644 | ) | $ | (3,209 | ) | ||
The gross profit relates to the change in the intercompany profit in inventory elimination.
Operating expenses of $3.7 million in the three months ended September 30, 2021 increased $0.4 million or 14% from the same period of fiscal 2021. The net increase was primarily due to non-recurring cost savings in the prior year quarter.
Consolidated Results
We reported $0.2 million and $0.1 million of net interest expense in the three months ended September 30, 2021 and September 30, 2020, respectively. We also recorded other expense/(income) of $0.1 million and ($0.1) million in the three months ended September 30, 2021 and September 30, 2020, respectively, both of which is related to net foreign exchange currency transaction losses and gains through our Mexican and Canadian subsidiaries.
The $1.0 million of income tax expense in the three months ended September 30, 2021 represents a consolidated effective tax rate of 24.2%. The $0.3 million of income tax expense in the three months ended September 30, 2020 represents a consolidated effective tax rate of 11.6% and was driven by a favorable deferred tax asset adjustment related to a net operating loss carryback from the CARES Act.
We reported net income of $3.1 million in the three months ended September 30, 2021 compared to net income of $2.0 million in the three months ended September 30, 2020. Non-GAAP adjusted net income was $3.5 million for the three months ended September 30, 2021 compared to adjusted net income of $2.1 million for the three months ended September 30, 2020 (Refer to the Non-GAAP tables above). The increase in Non-GAAP adjusted net income is primarily the net result of an increase in sales. Diluted earnings per share of $0.11 was reported in the three months ended September 30, 2021 as compared to $0.07 diluted earnings per share in the same period of fiscal 2021. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the three months ended September 30, 2021 were 27,743,000 shares compared to 26,968,000 shares in the same period last year.
Liquidity and Capital Resources
We consider our level of cash on hand, borrowing capacity, current ratio and working capital levels to be our most important measures of short-term liquidity. For long-term liquidity indicators, we believe our ratio of long-term debt to equity and our historical levels of net cash flows from operating activities to be the most important measures.
At September 30, 2021, we had working capital of $67.1 million compared to $54.1 million at June 30, 2021. The ratio of current assets to current liabilities was 1.91 to 1 compared to a ratio of 1.76 to 1 at June 30, 2021. The increase in working capital from June 30, 2021 to September 30, 2021 is primarily driven by a $9.0 million increase in net inventory, $9.0 million decrease in accrued expenses and a $6.2 million increase in net accounts receivable, partially offset by a $8.3 million increase in accounts payable and a $3.6 million increase in current maturities of long-term debt.
Net accounts receivable was $63.9 million and $57.7 million at September 30, 2021 and June 30, 2021, respectively. DSO decreased to 53 days at September 30, 2021 from 56 days at June 30, 2021.
Net inventories of $67.9 million at September 30, 2021 increased $9.0 million from $58.9 million at June 30, 2021. The increase of $9.0 million is the result of an increase in gross inventory of $9.1 million and an increase in obsolescence reserves of $0.1 million. Lighting Segment net inventory increased $6.8 million, in anticipation of an increase in market demand and ongoing supply chain challenges. Net inventory in the Display Solutions Segment increased $2.0 million.
Cash generated from operations and borrowing capacity under our line of credit is our primary source of liquidity. In September 2021, we amended our existing $100 million secured line of credit, to a $25 million term loan and $75 million remaining as a secured revolving line of credit. Both facilities expire in the third quarter of fiscal 2026. As of September 30, 2021, $21.7 million of the credit line was available. We are in compliance with all of our loan covenants. We believe that our $100 million credit facility plus cash flows from operating activities are adequate for operational and capital expenditure needs for the remainder of fiscal 2022. However, as the impact of COVID-19 on the economy and our operations evolves, we will continue to assess our liquidity needs. We also have on file with the SEC a shelf registration statement which allows us to sell any combination of common stock, preferred stock warrants, senior or subordinated debt securities or other securities in one or more offerings if we choose to do so in the future. We expect to maintain the effectiveness of this shelf registration statement for the foreseeable future.
We used $7.9 million of cash from operating activities in the three months ended September 30, 2021 compared to a source of cash of $7.6 million in the three months ended September 30, 2020. The decrease in net cash flows from operating activities is the result of increases in inventory and accounts receivable and decreases in accrued expense and customer prepayments, partially offset by improved earnings and an increase in accounts payable.
We used $0.3 million and $0.4 million of cash related to investing activities in the three months ended September 30, 2021 and September 30, 2020, respectively, all of which were for capital expenditures in both periods.
We had a source of cash of $8.5 million related to financing activities in the three months ended September 30, 2021 compared to a use of cash of $1.3 million in the three months ended September 30, 2020. The $9.8 million change in cash flow was the net result of an increase in working capital, the majority of which was due to the build-up of inventory to ensure product availability, given supply chain challenges.
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 November 2021, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable November 23, 2021 to shareholders of record as of November 15, 2021. The indicated annual cash dividend rate for fiscal 2022 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 2021 Annual Report on Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except for the broad effects of the COVID-19 pandemic as a result of its negative impact on the global economy and major financial markets, there have been no material changes in our exposure to market risk since June 30, 2021. Additional information can be found in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, which appears on page 13 of the Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
We conducted, under the supervision of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2021, our disclosure controls and procedures were effective. Management believes that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly presented in all material respects in accordance with GAAP for interim financial statements, and the Company’s Chief Executive Officer and Chief Financial Officer have certified that, based on their knowledge, the condensed consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for each of the periods presented in this report.
Changes in Internal Control
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits:
| 10.1 |
| 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 |
| 32.2 |
101.INS Inline XBRL Instance Document
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
| 104 |
Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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LSI Industries Inc. |
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By: |
/s/ James A. Clark |
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James A. Clark |
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Chief Executive Officer and President |
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| By: | /s/ James E. Galeese | ||
| James E. Galeese | |||
| Executive Vice President and Chief Financial Officer | |||
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| November 4, 2021 | |||
