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EX-32.2 - EXHIBIT 32.2 - LSI INDUSTRIES INCex32-2.htm
EX-32.1 - EXHIBIT 32.1 - LSI INDUSTRIES INCex32-1.htm
EX-31.2 - EXHIBIT 31.2 - LSI INDUSTRIES INCex31-2.htm
EX-31.1 - EXHIBIT 31.1 - LSI INDUSTRIES INCex31-1.htm

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

X

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017.

 

 

 

 

 

 

 

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

 

 

Commission File No. 0-13375

 

LSI Industries Inc.

 

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

 

10000 Alliance Road

 

Cincinnati, Ohio  45242

 

(513) 793-3200

 

Indicate by checkmark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  

YES    X     NO ____

 

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES    X      NO ____

 

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

 

 

Large accelerated filer [    ]  

 

Accelerated filer [ X ]

 

Non-accelerated filer [    ] 

 

Smaller reporting company [    ]

 

Emerging growth company [   ]

   

 

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

 

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

 

As of May 1, 2017 there were 25,399,626 shares of the Registrant's common stock, no par value per share, outstanding.

 

 
 

 

   

LSI INDUSTRIES INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2017

 

INDEX

 

 

 

Begins on Page

PART I.  Financial Information

  

  

  

  

  

  

  

  

ITEM 1.

Financial Statements (Unaudited)

  

  

  

  

  

  

  

  

  

Condensed Consolidated Statements of Operations

  

3

  

  

Condensed Consolidated Balance Sheets

  

4

  

  

Condensed Consolidated Statements of Cash Flows

  

6

  

  

  

  

  

  

  

Notes to Condensed Consolidated Financial Statements

  

7

  

  

  

  

  

  

ITEM 2.

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

  

27

  

  

  

  

  

  

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

  

42

  

  

  

  

 

  

ITEM 4.

Controls and Procedures

  

42

  

  

  

  

  

PART II.  Other Information

  

  

  

  

  

  

  

  

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

  

43

  

  

  

  

 

  

ITEM 6.

Exhibits

  

43

  

  

  

  

  

Signatures

 

44

 

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995

 

This Form 10-Q contains certain forward-looking statements that are subject to numerous assumptions, risks or uncertainties.  The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements.  Forward-looking statements may be identified by words such as “estimates,” “anticipates,” “projects,” “plans,” “expects,” “intends,” “believes,” “seeks,” “may,” “will,” “should” or the negative versions of those words and similar expressions, and by the context in which they are used.  Such statements, whether expressed or implied, are based upon current expectations of the Company and speak only as of the date made.  Actual results could differ materially from those contained in or implied by such forward-looking statements as a result of a variety of risks and uncertainties over which the Company may have no control.  These risks and uncertainties include, but are not limited to, the impact of competitive products and services, product demand and market acceptance risks, potential costs associated with litigation and regulatory compliance, reliance on key customers, financial difficulties experienced by customers, the cyclical and seasonal nature of our business, the adequacy of reserves and allowances for doubtful accounts, fluctuations in operating results or costs whether as a result of uncertainties inherent in tax and accounting matters or otherwise, unexpected difficulties in integrating acquired businesses, the ability to retain key employees of acquired businesses, unfavorable economic and market conditions, the results of asset impairment assessments and the other risk factors that are identified herein.  You are cautioned to not place undue reliance on these forward-looking statements.  In addition to the factors described in this paragraph, the risk factors identified in our Form 10-K and other filings the Company may make with the SEC constitute risks and uncertainties that may affect the financial performance of the Company and are incorporated herein by reference.  The Company does not undertake and hereby disclaims any duty to update any forward-looking statements to reflect subsequent events or circumstances.

 

 
Page 2

 

   

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

LSI INDUSTRIES INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

   

Three Months Ended

   

Nine Months Ended

 
   

March 31

   

March 31

 

(In thousands, except per share data)

 

2017

   

2016

   

2017

   

2016

 
                                 

Net sales

  $ 78,156     $ 70,740     $ 247,973     $ 241,352  
                                 

Cost of products and services sold

    59,445       54,191       185,877       177,528  
                                 

Restructuring costs

    312       --       1,455       --  
                                 

Gross profit

    18,399       16,549       60,641       63,824  
                                 

Impairment of intangible asset

    479       --       479       --  
                                 

Acquisition Deal Costs

    1,480       --       1,480       --  
                                 

Restructuring costs (gain)

    (1,301

)

    --       (1,091

)

    --  
                                 

Selling and administrative expenses

    18,515       15,817       56,663       51,949  
                                 

Operating income (loss)

    (774

)

    732       3,110       11,875  
                                 

Interest (income)

    (25

)

    (28

)

    (80

)

    (54

)

                                 

Interest expense

    188       9       209       27  
                                 

Income (loss) before income taxes

    (937

)

    751       2,981       11,902  
                                 

Income tax (benefit) expense

    (406

)

    229       677       3,848  
                                 

Net income (loss)

  $ (531

)

  $ 522     $ 2,304     $ 8,054  
                                 
                                 

Earnings (loss) per common share (see Note 4)

                               

Basic

  $ (0.02

)

  $ 0.02     $ 0.09     $ 0.32  

Diluted

  $ (0.02

)

  $ 0.02     $ 0.09     $ 0.32  
                                 
                                 

Weighted average common shares outstanding

                               

Basic

    25,452       25,080       25,346       24,918  

Diluted

    25,452       25,700       25,909       25,494  

 

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

 

 
Page 3

 

 

LSI INDUSTRIES INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

March 31, 

   

June 30,

 
(In thousands, except shares)  

2017

   

2016

 
                 

ASSETS

               
                 

Current Assets

               
                 

Cash and cash equivalents

  $ 4,375     $ 33,835  
                 

Accounts receivable, less allowance for doubtful accounts of $399 and $226, respectively

    48,740       46,975  
                 

Inventories

    48,460       44,141  
                 

Assets held for sale

    1,463       --  
                 

Other current assets

    3,852       2,792  
                 

Total current assets

    106,890       127,743  
                 

Property, Plant and Equipment, at cost

               

Land

    6,422       6,978  

Buildings

    35,430       39,317  

Machinery and equipment

    82,058       82,628  

Construction in progress

    1,721       838  
      125,631       129,761  

Less accumulated depreciation

    (79,511

)

    (82,299

)

Net property, plant and equipment

    46,120       47,462  
                 

Goodwill

    58,376       10,508  
                 

Other Intangible Assets, net

    38,859       5,586  
                 

Other Long-Term Assets, net

    5,671       4,261  
                 

Total assets

  $ 255,916     $ 195,560  

 

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)

 

  

   

March 31,

   

June 30,

 

(In thousands, except shares)

 

2017

   

2016

 
                 

LIABILITIES & SHAREHOLDERS’ EQUITY

               
                 

Current Liabilities

               

Accounts payable

  $ 16,003     $ 13,892  

Accrued expenses

    23,880       25,341  
                 

Total current liabilities

    39,883       39,233  
                 

Long-Term Debt

    54,966       --  
                 

Other Long-Term Liabilities

    1,490       807  
                 

Commitments and Contingencies (Note 12)

               
                 

Shareholders’ Equity

               

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

           

Common shares, without par value; Authorized 40,000,000 shares; Outstanding 25,375,142 and 24,982,219 shares, respectively

    119,178       113,653  

Retained earnings

    40,399       41,867  
                 

Total shareholders’ equity

    159,577       155,520  
                 

Total liabilities & shareholders’ equity

  $ 255,916     $ 195,560  

 

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

 

 
Page 5

 

 

LSI INDUSTRIES INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

(In thousands)

 

Nine Months Ended

 
   

March 31

 
   

2017

   

2016

 

Cash Flows from Operating Activities

               

Net income

  $ 2,304     $ 8,054  

Non-cash items included in net income:

               

Depreciation and amortization

    5,689       4,903  

Intangible asset impairment

    479       --  

Deferred income taxes

    (947

)

    (126

)

Deferred compensation plan

    196       328  

Stock compensation expense

    2,292       2,542  

Issuance of common shares as compensation

    331       168  

(Gain) loss on disposition of fixed assets

    52       (87

)

(Gain) on sale of building

    (1,361

)

    --  

Fixed asset impairment and accelerated depreciation

    354       --  

Allowance for doubtful accounts

    248       162  

Inventory obsolescence reserve

    981       1,351  
                 

Changes in certain assets and liabilities, net of acquisition:

               

Accounts receivable

    5,189       5,588  

Inventories

    3,190       (4,440

)

Refundable income taxes

    (143

)

    (531

)

Accounts payable

    (965

)

    (3,176

)

Accrued expenses and other

    (5,119

)

    812  

Customer prepayments

    174       (310

)

Net cash flows provided by operating activities

    12,944       15,238  
                 

Cash Flows from Investing Activities

 

 

   

 

 

   

Purchases of property, plant and equipment

 

 

(3,534

)

 

 

(8,410

)

Acquisition of business, net of cash received and warrants issued

   

(95,077

)

   

--

 

Proceeds from sale of fixed assets

   

3,081

     

124

 

Net cash flows (used in) investing activities

 

 

(95,530

)

 

 

(8,286

)

  

 

 

     

 

   

Cash Flows from Financing Activities

 

 

     

 

   

Payments of long-term debt

   

(14,882

)

   

--

 

Borrowings of long-term debt

   

69,649

     

--

 

Cash dividends paid

 

 

(3,772

)

 

 

(2,959

)

Exercise of stock options

   

2,401

     

3,604

 

Purchase of treasury shares

 

 

(446

)

 

 

(317

)

Issuance of treasury shares

   

176

     

90

 

Net cash flows provided by financing activities

 

 

53,126

   

 

418

 

  

 

 

     

 

   

Increase (decrease) in cash and cash equivalents

 

 

(29,460

)

 

 

7,370

 

  

 

 

     

 

   

Cash and cash equivalents at beginning of period

 

 

33,835

   

 

26,409

 

  

 

 

     

 

   

Cash and cash equivalents at end of period

 

$

4,375

   

$

33,779

 

 

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

 

 
Page 6

 

 

LSI INDUSTRIES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 -  INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The interim condensed consolidated financial statements are unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the interim financial statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of March 31, 2017, the results of its operations for the three and nine month periods ended March 31, 2017 and 2016, and its cash flows for the nine month periods ended March 31, 2017 and 2016. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2016 Annual Report on Form 10-K.  Financial information as of June 30, 2016 has been derived from the Company’s audited consolidated financial statements.

 

NOTE 2  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Consolidation:

 

The consolidated financial statements include the accounts of LSI Industries Inc. (an Ohio corporation) and its subsidiaries (collectively, the “Company”), all of which are wholly owned.  All intercompany transactions and balances have been eliminated in consolidation.

 

Revenue Recognition:

 

Revenue is recognized when title to goods and risk of loss have passed to the customer, there is persuasive evidence of a purchase arrangement, delivery has occurred or services have been rendered, and collectability is reasonably assured. Sales are recorded net of estimated returns, rebates and discounts. Amounts received from customers prior to the recognition of revenue are accounted for as customer pre-payments and are included in accrued expenses.

 

The Company has five sources of revenue:  revenue from product sales; revenue from installation of products; service revenue generated from providing integrated design, project and construction management, site engineering and site permitting, and commissioning of lighting controls; revenue from the management of media content and digital hardware related to active digital signage; and revenue from shipping and handling.

 

Product revenue is recognized on product-only orders upon passing of title and risk of loss, generally at time of shipment. In certain arrangements with customers, as is the case with the sale of some of our solid-state LED (light emitting diode) video screens, revenue is recognized upon customer acceptance of the video screen at the job site. Product revenue related to orders where the customer requires the Company to install the product is recognized when the product is installed.  The Company provides product warranties and certain post-shipment service, support and maintenance of certain solid state LED video screens.

 

Installation revenue is recognized when the products have been fully installed.  The Company is not always responsible for installation of products it sells and has no post-installation responsibilities, other than normal warranties.

 

Service revenue from integrated design, project and construction management, and site permitting is recognized when all products at a customer site have been installed.

 

Revenue from the management of media content and digital hardware related to active digital signage is recognized evenly over the service period with the customer. Media content service periods with most customers range from one month to one year.

 

Shipping and handling revenue coincides with the recognition of revenue from sale of the product.

 

 
Page 7

 

 

In situations where the Company is responsible for re-imaging programs with multiple sites, each site is viewed as a separate unit of accounting and has stand-alone value to the customer. Revenue is recognized upon the Company’s complete performance at the location, which may include a site survey, graphics products, lighting products, and installation of products. The selling price assigned to each site is based upon an agreed upon price between the Company and its customer and reflects the estimated selling price for that site relative to the selling price for sites with similar image requirements.

 

The Company also evaluates the appropriateness of revenue recognition in accordance with the accounting standards on software revenue recognition. Our solid-state LED video screens and active digital signage contain software elements which the Company has determined are incidental.

 

Credit and Collections:

 

The Company maintains allowances for doubtful accounts receivable for probable estimated losses resulting from either customer disputes or the inability of its customers to make required payments.  If the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against income.  The Company determines its allowance for doubtful accounts by first considering all known collectability problems of customers’ accounts, and then applying certain percentages against the various aging categories based on the due date of the remaining receivables.  The resulting allowance for doubtful accounts receivable is an estimate based upon the Company’s knowledge of its business and customer base, and historical trends.  Receivables deemed uncollectable are written-off against the allowance for doubtful accounts receivable after all reasonable collection efforts have been exhausted. The Company also establishes allowances, at the time revenue is recognized, for returns, discounts, pricing and other possible customer deductions.  These allowances are based upon historical trends.

 

The following table presents the Company’s net accounts receivable at the dates indicated.

 

(In thousands)

 

March 31,

   

June 30,

 
   

2017

   

2016

 
                 

Accounts receivable

  $ 49,139     $ 47,201  

Less: Allowance for doubtful accounts

    (399

)

    (226

)

Accounts receivable, net

  $ 48,740     $ 46,975  

 

Cash and Cash Equivalents:

 

The cash balance includes cash and cash equivalents which have original maturities of less than three months. Cash and cash equivalents consist primarily of bank deposits and a bank money market account that is stated at cost, which approximates fair value. The Company maintains balances at financial institutions in the United States.  In the United States, the FDIC limit for insurance coverage on non-interest bearing accounts is $250,000. As of March 31, 2017 and June 30, 2016, the Company had bank balances of $6,852,000 and $37,883,000, respectively, without insurance coverage.

 

Inventories and Inventory Reserves:

 

Inventories are stated at the lower of cost or market.  Cost of inventories includes the cost of purchased raw materials and components, direct labor, as well as manufacturing overhead which is generally applied to inventory based on direct labor and on material content. Cost is determined on the first-in, first-out basis.

 

The Company maintains an inventory reserve for obsolete and excess inventory. The Company first determines its obsolete inventory reserve by considering specific known obsolete items, and then by applying certain percentages to specific inventory categories based upon inventory turns. The Company uses various tools, in addition to inventory turns, to identify which inventory items have the potential to become obsolete. Judgment is used to establish excess and obsolete inventory reserves and management adjusts these reserves as more information becomes available about the ultimate disposition of the inventory item.  

 

 
Page 8

 

 

Property, Plant and Equipment and Related Depreciation:

 

Property, plant and equipment are stated at cost.  Major additions and betterments are capitalized while maintenance and repairs are expensed.  For financial reporting purposes, depreciation is computed on the straight-line method over the estimated useful lives of the assets as follows:

 

 

Buildings (in years)

    28 - 40  

Machinery and equipment (in years)

    10  

Computer software (in years)

    3 - 8  

 

Costs related to the purchase, internal development, and implementation of the Company’s fully integrated enterprise resource planning/business operating software system are either capitalized or expensed.  Leasehold improvements are depreciated over the shorter of fifteen years or the remaining term of the lease.

 

The Company recorded $1,725,000 and $1,603,000 of depreciation expense in the third quarter of fiscal 2017 and 2016, respectively, and $5,122,000 and $4,524,000 of depreciation expense in the first nine months of fiscal 2017 and 2016, respectively.

 

The Company is in the process of selling its facility in Woonsocket, Rhode Island. This Graphics Segment facility, which is not expected to be sold at a loss, has been separately disclosed on the balance sheet as an asset held for sale as of March 31, 2017. The Company sold its Kansas City facility and certain manufacturing equipment in the third quarter of fiscal 2017. Refer to Note 14 for more information regarding the closure of these facilities.

 

Goodwill and Intangible Assets:

 

Intangible assets consisting of customer relationships, trade names and trademarks, patents, technology and software, and non-compete agreements are recorded on the Company's balance sheet.  The definite-lived intangible assets are being amortized to expense over periods ranging between seven and twenty years.  The Company evaluates definite-lived intangible assets for possible impairment when triggering events are identified. Neither indefinite-lived intangible assets nor the excess of cost over fair value of assets acquired ("goodwill") are amortized, however they are subject to review for impairment.  See additional information about goodwill and intangibles in Note 7.

 

Fair Value:

 

The Company has financial instruments consisting primarily of cash and cash equivalents, revolving lines of credit, accounts receivable, accounts payable, and on occasion, 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.  The Company has no financial instruments with off-balance sheet risk.

 

Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in goodwill and other intangible asset impairment analyses, long-lived asset impairment analyses, in the purchase price of acquired companies, and in the valuation of the contingent earn-out. The accounting guidance on fair value measurement was used to measure the fair value of these nonfinancial assets and nonfinancial liabilities.

 

Product Warranties:

 

The Company offers a limited warranty that its products are free from defects in workmanship and materials.  The specific terms and conditions vary somewhat by product line, but generally cover defective products returned within one to five years, with some exceptions where the terms extend to 10 years, from the date of shipment.  The Company records warranty liabilities to cover the estimated future costs for repair or replacement of defective returned products as well as products that need to be repaired or replaced in the field after installation.  The Company calculates its liability for warranty claims by applying estimates based upon historical claims as a percentage of sales to cover unknown claims, as well as estimating the total amount to be incurred for known warranty issues.  The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

 

 
Page 9

 

 

Changes in the Company’s warranty liabilities, which are included in accrued expenses in the accompanying consolidated balance sheets, during the periods indicated below were as follows:

 

   

Nine

   

Nine

   

Fiscal

 
   

Months Ended

   

Months Ended

   

Year Ended

 

(In thousands)

 

March 31,

   

March 31,

   

June 30,

 
   

2017

   

2016

   

2016

 
                         

Balance at beginning of the period

  $ 5,069     $ 3,408     $ 3,408  

Additions charged to expense

    3,841       4,018       5,069  

Addition from acquisition

    907       --       --  

Deductions for repairs and Replacements

    (2,283

)

    (2,606

)

    (3,408

)

Balance at end of the period

  $ 7,534     $ 4,820     $ 5,069  

 

 

Research and Development Costs:

 

Research and development costs are directly attributable to new product development, including the development of new technology for both existing and new products, and consist of salaries, payroll taxes, employee benefits, materials, outside legal costs and filing fees related to obtaining patents, supplies, depreciation and other administrative costs.   The Company expenses as research and development all costs associated with development of software used in solid-state LED products.  All costs are expensed as incurred and are included in selling and administrative expenses. Research and development costs related to both product and software development totaled $1,447,000 and $1,562,000 for the three months ended March 31, 2017 and 2016, respectively, and $4,117,000 and $4,193,000 for the nine months ended March 31, 2017 and 2016, respectively.

 

Cost of Products and Services Sold:

 

Cost of products sold is primarily comprised of direct materials and supplies consumed in the manufacture of products, as well as manufacturing labor, depreciation expense and direct overhead expense necessary to acquire and convert the purchased materials and supplies into finished product. Cost of products sold also includes the cost to distribute products to customers, inbound freight costs, internal transfer costs, warehousing costs and other shipping and handling activity. Cost of services sold is primarily comprised of the internal and external labor costs required to support the Company’s service revenue along with the management of media content.

 

Earnings Per Common Share:

 

The computation of basic earnings per common share is based on the weighted average common shares outstanding for the period net of treasury shares held in the Company’s nonqualified deferred compensation plan.  The computation of diluted earnings per share is based on the weighted average common shares outstanding for the period and includes common share equivalents.  Common share equivalents include the dilutive effect of stock options, restricted stock units, stock warrants, contingently issuable shares and common shares to be issued under a deferred compensation plan, all of which totaled 297,000 and 893,000 shares for the three month ended March 31, 2017 and 2016, respectively, and 853,000 shares and 846,000 shares for the nine months ended March 31, 2017 and 2016, respectively. See further discussion of earnings per share in Note 4.

 

Income Taxes:

  

The Company accounts for income taxes in accordance with the accounting guidance for income taxes.  Accordingly, deferred income taxes are provided on items that are reported as either income or expense in different time periods for financial reporting purposes than they are for income tax purposes.  Deferred income tax assets are reported on the Company’s balance sheet.  Significant management judgment is required in developing the Company’s income tax provision, including the estimation of taxable income and the effective income tax rates in the multiple taxing jurisdictions in which the Company operates, the estimation of the liability for uncertain income tax positions, the determination of deferred tax assets and liabilities, and any valuation allowances that might be required against deferred tax assets.

 

 

 
Page 10

 

 

New Accounting Pronouncements:

 

In June 2014, the Financial Accounting Standards Board issued ASU 2014-09, “Revenue from Contracts with Customers.” This amended guidance supersedes and replaces all existing U.S. GAAP revenue recognition guidance. The guidance established a new revenue recognition model, changes the basis for deciding when revenue is recognized, provides new and more detailed guidance on specific revenue topics, and expands and improves disclosures about revenue. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing.” In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers: Narrow Scope Improvements and Practical Expedients.” In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” These three standards clarify or improve guidance from ASU 2014-09 and are effective for fiscal years and interim periods within those years, beginning after December 15, 2017, or the Company’s fiscal year 2019. The Company will adopt these standards no later than July 1, 2018. While the Company is currently assessing the impact of the new standards, the Company’s revenue is primarily generated from the sale of finished products to customers. Those sales predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risks, and rewards transfer. The recognition of revenue from most product sales is largely unaffected by the new standard. However, with respect to certain product sales requiring installation, revenue is currently not recognized until the installation is complete. While the Company does not expect this new guidance to have a material impact on the amount of overall sales recognized, the timing of recognition of revenues from sales on certain projects may be affected. The Company has not yet quantified this potential impact.

 

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which eliminates the current requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts in the statement of financial position. This update requires that deferred tax liabilities and assets be classified as noncurrent. This update is effective for financial statements issued for fiscal years beginning April 1, 2017. This update may be applied either prospectively or retrospectively. However, early adoption is permitted and the Company has chosen to adopt the standard retrospectively as of June 30, 2016. As a result, prior periods have been adjusted to reflect this change. This update affected the presentation, but not the measurement of deferred tax liabilities and assets.

 

In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases.” The amended guidance requires an entity to recognize assets and liabilities that arise from leases. The amended guidance is effective for financial statements issued for fiscal years and interim periods within those years, beginning after December 15, 2018, or the Company’s fiscal year 2020, with early adoption permitted. The Company has not yet determined the impact the amended guidance will have on its financial statements.  

  

Comprehensive Income:

 

The Company does not have any comprehensive income items other than net income.

 

Subsequent Events:

 

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

 

Reclassifications:

 

Certain prior year balance sheet amounts have been reclassified to conform to new accounting guidance on balance sheet classification of deferred taxes. These reclassifications have no impact on net income, earnings per share, or operating cash flows.

 

Use of Estimates:

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Actual results could differ from those estimates.

 

 
Page 11

 

 

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 three operating segments are Lighting, Graphics, and Technology, each of which has a president who is responsible for that business and reports to the CODM. Corporate and Eliminations, which captures the Company’s corporate administrative activities, will also be reported in the segment information.

 

The Lighting Segment includes outdoor and indoor lighting utilizing both traditional and LED light sources that have been fabricated and assembled for the commercial, industrial market, the petroleum / convenience store market, the automotive dealership market, the quick service restaurant market, along with other markets the Company serves.

 

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

 

LED video screens that were previously reported in the Technology Segment in prior years’ results have been reclassified to the Graphics Segment. The movement of the LED video screen product line was the result of a change in management responsibility of this product line to the Graphics Segment president during the first quarter of fiscal 2017. This movement aligns the product line with other digital visual image elements sold to graphics customers and is consistent with how the Company’s CODM manages the business. The movement of the video screen product line resulted in a reclassification of $96,000 of operating loss from the Technology Segment to the Graphics Segment in the third quarter of fiscal 2016, and $99,000 of operating loss in the first nine months of fiscal 2016.

 

The Technology Segment designs, engineers, and manufactures electronic circuit boards, assemblies and sub-assemblies, and various control system products used in other applications (primarily the control of solid-state LED lighting). This operating segment sells its products directly to customers (primarily in the transportation, original equipment manufacturers, sports, and medical markets) and also has significant inter-segment sales to the Lighting Segment.

 

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

 

There was no concentration of consolidated net sales in the three and nine months ended March 31, 2017 or March 31, 2016. There was no concentration of accounts receivable at March 31, 2017 or June 30, 2016.

 

 
Page 12

 

 

Summarized financial information for the Company’s operating segments is provided for the indicated periods and as of March 31, 2017 and June 30, 2016:

 

   

Three Months Ended

   

Nine Months Ended

 

(In thousands)

 

March 31

   

March 31

 
   

2017

   

2016

   

2017

   

2016

 

Net Sales:

                               

Lighting Segment

  $ 56,039     $ 49,331     $ 176,578     $ 168,007  

Graphics Segment

    16,463       17,236       55,939       60,772  

Technology Segment

    5,654       4,173       15,456       12,573  
    $ 78,156     $ 70,740     $ 247,973     $ 241,352  
                                 

Operating Income (Loss):

                               

Lighting Segment

  $ 2,759     $ 1,106     $ 8,288     $ 11,970  

Graphics Segment

    (480

)

    1,078       1,711       5,271  

Technology Segment

    1,386       984       3,038       3,320  

Corporate and Eliminations

    (4,439

)

    (2,436

)

    (9,927

)

    (8,686

)

    $ (774

)

  $ 732     $ 3,110     $ 11,875  
                                 

Capital Expenditures:

                               

Lighting Segment

  $ 251     $ 1,074     $ 1,518     $ 2,923  

Graphics Segment

    499       2,145       1,324       3,337  

Technology Segment

    48       1,626       82       1,767  

Corporate and Eliminations

    (8

)

    181       610       383  
    $ 790     $ 5,026     $ 3,534     $ 8,410  
                                 

Depreciation and Amortization:

                               

Lighting Segment

  $ 1,124     $ 730     $ 2,762     $ 2,152  

Graphics Segment

    357       316       1,093       787  

Technology Segment

    322       369       991       1,045  

Corporate and Eliminations

    281       314       843       919  
    $ 2,084     $ 1,729     $ 5,689     $ 4,903  

 

 

   

March 31,

2017

   

June 30,

2016

 

Identifiable Assets:

               

Lighting Segment

  $ 187,147     $ 95,168  

Graphics Segment

    32,151       33,490  

Technology Segment

    28,734       28,348  

Corporate and Eliminations

    7,884       38,554  
    $ 255,916     $ 195,560  

 

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.

 

 
Page 13

 

 

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

   

Nine Months Ended

 
   

March 31

   

March 31

 

(In thousands)

 

2017

   

2016

   

2017

   

2016

 
                                 

Lighting Segment inter-segment net sales

  $ 442     $ 715     $ 1,929     $ 2,143  
                                 

Graphics Segment inter-segment net sales

  $ 216     $ 275     $ 1,028     $ 1,281  
                                 

Technology inter-segment net sales

  $ 8,715     $ 8,920     $ 25,846     $ 27,236  

 

The Company’s operations are located solely within the United States. As a result, the geographic distribution of the Company’s net sales and long-lived assets originate within the United States.

 

 
Page 14

 

 

NOTE 4 - EARNINGS PER COMMON SHARE

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

March 31

   

March 31

 
   

2017

   

2016

   

2017

   

2016

 
                                 

BASIC EARNINGS PER SHARE

                               
                                 

Net income (loss)

  $ (531

)

  $ 522     $ 2,304     $ 8,054  
                                 

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

    25,155       24,807       25,056       24,648  

Weighted average vested restricted stock units outstanding

    37       22       37       25  

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

    260       251       253       245  

Weighted average shares outstanding

    25,452       25,080       25,346       24,918  
                                 

Basic earnings (loss) per share

  $ (0.02

)

  $ 0.02     $ 0.09     $ 0.32  
                                 

DILUTED EARNINGS PER SHARE

                               
                                 

Net income (loss)

  $ (531

)

  $ 522     $ 2,304     $ 8,054  
                                 

Weighted average shares outstanding

                               
                                 

Basic

    25,452       25,080       25,346       24,918  
Weighted average stock warrants outstanding      --       --        28       --  

Effect of dilutive securities (b): Impact of common shares to be issued under stock incentive plans, and contingently issuable shares, if any

    --       620       535       576  
                                 

Weighted average shares outstanding (c)

    25,452       25,700       25,909       25,494  
                                 

Diluted earnings (loss) per share

  $ (0.02

)

  $ 0.02     $ 0.09     $ 0.32  

 

  

(a)

Includes shares accounted for like treasury stock included in the Company’s non-qualified deferred compensation plan. (See Note 10.)

 

  

(b)

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

 

  

(c)

Options to purchase 1,032,250 common shares at March 31, 2016, and options to purchase 1,683,883 common shares and 1,391,300 common shares at March 31, 2017 and 2016, respectively were not included in the computation of the three month and nine month periods for diluted earnings per share, respectively, because the exercise price was greater than the average fair market value of the common shares. For the three months ended March 31, 2017, the effect of dilutive securities was not included in the calculation of diluted earnings per share because there was a net operating loss for the period.

 

 
Page 15

 

 

NOTE 5 - INVENTORIES

 

The following information is provided as of the dates indicated:

   

March 31,

   

June 30,

 

(In thousands)

 

2017

   

2016

 
                 

Inventories:

               

Raw materials

  $ 31,817     $ 28,979  

Work-in-process

    3,323       4,418  

Finished goods

    13,320       10,744  

Total Inventories

  $ 48,460     $ 44,141  

 

NOTE 6 - ACCRUED EXPENSES

 

The following information is provided as of the dates indicated:

   

March 31,

   

June 30,

 

(In thousands)

 

2017

   

2016

 
                 

Accrued Expenses:

               

Compensation and benefits

  $ 7,540     $ 11,983  

Customer prepayments

    1,227       1,053  

Accrued sales commissions

    2,275       2,792  

Accrued warranty

    7,534       5,069  

Other accrued expenses

    5,304       4,444  

Total Accrued Expenses

  $ 23,880     $ 25,341  

 

 

NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS

 

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 reporting units and indefinite-lived intangible assets 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 units and intangible assets requires significant management judgment with respect to revenue and expense growth rates, changes in working capital and the selection and use of an appropriate discount rate.  The estimates of fair value of reporting units are based on the best information available as of the date of the assessment.  The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease an impairment charge.  Company management uses its judgment in assessing whether assets may have become impaired between annual impairment tests.  Indicators such as adverse business conditions, 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 relies upon a number of factors, judgments and estimates when conducting its impairment testing including, but not limited to operating results, forecasts, anticipated future cash flows and marketplace data.  There are inherent uncertainties related to these factors and judgments in applying them to the analysis of goodwill impairment.

 

As of March 1, 2017, the Company performed its annual goodwill impairment test on the three reporting units that contain goodwill (excluding Atlas Lighting Products). The preliminary goodwill impairment test on one reporting unit in the Lighting Segment passed with a business enterprise value that was $60.0 million or 80% above the carrying value of this reporting unit including goodwill. The preliminary goodwill impairment test of the one reporting unit with goodwill in the Graphics Segment passed with an estimated business enterprise value that was $4.2 million or 423% above the carrying value of the reporting unit including goodwill. The preliminary goodwill impairment test of the reporting unit in the Technology Segment that contains goodwill passed with an estimated business enterprise value that was $23.2 million or 95% above the carrying value of this reporting unit including goodwill. The impairment test is expected to be completed in the fourth quarter of fiscal 2017. It is anticipated that the results of the test will not change when the test is complete.

 

 
Page 16

 

 

The Company acquired all of the capital stock of Atlas Lighting Products, Inc., on February 21, 2017 (see Note 16). The total purchase price exceeded the estimated fair value of net assets by approximately $47.9 million, which was allocated to goodwill. A preliminary valuation of the goodwill and intangible assets was completed in March 2017, and preliminary purchase price allocations have been made at February 21, 2017. While identified intangible assets related to the Atlas acquisition are being amortized effective February 21, 2017 over appropriate lives, goodwill will not be amortized on the Company’s financial statements. Goodwill and intangible assets related to Atlas Lighting Products are included in the assets of the Lighting Segment. It is anticipated that the valuation analysis will be fully complete in the fourth quarter of fiscal 2017. Refer to Note 16 for additional information on the intangible assets of Atlas Lighting Products.

 

In March 2017, a customer relationship intangible asset with a net book value of $479,000 related to the LED video screen product line in the Graphics Segment was determined to be fully impaired. The Company deemed that distribution channels and corresponding projected future cash flows that support the customer list intangible asset are not adequate to support the asset.

 

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

 

Goodwill

                               

(In thousands)

 

Lighting

   

Graphics

   

Technology

         
   

Segment

   

Segment

   

Segment

   

Total

 

Balance as of June 30, 2016

                               

Goodwill

  $ 34,913     $ 28,690     $ 11,621     $ 75,224  

Accumulated impairment losses

    (34,778

)

    (27,525

)

    (2,413

)

    (64,716

)

Goodwill, net as of June 30, 2016

  $ 135     $ 1,165     $ 9,208     $ 10,508  
                                 

Goodwill acquired

  $ 47,868     $ --     $ --     $ 47,868  
                                 

Balance as of March 31, 2017

                               

Goodwill

  $ 82,781       28,690       11,621       123,092  

Accumulated impairment losses

    (34,778

)

    (27,525

)

    (2,413

)

    (64,716

)

Goodwill, net as of March 31, 2017

  $ 48,003     $ 1,165     $ 9,208     $ 58,376  

 

The Company performed its annual review of indefinite-lived intangible assets (excluding the intangible assets of Atlas Lighting Products) as of March 1, 2017 and determined there was no impairment. The preliminary indefinite-lived intangible impairment test passed with a fair market value that was $15.2 million or 445% above its carrying value. The impairment test is expected to be completed in the fourth quarter of fiscal 2017. It is anticipated that the results of the test will not change when the test is complete.

 

The gross carrying amount and accumulated amortization by major other intangible asset class is as follows:

 

   

March 31, 2017

 

Other Intangible Assets

 

Gross

                 

(In thousands)

 

Carrying

   

Accumulated

   

Net

 
   

Amount

   

Amortization

   

Amount

 

Amortized Intangible Assets

                       

Customer relationships

  $ 35,563     $ 7,438     $ 28,125  

Patents

    338       180       158  

LED technology firmware, software

    16,066       11,098       4,968  

Trade name

    2,658       472       2,186  

Non-compete agreements

    710       710       --  

Total Amortized Intangible Assets

    55,335       19,898       35,437  
                         

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

  $ 58,757     $ 19,898     $ 38,859  

 

 
Page 17

 

 

   

June 30, 2016

 

Other Intangible Assets

 

Gross

                 
   

Carrying

   

Accumulated

   

Net

 

(In thousands)

 

Amount

   

Amortization

   

Amount

 

Amortized Intangible Assets

                       

Customer relationships

  $ 9,316     $ 7,581     $ 1,735  

Patents

    338       154       184  

LED technology firmware, software

    11,228       10,989       239  

Trade name

    460       460       --  

Non-compete agreements

    710       704       6  

Total Amortized Intangible Assets

    22,052       19,888       2,164  
                         

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

  $ 25,474     $ 19,888     $ 5,586  

 

 

(In thousands)

 

Amortization Expense of

Other Intangible Assets

 
   

March 31, 2017

   

March 31, 2016

 
                 

Three Months Ended

  $ 359     $ 126  

Nine Months Ended

  $ 567     $ 379  

 

The Company expects to record annual amortization expense as follows:

 

(In thousands)        

2017

  $ 1,486  

2018

  $ 2,761  

2019

  $ 2,761  

2020

  $ 2,687  

2021

  $ 2,683  

After 2021

  $ 23,587  

 

NOTE 8  -  REVOLVING LINE OF CREDIT AND LONG-TERM DEBT

 

In February, 2017 the Company amended its line of credit to increase it to a $100 million secured revolving line of credit, increased from the $30 million line of credit that was previously in place. The increased credit line was required for the funding of the acquisition of Atlas Lighting Products, Inc. The line of credit expires in the third quarter of fiscal 2022. Interest on the revolving line of credit is charged based upon an increment over the LIBOR rate as periodically determined, or at the bank’s base lending rate, at the Company’s option.  The increment over the LIBOR borrowing rate, as periodically determined, fluctuates between 125 and 250 basis points depending upon the ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA”), as defined in the line of credit agreement. The increment over LIBOR borrowing rate will remain at 175 basis points for the next twelve months.  The fee on the unused balance of the $100 million committed line of credit is 15 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 March 31, 2017, there was $55.0 million borrowed against the line of credit, and $45.0 million was available as of that date. Based on the terms of the line of credit and the final principal due date, the debt has been classified as long term. The line of credit closing fees and legal fees of $199,000 have been recorded as a long term asset and are being amortized over the term of the line of credit.

 

 
Page 18

 

 

The Company is in compliance with all of its loan covenants as of March 31, 2017.

 

NOTE 9 - CASH DIVIDENDS

 

The Company paid cash dividends of $3,772,000 and $2,959,000 in the nine months ended March 31, 2017 and 2016, respectively. Dividends on restricted stock units in the amount of $24,120 and $7,860 were accrued as of March 31, 2017 and 2016, respectively. These dividends will be paid upon the vesting of the restricted stock units when shares are issued to the award recipients. In April 2017, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable May 16, 2017 to shareholders of record as of May 8, 2017. The indicated annual cash dividend rate is $0.20 per share.

 

NOTE 10 - EQUITY COMPENSATION 

 

Stock Based Compensation 

 

The Company has an equity compensation plan that was approved by shareholders in November 2012 and that covers all of its full-time employees, outside directors and certain advisors.  This 2012 Stock Incentive Plan replaced all previous equity compensation plans. The Company’s shareholders approved amendments to the 2012 Stock Incentive Plan that added 1,600,000 shares to the plan and implemented the use of a fungible share ratio that consumes 2.5 available shares for every 1 full value share awarded by the Company as stock compensation. The options granted or stock awards made pursuant to this plan are granted at fair market value at the date of grant or award.  Service-based options granted to non-employee directors become exercisable 25% each ninety days (cumulative) from the date of grant and options granted to employees generally become exercisable 25% per year (cumulative) beginning one year after the date of grant. Performance-based options granted to employees become exercisable 33.3% per year (cumulative) beginning one year after the date of grant. The maximum contractual term of the Company’s stock options is ten years.  If a stock option holder’s employment with the Company terminates by reason of death, disability or retirement, as defined in the Plan, the Plan generally provides for acceleration of vesting.  The number of shares reserved for issuance is 1,669,003 shares, all of which were available for future grant or award as of March 31, 2017.  This plan allows for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted and unrestricted stock awards, performance stock awards, stock warrants and other stock awards. Service based and performance based stock options were granted and restricted stock units (“RSU’s”) were awarded during the nine months ended March 31, 2017. As of March 31, 2017, a total of 3,631,155 options for common shares were outstanding from this plan as well as one previous stock option plan (which has also been approved by shareholders), and of these, a total of 1,423,528 options for common shares were vested and exercisable.  As of March 31, 2017, the approximate unvested stock option expense that will be recorded as expense in future periods is $3,508,348.  The weighted average time over which this expense will be recorded is approximately 24 months. Additionally, as of March 31, 2017, a total of 135,585 RSU’s were outstanding. The approximate unvested stock compensation expense that will be recorded as expense in future periods for the RSU’s is $752,231. The weighted average time over which this expense will be recorded is approximately 37 months.

 

Stock Warrants

 

The Company issued 200,000 fully vested stock warrants in the third quarter of fiscal 2017 in conjunction with the acquisition of Atlas Lighting Products, Inc., with the fair value of the warrants being included in the purchase price of that company rather than being expensed. See further discussion in Note 16. These 200,000 stock warrants were outstanding as of March 31, 2017. The fair value of the warrants on the date of grant was estimated using the Black-Scholes option pricing model. The below listed weighted average assumptions were used for the warrants.

 

   

Three Months Ended

 
   

March 31

 
   

2017

 
         

Dividend yield

    2.01 %

Expected volatility

    39 %

Risk-free interest rate

    1.80 %
Expected life (in yrs.)     4.5  

 

The stock warrants issued during the quarter ended March 31, 2017 had an exercise price of $9.95, and a fair value of $2.87. As of March 31, 2017, the warrants had a remaining contractual life of 4.9 years.

 

 
Page 19

 

 

Stock Options

 

The fair value of each option on the date of grant was estimated using the Black-Scholes option pricing model. The below listed weighted average assumptions were used for grants in the periods indicated.

 

   

Three Months Ended

   

Nine Months Ended

 
   

March 31

   

March 31

 
   

2017

   

2016

   

2017

   

2016

 
                                 

Dividend yield

    1.93 %     1.72 %     1.85 %     1.29 %

Expected volatility

    41 %     43 %     42 %     44 %

Risk-free interest rate

    1.92 %     1.46 %     1.31 %     1.66 %

Expected life (in yrs.)

    6.2       6.0       6.1       6.0  

 

At March 31, 2017, the 1,256,623 options granted during the first nine months of fiscal 2017 to employees had exercise prices ranging from $9.48 to $11.06 per share, fair values ranging from of $3.22 to $3.83 per share, and remaining contractual lives of between 9.3 and 10 years.

 

At March 31, 2016, the 1,026,800 options granted during the first nine months of fiscal 2016 to employees had exercise prices ranging from $8.84 to $11.87 per share, fair values ranging from of $3.28 to $4.52 per share, and remaining contractual lives of between 9.3 and 9.9 years.

 

The Company calculates stock option expense using the Black-Scholes model.  Stock option expense is recorded on a straight line basis, or sooner if the grantee is retirement eligible as defined in the 2012 Stock Incentive Plan, with an estimated 3.3% forfeiture rate effective January 1, 2017. Previous estimated forfeiture rates were between 2.0% and 3.5% between the periods January 1, 2013 through December 31, 2016. The expected volatility of the Company’s stock was calculated based upon the historic monthly fluctuation in stock price for a period approximating the expected life of option grants.  The risk-free interest rate is the rate of a five year Treasury security at constant, fixed maturity on the approximate date of the stock option grant.  The expected life of outstanding options is determined to be less than the contractual term for a period equal to the aggregate group of option holders’ estimated weighted average time within which options will be exercised.  It is the Company’s policy that when stock options are exercised, new common shares shall be issued.  

 

The Company recorded $510,851 and $360,952 of expense related to stock options in the three months ended March 31, 2017 and 2016, respectively, and recorded $1,806,860 and $2,191,659 of expense related to stock options in the nine months ended March 31, 2017 and 2016, respectively.  The lower stock option expense in fiscal 2017 was the result of expectations that the performance criteria related to performance based options will not be met. As of March 31, 2017, the Company had 3,148,352 stock options that were vested and that were expected to vest, with a weighted average exercise price of $9.20 per share, an aggregate intrinsic value of $4,515,257 and weighted average remaining contractual terms of 7.2 years.

 

Information related to all stock options for the nine months ended March 31, 2017 and 2016 is shown in the following tables:

 

 

   

Nine Months Ended March 31, 2017

 
   

Shares

   

Weighted

Average

Exercise

Price

   

Weighted

Average

Remaining

Contractual Term

(in years)

   

Aggregate

Intrinsic

Value

 
                                 

Outstanding at 6/30/16

    2,976,490     $ 8.97       6.6     $ 8,338,974  
                                 

Granted

    1,256,623     $ 10.67                  

Forfeitures

    (161,812

)

  $ 16.17                  

Exercised

    (440,146

)

  $ 7.39                  
                                 

Outstanding at 3/31/17

    3,631,155     $ 9.43       7.4     $ 4,546,991  
                                 

Exercisable at 3/31/17

    1,423,528     $ 8.99       5.3     $ 2,912,714  

 

 
Page 20

 

 

   

Nine Months Ended March 31, 2016

 
   

Shares

   

Weighted

Average

Exercise

Price

   

Weighted

Average

Remaining

Contractual Term

(in years)

   

Aggregate

Intrinsic

Value

 
                                 

Outstanding at 6/30/15

    2,677,436     $ 8.85       6.1     $ 4,914,601  
                                 

Granted

    1,026,800     $ 9.39                  

Forfeitures

    (150,800

)

  $ 15.73                  

Exercised

    (509,871

)

  $ 7.33                  
                                 

Outstanding at 3/31/16

    3,043,565     $ 8.95       6.8     $ 10,448,456  
                                 

Exercisable at 3/31/16

    1,362,810     $ 9.67       4.3     $ 4,741,694  

 

 

The following table presents information related to unvested stock options:

 

            Weighted-Average  
            Grant Date  
    Shares     Fair Value  
                 

Unvested at June 30, 2016

    1,663,505     $ 3.39  

Granted

    1,256,623     $ 3.71  

Vested

    (685,751 )   $ 3.30  

Forfeited

    (26,750 )   $ 3.50  

Unvested at March 31, 2017

    2,207,627     $ 3.60  

 

 

The weighted average grant date fair value of options granted during the nine month periods ended March 31, 2017 and 2016 was $3.71 and $3.64, respectively. The aggregate intrinsic value of options exercised during the nine months ended March 31, 2017 and 2016 was $1,094,696 and $1,474,444, respectively. The aggregate grant date fair value of options that vested during the nine months ended March 31, 2017 and 2016 was $2,260,014 and $1,149,022, respectively. The Company received $2,612,578 and $3,737,233 of cash from employees who exercised options in the nine month periods ended March 31, 2017 and 2016, respectively. For the nine months ended March 31, 2017, the $2,612,578 cash received from stock options was partially offset by $138,793 related to the tax effect of disqualifying dispositions of stock options along with $72,399 related to the net tax effect of other stock option exercises. For the nine months ended March 31, 2016, the $3,737,233 cash received from stock options was partially offset by $133,172 related to the tax effect of disqualifying dispositions of stock options. In the first nine months of fiscal 2017 the Company recorded $465,521as a reduction of federal income taxes payable, $138,793 as a decrease in common stock, $109,140 as a reduction of income tax expense, and $495,175 as a reduction of the deferred tax asset related to the issuance of RSU’s and the exercises of stock options in which the employees sold the common shares prior to the passage of twelve months from the date of exercise. In the first nine months of fiscal 2016 the Company recorded $518,515 as a reduction of federal income taxes payable, $133,172 as a decrease in common stock, $95,543 as a reduction of income tax expense, and $556,144 as a reduction of the deferred tax asset related to the exercises of stock options in which the employees sold the common shares prior to the passage of twelve months from the date of exercise.

 

Restricted Stock Units

 

A total of 96,210 RSU’s with a weighted average fair value of $10.84 per share were awarded to employees during the nine months ended March 31, 2017. A total of 72,000 RSU’s with a fair value of $9.39 per share were awarded to employees during the nine months ended March 31, 2016. The Company determined the fair value of the awards based on the closing price of the Company stock on the date the RSU’s were awarded. The RSU’s have a four year ratable vesting period. The RSU’s are non-voting, but accrue cash dividends at the same per share rate as those cash dividends declared and paid on LSI’s common stock. Dividends on RSU’s in the amount of $24,120 and $7,860 were accrued as of March 31, 2017 and 2016, respectively. Accrued dividends are paid to the holder upon vesting of the RSU’s and issuance of shares.

 

 
Page 21

 

 

The following table presents information related to RSU’s:

           

Weighted-Average

 
           

Grant Date

 
   

Shares

   

Fair Value

 
                 

Unvested at June 30, 2016

    62,500     $ 9.39  

Awarded

    96,210     $ 10.84  

Shares Issued

    (23,125 )   $ 9.71  

Unvested at March 31, 2017

    135,585     $ 10.36  

            

                                                                                                                  

As of March 31, 2017, the 135,585 RSU’s had a remaining weighted average contractual life of 6.2 years. Of the 135,585 RSU’s outstanding as of March 31, 2017, 130,316 are vested or expected to vest in the future. An estimated forfeiture rate of 3.4% was used in the calculation of expense related to the RSU’s. The Company recorded $93,905 and $486,102 of expense related to RSU’s in the three and nine month periods ended March 31, 2017, respectively.

 

As of March 31, 2016, the 65,500 outstanding RSU’s had a remaining weighted average contractual life of 9.25 years. Of the 65,500 RSU’s outstanding as of March 31, 2016, 63,369 were vested or expected to vest in the future. An estimated forfeiture rate of 3.3% was used in the calculation of expense related to the RSU’s. The Company recorded $30,387 and $350,369 of expense related to RSU’s in the three and nine month periods ended March 31, 2016, respectively.

 

Director and Employee Stock Compensation Awards

 

The Company awarded a total of 31,782 and 17,240 common shares in the nine months ended March 31, 2017 and 2016, respectively, as stock compensation awards. These common shares were valued at their approximate $331,000 and $168,000 fair market values based on their stock price at dates of issuance multiplied by the number of common shares awarded, respectively, pursuant to the compensation programs for non-employee directors who receive a portion of their compensation as an award of Company stock and for employees who received a nominal recognition award in the form of Company stock. Stock compensation awards are made in the form of newly issued common shares of the Company.

 

Deferred Compensation Plan 

 

The Company has a non-qualified deferred compensation plan providing for both Company contributions and participant deferrals of compensation. This plan is fully funded in a Rabbi Trust. All plan investments are in common shares of the Company. As of March 31, 2017, there were 29 participants, all with fully vested account balances. A total of 255,119 common shares with a cost of $2,437,880, and 228,103 common shares with a cost of $2,167,717 were held in the plan as of March 31, 2017 and June 30, 2016, respectively, and, accordingly, have been recorded as treasury shares. The change in the number of shares held by this plan is the net result of share purchases and sales on the open stock market for compensation deferred into the plan and for distributions to terminated employees. The Company does not issue new common shares for purposes of the non-qualified deferred compensation plan. The Company used approximately $446,251 and $316,900 to purchase 45,335 and 32,696 common shares of the Company in the open stock market during the nine months ended March 31, 2017 and 2016, respectively, for either employee salary deferrals or Company contributions into the non-qualified deferred compensation plan. For fiscal year 2017, the Company estimates the Rabbi Trust for the Nonqualified Deferred Compensation Plan will make net repurchases in the range of 48,000 to 53,000 common shares of the Company. The Company does not currently repurchase its own common shares for any other purpose.

 

NOTE 11 -  SUPPLEMENTAL CASH FLOW INFORMATION

 

(In thousands)

 

Nine Months Ended

March 31

 
   

2017

   

2016

 

Cash payments:

               

Interest

  $ 66     $ 32  

Income taxes

  $ 2,484     $ 4,863  
                 

Issuance of common shares as compensation

  $ 331     $ 168  

Issuance of stock warrants

  $ 575       --  

 

 
Page 22

 

 

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 March 31, 2017, there were no standby letter of credit agreements.

 

NOTE 13 – SEVERANCE COSTS

 

The Company recorded severance expense of $222,000 and $401,000 in the nine months ended March 31, 2017 and 2016, respectively. This severance expense was related to reductions in staffing not related to plant restructuring. See further discussion of restructuring expenses in Note 14.

 

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

 

 

   

Nine

   

Nine

   

Fiscal

 
   

Months Ended

   

Months Ended

   

Year Ended

 

(In thousands)

 

March 31,

   

March 31,

   

June 30,

 
   

2017

   

2016

   

2016

 
                         

Balance at beginning of the period

  $ 39     $ 379     $ 379  

Accrual of expense

    222       401       469  

Payments

    (235

)

    (544

)

    (742

)

Adjustments

    --       (67

)

    (67

)

Balance at end of the period

  $ 26     $ 169     $ 39  

 

 

NOTE 14 – RESTRUCTURING COSTS

 

On September 22, 2016, the Company announced plans to close its lighting facility in Kansas City, Kansas. The decision was based upon the market shift away from fluorescent and other technologies and the rapid movement to LED lighting which is produced at other LSI facilities. The Company expects to continue to meet the demand for products containing fluorescent light sources as long as these products are commercially viable. All operations at the Kansas City facility ceased prior to December 31, 2016. Total restructuring costs related to the closure of the Kansas City facility were $944,000. These costs primarily included employee-related costs (primarily severance), the impairment of manufacturing equipment, plant shut down costs, costs related to the preparation of the facility for sale, legal costs, and other related costs. In addition, there was also an inventory write-down of $432,000 recorded in the first nine months of fiscal 2017. The write-down was related to inventory that was previously realizable until the decision in the first quarter of fiscal 2017 to shut down the Kanas City plant due to the planned curtailment of the manufacturing of fluorescent light fixtures. The Company owned the facility in Kansas City and realized a $1,361,000 gain when the facility was sold.

 

The Company also announced the consolidation of the Beaverton, Oregon facility into other LSI facilities. The light assembly of products in the Beaverton facility was moved to the Company’s Columbus, Ohio facility, and administration and engineering functions were moved to the Company’s Cincinnati, Ohio facility. This consolidation was completed September 30, 2016. As a result of this consolidation, restructuring charges of $363,000 were recorded in the first nine months of fiscal 2017, with the majority of this representing the costs related to the remaining period of the facility’s lease and severance costs for employees who formerly worked in the Beaverton facility.

 

In November 2016, the Company announced the consolidation of the Woonsocket, Rhode Island manufacturing operation into its North Canton, Ohio operation. The manufacturing operations in Woonsocket ceased prior to December 31, 2016. The Company owns the facility in Woonsocket and expects to realize a gain when the facility is sold. The facility is presented on the balance sheet as an asset held for sale. Total restructuring costs related to the consolidation of the Woonsocket facility are expected to be approximately $464,000. These costs primarily include employee-related costs (severance), plant shut down costs, costs related to the preparation of the facility for sale, legal costs, and other related costs.

 

 
Page 23

 

 

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

 

   

Three

   

Nine Months

   

Total Expected

   

Total

 
   

Months Ended

   

Ended

   

to be Recognized

   

Fiscal 2017

 

(In thousands)

 

March 31,

   

March 31,

   

in Remainder of

   

Restructuring

 
   

2017

   

2017

   

Fiscal 2017

   

Expenses

 
                                 

Severance and other termination benefits

  $ 120     $ 811     $ --     $ 811  

Lease obligation

    --       213       --       213  

Impairment of fixed assets and accelerated depreciation

    1       354       --       354  

Gain on sale of facility

    (1,361

)

    (1,361

)

    --       (1,361

)

Other

    251       347       60       407  

Total

  $ (989

)

  $ 364     $ 60     $ 424  

 

 

Impairment and accelerated depreciation expense of $354,000 was recorded in the first nine months of fiscal 2017 related to machinery and equipment at the Kansas City and Beaverton facilities. There was no impairment expense related to the closure of the Woonsocket facility. Of the $354,000 of impairment and accelerated depreciation expense, $322,000 was recorded in the Lighting Segment and $32,000 was recorded in the Technology Segment. The fair value of the equipment evaluated for impairment was determined by comparing the future undiscounted cash flows to the carrying value of the assets. The future cash flows are from the remaining use of the assets as well as the cash flows expected to result from the future sale of the assets.

 

The following table presents restructuring costs incurred by line item in the consolidated statement of operations in which the costs are included:

 

   

Three Months Ended

   

Nine Months Ended

 

(In thousands)

 

March 31, 2017

   

March 31, 2017

 
                 

Cost of Goods Sold

  $ 312     $ 1,455  

Operating Expenses

    (1,301

)

    (1,091

)

Total

  $ (989

)

  $ 364  

 

 

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

 

   

Three

   

Nine Months

   

Total Expected

   

Total

 
   

Months Ended

   

Ended

   

to be Recognized

   

Fiscal 2017

 

(In thousands)

 

March 31,

   

March 31,

   

In Remainder of

   

Restructuring

 
   

2017

   

2017

   

Fiscal 2017

   

Expenses

 
                                 

Lighting Segment

  $ (1,187

)

    (417

)

  $ --     $ (417

)

Graphics Segment

    183       404       60       464  

Technology Segment

    1       252       --       252  

Corporate and Eliminations

    14       125       --       125  

Total

  $ (989

)

    364     $ 60     $ 424  

 

 
Page 24

 

 

The above tables include the gain on the sale of the Kansas City facility, and exclude the expected gain on the Woonsocket facility. Additionally, the above tables do not include expense of $432,000 recorded during the first nine months of fiscal 2017 related to the write-down of inventory included as cost of sales as part of the Kansas City facility closure.   

 

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

 

(In thousands)

                                       
   

Balance as of

June 30,

2016

   

Restructuring

Expense

   

Payments

   

Adjustments

   

Balance as of

March 31,

2017

 
                                         

Severance and termination benefits

  $ --     $ 814     $ (748

)

  $ (15

)

  $ 51  

Lease obligation

    --       213       (86

)

            127  

Other

    --       359       (354

)

            5  

Total

  $ --     $ 1,386     $ (1,188

)

  $ (15

)

  $ 183  

 

 

The above table does not include fixed asset impairment and accelerated depreciation expense of $354,000 recorded in the first nine months of fiscal 2017 or the gain on the sale of the Kansas City facility recorded in the three months ended March 31, 2017.

 

Refer to Note 13 for information regarding additional severance expenses that are not included in the restructuring costs identified in this footnote.

 

NOTE 15INCOME TAXES

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

March 31

   

March 31

 
   

2017

   

2016

   

2017

   

2016

 

Reconciliation to effective tax rate:

                               
                                 

Provision for income taxes at the anticipated annual tax rate

    32.0

%

    34.4

%

    30.4

%

    34.5

%

Uncertain tax positions

    4.2       (2.9

)

    (2.4

)

    (0.5

)

Disqualifying dispositions

    9.3       (1.4

)

    (3.6

)

    (0.8

)

Deferred tax asset adjustment

    --       --       (2.4

)

    --  

Other

    (2.2

)

    0.4       0.7       (0.9

)

Effective tax rate

    43.3

%

    30.5

%

    22.7

%

    32.3

%

 

 

NOTE 16ACQUISITION

 

On February 21, 2017, the Company acquired all the capital stock of Atlas Lighting Products, Inc. (Atlas), a Burlington North Carolina manufacturer of high-quality LED lighting products sold into the electrical distribution market. The purchase price of $97.5 million included a cash payment of $96.9 million and 200,000 five year warrants valued at $0.6 million. The Company funded the acquisition with a combination of cash on hand and $66 million from a new $100 million revolving line of credit (See note 8).

 

 
Page 25

 

 

The Company has accounted for this transaction as a business combination. Under business combination accounting, the preliminary allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed as of February 21, 2017 is as follows:

 

(amounts in thousands)

       

Cash and Cash Equivalents

  $ 1,815  

Accounts Receivable

    7,202  

Inventories

    8,490  

Property, Plant, and Equipment

    3,631  

Other Assets

    248  

Intangible Assets

    34,319  

Liabilities Assumed

    (6,106

)

Identifiable net assets acquired

    49,599  

Goodwill

    47,868  

Net Purchase Consideration

  $ 97,467  

 

As indicated, the allocation of the purchase price and estimated useful lives of the property, plant, and equipment, and intangible assets shown remain preliminary, pending final completion of valuations.

 

Goodwill recorded from the acquisition of Atlas is attributable to the impact of the positive cash flow from Atlas in addition to the expected synergies from the business combination. The goodwill resulting from the acquisition is deductible for tax purposes. The intangible assets include amounts recognized for the fair value of the trade name, customer relationships, and technology-related assets. The fair value of the intangible assets was determined based upon a combination of the market and income (discounted cash flow) approach. The following table present the details of the identified intangible assets acquired at the date of acquisition (in thousands):

 

   

Estimated

   

Estimate Useful

 
   

Fair Value

   

Life (Years)

 

Tradename

  $ 2,198       20  

Technology asset

    4,838       10  

Customer relationship

    27,283       15  

Total

  $ 34,319          

 

The fair market value write-up of the inventory totaled $228,000, and the fair market value write-up of the property, plant, and equipment totaled $526,000. Transaction costs related to the acquisition totaled $1.48 million in the third quarter and nine months ended March 31, 2017 and are recorded as an operating expense.

 

Atlas’s post-acquisition results of operations for the period from February 21, 2017 through March 31, 2017 are included in the Company’s Condensed Consolidated Statements of Operations. Since the acquisition date, net sales of Atlas for the period from February 21, 2017 through March 31, 2017 were $6.7 million and operating income was $1.0 million. The operating results of Atlas are included in the Lighting Segment.

 

Pro Forma Impact of the Acquisition of Atlas Lighting Products, Inc. (unaudited)

 

The following table represents pro forma results of operations and gives effect to the acquisition of Atlas as if the transaction had occurred on July 1, 2015. 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 pro forma financial information does not reflect the impact of any synergies or operating efficiencies resulting from the acquisition of Atlas.

 

 
Page 26

 

 

(In thousands, unaudited)

 

Nine Months Ended

March 31

 
   

2017

   

2016

 

Net Sales

  $ 283,122     $ 287,176  
                 

Gross Profit

  $ 73,802     $ 81,067  
                 

Operating Income

  $ 6,230     $ 14,694  

 

The unaudited pro forma financial information for the nine months ended March 31, 2017 and March 31, 2016 is prepared using the acquisition method of accounting and has been adjusted to 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 pro forma operating income of $6.2 million excludes acquisition-related expenses of $1.48 million.

 

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

 

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

 

Net Sales by Business Segment

                               

(In thousands)

 

Three Months Ended

   

Nine Months Ended

 
   

March 31

   

March 31

 
   

2017

   

2016

   

2017

   

2016

 
                                 

Lighting Segment

  $ 56,039     $ 49,331     $ 176,578     $ 168,007  

Graphics Segment

    16,463       17,236       55,939       60,772  

Technology Segment

    5,654       4,173       15,456       12,573  
    $ 78,156     $ 70,740     $ 247,973     $ 241,352  

 

Operating Income (Loss) by Business Segment

                               

(In thousands)

 

Three Months Ended

   

Nine Months Ended

 
   

March 31

   

March 31

 
   

2017

   

2016

   

2017

   

2016

 
                                 

Lighting Segment

  $ 2,759     $ 1,106     $ 8,288     $ 11,970  

Graphics Segment

    (480

)

    1,078       1,711       5,271  

Technology Segment

    1,386       984       3,038       3,320  

Corporate and Eliminations

    (4,439

)

    (2,436

)

    (9,927

)

    (8,686

)

    $ (774

)

  $ 732     $ 3,110     $ 11,875  

 

Summary Comments

 

The Company acquired Atlas Lighting Products, Inc. on February 21, 2017. Atlas is a manufacturer of high-quality LED lighting products sold in the electrical distribution market. The operating results of Atlas beginning February 21, 2017 have been included in the Company’s consolidated operating results and in the Lighting Segment results.

 

Fiscal 2017 third quarter net sales of $78,156,000 increased as compared to third quarter fiscal 2016 net sales of $70,740,000. Net sales were favorably influenced by increased net sales of the Lighting Segment (up $6.7 million or 13.6%) and increased net sales of the Technology Segment (up $1.5 million or 35.5%). Net sales were unfavorably influenced by decreased net sales of the Graphics Segment (down $0.8 million or 4.5%). Fiscal 2017 third quarter organic sales of $71,495,000 increased $0.7 million or 1.1% as compared to $70,740,000 in the same period of fiscal 2016.

 

 
Page 27

 

 

Fiscal 2017 nine month net sales of $247,973,000 increased $6.6 million or 2.7% as compared to the same period of fiscal 2016. Net sales were favorably influenced by increased net sales of the Lighting Segment (up $8.6 million or 5.1%) and increased net sales of the Technology Segment (up $2.9 million or 22.9%). Net sales were unfavorably influenced by decreased net sales of the Graphics Segment (down $4.8 million or 8.0%). Fiscal 2017 nine month organic sales of $241,312,000 remained fairly constant as compared to fiscal 2016 nine month organic sales of $241,352,000.

 

Fiscal 2017 third quarter operating income (loss) of $(774,000) decreased $1.5 million from operating income of $732,000 in the same period of fiscal 2016. The $1.5 million decrease in operating income was the net result of an increase in gross profit on higher sales year-over-year, higher selling and administrative expenses, acquisition costs of $1,480,000 in the third quarter of fiscal 2017 with no comparable costs in 2016, and the gain on the sale of a facility of $1,361,000 with no comparable gain in the same period of fiscal 2016. Also, contributing to the lower operating income in the third quarter of fiscal 2017 was an impairment expense of $479,000 related to a customer relationship intangible asset that was determined to be fully impaired with no comparable expense in the same period of fiscal 2016.

 

Fiscal 2017 nine month operating income of $3,110,000 decreased $8.8 million or 74% from operating income of $11,875,000 in the same period of fiscal 2016. The $8.8 million decrease in operating income was the net result of increased net sales, decreased gross profit, an increase in selling and administrative expenses, acquisition costs of $1,480,000 in fiscal 2017 with no comparable costs in fiscal 2016, restructuring, plant closure costs, related inventory write-downs of $2,157,000 with no comparable costs in fiscal 2016, and a gain on the sale of a facility of $1,361,000 in fiscal 2017 with no comparable gain in fiscal 2016. Also, contributing to the lower operating income in fiscal 2017 was an impairment expense of $479,000 related to a customer relationship intangible asset that was determined to be fully impaired with no comparable expense in the same period of fiscal 2016. Fiscal 2017 nine month operating income was favorably impacted by significant adjustments to the Company’s incentive compensation and stock compensation accruals. The adjustments affected fluctuations in employee compensation and benefits expense described below in the discussion of each segment’s results.

 

Non-GAAP Financial Measures

 

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

 

(in thousands, unaudited)

 

Third Quarter

 
   

FY 2017

   

FY 2016

 

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

               
                 

Operating income (loss) as reported

  $ (774 )   $ 732  
                 

Impairment of intangible asset

    479       --  
                 

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

    (957 )     --  
                 

Adjustment for other severance costs

    49       178  
                 

Adjustment for acquisition deal costs

    1,480       --  
                 

Fair market value inventory write-up

    155       --  
                 

Adjusted Operating Income

  $ 432     $ 910  

 

 
Page 28

 

 

(in thousands, except per share data; unaudited)

 

Third Quarter

 
           

Diluted

           

Diluted

 
   

FY 2017

   

EPS

   

FY 2016

   

EPS

 

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

                               
                                 

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

  $ (531 )   $ (0.02 )   $ 522     $ 0.02  
                                 

Impairment of intangible asset, inclusive of the income tax effect

    335 (1)     0.01       --       --  
                                 

Adjustment for restructuring and plant closure costs (gain), inclusive of the income tax effect

    (629 )(2)     (0.02 )     --       --  
                                 

Adjustment for severance costs, inclusive of the income tax effect

    44 (3)     --       117 (6)     --  
                                 

Adjustment for acquisition deal costs, inclusive of the income tax effect

    1,030 (4)     0.04       --       --  
                                 

Fair market value inventory write-up, inclusive of the income tax effect

    108 (5)     --       --          
                                 

Adjusted net income and earnings per share

  $ 357     $ 0.01     $ 639     $ 0.02  

 

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

 

(1) $144

(2) $(328)

(3) $5

(4) $450

(5) $47

(6) $61

 

 

(in thousands, unaudited)

 

Nine Months

 
   

FY 2017 

   

FY 2016

 

Reconciliation of operating income to adjusted operating income:

               
                 

Operating Income as reported

  $ 3,110     $ 11,875  
                 

Impairment of intangible asset

    479       --  
                 

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

    796       --  
                 

Adjustment for other severance costs

    222       401  
                 

Adjustment for acquisition deal costs

    1,480       --  
                 

Fair market value inventory write-up

    155       --  
                 

Adjusted Operating Income

  $ 6,242     $ 12,276  

 

 
Page 29

 

 

(in thousands, except per share data; unaudited)

 

Nine Months

 
           

Diluted

           

Diluted

 
   

FY 2017

   

EPS

   

FY 2016

   

EPS

 

Reconciliation of net income to adjusted net income:

                               
                                 

Net income and earnings per share as reported

  $ 2,304     $ 0.09     $ 8,054     $ 0.32  
                                 

Impairment of intangible asset, inclusive of the income tax effect

    335 (1)     0.01       --       --  
                                 

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

    514 (2)     0.02       --       --  
                                 

Adjustment for other severance costs, inclusive of the income tax effect

    164 (3)     0.01       263 (6)     0.01  
                                 

Adjustment for acquisition deal costs

    1,030 (4)     0.04                  
                                 

Fair market value inventory write-up

    108 (5)     --       --       --  
                                 

Adjusted net income and earnings per share

  $ 4,455     $ 0.17     $ 8,317     $ 0.33  

 

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

 

(1) $144

(2) $282

(3) $58

(4) $450

(5) $47

(6) $138

 

These non-GAAP measures may be different from non-GAAP measures used by other companies.  In addition, these 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 only be used to evaluate our results in conjunction with corresponding GAAP measures.

 

 

Results of Operations

 

THREE MONTHS ENDED MARCH 31, 2017 COMPARED TO THREE MONTHS ENDED MARCH 31, 2016

 

Lighting Segment

               

(In thousands)

 

Three Months Ended

 
   

March 31

 
   

2017

   

2016

 
                 

Net Sales

  $ 56,039     $ 49,331  

Gross Profit

  $ 12,767     $ 10,563  

Operating Income

  $ 2,759     $ 1,106  

 

The Company acquired Atlas Lighting Products, Inc. on February 21, 2017. Atlas is a manufacturer of high-quality LED lighting products sold in the electrical distribution market. The operating results of Atlas beginning February 21, 2017 have been included in the Company’s consolidated operating results and in the Lighting Segment results. Atlas contributed $6.7 million to net sales during the third quarter of fiscal 2017 since the date of acquisition.

 

Lighting Segment net sales of $56,039,000 in the third quarter of fiscal 2017 increased 13.7% from fiscal 2016 same period net sales of $49,331,000. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $45.8 million in the third quarter of fiscal 2017, representing a $12.1 million or 36.1% increase from fiscal 2016 third quarter net sales of solid-state LED light fixtures of $33.7 million. Net sales of light fixtures having solid-state LED technology accounted for 81.8% of total Lighting Segment net sales in the third quarter of fiscal 2017 compared to 68.3% of total Lighting Segment net sales in the third quarter of fiscal 2016. There was a reduction in the Company’s traditional lighting sales (metal halide and fluorescent light sources) from third quarter fiscal 2016 to third quarter fiscal 2017 as customers converted from traditional lighting to light fixtures having solid-state LED technology.

 

 
Page 30

 

 

Lighting Segment total net sales of solid-state LED technology in light fixtures have been recorded as indicated in the table below.

 

   

LED Net Sales

 

(In thousands)

 

FY 2017

   

FY 2016

   

% Change

 
                         

First Quarter

  $ 43,146     $ 37,393       15.4%  

Second Quarter

    46,137       41,612       10.9%  

First Half

    89,283       79,005       13.0%  

Third Quarter

    45,815       33,670       36.1%  

Nine Months

  $ 135,098       112,675       19.9%  

Fourth Quarter

          42,810          

Full Year

          155,485           

 

 

Gross profit of $12,767,000 in the third quarter of fiscal 2017 increased $2.2 million or 20.9% from the same period of fiscal 2016, and increased from 21.1% to 22.6% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The Company incurred restructuring, plant closure and related inventory write-down costs that were recorded in cost of sales related to the closure of the Kansas City, Kansas manufacturing facility of $158,000 in the third quarter of fiscal 2017 with no comparable costs in the third quarter of fiscal 2016. The remaining change in the amount of gross profit is due to the net effect of increased product sales, improved manufacturing efficiencies as a result of the Company’s lean initiatives, competitive pricing pressures, product mix, and inflationary pressures including the rising cost of steel, aluminum, copper, and other commodities. Also contributing to the change in gross profit is decreased warranty expense ($0.3 million), decreased supplies expense ($0.1 million), decreased utilities expense ($0.1 million) increased rent expense ($0.1 million), increased depreciation expense ($0.1 million), decreased outside services expense ($0.1 million), and increased customer relations expense ($0.1 million).

 

Selling and administrative expenses of $10,008,000 in the third quarter of fiscal 2017 increased $0.6 million or 5.8% from the same period of fiscal 2016. The increase is primarily the net result of increased sales commission expense ($1.1 million), a gain on the sale of a facility ($1.4 million), increased wage and benefits expense ($0.4 million), increased bad debt expense ($0.1 million), increased travel expense ($0.1 million), and increased intangible asset amortization expense ($0.2 million).

 

The Lighting Segment third quarter fiscal 2017 operating income of $2,759,000 increased $1.7 million or 150% from operating income of $1,106,000 in the same period of fiscal 2016. This increase of $1.7 million was primarily the net result of increased net sales, increased gross profit, increased selling and administrative expenses, a gain on the sale of a facility of $1,361,000 and restructuring, plant closure, and related inventory write-down costs of $206,000 with no comparable costs in fiscal 2016.

 

On September 22, 2016, the Company announced plans to close its lighting facility in Kansas City, Kansas. The decision was based upon the market shift away from fluorescent and other technologies and the rapid movement to LED lighting which is produced at other LSI facilities. All operations at the Kansas City facility ceased prior to December 31, 2016. The Company expects closure of this facility to result in annual net operating profit improvement and cost savings of approximately $1.4 million before consideration of the restructuring, inventory write-down costs, and gain on the sale of the facility. Realization of such savings started in the third quarter of fiscal 2017.

 

 
Page 31

 

 

Graphics Segment

               

(In thousands)

 

Three Months Ended

 
   

March 31

 
   

2017

   

2016

 
                 

Net Sales

  $ 16,463     $ 17,236  

Gross Profit

  $ 3,506     $ 4,308  

Operating Income (Loss)

  $ (480

)

  $ 1,078  

 

Graphics Segment net sales of $16,463,000 in the third quarter of fiscal 2017 decreased $0.8 million or 4.5% from fiscal 2016 same period net sales of $17,236,000. The $0.8 million decrease in Graphics Segment net sales is the net result of sales to the petroleum / convenience store market ($0.3 million net decrease), sales to the retail grocery market ($0.1 million net decrease), sales to the national retail drug store market ($0.7 million decrease), sales to the quick serve restaurant market ($0.1 million net decrease), sales to the retail market ($0.3 million increase), and changes in volume or completion of several other graphics programs ($0.1 million net increase).

 

Gross profit of $3,506,000 in the third quarter of fiscal 2017 decreased $0.8 million or 18.6% from the same period of fiscal 2016. Gross profit as a percentage of Graphics Segment net sales (customer plus inter-segment net sales) decreased from 24.6% in the third quarter of fiscal 2016 to 21.0% in the third quarter of fiscal 2017. The Company incurred restructuring and plant closure costs of $185,000 in the third quarter of fiscal 2017 with no comparable costs in the prior year. The remaining change in the amount of gross profit is due to the net effect of decreased net product sales (customer plus inter-segment net product sales were down $0.5 million or 3.7%), a decrease in installation sales (customer plus inter-segment installation sales were down $0.5 million or 21.4%) an increase in the gross profit margin on installation sales, increased shipping and handling costs as a percentage of shipping and handling sales, decreased employee compensation and benefits expense ($0.1 million), decreased supplies expense ($0.1 million), decreased property taxes ($0.2 million), and decreased outside services expense ($0.1 million).

 

Selling and administrative expenses of $3,986,000 in the third quarter of fiscal 2017 increased $0.8 million or 23.4% from the same period of fiscal 2016 primarily as the net result of increased employee compensation and benefits expense, ($0.4 million), increased outside services expense ($0.1 million), and small net decreases in expense in other categories. Also contributing to the higher selling and administrative expense in the third quarter of fiscal 2017 was an intangible asset impairment expense of $479,000 related to a customer relationship intangible asset that was determined to be fully impaired with no comparable expense in the prior period of fiscal 2016.

 

The Graphics Segment third quarter fiscal 2017 operating loss of $(480,000) decreased $1.6 million from operating income of $1,078,000 in the same period of fiscal 2016. The $1.6 million decrease from fiscal 2016 was the net result of decreased net sales, decreased gross profit and decreased gross margin as a percentage of sales, increased selling and administrative expenses, restructuring and plant closure costs of $183,000 with no comparable costs in fiscal 2016, and intangible asset impairment expense of $479,000 with no comparable costs in the same period of fiscal 2016.

 

In November 2016, the Company announced the consolidation of the Woonsocket, Rhode Island manufacturing operation into its North Canton, Ohio operation. The manufacturing operations in Woonsocket ceased prior to December 31, 2016. The Company expects closure of this facility to result in annual net operating profit improvement and cost savings of approximately $680,000, before consideration of the restructuring costs.   

 

 

Technology Segment

               

(In thousands)

 

Three Months Ended

 
   

March 31

 
   

2017

   

2016

 
                 

Net Sales

  $ 5,654     $ 4,173  

Gross Profit

  $ 2,153     $ 1,852  

Operating Income

  $ 1,386     $ 984  

 

 
Page 32

 

 

Technology Segment net sales of $5,654,000 in the third quarter of fiscal 2017 increased $1.5 million or 35.5% from fiscal 2016 same period net sales of $4,173,000. The $1.5 million increase in Technology Segment net sales is primarily the net result of a $0.6 million increase in sales to the transportation market, a $0.7 million increase in sales to the original equipment manufacturing market, and a $0.2 million increase in sales to various other markets. Technology Segment inter-segment sales decreased $0.2 million or 2.3%. While the Technology Segment’s intercompany sales decreased slightly, the support of electronic circuit boards and lighting control systems to the Lighting Segment continues to be core to the strategic growth of the Company.

 

Gross profit of $2,153,000 in the third quarter of fiscal 2017 increased $0.3 million or 16.3% from the same period in fiscal 2016, and increased from 14.1% to 15.0% as a percentage of net sales (customer plus inter-segment net sales). The $0.3 million increase in gross profit is due to the net effect of increased customer net sales partially offset by decreased inter-segment sales, increased supplies expense ($0.1 million), increased warranty expense ($0.1 million), and other small net increases in expense in other categories.

 

Selling and administrative expenses of $767,000 in the third quarter of fiscal 2017 decreased $0.1 million or 11.6% from fiscal 2016 selling and administrative expenses of $868,000 primarily as a result of a decrease in research and development expense ($0.1 million), a gain on the sale of assets in fiscal 2016 with no similar costs in fiscal 2017 ($0.1 million increase), and other small net decreases in expense in other categories.

 

The Technology Segment third quarter fiscal 2017 operating income of $1,386,000 increased $0.4 million or 40.9% from operating income of $984,000 in the same period of fiscal 2016. The $0.4 million increase in operating income was primarily the net result of increased customer net sales, decreased inter-segment sales, increased gross profit, and decreased selling and administrative expenses.

 

In September 2016, the Company announced the consolidation of the Beaverton, Oregon facility into other LSI facilities. The light assembly of products in the Beaverton facility was moved to the Company’s Columbus, Ohio facility, and administration and engineering functions were moved to the Company’s Cincinnati, Ohio facility. This consolidation was completed September 30, 2016. The consolidation of this facility and net reduction of employment is expected to result in annual cost savings of approximately $450,000. Realization of such savings started in the second quarter of fiscal 2017.

 

 

Corporate and Eliminations

               

(In thousands)

 

Three Months Ended

 
   

March 31

 
   

2017

   

2016

 
                 

Gross Profit (Loss)

  $ (27

)

  $ (174

)

Operating (Loss)

  $ (4,439

)

  $ (2,436

)

 

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

 

Administrative expenses of $4,412,000 in the third quarter of fiscal 2017 increased $2.2 million or 95% from the same period of the prior year. The $2.2 million increase in expense is primarily the result of increased employee compensation and benefits expense, ($0.2 million), increased outside service expense ($0.2 million), acquisition costs of $1,480,000 million with no similar expenses in the prior period, and other small net increases in expense in other categories.

 

 

Consolidated Results

 

The Company reported net interest expense of $163,000 in the third quarter of fiscal 2017 as compared to net interest income of $19,000 in the same period of fiscal 2016. Commitment fees related to the unused portions of the Company’s lines of credit and interest income on invested cash are included in both fiscal years. Interest expense related to outstanding debt is included in fiscal 2017. The Company was in a positive cash position and was debt free during the three months ended March 31, 2016 and generated interest income on invested cash. The Company was in a borrowing position beginning on February 21, 2017 primarily as a result of the Atlas Lighting Products, Inc. acquisition.

 

The $(406,000) income tax benefit in the third quarter of fiscal 2017 represents a consolidated effective tax rate of 43.3%. This is the net result of an income tax rate of 30.4% influenced by certain permanent book-tax differences, a tax benefit related to disqualifying dispositions, and by a benefit related to uncertain income tax positions. The $229,000 income tax expense in the third quarter of fiscal 2016 represents a consolidated effective tax rate of 30.5%. This is the net result of an income tax rate of 34.5% influenced by certain permanent book-tax differences, a tax benefit related to disqualifying dispositions, and a benefit related to uncertain income tax positions.

 

 
Page 33

 

 

The Company reported a net loss of $(531,000) in the third quarter of fiscal 2017 as compared to net income of $522,000 in the same period of the prior year. The change in net income is primarily the net result of increased gross profit on higher sales, increased selling and administrative expenses, and an income tax benefit in fiscal 2017 compared to expense in fiscal 2016. Also contributing to the lower net income are pre-tax restructuring, plant closure, and related inventory write-down costs of $404,000 recorded in the third quarter of fiscal 2017 with no comparable costs in fiscal 2016, a gain on the sale of the Kansas City facility of $1,361,000 recorded in the third quarter of fiscal 2017 with no comparable gain in fiscal 2016, acquisition costs of $1,480,000 recorded in the third quarter of fiscal 2017 with no comparable costs in fiscal 2016, and intangible asset impairment expense of $479,000 with no comparable cost in fiscal 2016. Diluted loss per share of $(0.02) was reported in the third quarter of fiscal 2017 as compared to diluted earnings per share of $0.02 in the same period of fiscal 2016. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the third quarter of fiscal 2017 were 25,452,000 shares as compared to 25,700,000 shares in the same period last year.

 

NINE MONTHS ENDED MARCH 31, 2017 COMPARED TO NINE MONTHS ENDED MARCH 31, 2016

 

Lighting Segment

               

(In thousands)

 

Nine Months Ended

 
   

March 31

 
   

2017

   

2016

 
                 

Net Sales

  $ 176,578     $ 168,007  

Gross Profit

  $ 41,928     $ 41,904  

Operating Income

  $ 8,288     $ 11,970  

 

The Company acquired Atlas Lighting Products, Inc. on February 21, 2017. Atlas is a manufacturer of high-quality LED lighting products sold in the electrical distribution market. The operating results of Atlas beginning February 21, 2017 have been included in the Company’s consolidated operating results and in the Lighting Segment results. Atlas contributed $6.7 million to net sales during the first nine months of fiscal 2017 since the date of acquistion.

 

Lighting Segment net sales of $176,578,000 in the first nine months of fiscal 2017 increased 5.1% from fiscal 2016 same period net sales of $168,007,000. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $135.1 million in the first nine months of fiscal 2017, representing a 19.9% increase from first nine months of fiscal 2016 net sales of solid-state LED light fixtures of $112.7 million. Net sales of light fixtures having solid-state LED technology accounted for 76.5% of total Lighting Segment net sales. (See the LED net sales table on page 31.) There was a reduction in the Company’s traditional lighting sales (metal halide and fluorescent light sources) from fiscal 2016 to fiscal 2017 as customers converted from traditional lighting to light fixtures having solid-state LED technology.

 

Gross profit of $41,928,000 in the first nine months of fiscal 2017 increased $0.02 million or 0.1% compared to the same period of fiscal 2016, and decreased from 24.6% to 23.5% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales).   The Company incurred restructuring and plant closure costs, including the write-down of inventory, that were recorded in cost of sales related to the closure of the Kansas City, Kansas manufacturing facility of $1,272,000 in fiscal 2017 with no comparable costs in fiscal 2016. The Lighting Segment’s gross profit was also favorably influenced by the net effect of increased product net sales, improved manufacturing efficiencies as a result of the Company’s lean initiatives, competitive pricing pressures, product mix, and inflationary pressures including the rising cost of steel, aluminum, copper, and other commodities. Also contributing to the net change in gross profit is decreased employee compensation and benefits expense ($0.7 million), decreased warranty costs ($0.5 million), increased customer relations expense ($0.4 million), increased repairs and maintenance expense ($0.1 million), increased depreciation expense ($0.4 million), increased rent expense ($0.3 million), decreased supplies expense ($0.1 million), and increased outside service expense ($0.1 million).

 

Selling and administrative expenses of $33,640,000 in the first nine months of fiscal 2017 increased $3.7 million or 12.4% from the same period of fiscal 2016. The $3.7 million increase is primarily the result of increased employee compensation and benefits expense ($0.9 million), increased intangible asset amortization expense ($0.2 million), increased samples expense ($0.1 million), increased outside service expense ($0.1 million), increased sales commission expense ($3.0 million), increased bad debt expense ($0.1 million), increased travel expense ($0.1 million), decreased literature expense ($0.1 million), a loss on the sale of fixed assets ($0.1 million), use tax recorded on current and prior year purchases as a result of a use tax audit ($0.2 million), and small net increases in several other categories. Also contributing to the increase in selling and administrative expenses are restructuring and plant closure costs of $104,000 related to the closure of the Kansas City, Kansas manufacturing facility that were recorded in fiscal 2017 with no comparable costs in fiscal 2016, and a gain on the sale of the Kansas City facility of $1,361,000 with no comparable gain in fiscal 2016.

 

 
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Lighting Segment nine month fiscal 2017 operating income of $8,288,000 decreased $3.7 million or 30.8% from operating income of $11,970,000 in the same period of fiscal 2016.  This decrease of $3.7 million was the net result of increased net sales, a slight increase in gross profit, increased selling and administrative expenses, restructuring and plant closure costs, and related inventory write-downs of $1.4 million with no comparable costs in fiscal 2016, and a gain on the sale of the Kansas City facility of $1.4 million with no comparable gain in fiscal 2016.

 

On September 22, 2016, the Company announced plans to close its lighting facility in Kansas City, Kansas. The decision was based upon the market shift away from fluorescent and other technologies and the rapid movement to LED lighting which is produced at other LSI facilities. All operations at the Kansas City facility ceased prior to December 31, 2016. The Company expects closure of this facility to result in annual net operating profit improvement and cost savings of approximately $1.4 million before consideration of the restructuring, inventory write-down costs, and gain on the sale of the facility. Realization of such savings started in the third quarter of fiscal 2017.

 

 

Graphics Segment

               

(In thousands)

 

Nine Months Ended

 
   

March 31

 
   

2017

   

2016

 
                 

Net Sales

  $ 55,939     $ 60,772  

Gross Profit

  $ 12,864     $ 16,161  

Operating Income

  $ 1,711     $ 5,271  

 

Graphics Segment net sales of $55,939,000 in the first nine months of fiscal 2017 decreased 8.0% from fiscal 2016 same period net sales of $60,772,000.  The $4.8 million decrease in Graphics Segment net sales is primarily the net result of sales to the petroleum / convenience store market ($2.7 million net decrease), sales to the retail grocery market ($0.9 million net decrease), sales to the national retailer drug store market ($2.6 million decrease), sales to the quick-service restaurant market ($0.5 million net increase), sales to the retail market ($0.7 million increase), and changes in volume or completion of several other graphics programs ($0.2 million net increase).

 

Gross profit of $12,864,000 in the first nine months of fiscal 2017 decreased $3.3 million or 20.4% from the same period in fiscal 2016, and decreased from 26.0% to 22.6% as a percentage of Graphics Segment net sales (customer plus inter-segment net sales). The Company incurred restructuring and plant closure costs that were recorded in cost of sales related to the closure of the Woonsocket, Rhode Island manufacturing facility of $396,000. The remaining $2.9 million decrease in the amount of gross profit is due to the net effect of decreased net product sales (customer plus inter-segment net product sales were down $3.5 million or 7.3%), a drop in installation sales (customer plus inter-segment installation sales were down $2.3 million or 23.7%) partially offset by higher margins on installation sales, slightly decreased freight expense as a percentage of shipping and handling revenue, increased depreciation expense ($0.3 million), decreased real estate taxes ($0.1 million), decreased supplies expense ($0.1 million), decreased repair and maintenance expense ($0.1 million), decreased outside services ($0.1 million), and decreased compensation and benefits expense ($0.5 million).  

 

Selling and administrative expenses of $11,153,000 in the first nine months of fiscal 2017 increased $0.3 million or 2.4% from the same period of fiscal 2016 primarily as a result of decreased compensation and benefits expense ($0.5 million), increased outside services expense ($0.3 million), increased convention and shows expense ($0.1 million), increased travel expense ($0.1 million), increased supplies expense ($0.1 million), decreased commissions expense ($0.1 million), and other small net decreases in other categories. Also contributing to the higher selling and administrative expense in fiscal 2017 was intangible asset impairment expense of $479,000 related to a customer relationship intangible asset that was determined to be fully impaired with no comparable expenses in the prior period of fiscal 2016.

 

Graphics Segment first nine month fiscal 2017 operating income of $1,711,000 decreased $3.6 million or 67.5% from the same period of fiscal 2016 and is the net result of decreased net sales, decreased gross profit and decreased gross profit as a percentage of net sales, restructuring and plant closure costs of $404,000 with no comparable costs in fiscal 2016, and intangible asset impairment expense of $479,000 with no comparable cost in fiscal 2016, and a decrease in other selling and administrative expenses.

 

 
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In November 2016, the Company announced the consolidation of the Woonsocket, Rhode Island manufacturing operation into its North Canton, Ohio operation. The manufacturing operations in Woonsocket ceased prior to December 31, 2016. The Company expects closure of this facility to result in annual net operating profit improvement and cost savings of approximately $680,000, before consideration of the restructuring costs.

 

Technology Segment

               

(In thousands)

 

Nine Months Ended

 
   

March 31

 
   

2017

   

2016

 
                 

Net Sales

  $ 15,456     $ 12,573  

Gross Profit

  $ 5,704     $ 6,029  

Operating Income

  $ 3,038     $ 3,320  

 

Technology Segment net sales of $15,456,000 in the first nine months of fiscal 2017 increased $2.9 million or 22.9% from fiscal 2016 same period net sales of $12,573,000.  The $2.9 million increase in Technology Segment net sales is primarily the net result of a $0.2 million increase in sales to the medical market, a $2.2 million increase in sales to the transportation market, a $0.6 million increase in sales to original equipment manufacturers, and a $0.1 million decrease in sales to the telecommunication market. Technology Segment inter-segment sales decreased $1.4 million or 5.1%. While the Technology Segment’s intercompany sales decreased, the support of electronic circuit boards and lighting control systems to the Lighting Segment continues to be core to the strategic growth of the Company.

 

Gross profit of $5,704,000 in the first nine months of fiscal 2017 decreased $0.3 million or 5.4% from the same period of fiscal 2016, and decreased from 15.1% to 13.8% as a percentage of Technology Segment net sales (customer plus inter-segment net sales). The Company incurred restructuring charges of $0.2 million related to the consolidation of its Beaverton, Oregon facility into other LSI facilities, with no comparable costs in fiscal 2016. The remaining $0.1 million decrease in amount of gross profit is due to the net effect of increased customer net sales, partially offset by decreased inter-segment sales, increased employee compensation and benefits expense ($0.3 million), increased supplies expense ($0.4 million), increased warranty expense ($0.3 million), decreased rent expense ($0.1 million), and decreased outside services expense ($0.2 million).

 

Selling and administrative expenses of $2,666,000 in the first nine months of fiscal 2017 decreased $43,000 or 1.6% from the same period of fiscal 2016. The decrease in selling and administrative expenses is the net result of an increase in employee compensation and benefits expense ($0.1 million), an increase in outside services expense ($0.1 million), a decrease in research and development expense ($0.3 million), and a gain on the sale of assets in fiscal 2016 with no comparable gain in fiscal 2017 ($0.1 million increase).

 

Technology Segment nine month fiscal 2017 operating income of $3,038,000 decreased $0.3 million or 8.5% from operating income of $3,320,000 in the same period of fiscal 2016. The decrease of $0.3 million was the net result of increased net customer sales, decreased inter-segment sales, restructuring costs in fiscal 2017 with no comparable costs in fiscal 2016, and decreased gross profit.

 

In September 2016, the Company announced the consolidation of the Beaverton, Oregon facility into other LSI facilities. The light assembly of products in the Beaverton facility was moved to the Company’s Columbus, Ohio facility, and administration and engineering functions were moved to the Company’s Cincinnati, Ohio facility. This consolidation was completed September 30, 2016. The consolidation of this facility and net reduction of employment is expected to result in annual cost savings of approximately $450,000. Realization of such savings started in the second quarter of fiscal 2017.

 

Corporate and Eliminations

               

(In thousands)

 

Nine Months Ended

 
   

March 31

 
   

2017

   

2016

 
                 

Gross Profit (Loss)

  $ 145     $ (270

)

Operating (Loss)

  $ (9,927

)

  $ (8,686

)

 

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

 

 
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Administrative expenses of $10,072,000 in the first nine months of fiscal 2017 increased $1.7 million or 19.7% from the same period of the prior year. The $1.7 million change in administrative expenses is primarily the net result of decreased employee compensation and benefits expense ($1.1 million), an increase in legal expense ($0.1 million), decreased depreciation expense ($0.1 million), increased research and development expense ($0.3 million), increased telephone expense ($0.1 million), increased outside services expense ($0.2 million), increased director’s fees ($0.2 million), a change in the allocation of corporate expense to the operating units ($0.2 million increase), and several small net increases in various other expenses. Also contributing to the increased administrative expenses are acquisition costs of $1,480,000 recorded in fiscal 2017 and restructuring costs of $0.1 million recorded in fiscal 2017 related to the consolidation of its Beaverton, Oregon facility into other LSI facilities, with no comparable costs in fiscal 2016. These restructuring expenses were primarily for severance costs for employees located in the Beaverton, Oregon facility that were previously included in corporate research and development expenses.

 

Consolidated Results

 

The Company reported net interest expense of $129,000 in the first nine months of fiscal 2017 as compared to net interest income of $27,000 in the same period of fiscal 2016. Commitment fees related to the unused portion of the Company’s line of credit and interest income on invested cash are included in both fiscal years. The Company was in a positive cash position and was debt free for the nine months ended March 31, 2016 and generated interest income on invested cash. The Company was in a borrowing position beginning on February 21, 2017 primarily as a result of the Atlas Lighting Products acquisition.

 

The $677,000 income tax expense in the first nine months of fiscal 2017 represents a consolidated effective tax rate of 22.7%. This is the net result of an income tax rate of 30.4% influenced by certain permanent book-tax differences, by a benefit related to uncertain income tax positions, a tax benefit related to disqualifying dispositions, and by a favorable adjustment to a deferred tax asset. The $3,848,000 income tax expense in the first nine months of fiscal 2016 represents a consolidated effective tax rate of 32.3%. This is the net result of an income tax rate of 34.5% influenced by certain permanent book-tax differences, an $111,000 tax benefit related to the retroactive reinstatement of the R&D tax credit, a tax benefit related to disqualifying dispositions, and by a benefit related to uncertain income tax positions.

 

The Company reported net income of $2,304,000 in the first nine months of fiscal 2017 compared to net income of $8,054,000 in the same period of the prior year.  The $5.8 million decrease in net income is primarily the net result of increased net sales, decreased gross profit, increased operating expenses, restructuring and plant closure costs in fiscal 2017 with no comparable costs in fiscal 2016, intangible asset impairment expense in fiscal 2017 with no comparable cost in fiscal 2016, and lower income tax expense in fiscal 2017 compared to fiscal 2016.  Diluted earnings per share of $0.09 was reported in the first nine months of fiscal 2017 as compared to diluted earnings per share of $0.32 in the same period of fiscal 2016. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first nine months of fiscal 2017 was 25,909,000 shares as compared to 25,494,000 shares in the same period last year.

 

Liquidity and Capital Resources 

 

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

 

The March 31, 2017 balance sheet includes the acquisition Atlas Lighting Products, whereas Atlas was not included in the June 30, 2016 balance sheet. With respect to the Consolidated Statement of Cash flows, fiscal 2017 amounts include Atlas’ changes in its balance sheet from the February 21, 2017 acquisition date to March 31, 2017.

 

At March 31, 2017, the Company had working capital of $67.0 million, compared to $88.5 million at June 30, 2016. The ratio of current assets to current liabilities was 2.68 to 1 as compared to a ratio of 3.26 to 1 at June 30, 2016. The $21.5 million decrease in working capital from June 30, 2016 to March 31, 2017 was primarily related to the net effect of decreased cash and cash equivalents ($29.5 million), increased net accounts receivable ($1.8 million), increased net inventory ($4.3 million), a decrease in accrued expenses ($1.5 million), an increase in other current assets ($0.9 million), an increase in refundable income taxes ($0.1 million), an increase in accounts payable ($2.1 million), and assets held for sale of $1.5 million at March 31, 2017. The Company has a strategy of aggressively managing working capital, including reduction of the accounts receivable days sales outstanding (DSO) and reduction of inventory levels, without reducing service to its customers.

 

The Company generated $12.9 million of cash from operating activities in the first nine months of fiscal 2017 as compared to $15.2 million in the same period of the prior year. This $2.3 million decrease in net cash flows from operating activities is primarily the net result of a smaller decrease in net accounts receivable (unfavorable change of $0.3 million), a smaller decrease in accounts payable (favorable change of $2.2 million), an increase rather than a decrease in customer prepayments (favorable change of $0.5 million), a decrease rather than an increase in net inventory (favorable change of $7.3 million), an decrease rather than an increase in accrued expenses and other (unfavorable change of $5.9 million), a smaller increase in refundable income taxes (favorable change of $0.4 million), a greater increase in net deferred tax assets (unfavorable change of $0.8 million), a decrease in stock compensation expense (unfavorable change of $0.1 million), a decrease in the deferred compensation liability (unfavorable change of $0.1 million), an increase in depreciation and amortization expense (favorable change of $0.8 million), fixed asset impairment and accelerated depreciation with no comparable events in the prior year (favorable change of $0.4 million), intangible asset impairment with no comparable events in the prior year (favorable change of $0.5 million), a gain on the sale of a building in fiscal 2017 with no comparable event in fiscal 2016 (unfavorable change of $1.4 million), a loss compared to a gain on the sale of fixed assets (favorable change of $0.1 million), and a decrease in net income (unfavorable change of $5.8 million).

 

 
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Net accounts receivable were $48.8 million and $47.0 million at March 31, 2017 and June 30, 2016, respectively. DSO increased to 52 days at March 31, 2017 compared to 47 days at June 30, 2016. The Company believes that its receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.

 

Net inventories of $48.5 million at March 31, 2017 increased $4.3 million from $44.1 million at June 30, 2016. The increase of $4.3 million is the result of an increase in gross inventory of $4.1 million and an increase of obsolescence reserves of $0.2 million. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, a net inventory decrease occurred in the first nine months of fiscal 2017 in the Lighting Segment of approximately $4.0 million, which was offset by the added inventory from the acquisition of Atlas Lighting Products. Graphics Segment net inventory decreased approximately $0.1 million. Technology Segment inventory remained constant.

 

Cash generated from operations and borrowing capacity under the Company’s line of credit is the Company’s primary source of liquidity. The Company has a secured $100 million revolving line of credit with its bank, with $44.2 million of the credit line available as of April 27, 2017. This line of credit is a $100 million five year credit line expiring in the third quarter of fiscal 2022. The Company believes that its $100 million line of credit plus cash flows from operating activities are adequate for the Company’s fiscal 2017 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.

 

The Company used cash of $95.5 million related to investing activities in the first nine months of fiscal 2017 as compared to a use of $8.3 million in the same period of the prior year, resulting in an unfavorable change of $87.2 million. Capital expenditures in the first nine months of fiscal 2017 decreased $4.9 million to $3.5 million from the same period in fiscal 2016. The largest components of the fiscal 2017 capital expenditures are equipment and building improvements related to the Company’s Lighting and Graphics Segments and computer hardware and software related to Corporate Administration. The Company acquired Atlas Lighting Products in the third quarter of fiscal 2017, which used cash of $95.1 million.

 

The Company provided $53.1 million of cash related to financing activities in the first nine months of fiscal 2017 compared to a source of cash of $0.4 million in the first nine months of fiscal 2016. The $52.7 million favorable change in cash flow was the net result of borrowings in excess of payments of long term debt of $54.8 million, an increase in dividends paid to shareholders (unfavorable change of $0.8 million), and a decrease in the exercise of stock options in the first nine months of fiscal 2017 (unfavorable change of $1.2 million).

 

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

 

Off-Balance Sheet Arrangements

 

The Company has no financial instruments with off-balance sheet risk and has no off-balance sheet arrangements, except for various operating leases.

 

Cash Dividends

 

In April 2017, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable May 16, 2017 to shareholders of record as of May 8, 2017. The indicated annual cash dividend rate for fiscal 2017 is $0.20 per share. The Board of Directors has adopted a policy regarding dividends which indicates that dividends will be determined by the Board of Directors in its discretion based upon its evaluation of earnings, cash flow requirements, financial condition, debt levels, stock repurchases, future business developments and opportunities, and other factors deemed relevant.

 

 
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Critical Accounting Policies and Estimates

 

The Company is required to make estimates and judgments in the preparation of its financial statements that affect the reported amounts of assets, liabilities, revenues and expenses, and related footnote disclosures.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.  The Company continually reviews these estimates and their underlying assumptions to ensure they remain appropriate.  The Company believes the items discussed below are among its most significant accounting policies because they utilize estimates about the effect of matters that are inherently uncertain and therefore are based on management’s judgment.  Significant changes in the estimates or assumptions related to any of the following critical accounting policies could possibly have a material impact on the financial statements.

  

Revenue Recognition

 

Revenue is recognized when title to goods and risk of loss have passed to the customer, there is persuasive evidence of a purchase arrangement, delivery has occurred or services have been rendered, and collectability is reasonably assured. Sales are recorded net of estimated returns, rebates and discounts.  Amounts received from customers prior to the recognition of revenue are accounted for as customer pre-payments and are included in accrued expenses.

 

The Company has five sources of revenue:  revenue from product sales; revenue from installation of products; service revenue generated from providing integrated design, project and construction management, site engineering and site permitting, and commissioning of lighting controls; revenue from the management of media content and digital hardware related to active digital signage; and revenue from shipping and handling.

 

Product revenue is recognized on product-only orders upon passing of title and risk of loss, generally at time of shipment. In certain arrangements with customers, as is the case with the sale of some of our solid-state LED video screens, revenue is recognized upon customer acceptance of the video screen at the job site. Product revenue related to orders where the customer requires the Company to install the product is recognized when the product is installed.  The company provides product warranties and certain post-shipment service, support and maintenance of certain solid state LED video screens and billboards.

 

Installation revenue is recognized when the products have been fully installed.  The Company is not always responsible for installation of products it sells and has no post-installation responsibilities, other than normal warranties.

 

Service revenue from integrated design, project and construction management, and site permitting is recognized when all products at a customer site have been installed.

 

Revenue from the management of media content and digital hardware related to active digital signage is recognized evenly over the service period with the customer. Media content service periods with most customers range from 1 month to 1 year.

 

Shipping and handling revenue coincides with the recognition of revenue from the sale of the product.

 

In situations where the Company is responsible for re-imaging programs with multiple sites, each site is viewed as a separate unit of accounting and has stand-alone value to the customer. Revenue is recognized upon the Company’s complete performance at the location, which may include a site survey, graphics products, lighting products, and installation of products. The selling price assigned to each site is based upon an agreed upon price between the Company and its customer and reflects the estimated selling price for that site relative to the selling price for sites with similar image requirements.

 

The Company also evaluates the appropriateness of revenue recognition in accordance with the accounting standard on software revenue recognition. Our solid-state LED video screens, billboards and active digital signage contain software elements which the Company has determined are incidental.

 

Income Taxes

 

 The Company accounts for income taxes in accordance with the accounting guidance for income taxes. Accordingly, deferred income taxes are provided on items that are reported as either income or expense in different time periods for financial reporting purposes than they are for income tax purposes.  Deferred income tax assets and liabilities are reported on the Company’s balance sheet.  Significant management judgment is required in developing the Company’s income tax provision, including the estimation of taxable income and the effective income tax rates in the multiple taxing jurisdictions in which the Company operates, the estimation of the liability for uncertain income tax positions, the determination of deferred tax assets and liabilities, and any valuation allowances that might be required against deferred tax assets. The Company has adopted ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.” As a result of early adoption of this accounting guidance, prior periods have been re-classified, which only affected the financial statement presentation and not the measurement of deferred tax liabilities and assets.

 

 
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The Company operates in multiple taxing jurisdictions and is subject to audit in these jurisdictions.  The Internal Revenue Service and other tax authorities routinely review the Company’s tax returns.  These audits can involve complex issues which may require an extended period of time to resolve.  In management’s opinion, adequate provision has been made for potential adjustments arising from these audits.

  

The Company is recording estimated interest and penalties related to potential underpayment of income taxes as a component of tax expense in the Condensed Consolidated Statements of Operations.  The reserve for uncertain tax positions is not expected to change significantly in the next twelve months.

 

Asset Impairment

 

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

 

Carrying values for long-lived tangible assets and definite-lived intangible assets, excluding goodwill and indefinite-lived intangible assets, are reviewed for possible impairment as circumstances warrant. Impairment reviews are conducted at the judgment of Company management when it believes that a change in circumstances in the business or external factors warrants a review.  Circumstances such as the discontinuation of a product or product line, a sudden or consistent decline in the forecast for a product, changes in technology or in the way an asset is being used, a history of negative operating cash flow, or an adverse change in legal factors or in the business climate, among others, may trigger an impairment review.  The Company’s initial impairment review to determine if a potential impairment charge is required is based on an undiscounted cash flow analysis at the lowest level for which identifiable cash flows exist.  The analysis requires judgment with respect to changes in technology, the continued success of product lines and future volume, revenue and expense growth rates, and discount rates.

 

Credit and Collections

 

The Company maintains allowances for doubtful accounts receivable for probable estimated losses resulting from either customer disputes or the inability of its customers to make required payments.  If the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against income.  The Company determines its allowance for doubtful accounts by first considering all known collectability problems of customers’ accounts, and then applying certain percentages against the various aging categories based on the due date of the remaining receivables.  The resulting allowance for doubtful accounts receivable is an estimate based upon the Company’s knowledge of its business and customer base, and historical trends.  The amount ultimately not collected may differ from the reserve established, particularly in the case where percentages are applied against aging categories.  In all cases, it is management’s goal to carry a reserve against the Company’s accounts receivable which is adequate based upon the information available at that time so that net accounts receivable is properly stated. The Company also establishes allowances, at the time revenue is recognized, for returns and allowances, discounts, pricing and other possible customer deductions.  These allowances are based upon contractual terms and historical trends.

 

 
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Warranty Reserves

 

The Company offers a limited warranty that its products are free from defects in workmanship and materials.  The specific terms and conditions vary somewhat by product line, but generally cover defective products returned within one to five years, with some exceptions where the terms extend to 10 years, from the date of shipment.  The Company records warranty liabilities to cover the estimated future costs for repair or replacement of defective returned products as well as products that need to be repaired or replaced in the field after installation.  The Company calculates its liability for warranty claims by applying estimates based upon historical claims as a percentage of sales to cover unknown claims, as well as estimating the total amount to be incurred for known warranty issues.  The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

 

Inventory Reserves

 

The Company maintains an inventory reserve for probable obsolete and excess inventory. The Company first determines its obsolete inventory reserve by considering specific known obsolete items, and then by applying certain percentages to specific inventory categories based upon inventory turns. The Company uses various tools, in addition to inventory turns, to identify which inventory items have the potential to become obsolete. Judgment is used to establish excess and obsolete inventory reserves and management adjusts these reserves as more information becomes available about the ultimate disposition of the inventory item.  Management values inventory at lower of cost or market.

 

New Accounting Pronouncements

 

In June 2014, the Financial Accounting Standards Board issued ASU 2014-09, “Revenue from Contracts with Customers.” This amended guidance supersedes and replaces all existing U.S. GAAP revenue recognition guidance. The guidance established a new revenue recognition model, changes the basis for deciding when revenue is recognized, provides new and more detailed guidance on specific revenue topics, and expands and improves disclosures about revenue. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing.” In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers: Narrow Scope Improvements and Practical Expedients.” In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” These three standards clarify or improve guidance from ASU 2014-09 and are effective for fiscal years and interim periods within those years, beginning after December 15, 2017, or the Company’s fiscal year 2019. The Company will adopt these standards no later than July 1, 2018. While the Company is currently assessing the impact of the new standard, the Company’s revenue is primarily generated from the sale of finished products to customers. Those sales predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risks, and rewards transfer. The recognition of revenue from most product sales is largely unaffected by the new standard. However, with respect to certain product sales requiring installation, revenue is currently not recognized until the installation is complete. While the Company does not expect this new guidance to have a material impact on the amount of overall sales recognized, the timing of recognition of revenues from sales on certain projects may be affected. The Company has not yet quantified this potential impact.

 

In July 2015, the Financial Accounting Standards Board issued ASU 2015-11, “Simplifying the Measurement of Inventory.” The amended guidance requires an entity to measure in scope inventory at lower of cost and net realizable value. The amended guidance is effective for fiscal years beginning after December 15, 2016, or the Company’s fiscal year 2018, with early adoption permitted. The Company is evaluating the impact the amended guidance will have on its financial statements.

 

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which eliminates the current requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts in the statement of financial position. This update requires that deferred tax liabilities and assets be classified as noncurrent. This update is effective for financial statements issued for fiscal years beginning April 1, 2017. This update may be applied either prospectively or retrospectively. However, early adoption is permitted and the Company has chosen to adopt the standard retrospectively as of June 30, 2016. As a result, prior periods have been adjusted to reflect this change. This update affected the presentation, but not the measurement of deferred tax liabilities and assets.

 

In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases.” The amended guidance requires an entity to recognize assets and liabilities that arise from leases. The amended guidance is effective for financial statements issued for fiscal years and interim periods within those years, beginning after December 15, 2018, or the Company’s fiscal year 2020, with early adoption permitted. The Company has not yet determined the impact the amended guidance will have on its financial statements.  

 

 
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In March 2016, the Financial Accounting Standards Board issued ASU 2016-08, “Principal versus Agent Considerations.” The amendment is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The amended guidance is effective for financial statements issued for fiscal years and interim periods within those years, beginning after December 15, 2017, or the Company’s fiscal year 2019, with early adoption permitted in fiscal years beginning after December 15, 2016. The Company has not yet determined the impact the amended guidance will have on its financial statements.

 

In March 2016, the Financial Accounting Standards Board issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This amended guidance simplifies several aspects of the accounting for share-based payment award transactions. The amended guidance is effective for financial statements issued for fiscal years and interim periods within those years, beginning after December 15, 2016, or the Company’s fiscal year 2018, with early adoption permitted. The Company has not yet determined the impact the amended guidance will have on its financial statements. 

 

In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” This amendment provides additional guidance on the measurement of expected credit losses for financial assets based on historical experience, current conditions, and supportable forecasts. The amended guidance is effective for financial statements issued for fiscal years and interim periods within those years, beginning after December 15, 2019, or the Company’s fiscal year 2021. The Company is evaluating the impact of the amended guidance and the anticipated impact to the financial statements is not material.

 

In August 2016, the Financial Accounting Standards Board issued ASU 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments,” which provides cash flow classification guidance for certain cash receipts and cash payments. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, or the Company’s fiscal year 2019. The Company is evaluating the impact the amended guidance will have on its financial statements.

 

In January 2017, the Financial Accounting Standards Board issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment, which simplifies the testing for goodwill impairment by eliminating a previously required step. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2019, or the Company’s fiscal year 2021. The Company is evaluating the impact the amended guidance will have on its financial statements.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There have been no material changes in the Company’s exposure to market risk since June 30, 2016.  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, 2016.

 

 ITEM 4.  CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

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

 

We conducted, under the supervision of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2017, 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.

 

 
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Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that control objectives are met. Because of inherent limitations in all control systems, no evaluation of controls can provide assurance that all control issues and instances of fraud, if any, within a company will be detected. Additionally, controls can be circumvented by individuals, by collusion of two or more people, or by management override. Over time, controls can become inadequate because of changes in conditions or the degree of compliance may deteriorate. Further, the design of any system of controls is based in part upon assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions. Because of the inherent limitations in any cost-effective control system, misstatements due to errors or fraud may occur and not be detected.

 

Changes in Internal Control

 

There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended March 31, 2017, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, except as otherwise described in this Item 4.

 

PART II.  OTHER INFORMATION

 

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

 

  

(c)

The Company does not purchase into treasury its own common shares for general purposes.  However, the Company does purchase its own common shares, through a Rabbi Trust, in connection with investments of employee/participants of the LSI Industries Inc. Non-Qualified Deferred Compensation Plan.  Purchases of Company common shares for this Plan in the second quarter of fiscal 2017 were as follows:

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

 

(a) Total

Number of

Shares

Purchased

   

(b) Average

Price Paid

per Share

   

(c) Total Number of

Shares Purchased as Part of

Publicly Announced Plans

or Programs

   

(d) Maximum Number (or

Approximate Dollar Value) of

Shares that May Yet Be

Purchased Under the Plans or

Programs

 

1/1/17 to 1/31/17

    1,835       $8.69       1,835       (1)  

2/1/17 to 2/28/17

    1,627       $9.85       1,627       (1)  

3/1/17 to 3/31/17

    2,386       $10.05       2,386       (1)  

Total

    5,848       $9.57       5,848       (1)  

 

(1)

All acquisitions of shares reflected above have been made in connection with the Company's Non-Qualified Deferred Compensation Plan, which has been authorized for 575,000 shares of the Company to be held in and distributed by the Plan.  At March 31, 2017, the Plan held 255,119 common shares of the Company and had distributed 299,474 common shares.

 

ITEM 6.  EXHIBITS

 

Exhibits:

 

31.1

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

   
31.2 Certification of Principal Financial Officer required by Rule 13a-14(a)
   
32.1 Section 1350 Certification of Principal Executive Officer
   
32.2 Section 1350 Certification of Principal Financial Officer

 

101.INS XBRL Instance Document

 

101.SCH XBRL Taxonomy Extension Schema Document

 

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

 
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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/ Dennis W. Wells

 

 

 

Dennis W. Wells

 

 

 

Chief Executive Officer and President

 

 

 

(Principal Executive Officer)

 

 

 

 

 

       

 

By:

/s/ Ronald S. Stowell

 

 

 

Ronald S. Stowell

 

 

 

Vice President, Chief Financial Officer and Treasurer

 

 

 

(Principal Financial and Accounting Officer)

 

May 8, 2017

 

 

 

 

 

 

 

 

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