Item 1. Financial Statements
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)
2020
2019
2020
2019
Net Sales
$
71,010
$
72,832
$
242,088
$
247,330
Cost of products and services sold
54,834
57,180
183,558
190,207
Restructuring costs
223
261
758
792
Severance costs
11
54
11
77
Gross profit
15,942
15,337
57,761
56,254
Selling and administrative expenses
17,032
17,515
55,045
54,990
Restructuring (gain) costs
(3,729
)
107
(8,576
)
132
Severance costs
8
(12
)
62
457
Impairment of goodwill
-
-
-
20,165
Transition and realignment costs
-
-
-
120
Operating income (loss)
2,631
(2,273
)
11,230
(19,610
)
Interest (income)
(1
)
(6
)
(3
)
(37
)
Interest expense
129
585
795
1,749
Other expense
642
183
633
183
Income (loss) before income taxes
1,861
(3,035
)
9,805
(21,505
)
Income tax expense (benefit)
-
133
1,726
(4,304
)
Net income (loss)
$
1,861
$
(3,168
)
$
8,079
$
(17,201
)
Earnings (loss) per common share (see Note 4)
Basic
$
0.07
$
(0.12
)
$
0.31
$
(0.66
)
Diluted
$
0.07
$
(0.12
)
$
0.31
$
(0.66
)
Weighted average common shares outstanding
Basic
26,301
26,132
26,250
26,083
Diluted
26,623
26,132
26,423
26,083
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
Page 3
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended
Nine Months Ended
March 31
March 31
(In thousands)
2020
2019
2020
2019
Net Income (Loss)
$
1,861
$
(3,168
)
$
8,079
$
(17,201
)
Foreign currency translation adjustment
(116
)
-
(110
)
-
Comprehensive Income (Loss)
$
1,745
$
(3,168
)
$
7,969
$
(17,201
)
Page 4
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,
June 30,
(In thousands, except shares)
2020
2019
ASSETS
Current assets
$
820
$
966
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of $267 and $879, respectively
45,957
54,728
Inventories
43,597
43,512
Refundable income tax
1,807
882
Asset held for sale
-
7,512
Other current assets
3,106
3,380
Total current assets
95,287
110,980
Property, Plant and Equipment, at cost
Land
3,933
4,576
Buildings
20,215
27,015
Machinery and equipment
70,733
73,185
Construction in progress
803
455
95,684
105,231
Less accumulated depreciation
(70,981
)
(73,255
)
Net property, plant and equipment
24,703
31,976
Goodwill
10,373
10,373
Other Intangible Assets, net
30,631
32,647
Other Long-Term Assets, net
21,238
15,124
Total assets
$
182,232
$
201,100
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
Page 5
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,
June 30,
(In thousands, except shares)
2020
2019
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable
$
18,772
$
18,664
Accrued expenses
20,106
21,211
Total current liabilities
38,878
39,875
Long-Term Debt
7,919
39,541
Other Long-Term Liabilities
10,728
1,747
Commitments and Contingencies (Note 12)
-
-
Shareholders' Equity
Preferred shares, without par value; Authorized 1,000,000 shares, none issued
-
-
Common shares, without par value; Authorized 40,000,000 shares; Outstanding 26,162,209 and 25,967,275 shares, respectively
126,918
125,729
Treasury shares, without par value
(1,057
)
(1,468
)
Deferred compensation plan
1,055
1,468
Retained (loss)
(2,115
)
(5,808
)
Accumulated other comprehensive (loss) income
(94
)
16
Total shareholders' equity
124,707
119,937
Total liabilities & shareholders' equity
$
182,232
$
201,100
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
Page 6
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
Common Shares
Treasury Shares
Key Executive
Accumulated Other
Retained
Total
Number Of
Number Of
Compensation
Comprehensive
Earnings
Shareholders'
(In thousands, except per share data)
Shares
Amount
Shares
Amount
Amount
Income (Loss)
(Loss)
Equity
Balance at June 30, 2018
25,884
$
124,104
(242
)
$
(2,110
)
$
2,133
-
$
15,124
$
139,251
Net Loss
-
-
-
-
-
-
(17,201
)
(17,201
)
Other comprehensive income
-
-
-
-
-
-
-
-
Stock compensation awards
70
265
-
-
-
-
-
265
Restricted stock units issued
98
-
-
-
-
-
-
-
Shares issued for deferred compensation
65
257
-
-
-
-
-
257
Activity of treasury shares, net
-
-
19
481
-
-
-
481
Deferred stock compensation
-
-
-
-
(474
)
-
-
(474
)
Stock-based compensation expense
-
951
-
-
-
-
-
951
Dividends — $0.20 per share
-
-
-
-
-
-
(3,882
)
(3,882
)
Cumulative effect of adoption of accounting guidance
-
-
-
-
-
-
591
591
Balance at March 31, 2019
26,117
$
125,577
(223
)
$
(1,629
)
$
1,659
$
-
$
(5,368
)
$
120,239
Common Shares
Treasury Shares
Key Executive
Accumulated Other
Total
Number Of
Number Of
Compensation
Comprehensive
Retained
Shareholders'
Shares
Amount
Shares
Amount
Amount
Income (Loss)
Earnings
Equity
Balance at June 30, 2019
26,176
$
125,729
(209
)
$
(1,468
)
$
1,468
16
$
(5,808
)
$
119,937
Net Income
-
-
-
-
-
-
8,079
8,079
Other comprehensive income
-
-
-
-
-
(110
)
-
(110
)
Stock compensation awards
48
225
-
-
-
-
-
225
Restricted stock units issued
21
-
-
-
-
-
-
-
Shares issued for deferred compensation
54
296
-
-
-
-
-
296
Activity of treasury shares, net
-
-
42
411
-
-
-
411
Deferred stock compensation
-
-
-
-
(413
)
-
-
(413
)
Stock-based compensation expense
-
494
-
-
-
-
-
494
Stock options exercised, net
29
174
-
-
-
-
-
174
Dividends — $0.20 per share
-
-
-
-
-
-
(3,958
)
(3,958
)
Cumulative effect of adoption of accounting guidance
-
-
-
-
-
-
(428
)
(428
)
Balance at March 31, 2020
26,328
$
126,918
(167
)
$
(1,057
)
$
1,055
$
(94
)
$
(2,115
)
$
124,707
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
Page 7
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
(In thousands)
2020
2019
Cash Flows from Operating Activities
Net income (loss)
$
8,079
$
(17,201
)
Non-cash items included in net income (loss)
Depreciation and amortization
6,631
7,787
Deferred income taxes
2,637
(4,077
)
Impairment of goodwill
-
20,165
Deferred compensation plan
296
264
Stock compensation expense
494
951
Issuance of common shares as compensation
225
265
Gain on disposition of fixed assets
(8,510
)
(22
)
Allowance for doubtful accounts
(105
)
505
Inventory obsolescence reserve
1,720
2,574
Changes in certain assets and liabilities
Accounts receivable
8,322
2,902
Inventories
(1,981
)
(7,368
)
Refundable income taxes
(1,170
)
323
Accounts payable
1,015
2,705
Accrued expenses and other
(258
)
(4,373
)
Customer prepayments
(298
)
985
Net cash flows provided by operating activities
17,097
6,385
Cash Flows from Investing Activities
Proceeds from the sale of assets
20,040
-
Purchases of property, plant and equipment
(1,538
)
(2,348
)
Net cash flows provided by (used in) investing activities
18,502
(2,348
)
Cash Flows from Financing Activities
Payments of long-term debt
(169,671
)
(89,489
)
Borrowings of long-term debt
138,049
87,941
Cash dividends paid
(3,958
)
(3,882
)
Shares withheld for employees' taxes
(124
)
(99
)
Proceeds from stock option exercises
174
-
Net cash flows used in financing activities
(35,530
)
(5,529
)
Change related to foreign currency
(215
)
-
Decrease in cash and cash equivalents
(146
)
(1,492
)
Cash and cash equivalents at beginning of period
966
3,178
Cash and cash equivalents at end of period
$
820
$
1,686
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
Page 8
LSI INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The interim condensed consolidated financial statements are unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the interim financial statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of March 31, 2020, the results of its operations for the three and nine month periods ended March 31, 2020 and 2019, and its cash flows for the nine month periods ended March 31, 2020 and 2019. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2019 Annual Report on Form 10-K. Financial information as of June 30, 2019 has been derived from the Company’s audited consolidated financial statements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation:
A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2019 Annual Report on Form 10-K. Significant changes to our accounting policies as a result of adopting ASU-2014-09 “Revenue from Contracts with Customers” (Topic 606) in the first quarter of fiscal 2019 and adopting ASU 2016-02, “Leases” in the first quarter of fiscal 2020 are discussed below.
Revenue Recognition:
The Company recognizes revenue when it satisfies the performance obligation in its customer contracts or purchase orders. Most of the Company’s products have a single performance obligation which is satisfied at a point in time when control is transferred to the customer. Control is generally transferred at time of shipment when title and risk of ownership passes to the customer. For customer contracts with multiple performance obligations, the Company allocates the transaction price and any discounts to each performance obligation based on relative standalone selling prices. Payment terms are typically within 30 to 90 days from the shipping date, depending on the terms with the customer. The Company offers standard warranties that do not represent separate performance obligations.
Installation is a separate performance obligation, except for the Company’s digital signage products. For digital signage products, installation is not a separate performance obligation as the product and installation is the combined item promised in digital signage contracts. The Company is not always responsible for installation of products it sells and has no post-installation responsibilities other than standard warranties.
A number of the Company's Graphics and select lighting products are highly customized for specific customers. As a result, these customized products do not have an alternative use. For these products, the Company has a legal right to payment for performance to date and generally does not accept returns on these items. The measurement of performance is based upon cost plus a reasonable profit margin for work completed. Because there is no alternative use and there is a legal right to payment, the Company transfers control of the item as the item is being produced and therefore, recognizes revenue over time. The customized product types are as follows:
●
Customer specific print graphics branding
●
Electrical components based on customer specifications
●
Digital signage and related media content
The Company also offers installation services for its Graphics and select lighting products. Installation revenue is recognized over time as our customer simultaneously receives and consumes the benefits provided through the installation process.
For these customized products and installation services, revenue is recognized using a cost-based input method: recognizing revenue and gross profit as work is performed based on the relationship between the actual cost incurred and the total estimated cost for the contract.
Page 9
Disaggregation of Revenue
The Company disaggregates the revenue from contracts with customers by the timing of revenue recognition because the Company believes it best depicts the nature, amount, and timing of its revenue and cash flows. The table presents a reconciliation of the disaggregation by reportable segments.
Three Months Ended
Nine Months Ended
(In thousands)
March 31, 2020
March 31, 2020
Lighting
Segment
Graphics Segment
Lighting
Segment
Graphics Segment
Timing of revenue recognition
Products and services transferred at a point in time
$
43,222
$
15,093
$
147,260
$
50,339
Products and services transferred over time
5,791
6,904
18,380
26,109
$
49,013
$
21,997
$
165,640
$
76,448
Three Months Ended
Nine Months Ended
March 31, 2020
March 31, 2020
Lighting
Segment
Graphics Segment
Lighting
Segment
Graphics Segment
Type of Product and Services
LED lighting, digital signage solutions, electronic circuit boards
$
42,536
$
2,234
$
143,615
$
13,515
Legacy products
5,949
14,444
20,252
47,155
Turnkey services and other
528
5,319
1,773
15,778
$
49,013
$
21,997
$
165,640
$
76,448
Legacy products include lighting fixtures utilizing light sources other than LED technology and printed two- and three-dimensional graphic products. Turnkey services and other includes project management and installation services along with shipping and handling charges.
Practical Expedients and Exemptions
●
The Company’s contracts with customers have an expected duration of one year or less, as such the Company applies the practical expedient to expense sales commissions as incurred, and have omitted disclosures on the amount of remaining performance obligations.
●
Shipping costs that are not material in context of the delivery of products are expensed as incurred.
●
The Company’s accounts receivable balance represents the Company’s unconditional right to receive payment from its customers with contracts. Payments are generally due within 30 to 90 days of completion of the performance obligation and invoicing, therefore, payments do not contain significant financing components.
●
The Company collects sales tax and other taxes concurrent with revenue-producing activities which are excluded from revenue. Shipping and handling costs are treated as fulfillment activities and included in cost of products and services sold on the Consolidated Statements of Operations.
Page 10
New Accounting Pronouncements:
On July 1, 2018, the Company adopted ASU 2014-09. “Revenue from Contracts with Customers,” (Topic 606) using the modified retrospective adoption method which requires a cumulative effect adjustment to the opening balance of retained earnings. This approach was applied to contracts that were not completed as of June 30, 2018. Results for reporting periods beginning July 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The Company recorded a net increase to beginning retained earnings of $591,000 on July 1, 2018 due to the cumulative impact of adopting Topic 606, as described below.
ASC 606 Cumulative Impact
(in thousands)
Balance as of
Balance as of
June 30, 2018
Adjustments
July 1, 2018
Assets:
Accounts receivable, net
$
50,609
$
4,935
$
55,544
Inventories, net
$
50,994
$
(4,167
)
$
46,827
Other long-term assets, net
$
9,786
$
(177
)
$
9,609
Shareholder's Equity:
Retained earnings
$
15,124
$
591
$
15,715
In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases.” The amended guidance requires an entity to recognize assets and liabilities that arise from leases. The amended guidance is effective for financial statements issued for fiscal and interim periods within those years, beginning after December 15, 2018, or the Company’s fiscal 2020, with early adoption permitted. The Company adopted this guidance effective July 1, 2019 using a modified-retrospective transition method, under which it elected not to adjust comparative periods. The Company elected the package of practical expedients permitted under the new guidance to not reassess prior conclusions related to contracts containing leases, lease classification, and initial direct costs. In addition, the Company elected the practical expedient to not separate lease and non-lease component and the accounting policy election to not present leases with an initial term of twelve months or less on the balance sheet.
The Company’s most significant leases are those relating to certain manufacturing facilities along with a small office space. Besides these real estate leases, most other leases are insignificant and consist of leases related to a vehicle, forklifts, small tooling, and various office equipment. All of the Company’s leases are operating leases and are included in other long-term assets with the corresponding liability in other long-term liabilities. Lease expense is recognized on a straight-line basis over the lease term. The Company used its incremental borrowing rate when determining the present value of lease payments. The adoption of the new lease standard resulted in the recognition of right-of-use assets (ROU assets) of $10.4 million and lease liabilities of $10.8 million which includes the impact of existing deferred rents and tenant improvement allowances on the consolidated balance sheets as of July 1, 2019 for the Company’s real estate leases. The adoption of the standard resulted in no material impact to consolidated statements of operations or consolidated statements of cash flow. (Refer to Note 15)
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 other than noted below.
In December 2019, a novel coronavirus disease (“COVID-19”) was reported and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic.
As of the date of this filing, the Company’s locations and primary suppliers continue to be operating. However, the broader implications of COVID-19 on the Company’s results of operations and overall financial performance remain uncertain. The Company may experience constrained supply or slowed customer demand that could materially impact its business, results of operations and overall financial performance in future periods. See Risk Factors in Part II, Item 1A of this Form 10-Q for further discussion of the possible impact of the COVID-19 pandemic on the Company’s business .
NOTE 3 - SEGMENT REPORTING INFORMATION
The accounting guidance on Segment Reporting establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (the Company’s Chief Executive Officer or “CODM”) in making decisions on how to allocate resources and assess performance. The Company’s two operating segments are Lighting and Graphics, with one executive team under the organizational structure reporting directly to the CODM with responsibilities for managing each segment. Corporate and Eliminations, which captures the Company’s corporate administrative activities, is also reported in the segment information.
The Lighting Segment includes outdoor and indoor lighting utilizing both traditional and LED light sources that have been fabricated and assembled for the Company’s markets, primarily petroleum / convenience stores, automotive dealerships, quick-service restaurants, grocery and pharmacy store, and retail/national accounts. The Company also addresses lighting product customers through the commercial, industrial, stock and flow, and renovation channels. The Lighting Segment also includes the design, engineering, and manufacturing of electronic circuit boards, assemblies and sub-assemblies used to manufacture certain LED light fixtures and sold directly to customers.
The Graphics Segment designs, manufactures and installs exterior and interior visual image elements such as traditional graphics, interior branding, electrical and architectural signage, active digital signage along with the management of media content related to digital signage, LED video screens, and menu board systems that are either digital or traditional by design. These products are used in visual image programs in several markets including, but not limited to the petroleum / convenience store market, multi-site retail operations, banking, and quick-service restaurants. The Graphics Segment implements, installs and provides program management services related to products sold by the Graphics Segment and by the Lighting Segment.
Page 11
The Company’s corporate administration activities are reported in the Corporate and Eliminations line item. These activities primarily include intercompany profit in inventory eliminations, expense related to certain corporate officers and support staff, the Company’s internal audit expenses, expense related to the Company’s Board of Directors, equity compensation expense for various equity awards granted to corporate administration employees, certain consulting expenses, investor relations activities, and a portion of the Company’s legal, auditing and professional fee expenses. Corporate identifiable assets primarily consist of cash, invested cash (if any), refundable income taxes (if any), and deferred income taxes.
There was no concentration of consolidated net sales in the three and nine months ended March 31, 2020 and 2019. There was no concentration of accounts receivable at March 31, 2020 or June 30, 2019.
Summarized financial information for the Company’s operating segments is provided for the indicated periods and as of March 31, 2020 and March 31, 2019:
Three Months Ended
Nine Months Ended
(In thousands)
March 31
March 31
2020
2019
2020
2019
Net Sales:
Lighting Segment
$
49,013
$
52,785
$
165,640
$
177,871
Graphics Segment
21,997
20,047
76,448
69,459
$
71,010
$
72,832
$
242,088
$
247,330
Operating Income (Loss):
Lighting Segment
$
1,102
$
691
$
13,411
$
(13,911
)
Graphics Segment
4,015
(898
)
6,394
2,350
Corporate and Eliminations
(2,486
)
(2,066
)
(8,575
)
(8,049
)
$
2,631
$
(2,273
)
$
11,230
$
(19,610
)
Capital Expenditures:
Lighting Segment
$
126
$
769
$
1,013
$
1,633
Graphics Segment
234
-
279
515
Corporate and Eliminations
59
-
246
200
$
419
$
769
$
1,538
$
2,348
Depreciation and Amortization:
Lighting Segment
$
1,650
$
1,925
$
5,089
$
5,867
Graphics Segment
347
391
1,107
1,183
Corporate and Eliminations
83
236
435
737
$
2,080
$
2,552
$
6,631
$
7,787
March 31,
2020
June 30,
2019
Identifiable Assets:
Lighting Segment
$
130,370
$
142,105
Graphics Segment
35,213
40,914
Corporate and Eliminations
16,649
18,081
$
182,232
$
201,100
The segment net sales reported above represent sales to external customers. Segment operating income, which is used in management’s evaluation of segment performance, represents net sales less all operating expenses. Identifiable assets are those assets used by each segment in its operations.
The Company records a 10% mark-up on intersegment revenues. Any intersegment profit in inventory is eliminated in consolidation. Intersegment revenues were eliminated in consolidation as follows:
Inter-segment sales
Three Months Ended
Nine Months Ended
(In thousands)
March 31
March 31
2020
2019
2020
2019
Lighting Segment inter-segment net sales
$
744
$
479
$
2,415
$
1,758
Graphics Segment inter-segment net sales
$
153
$
96
$
251
$
171
The Company’s operations are located solely within North America. As a result, the geographic distribution of the Company’s net sales and long-lived assets originate within North America.
Page 12
NOTE 4 - EARNINGS PER COMMON SHARE
The following table presents the amounts used to compute basic and diluted earnings per common share, as well as the effect of dilutive potential common shares on weighted average shares outstanding (in thousands, except per share data):
Three Months Ended
Nine Months Ended
March 31
March 31
2020
2019
2020
2019
BASIC EARNINGS PER SHARE
Net income (loss)
$
1,861
$
(3,168
)
$
8,079
$
(17,201
)
Weighted average shares outstanding during the period, net of treasury shares
26,151
25,893
26,087
25,828
Weighted average vested restricted stock units outstanding
6
33
7
40
Weighted average shares outstanding in the Deferred Compensation Plan during the period
144
206
156
215
Weighted average shares outstanding
26,301
26,132
26,250
26,083
Basic income (loss) per share
$
0.07
$
(0.12
)
$
0.31
$
(0.66
)
DILUTED EARNINGS PER SHARE
Net income (loss)
$
1,861
$
(3,168
)
$
8,079
$
(17,201
)
Weighted average shares outstanding
Basic
26,301
26,132
26,250
26,083
Effect of dilutive securities (a):
Impact of common shares to be issued under stock option plans, and contingently issuable shares, if any
322
-
173
-
Weighted average shares outstanding
26,623
26,132
26,423
26,083
Diluted income (loss) per share
$
0.07
$
(0.12
)
$
0.31
$
(0.66
)
Anti-dilutive securities (b)
1,875
3,788
2,038
3,702
(a)
Calculated using the “Treasury Stock” method as if dilutive securities were exercised and the funds were used to purchase common shares at the average market price during the period.
(b)
Anti-dilutive securities were excluded from the computation of diluted net income per share for the three and nine months ended March 31, 2020 because the exercise price was greater than the average fair market price of the common shares or because the assumed proceeds from the award’s exercise or vesting was greater than the average fair market price of the common shares. For the three and nine months ended March 31, 2019, the effect of dilutive securities was not included in the calculation of diluted loss per share because there was a net loss for the period.
Page 13
NOTE 5 - INVENTORIES
The following information is provided as of the dates indicated:
March 31,
June 30,
(In thousands)
2020
2019
Inventories:
Raw materials
$
29,457
$
27,927
Work-in-progress
1,592
2,193
Finished goods
12,548
13,392
Total Inventories
$
43,597
$
43,512
NOTE 6 - ACCRUED EXPENSES
The following information is provided as of the dates indicated:
March 31,
June 30,
(In thousands)
2020
2019
Accrued Expenses:
Compensation and benefits
$
5,095
$
5,319
Customer prepayments
1,443
1,768
Accrued sales commissions
1,556
1,301
Accrued warranty
7,464
7,687
Other accrued expenses
4,548
5,136
Total Accrued Expenses
$
20,106
$
21,211
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment. The Company may first assess qualitative factors in order to determine if goodwill and indefinite-lived intangible assets are impaired. If through the qualitative assessment it is determined that it is more likely than not that goodwill and indefinite-lived assets are not impaired, no further testing is required. If it is determined more likely than not that goodwill and indefinite-lived assets are impaired, or if the Company elects not to first assess qualitative factors, the Company’s impairment testing continues with the estimation of the fair value of the reporting unit using a combination of a market approach and an income (discounted cash flow) approach, at the reporting unit level. The estimation of the fair value of reporting unit requires significant management judgment with respect to revenue and expense growth rates, changes in working capital and the selection and use of an appropriate discount rate. The estimates of the fair value of reporting units are based on the best information available as of the date of the assessment. The fair value measurements of the reporting units are based on significant inputs not observable in the market and thus represent Level 3 measurements as defined by ASC 820 “Fair Value Measurements.” The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease an impairment charge. Company management uses its judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as adverse business conditions, economic factors and technological change or competitive activities may signal that an asset has become impaired.
The Company identified its reporting units in conjunction with its annual goodwill impairment testing. The Company has a total of two reporting units that contain goodwill. There is one reporting unit within the Lighting Segment and one reporting unit within the Graphics Segment. The Company relies upon a number of factors, judgments and estimates when conducting its impairment testing including, but not limited to, the Company’s stock price, operating results, forecasts, anticipated future cash flows and marketplace data. There are inherent uncertainties related to these factors and judgments in applying them to the analysis of goodwill impairment.
Page 14
As of March 1, 2020, the Company performed its annual goodwill impairment test on the two reporting units that contain goodwill. The preliminary goodwill impairment test of the reporting unit in the Lighting Segment passed with a business enterprise value of $31.6 million or 33% above the carrying value of this reporting unit including goodwill. The preliminary goodwill impairment test of the reporting unit with goodwill in the Graphics Segment passed with an estimated business enterprise value of $4.7 million or 619% above the carrying value of the reporting unit including goodwill. The definitive impairment test is expected to be completed in the fourth quarter of fiscal 2020. It is anticipated that the results of the test will not change when the test is complete.
A significant decline in the Company’s stock price during March 2020 related to the COVID-19 pandemic led management to conclude that a triggering event occurred. As a result, an interim goodwill impairment test subsequent to the March 1 testing date was required for both reporting units as of March 31, 2020 . The result of the impairment test on both reporting units indicated that goodwill was not impaired .
The following table presents information about the Company's goodwill on the dates or for the periods indicated:
Goodwill
(In thousands)
Lighting
Graphics
Segment
Segment
Total
Balance as of June 30, 2019
Goodwill
$
94,564
$
28,690
$
123,254
Accumulated impairment losses
(85,356
)
(27,525
)
(112,881
)
Goodwill, net as of June 30, 2019
$
9,208
$
1,165
$
10,373
Balance as of March 31, 2020
Goodwill
$
94,564
$
28,690
$
123,254
Accumulated impairment losses
(85,356
)
(27,525
)
(112,881
)
Goodwill, net as of March 31, 2020
$
9,208
$
1,165
$
10,373
The Company performed its annual review of indefinite-lived intangible assets as of March 1, 2020 and determined there was no impairment. The preliminary indefinite-lived intangible impairment test passed with a fair market value of $16.8 million or 392% above its carrying value. The definitive indefinite-lived impairment test is expected to be completed in the fourth quarter of fiscal 2020. It is anticipated that the results of the test will not change when the test is complete.
The following table presents the gross carrying amount and accumulated amortization by each major asset class:
Other Intangible Assets
March 31, 2020
(In thousands)
Gross
Carrying
Accumulated
Net
Amount
Amortization
Amount
Amortized Intangible Assets
Customer relationships
$
35,563
$
13,614
$
21,949
Patents
338
270
68
LED technology firmware, software
16,066
12,731
3,335
Trade name
2,658
801
1,857
Total Amortized Intangible Assets
54,625
27,416
27,209
Indefinite-lived Intangible Assets
Trademarks and trade names
3,422
-
3,422
Total indefinite-lived Intangible Assets
3,422
-
3,422
Total Other Intangible Assets
$
58,047
$
27,416
$
30,631
Page 15
Other Intangible Assets
June 30, 2019
(In thousands)
Gross
Carrying
Accumulated
Net
Amount
Amortization
Amount
Amortized Intangible Assets
Customer relationships
$
35,563
$
12,070
$
23,493
Patents
338
247
91
LED technology firmware, software
16,066
12,364
3,702
Trade name
2,658
719
1,939
Total Amortized Intangible Assets
54,625
25,400
29,225
Indefinite-lived Intangible Assets
Trademarks and trade names
3,422
-
3,422
Total indefinite-lived Intangible Assets
3,422
-
3,422
Total Other Intangible Assets
$
58,047
$
25,400
$
32,647
Three Months Ended
Nine Months Ended
March 31
March 31
(In thousands)
2020
2019
2020
2019
Amortization Expense of Other Intangible Assets
$
670
$
691
$
2,016
$
2,071
The Company expects to record annual amortization expense as follows:
(In thousands)
2020
$
2,687
2021
$
2,682
2022
$
2,459
2023
$
2,412
2024
$
2,412
After 2024
$
16,573
NOTE 8 - REVOLVING LINE OF CREDIT
In February 2019, the Company amended its secured line of credit to a $75 million facility from a $100 million facility in order to better match its financing needs with an appropriate borrowing capacity. The line of credit expires in the third quarter of fiscal 2022. Interest on the revolving line of credit is charged based upon an increment over the LIBOR rate as periodically determined, or at the bank’s base lending rate, at the Company’s option. The increment over the LIBOR borrowing rate, as periodically determined, fluctuates between 125 and 250 basis points depending upon the ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA”), as defined in the line of credit agreement. The increment over LIBOR borrowing rate will be 125 basis points for the fourth quarter of fiscal 2020. The fee on the unused balance of the $75 million committed line of credit is 20 basis points. Under the terms of this line of credit, the Company has agreed to a negative pledge of real estate assets and is required to comply with financial covenants that limit the ratio of indebtedness to EBITDA and require a minimum fixed charge coverage ratio. As of March 31, 2020, there was $7.9 million borrowed against the line of credit, and $67.1 million was available as of that date. Based on the terms of the line of credit and the maturity date, the debt has been classified as long term.
The Company is in compliance with all of its loan covenants as of March 31, 2020.
NOTE 9 - CASH DIVIDENDS
The Company paid cash dividends of $3,958,000 and $3,882,000 in the nine months ended March 31, 2020 and 2019, respectively. Dividends on restricted stock units in the amount of $59,077 and $40,798 were accrued as of March 31, 2020 and 2019, respectively. These dividends will be paid upon the vesting of the restricted stock units when shares are issued to the award recipients. In April 2020, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable May 12, 2020 to shareholders of record as of May 4, 2020. The indicated annual cash dividend rate is $0.20 per share.
Page 16
NOTE 10 – EQUITY COMPENSATION
In November 2019, the Company’s shareholders approved the 2019 Omnibus Award Plan (“2019 Omnibus Plan”). The purpose of the 2019 Omnibus Plan is to provide a means through which the Company may attract and retain key personnel and to provide a means by which directors, officers, and employees can acquire and maintain an equity interest in the Company. The 2019 Omnibus Plan replaced the 2012 Stock Incentive Plan (“2012 Stock Plan”). The number of shares of common stock authorized for issuance under the 2019 Omnibus Plan is 2,650,000 which were combined with the remaining shares available under the 2012 Stock Plan. The number of shares reserved for issuance under the 2019 Omnibus Plan is 3,812,997, all of which are available for future grant or award as of March 31, 2020. The 2019 Omnibus Plan implements the use of a fungible share ratio that consumes 2.5 available shares for every full value share awarded by the Company as stock compensation. The 2019 Omnibus Plan allows for the grant of non-qualified stock options, stock appreciation rights, restricted stock awards, performance stock units, and other stock-based awards.
In the third quarter of fiscal 2020, the Company granted 150,000 inducement stock options with an exercise price of $6.51. In the first quarter of fiscal 2020, the Company granted 455,429 non-qualified serviced-based stock options with an exercise price of $3.83 and 199,310 Performance Stock Units and 81,917 Restricted Stock Units at a fair value of $3.83. Stock compensation expense was $(103,000) and $224,000 for the three months ended March 31, 2020 and 2019, respectively and $494,000 and $951,000 for the nine months ended March 31, 2020 and 2019, respectively.
NOTE 1 1 - SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months Ended
(In thousands)
March 31
2020
2019
Cash Payments:
Interest
$
889
$
1,669
Income taxes
$
8
$
3
Non-cash investing and financing activities
Issuance of common shares as compensation
$
225
$
265
Issuance of common shares to fund deferred compensation plan
$
296
$
257
NOTE 1 2 - 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, 2020, there were no such standby letters of credit issued.
NOTE 1 3 – SEVERANCE COSTS
The activity in the Company’s accrued severance liability is as follows for the periods indicated:
Nine Months
Nine Months
Fiscal Year
Ended
Ended
Ended
March 31,
March 31,
June 30,
(In thousands)
2020
2019
2019
Balance at beginning of period
$
1,134
$
1,772
$
1,772
Accrual of expense
73
534
560
Payments
(481
)
(956
)
(1,198
)
Balance at end of period
$
726
$
1,350
$
1,134
Of the total $726,000 severance reserve reported as of March 31, 2020, $612,000 has been classified as a current liability and will be paid out over the next twelve months. The remaining $114,000 has been classified as a long-term liability.
Page 17
NOTE 1 4 – RESTRUCTURING COSTS
In the first quarter of fiscal 2020, the Company sold its New Windsor, New York facility. The net proceeds from the sale were $12.3 million resulting in a gain of $4.8 million. Restructuring costs incurred in the first quarter of fiscal 2020 related to the closure of the New Windsor facility, which impacted both the Lighting and Graphics segment.
Restructuring costs incurred in the second quarter of fiscal 2020 related to the realignment of the Company’s manufacturing footprint at its Houston, Texas facility, which impacted the Graphics segment. The realignment occurred as the result of the movement of equipment related to the closure of the New Windsor facility along with preparations to receive additional equipment resulting from the relocation of the North Canton, Ohio facility.
In the third quarter of fiscal 2020, the Company sold its North Canton, Ohio facility. The net proceeds from the sale were $7.7 million resulting in a net gain of $3.7 million. Restructuring charges incurred in the third quarter of fiscal 2020 related to the relocation of the North Canton facility, which impacted the Graphics Segment. The Company will relocate the production at the North Canton facility to a smaller, leased facility in Akron, Ohio during the fourth quarter of fiscal 2020. The Company also incurred $451,000 of expense to write-down inventory which is not included in the tables below.
Total restructuring costs were $235,000 and $744,000 for the three and nine months ended March 31, 2020, respectively.
The following table presents information about restructuring costs for the periods indicated:
Three Months Ended
Nine Months Ended
March 31
March 31
(In thousands)
2020
2019
2020
2019
Severance benefits
$
-
$
263
$
-
$
484
Impairment of fixed assets and accelerated depreciation
-
-
49
228
Facility repairs
-
52
-
99
Gain on sale of facility
(3,741
)
-
(8,562
)
-
Exit costs
235
53
419
113
Manufacturing realignment costs
-
-
276
-
Total
$
(3,506
)
$
368
$
(7,818
)
$
924
The following table presents a roll forward of the beginning and ending liability balances related to the restructuring costs:
Balance as of
Balance as of
June 30,
Restructuring
March 31,
(In thousands)
2019
Expense
Payments
Adjustments
2020
Severance and termination benefits
$
236
$
-
$
(209
)
$
-
$
27
Other restructuring costs
-
695
(695
)
-
$
-
Total
$
236
$
695
$
(904
)
$
-
$
27
Page 18
NOTE 15 - LEASES
The Company leases certain manufacturing facilities along with a small office space, a company vehicle, several forklifts, several small tooling items, and various items of office equipment. All of the Company’s leases are operating leases and are included in other long-term assets with the corresponding liability in other long-term liabilities. Leases have a remaining term of 1 to 5 years some of which have an option to renew. The Company does not assume renewals in determining the lease term unless the renewals are deemed reasonably certain. The lease agreements do not contain any material residual guarantees or material variable lease payments.
The Company has periodically entered into short-term operating leases with an initial term of twelve months or less. The Company elected not to record these leases on the balance sheet. For the three and nine months ended March 31, 2020, the rent expense for these leases is immaterial.
The Company has certain leases that contain lease and non-lease components and has elected to utilize the practical expedient to account for these components together as a single lease component.
Lease expense is recognized on a straight-line basis over the lease term. The Company used its incremental borrowing rate when determining the present value of lease payments. The adoption of the new lease standard resulted in the recognition of right-of-use assets (ROU assets) of $10.4 million and lease liabilities of $10.8 million which includes the impact of existing deferred rents and tenant improvement allowances on the consolidated balance sheets as of July 1, 2019 for the Company’s real estate leases. The adoption of the new standard resulted in no material impact to the consolidated statements of operations or consolidated statements of cash flow.
Three months ended
Nine months ended
(In thousands)
March 31, 2020
March 31, 2020
Operating lease cost
$
574
$
1,736
Supplemental Cash Flow Information:
Nine months ended
(In thousands)
March 31, 2020
Operating cash flows from operating leases
Fixed payments
1,707
Liability reduction
1,334
Operating Leases:
At March 31, 2020
Total operating right-of-use asset (Other long-term assets)
9,050
Accrued expenses (Current liabilities)
362
Long-term operating lease liability (Other long-term liabilities)
9,440
9,802
Weighted Average remaining Lease Term (in years)
4.81
Weighted Average Discount Rate
4.85
%
Maturities of Lease Liability:
2020
955
2021
2,303
2022
2,279
2023
2,244
2024
1,917
Thereafter
1,683
Total lease payments
11,381
Less: Interest
(1,579
)
Present Value of Lease Liabilities
9,802
Page 19
NOTE 1 6 – INCOME TAXES
The Company's effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year's taxable income as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law in March 2020. The CARES Act allowed the Company to utilize a Net Operating Loss (NOL) Carryback resulting in a revaluation of its deferred tax assets creating a favorable impact of $0.3 million in the third quarter of fiscal 2020. In addition, the Company sold its North Canton, Ohio facility in the third quarter of fiscal 2020 resulting in a book gain of $3.7 million. The sale generated a capital gain during the quarter resulting in a tax benefit due to the utilization of a capital loss carryforward, which reduced the anticipated full year estimated effective income tax rate.
In the first quarter of fiscal 2020, the Company sold its New Windsor, New York facility resulting in a book gain of $4.8 million. The Company was able to utilize a deferred tax asset of $864,000 related to the sale of the facility.
In the second quarter of fiscal 2019, a deferred tax asset of $4.8 million was created as a result of the impairment of goodwill in the Lighting reporting unit.
Three Months Ended
Nine Months Ended
March 31
March 31
2020
2019
2020
2019
Reconciliation of effective tax rate:
Provision for income taxes at the anticipated annual tax rate
10.8
%
(0.7
)%
16.7
%
13.6
%
Uncertain tax positions
1.5
(0.1
)
(0.3
)
0.6
Deferred income tax adjustments
(16.7
)
-
(2.5
)
6.7
Shared-based compensation
4.4
(3.6
)
3.7
(0.9
)
Effective tax rate
-
%
(4.4
)%
17.6
%
20.0
%
Page 20
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.