lyts20130930_10q.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 SEPTEMBER 30, 2013.

 

 

 

 

 

 

 

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 [    ]

 

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 October 24, 2013 there were 24,052,919 shares of the Registrant's common stock, no par value per share, outstanding.

 

 
 

 

  

LSI INDUSTRIES INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2013

 

INDEX

 

 

 

Begins on Page

PART I.  Financial Information

  

  

  

  

  

  

  

  

ITEM 1.

Financial Statements

  

  

  

  

  

  

  

  

  

Condensed Consolidated Statements of Operations

  

3

  

  

Condensed Consolidated Balance Sheets

  

4

  

  

Condensed Consolidated Statements of Cash Flows

  

6

  

  

  

  

  

  

  

Notes to Condensed Consolidated Financial Statements

  

7

  

  

  

  

  

  

ITEM 2.

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

  

21

  

  

  

  

  

  

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

  

28

  

  

  

  

  

  

ITEM 4.

Controls and Procedures

  

28

  

  

  

  

  

PART II.  Other Information

  

  

  

  

  

  

  

  

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

  

29

  

  

  

  

  

  

ITEM 6.

Exhibits

  

29

  

  

  

  

  

Signatures

 

30

 

“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

September 30

 

(In thousands, except per share data)

 

2013

   

2012

 
                 

Net sales

  $ 80,486     $ 74,719  
                 

Cost of products and services sold

    61,364       56,848  
                 

Gross profit

    19,122       17,871  
                 

Selling and administrative expenses

    16,283       14,844  
                 

Operating income

    2,839       3,027  
                 

Interest (income)

    (7

)

    (20

)

                 

Interest expense

    19       40  
                 

Income before income taxes

    2,827       3,007  
                 

Income tax expense

    962       1,177  
                 

Net income

  $ 1,865     $ 1,830  
                 
                 

Earnings per common share (see Note 4)

               

Basic

  $ 0.08     $ 0.08  

Diluted

  $ 0.08     $ 0.08  
                 
                 

Weighted average common shares outstanding

               

Basic

    24,353       24,304  

Diluted

    24,487       24,373  

 

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

 

 

 
Page 3

 

 

LSI INDUSTRIES INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

(In thousands, except shares)

 

September 30,

2013

   

June 30,

2013

 
                 

ASSETS

               
                 

Current Assets

               
                 

Cash and cash equivalents

  $ 9,360     $ 7,949  
                 

Accounts receivable, less allowance for doubtful accounts of $417 and $346, respectively

    46,929       45,991  
                 

Inventories

    43,107       42,093  
                 

Refundable income taxes

    271       1,435  
                 

Other current assets

    5,908       5,445  
                 

Total current assets

    105,575       102,913  
                 

Property, Plant and Equipment, at cost

               

Land

    7,022       7,015  

Buildings

    37,893       37,889  

Machinery and equipment

    71,926       71,535  

Construction in progress

    4,221       3,464  
      121,062       119,903  

Less accumulated depreciation

    (75,692

)

    (74,553

)

Net property, plant and equipment

    45,370       45,350  
                 

Goodwill

    10,508       10,508  
                 

Other Intangible Assets, net

    8,649       8,579  
                 

Other Long-Term Assets, net

    2,002       1,829  
                 

Total assets

  $ 172,104     $ 169,179  

 

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)

  

(In thousands, except shares)

 

September 30,

2013

   

June 30,

2013

 
                 

LIABILITIES & SHAREHOLDERS’ EQUITY

               
                 

Current Liabilities

               

Accounts payable

  $ 13,487     $ 12,429  

Accrued expenses

    14,615       13,781  
                 

Total current liabilities

    28,102       26,210  
                 

Other Long-Term Liabilities

    1,200       1,279  
                 

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 24,047,904 and 24,057,266 shares, respectively

    103,182       102,492  

Retained earnings

    39,620       39,198  
                 

Total shareholders’ equity

    142,802       141,690  
                 

Total liabilities & shareholders’ equity

  $ 172,104     $ 169,179  

 

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)

 

Three Months Ended

September 30

 
   

2013

   

2012

 

Cash Flows from Operating Activities

               

Net income

  $ 1,865     $ 1,830  

Non-cash items included in net income:

               

Depreciation and amortization

    1,408       1,850  

Deferred income taxes

    (169

)

    (116

)

Deferred compensation plan

    62       52  

Stock option expense

    685       518  

Issuance of common shares as compensation

    48       12  

(Gain) on disposition of fixed assets

    (25

)

    (12

)

Allowance for doubtful accounts

    93       185  

Inventory obsolescence reserve

    419       245  
                 

Changes in certain assets and liabilities

               

Accounts receivable

    (1,031

)

    (690

)

Inventories

    (1,433

)

    (3,232

)

Refundable income taxes

    1,164       122  

Accounts payable

    1,058       1,864  

Accrued expenses and other

    (1,417

)

    829  

Customer prepayments

    1,437       18  

Net cash flows provided by operating activities

    4,164       3,475  
                 

Cash Flows from Investing Activities

               

Purchases of property, plant and equipment

    (1,230

)

    (1,336

)

Proceeds from sale of fixed assets

    25       31  

Net cash flows (used in) investing activities

    (1,205

)

    (1,305 )
                 

Cash Flows from Financing Activities

               

Cash dividends paid

    (1,443

)

    (1,441

)

Exercise of stock options

    25       8  

Purchase of treasury shares

    (130

)

    (121

)

Net cash flows (used in) financing activities

    (1,548

)

    (1,554

)

                 

Increase in cash and cash equivalents

    1,411       616  
                 

Cash and cash equivalents at beginning of period

    7,949       15,255  
                 

Cash and cash equivalents at end of period

  $ 9,360     $ 15,871  

 

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 September 30, 2013, the results of its operations for the three month periods ended September 30, 2013 and 2012, and its cash flows for the three month periods ended September 30, 2013 and 2012. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2013 Annual Report on Form 10-K.  Financial information as of June 30, 2013 has been derived from the Company’s audited consolidated financial statements.

 

NOTE 2  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Consolidation:

 

The condensed 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.  Revenue from product sales is typically recognized 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.  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 four 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 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.  However, product revenue related to orders where the customer requires the Company to install the product is recognized when the product is installed.  Other than normal product warranties or the possibility of installation or post-shipment service, support and maintenance of certain solid state LED video screens, billboards, or active digital signage, the Company has no post-shipment responsibilities.

 

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 each customer site have been installed.

 

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

 

The Company evaluates the appropriateness of revenue recognition in accordance with Accounting Standards Codification (“ASC”) Subtopic 605-25, Revenue Recognition:  Multiple–Element Arrangements. 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.

 

 

 
Page 7

 

 

The Company also evaluates the appropriateness of revenue recognition in accordance with ASC Subtopic 985-605, “Software:  Revenue Recognition.”  Our solid-state LED video screens, billboards and active digital signage contain software elements which the Company has determined are incidental and excluded from the scope of ASC Subtopic 985-605.

 

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 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)

 

September 30,

2013

   

June 30,

2013

 
                 

Accounts receivable

  $ 47,346     $ 46,337  

less Allowance for doubtful accounts

    (417

)

    (346

)

Accounts receivable, net

  $ 46,929     $ 45,991  

 

Cash and Cash Equivalents:

 

The cash balance includes cash and cash equivalents which have original maturities of less than three months.  The Company maintains balances at financial institutions in the United States and Canada.  The balances at financial institutions in Canada are not covered by insurance.  The FDIC limit for insurance coverage on non-interest bearing accounts is $250,000. As of September 30, 2013 and June 30, 2013, the Company had bank balances of $9,101,000 and $7,688,000, respectively, without insurance coverage.

 

Inventories:

 

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.

 

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 (years)

28 -

40

Machinery and equipment (years)

3 -

10

Computer software (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 in accordance with ASC Subtopic 350-40, “Intangibles – Goodwill and Other:  Internal-Use Software.”  Leasehold improvements are amortized over the shorter of fifteen years or the remaining term of the lease.

 

The Company recorded $1,210,000 and $1,161,000 of depreciation expense in the first quarter of fiscal 2014 and 2013, respectively.

 

 

 
Page 8

 

 

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 two and twenty years.  The Company periodically evaluates definite-lived intangible assets for permanent impairment. 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, 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, in the purchase price of acquired companies (if any), and in the valuation of the contingent earn-out. The fair value measurement of these nonfinancial assets and nonfinancial liabilities is based on significant inputs not observable in the market and thus represent Level 3 measurements as defined in ASC 820, “Fair Value Measurement.”

 

Product Warranties:

 

The Company offers a limited warranty that its products are free of 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 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 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.

 

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:

 

(In thousands)

 

Three

Months Ended

September 30,

2013

   

Three

Months Ended

September 30,

2012

   

Fiscal

Year Ended

June 30,

2013

 
                         

Balance at beginning of the period

  $ 1,424     $ 1,121     $ 1,121  

Additions charged to expense

    587       172       2,134  

Deductions for repairs and replacements

    (593

)

    (212

)

    (1,831

)

Balance at end of the period

  $ 1,418     $ 1,081     $ 1,424  

 

 

Research and Development Costs:

 

Research and development expenses are costs 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, supplies, depreciation and other administrative costs.   The Company follows the requirements of ASC Subtopic 985-20, “Software:  Costs of Software to be Sold, Leased, or Marketed,” and 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 $1,954,000 and $1,652,000 for the three months ended September 30, 2013 and 2012, respectively.

 

 
Page 9

 

 

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 non-qualified 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, contingently issuable shares and common shares to be issued under a deferred compensation plan, all of which totaled 430,000 shares and 345,000 shares for the three months ended September 30, 2013 and 2012, respectively. See further discussion in Note 4.

 

New Accounting Pronouncements:

 

In July 2012, the Financial Accounting Standards Board issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Long-Lived Intangible Assets for Impairment.”  This amended guidance is intended to simplify the test of indefinite-lived intangible assets for impairment by allowing companies to first assess qualitative factors to determine whether or not it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value as the basis for determining whether it is necessary to perform the two-step impairment test. Current guidance requires companies to perform an annual indefinite-lived intangible asset impairment test. The amended guidance is effective for annual and interim tests performed for fiscal years beginning after September 15, 2012, or the Company’s fiscal year 2014, with early adoption permissible. The adoption of this standard in fiscal 2014 did not have a material impact on the financial statements.

 

In July 2013, the Financial Accounting Standards Board issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This amended guidance is intended to eliminate the diversity that is in practice with regard to the financial statement presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amended guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2013, or the Company’s fiscal year 2015, with early adoption permissible. The adoption of this guidance is not expected to have a material impact on the financial statements.

 

Comprehensive Income:

 

The Company does not have any comprehensive income items other than net income. The functional currency of the Company’s Canadian operation is the U.S. dollar.

 

Subsequent Events:

 

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

 

Reclassifications:

 

A reclassification was made in the prior year cash flow statement to more accurately reflect the cash flow impact of the Allowance for Doubtful Accounts and the Inventory Obsolescence Reserve. The offset to these reclassifications was Accounts Receivable and Inventory, respectively. The prior year cash flow conforms to the current year presentation. There was no impact to earnings or net operating cash flows as a result of these reclassifications.

 

Use of Estimates:

 

The preparation of the 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 financial statements and accompanying notes.  Actual results could differ from those estimates.

 

NOTE 3 — BUSINESS SEGMENT INFORMATION

 

ASC Topic 280, “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) in making decisions on how to allocate resources and assess performance. While the Company has twelve operating segments, it has only three reportable operating business segments (Lighting, Graphics, and Electronic Components), an All Other Category, and Corporate and Eliminations.

 

 

 
Page 10

 

 

The Lighting Segment includes outdoor, indoor, and landscape lighting that has been fabricated and assembled for the commercial, industrial and multi-site retail lighting markets, the Company’s primary niche markets (petroleum / convenience store market, automotive dealership market, and quick service restaurant market), and LED solid state digital sports video screens. LED video screens are designed and manufactured by the Company’s Lighting Segment and by LSI Saco in the All Other Category. The Lighting Segment includes the operations of LSI Ohio Operations, LSI Metal Fabrication, LSI MidWest Lighting and LSI Lightron.  These operations have been integrated, have similar economic characteristics and meet the other requirements for aggregation in segment reporting.   

 

The Graphics Segment designs, manufactures and installs exterior and interior visual image elements related to graphics. These products are used in visual image programs in several markets, including the petroleum / convenience store market and multi-site retail operations. The Graphics Segment includes the operations of Grady McCauley, LSI Retail Graphics and LSI Integrated Graphic Systems, which have been aggregated as such facilities manufacture two-dimensional graphics with the use of screen and digital printing, fabricate three-dimensional structural graphics sold in the multi-site retail and petroleum / convenience store markets, and each exhibit similar economic characteristics and meet the other requirements for aggregation in segment reporting.

 

The Electronic Components Segment designs, engineers and manufactures custom designed electronic circuit boards, assemblies and sub-assemblies, and various products used in various applications including the control of solid-state LED lighting and metal halide lighting.  The Electronic Components Segment includes the operations of LSI ADL Technology as well as LSI Virticus. LSI ADL Technology sells electronic circuit boards, assemblies and sub-assemblies directly to customers and also has significant inter-segment sales to the Lighting Segment. LSI Virticus sells lighting control systems directly to customers and to the Lighting Segment. Products produced by this segment may have applications in the Company’s other LED product lines such as digital scoreboards, advertising ribbon boards and billboards.  

 

The All Other Category includes the Company’s operating segments that neither meet the aggregation criteria, nor the criteria to be a separate reportable segment.  The Operations of LSI Images (menu board systems), LSI Adapt (implementation, installation and program management services related to products of the Graphics and Lighting Segments) and LSI Saco Technologies (designs and produces high-performance light engines, large format video screens using solid-state LED technology, and certain specialty LED lighting) are combined in the All Other Category.

 

The Company’s corporate administration activities are reported in a line item titled Corporate and Eliminations.  This primarily includes 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, and deferred income tax assets.

 

There was no concentration of consolidated net sales in the three months ended September 30, 2013 or 2012. There was no concentration of accounts receivable at September 30, 2013 and 2012. 

  

 
Page 11

 

 

Summarized financial information for the Company’s reportable business segments is provided for the indicated periods and as of September 30, 2013 and June 30, 2013:

 

(In thousands)

 

Three Months Ended

September 30

 
   

2013

   

2012

 

Net Sales:

               

Lighting Segment

  $ 59,471     $ 55,791  

Graphics Segment

    14,008       10,745  

Electronic Components Segment

    5,080       5,754  

All Other Category

    1,927       2,429  
    $ 80,486     $ 74,719  
                 

Operating Income (Loss):

               

Lighting Segment

  $ 3,811     $ 4,513  

Graphics Segment

    163       (355

)

Electronic Components Segment

    972       786  

All Other Category

    4       (2

)

Corporate and Eliminations

    (2,111

)

    (1,915

)

    $ 2,839     $ 3,027  
                 

Capital Expenditures:

               

Lighting Segment

  $ 491     $ 316  

Graphics Segment

    57       218  

Electronic Components Segment

    70       133  

All Other Category

    29       30  

Corporate and Eliminations

    583       639  
    $ 1,230     $ 1,336  
                 

Depreciation and Amortization:

               

Lighting Segment

  $ 706     $ 1,165  

Graphics Segment

    221       222  

Electronic Components Segment

    366       320  

All Other Category

    40       47  

Corporate and Eliminations

    75       96  
    $ 1,408     $ 1,850  

 

   

September 30,

2013

   

June 30, 2013

 

Identifiable Assets:

               

Lighting Segment

  $ 93,672     $ 90,536  

Graphics Segment

    26,483       28,792  

Electronic Components Segment

    31,740       30,926  

All Other Category

    6,727       6,361  

Corporate and Eliminations

    13,482       12,564  
    $ 172,104     $ 169,179  


 

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 including impairment of goodwill, but excluding interest expense and interest income. Identifiable assets are those assets used by each segment in its operations. Corporate identifiable assets primarily consist of cash, invested cash (if any), refundable income taxes, and deferred income tax assets. Inter-segment revenues were eliminated in consolidation as follows:

 

 
Page 12

 

 

 

   

Three Months Ended

September 30

 

(In thousands)

 

2013

   

2012

 
                 

Lighting Segment inter-segment net sales

  $ 898     $ 657  
                 

Graphics Segment inter-segment net sales

  $ 205     $ 837  
                 

Electronic Components inter-segment net sales

  $ 8,504     $ 6,336  
                 

All other Category inter-segment net sales

  $ 2,155     $ 866  

 

 

The Company considers its geographic areas to be:  1) the United States, and 2) Canada.  The majority of the Company’s operations are in the United States, with one operation in Canada.  The geographic distribution of the Company’s net sales and long-lived assets are as follows:

 

(In thousands)

 

Three Months Ended

September 30

 
   

2013

   

2012

 

Net Sales (a):

               

United States

  $ 79,673     $ 74,689  

Canada

    813       30  
    $ 80,486     $ 74,719  

 

 

   

September 30,

2013

   

June 30,

2013

 

Long-lived Assets (b):

               

United States

  $ 47,032     $ 46,843  

Canada

    340       336  
    $ 47,372     $ 47,179  

 

 

a.

Net sales are attributed to geographic areas based upon the location of the operation making the sale.

 

b.

Long-lived assets include property, plant and equipment, and other long term assets.  Goodwill and intangible assets are not included in long-lived assets.

 

 
Page 13

 

 

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

September 30

 
   

2013

   

2012

 
                 

BASIC EARNINGS PER SHARE

               
                 

Net income

  $ 1,865     $ 1,830  
                 

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

    24,057       24,028  

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

    296       276  
                 

Weighted average shares outstanding

    24,353       24,304  
                 

Basic earnings per share

  $ 0.08     $ 0.08  
                 

DILUTED EARNINGS PER SHARE

               
                 

Net income

  $ 1,865     $ 1,830  
                 

Weighted average shares outstanding

               
                 

Basic

    24,353       24,304  
                 

Effect of dilutive securities (b):

               

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

    134       69  
                 

Weighted average shares outstanding (c)

    24,487       24,373  
                 

Diluted earnings per share

  $ 0.08     $ 0.08  

 

 

  

(a)

Includes shares accounted for like treasury stock in accordance with Accounting Standards Codification Topic 710, Compensation - General.

 

  

(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 2,184,025 common shares and 1,838,650 common shares at September 30, 2013 and 2012, respectively, were not included in the computation of diluted earnings per share because the exercise price was greater than the average fair market value of the common shares.

 

 

 
Page 14

 

 

NOTE 5 — INVENTORIES

 

The following information is provided as of the dates indicated:

 

(In thousands)

 

September 30,

2013

   

June 30,

2013

 
                 

Inventories:

               

Raw materials

  $ 27,951     $ 28,113  

Work-in-process

    6,347       4,959  

Finished goods

    8,809       9,021  

Total Inventories

  $ 43,107     $ 42,093  

 

NOTE 6 — ACCRUED EXPENSES

 

The following information is provided as of the dates indicated:

 

(In thousands)

 

September 30,

2013

   

June 30,

2013

 
                 

Accrued Expenses:

               

Compensation and benefits

  $ 6,834     $ 8,023  

Customer prepayments

    2,384       947  

Accrued sales commissions

    1,730       1,595  

Other accrued expenses

    3,667       3,216  

Total Accrued Expenses

  $ 14,615     $ 13,781  

 

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 in accordance with ASC Topic 350, “Intangibles – Goodwill and Other.”  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 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, that 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. Based on this assessment, no such potential impairment conditions were noted during the three month periods ended September 30, 2013 and 2012.

 

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.  These include operating results, forecasts, anticipated future cash flows and marketplace data, to name a few.  There are inherent uncertainties related to these factors and judgments in applying them to the analysis of goodwill impairment.

 

 

 
Page 15

 

 

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

 

Goodwill

                 

Electronic

                 

(In thousands)

 

Lighting

Segment

   

Graphics

Segment

   

Components

Segment

   

All Other

Category

   

Total

 

Balance as of June 30, 2013

                                       

Goodwill

  $ 34,913     $ 24,959     $ 11,621     $ 6,850     $ 78,343  

Accumulated impairment losses

    (34,778

)

    (24,959

)

    (2,413

)

    (5,685

)

    (67,835

)

Goodwill, net as of June 30, 2013

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

Balance as of September 30, 2013

                                       

Goodwill

    34,913       24,959       11,621       6,850       78,343  

Accumulated impairment losses

    (34,778

)

    (24,959

)

    (2,413

)

    (5,685

)

    (67,835

)

Goodwill, net as of September 30, 2013

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

 

In the first quarter of fiscal 2014, the Company purchased intellectual property related to certain lighting control systems. The cost of this intellectual property was $268,000 and it is being amortized over a nine year period.

 

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

 

   

September 30, 2013

 

Other Intangible Assets

 

Gross

                 

(In thousands)

 

Carrying

Amount

   

Accumulated

Amortization

   

Net

Amount

 

Amortized Intangible Assets

                       

Customer relationships

  $ 10,352     $ 7,152     $ 3,200  

Patents

    338       58       280  

LED technology

                       

firmware, software

    12,361       11,018       1,343  

Trade name

    460       385       75  

Non-compete agreements

    768       439       329  

Total Amortized Intangible Assets

    24,279       19,052       5,227  
                         

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

  $ 27,701     $ 19,052     $ 8,649  

 

   

June 30, 2013

 

(In thousands)

 

Gross

Carrying

Amount

   

Accumulated

Amortization

   

Net

Amount

 

Amortized Intangible Assets

                       

Customer relationships

  $ 10,352     $ 7,068     $ 3,284  

Patents

    70       55       15  

LED technology firmware, software

    12,361       10,958       1,403  

Trade name

    460       362       98  

Non-compete agreements

    948       591       357  

Total Amortized Intangible Assets

    24,191       19,034       5,157  
                         

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

  $ 27,613     $ 19,034     $ 8,579  

 

 

 
Page 16

 

 

(In thousands)

 

Amortization Expense of

Other Intangible Assets

 
   

September 30, 2013

   

September 30, 2012

 
                 

Three Months Ended

  $ 198     $ 689  

 

The Company expects to record amortization expense as follows:

 

(In thousands)

       
         

2014

  $ 816  

2015

  $ 735  

2016

  $ 730  

2017

  $ 634  

2018

  $ 623  

After 2018

  $ 1,887  

 

NOTE 8  -  REVOLVING LINES OF CREDIT

 

The Company has a $30 million unsecured revolving line of credit with its bank group in the U.S., all of which was available as of September 30, 2013.  The line of credit expires in the third quarter of fiscal 2016.  Annually in the third quarter, the credit facility is renewable with respect to adding an additional year of commitment, if the bank group and the Company so choose, to replace the year just ended.  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 175 and 215 basis points depending upon the ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA”), as defined in the credit facility.  The fee on the unused balance of the $30 million committed line of credit is 25 basis points.  Under the terms of this credit facility, the Company has agreed to a negative pledge of assets and is required to comply with financial covenants that limit the amount of debt obligations, require a minimum amount of tangible net worth, and limit the ratio of indebtedness to EBITDA. 

 

The Company also has a $5 million line of credit for its Canadian subsidiary.  The line of credit expires in the third quarter of fiscal 2015.  Interest on the Canadian subsidiary’s line of credit is charged based upon a 200 basis point increment over the LIBOR rate or based upon an increment over the United States base rate if funds borrowed are denominated in U.S. dollars or an increment over the Canadian prime rate if funds borrowed are denominated in Canadian dollars.  There are no borrowings against this line of credit as of September 30, 2013.

 

The Company is in compliance with all of its loan covenants as of September 30, 2013.

 

NOTE 9 -  CASH DIVIDENDS

 

The Company paid cash dividends of $1,443,000 and $1,441,000 in the three months ended September 30, 2013 and 2012, respectively.  In October 2013, the Board of Directors declared a regular quarterly cash dividend of $0.06 per share payable November 12, 2013 to shareholders of record November 5, 2013. The cash dividend indicated annual rate for fiscal 2014 is $0.24 per share.

 

NOTE 10 — EQUITY COMPENSATION

 

Stock Options 

 

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 replaces all previous equity compensation plans. The options granted or stock awards made pursuant to this plan are granted at fair market value at date of grant or award.  Options granted to non-employee directors become exercisable 25% each ninety days (cumulative) from date of grant and options granted to employees generally become exercisable 25% per year (cumulative) beginning one year after the date of grant.  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 699,971 shares (includes 331,523 shares transferred in from the previous plan), all of which were available for future grant or award as of September 30, 2013.  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, and other stock awards.  As of September 30, 2013, a total of 2,740,850 options for common shares were outstanding from this plan as well as two previous stock option plans (each of which had also been approved by shareholders), and of these, a total of 1,932,987 options for common shares were vested and exercisable.  As of September 30, 2013, the approximate unvested stock option expense that will be recorded as expense in future periods is $867,074.  The weighted average time over which this expense will be recorded is approximately 35 months.

 

 

 
Page 17

 

 

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

September 30

 
   

2013

   

2012

 
                 

Dividend yield

    3.3 %     3.6 %

Expected volatility

    53 %     51 %

Risk-free interest rate

    1.7 %     0.6 %

Expected life (years)

    5.5       4.7  

 

At September 30, 2013, the 421,000 options granted during the first three months of fiscal 2014 to employees had exercise prices of $7.20 per share, fair values of $2.64 per share, and remaining contractual lives of nine years eleven months.

 

At September 30, 2012, the 408,750 options granted during the first three months of fiscal 2013 to both employees and non-employee directors had exercise prices of $6.58 per share, fair values of $2.11 per share, and remaining contractual lives of nine years eleven months.

 

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 2.2% forfeiture rate effective July 1, 2013. Previous estimated forfeiture rates were 2.3% effective January 1, 2013, 3.4% effective October 1, 2012, 4.1% effective April 1, 2012, 3.6% effective April 1, 2011, 3.0% effective July 1, 2010 and 6.55% prior to July 1, 2010.  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 $685,659 and $518,393 of expense related to stock options in the three months ended September 30, 2013 and 2012, respectively.  As of September 30, 2013, the Company had 2,723,918 stock options that were vested and that were expected to vest, with a weighted average exercise price of $9.55 per share, an aggregate intrinsic value of $2,324,254 and weighted average remaining contractual terms of 6.1 years.

 

 

 
Page 18

 

 

Information related to all stock options for the three months ended September 30, 2013 and 2012 is shown in the following table:

  

   

Three Months Ended September 30, 2013

 
   

Shares

   

Weighted

Average

Exercise

Price

   

Weighted

Average

Remaining

Contractual Term

(years)

   

Aggregate

Intrinsic

Value

 
                                 

Outstanding at 6/30/13

    2,341,150     $ 9.95       5.6     $ 1,544,896  
                                 

Granted

    421,000     $ 7.20                  

Forfeitures

    (18,675

)

  $ 10.31                  

Exercised

    (2,625

)

  $ 5.60                  
                                 

Outstanding at 9/30/13

    2,740,850     $ 9.53       6.1     $ 2,350,457  
                                 

Exercisable at 9/30/13

    1,932,987     $ 10.67       4.8     $ 1,032,942  

 

 

   

Three Months Ended September 30, 2012

 
   

Shares

   

Weighted

Average

Exercise

Price

   

Weighted

Average

Remaining

Contractual Term

(years)

   

Aggregate

Intrinsic

Value

 
                                 

Outstanding at 6/30/12

    2,006,250     $ 10.64       5.8     $ 654,747  
                                 

Granted

    408,750     $ 6.58                  

Forfeitures

    (13,800

)

  $ 19.76                  

Exercised

    (1,500

)

  $ 5.21                  
                                 

Outstanding at 9/30/12

    2,399,700     $ 9.90       6.3     $ 585,326  
                                 

Exercisable at 9/30/12

    1,669,725     $ 11.31       5.2     $ 293,398  

 

 

The aggregate intrinsic value of options exercised during the three months ended September 30, 2013 and 2012 were $6,428 and $2,084, respectively. The Company received $14,704 and $7,815 of cash from employees who exercised options in the three month periods ended September 30, 2013 and 2012, respectively. Additionally, the Company recorded $2,250 as a reduction of federal income taxes payable, $735 as an increase in common stock, and $1,515 as a reduction of income tax expense 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.

 

Stock Compensation Awards 

 

The Company awarded a total of 5,940 and 1,692 common shares in the three months ended September 30, 2013 and 2012, respectively, as stock compensation awards. These common shares were valued at their approximate $47,500 and $12,000 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. 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 September 30, 2013 there were 31 participants, all with fully vested account balances. A total of 306,432 common shares with a cost of $2,921,000, and 288,505 common shares with a cost of $2,791,000 were held in the plan as of September 30, 2013 and June 30, 2013, 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 accounts for assets held in the non-qualified deferred compensation plan in accordance with Accounting Standards Codification Topic 710, Compensation — General. The Company used approximately $129,900 and $121,400 to purchase 17,927 and 18,100 common shares of the Company in the open stock market during the three months ended September 30, 2013 and 2012, respectively, for either employee salary deferrals or Company contributions into the non-qualified deferred compensation plan. For fiscal year 2014, the Company estimates the Rabbi Trust for the Nonqualified Deferred Compensation Plan will make net repurchases in the range of 22,000 to 25,000 common shares of the Company. The Company does not currently repurchase its own common shares for any other purpose.

 

 
Page 19

 

 

NOTE 11  -  SUPPLEMENTAL CASH FLOW INFORMATION

 

(In thousands)

 

Three Months Ended

September 30

 
   

2013

   

2012

 

Cash payments:

               

Interest

  $ 19     $ 19  

Income taxes

  $ 20     $ 837  
                 

Issuance of common shares as compensation

  $ 48     $ 12  

 

NOTE 12 – COMMITMENTS AND CONTINGENCIES

 

As part of the acquisition of Virticus Corporation on March 19, 2012, a contingent Earn-Out liability of $877,000 was recorded based on the fair value of estimated Earn-Out payments. This discounted liability is to be paid over a five year period, contingent upon reaching certain sales in each year over the five year period (fiscal year 2013 through fiscal year 2017). In December 2012, as a result of modified sales forecasts for LSI Virticus, the fair value of the Earn-Out liability was adjusted to $218,000. In June 2013, another revised forecast was provided which in turn reduced the remaining Earn-Out liability to zero. In addition to the $877,000 reversal of the Earn-Out liability, which was recorded in selling and administrative expenses in Corporate and Eliminations, $20,000 of accrued interest expense was also reversed. As of September 30, 2013, the maximum potential undiscounted liability related to the Earn-Out is $4 million. This would be based upon the achievement of a defined level of sales of lighting control systems in fiscal years 2014 through 2017. The likelihood of this occurring is not considered probable.

 

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

 

The Company may occasionally issue a standby letter of credit in favor of third parties. As of September 30, 2013, there were no standby letter of credit agreements.  

 

 
Page 20

 

 

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

 
   

September 30

 
   

2013

   

2012

 
                 

Lighting Segment

  $ 59,471     $ 55,791  

Graphics Segment

    14,008       10,745  

Electronic Components Segment

    5,080       5,754  

All Other Category

    1,927       2,429  
    $ 80,486     $ 74,719  

 

Operating Income (Loss) by Business Segment

(In thousands)

 

Three Months Ended

 
   

September 30

 
   

2013

   

2012

 
                 

Lighting Segment

  $ 3,811     $ 4,513  

Graphics Segment

    163       (355 )

Electronic Components Segment

    972       786  

All Other Category

    4       (2 )

Corporate and Eliminations

    (2,111 )     (1,915 )
    $ 2,839     $ 3,027  

 

Summary Comments

 

Fiscal 2014 first quarter net sales of $80,486,000 increased $5.8 million or 7.7% as compared to first quarter fiscal 2013. Net sales were favorably influenced by increased net sales of the Lighting Segment (up $3.7 million or 6.6%) and increased net sales of the Graphics Segment (up $3.3 million or 30.4%). Net sales were unfavorably influenced by decreased net sales of the Electronic Components Segment (down $0.7 million or 11.7%) and decreased net sales of the All Other Category (down $0.5 million or 20.7%).

 

The Company’s total net sales of products and services related to solid-state LED technology in light fixtures and video screens for sports, advertising and entertainment markets have been recorded as indicated in the table below.

 

 

   

LED Net Sales

 

(In thousands)

 

FY 2014

   

FY 2013

   

% Change

 
                         

First Quarter

  $ 25,293     $ 23,809       6.2 %

Second Quarter

            18,724          

First Half

            42,533          

Third Quarter

            18,794          

Nine Months

            61,327          

Fourth Quarter

            18,305          

Full Year

          $ 79,632          
 

First quarter fiscal 2014 LED net sales of $25,293,000 were up $1.5 million or 6.2% from the same period of the prior year. The $25,293,000 total LED net sales and the $1.5 million increase is the result of Lighting Segment LED net sales of $23.9 million (up $0.3 million or 1.2%), which is comprised of $23.2 million of light fixtures having solid-state LED technology and $0.7 million related to video screens, Graphics Segment LED net sales of $0.7 million (up $0.5 million or 239%), and All Other Category LED net sales of $0.7 million (up $0.7 million from few sales in the same period last year).

 

 

 

 
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Results of Operations

 

THREE MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2012

 

Lighting Segment

(In thousands)

 

Three Months Ended

 
   

September 30

 
   

2013

   

2012

 
                 

Net Sales

  $ 59,471     $ 55,791  

Gross Profit

  $ 14,283     $ 13,894  

Operating Income

  $ 3,811     $ 4,513  

  

Lighting Segment net sales of $59,471,000 in the first quarter of fiscal 2014 increased 6.6% from fiscal 2013 same period net sales of $55,791,000. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $23.2 million in the first quarter of fiscal 2014, representing a $3.9 million or 20.0% increase from fiscal 2013 first quarter net sales of solid-state LED light fixtures of $19.3 million. The Lighting Segment’s net sales related to LED video screens totaled $0.7 million in the first quarter of fiscal 2014, representing a $3.6 million or 84.0% decrease from fiscal 2013 first quarter net sales of $4.3 million. Fiscal 2013 LED video screen sales include the sale of a large outdoor sports video screen with no corresponding sale of similar size in fiscal 2014.   

 

Gross profit of $14,283,000 in the first quarter of fiscal 2014 increased $0.4 million or 2.8% from the same period of fiscal 2013, and decreased from 24.6% to 23.7% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The increase in amount of gross profit at a lower gross margin percentage is due to the net effect of increased net product sales, competitive pricing pressures, customer and product mix, direct labor inefficiencies as a result of an increase in the temporary workforce required to accommodate higher sales volume, increased overhead absorption and increased freight costs as a percentage of sales. Also contributing to the change in gross profit is increased employee compensation and wage expense ($0.6 million), increased repairs and maintenance ($0.1 million), increased supplies ($0.1 million), decreased customer relations expense ($0.3 million), and increased warranty expense ($0.4 million).

 

Selling and administrative expenses of $10,472,000 in the first quarter of fiscal year 2014 increased $1.1 million or 11.6% from the same period of fiscal 2013 primarily as the net result of increased employee compensation and benefits expense ($0.2 million), increased research and development expense ($0.3 million), increased outside service expense ($0.1 million), decreased amortization expense ($0.5 million), and increased sales commission ($1.0 million). Commission expense grew as a direct result of the increase in sales volume and as a result of an increase in the commission rate.

 

The Lighting Segment first quarter fiscal 2014 operating income of $3,811,000 decreased $0.7 million or 15.6% from operating income of $4,513,000 in the same period of fiscal 2013. This decrease of $0.7 million was primarily the net result of increased net sales, higher gross profit and a lower gross margin as a percentage of net sales, and increased selling and administrative expenses.

 

Graphics Segment

(In thousands)

 

Three Months Ended

 
   

September 30

 
   

2013

   

2012

 
                 

Net Sales

  $ 14,008     $ 10,745  

Gross Profit

  $ 2,522     $ 1,858  

Operating Income (Loss)

  $ 163     $ (355 )

 

 

Graphics Segment net sales of $14,008,000 in the first quarter of fiscal 2014 increased 30.4% from fiscal 2013 same period net sales of $10,745,000. The $3.3 million increase in Graphics Segment net sales is primarily the net result of image conversion programs and sales to several petroleum / convenience store customers of which one customer contributed approximately 70% or $3.1 million of the total net increase of $4.4 million, two grocery retailers ($1.9 million decrease), two quick-service restaurant chains ($0.5 million increase), two national drug store retailers ($0.5 million increase) and sales to other customers ($0.3 million decrease). Graphics Segment net sales of graphic identification products that contain solid-state LED light sources and LED lighting for signage totaled $0.7 million in the first quarter of fiscal 2014 compared to $0.2 million in fiscal 2013.

 

 

 
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Gross profit of $2,522,000 in the first quarter of fiscal 2014 increased $0.7 million or 35.7% from the same period of fiscal 2013. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) increased from 16.0% in the first quarter of fiscal 2013 to 17.7% in the first quarter of fiscal 2014. The change in amount of gross profit is due to the net effect of increased net sales, increased overhead absorption, and increased employee compensation and benefit expense ($0.2 million).

 

Selling and administrative expenses of $2,359,000 in the first quarter of fiscal 2014 increased $0.1 million from the same period of fiscal 2013 primarily as a result of increased employee compensation and benefits ($0.2 million).

 

The Graphics Segment first quarter fiscal 2014 operating income of $163,000 increased $0.5 million from an operating loss of $(355,000) in the same period of fiscal 2013. The $0.5 million change from an operating loss in fiscal 2013 to an operating profit in fiscal 2014 was primarily the net result of increased net sales, increased gross margin, and increased selling and administrative expenses.

 

Electronic Components Segment

(In thousands)

 

Three Months Ended

 
   

September 30

 
   

2013

   

2012

 
                 

Net Sales

  $ 5,080     $ 5,754  

Gross Profit

  $ 1,941     $ 1,744  

Operating Income

  $ 972     $ 786  

   

Electronic Components Segment net sales of $5,080,000 in the first quarter of fiscal 2014 decreased 11.7% from fiscal 2013 same period net sales of $5,754,000. The $0.7 million decrease in Electronic Components Segment net sales is primarily the result of a $0.4 million decrease in sales to the transportation market, a $0.1 million increase in sales to the medical market, a $0.1 million decrease in sales to original equipment manufacturers, and a $0.3 million decrease in sales to various other markets. While the net customer sales decreased, the Electronic Components’ inter-segment sales increased $2.2 million or 34.2% due to increased intercompany demand of LED circuit board assemblies used in light fixtures having solid-state LED technology and due to increased intercompany demand for lighting controls.

 

Gross profit of $1,941,000 in the first quarter of fiscal 2014 increased $0.2 million or 11.3% from the same period in fiscal 2013, and decreased from 14.4% to 14.3% as a percentage of net sales (customer plus inter-segment net sales). The $0.2 million increase in amount of gross profit is due to the net effect of decreased customer net sales, increased inter-segment net sales, decreased outside service expense ($0.2 million), and increased employee compensation and wage expense ($0.3 million).

 

Selling and administrative expenses of $969,000 in the first quarter of fiscal 2014 increased slightly from $958,000 in the same period in fiscal 2013. Research and development expense increased $0.1 million offset by small decreases in several other cost categories.

 

The Electronic Components Segment first quarter fiscal 2014 operating income of $972,000 increased $0.2 million from operating income of $786,000 in the same period of fiscal 2013. The $0.2 million increase in operating income was the net result of decreased net customer sales, increased inter-segment net sales, increased gross profit, and slightly increased selling and administrative expense.

 

All Other Category

(In thousands)

 

Three Months Ended

 
   

September 30

 
   

2013

   

2012

 
                 

Net Sales

  $ 1,927     $ 2,429  

Gross Profit

  $ 536     $ 525  

Operating Income (Loss)

  $ 4     $ (2 )

 

All Other Category net sales of $1,927,000 in the first quarter of fiscal 2014 decreased 20.7% from fiscal 2013 net sales of $2,429,000. The $0.5 million decrease in the All Other Category net sales is the net result of decreased sales of menu board systems ($1.0 million), decreased project management net sales ($0.3 million), and increased video screen sales related to the Company’s Montreal facility ($0.8 million). Inter-segment sales increased 149% primarily as a result of increased intercompany project management support.

 

 

 
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Gross profit of $536,000 in the first quarter of fiscal 2014 increased marginally compared to the gross profit of $525,000 in the same period of fiscal 2013. The slight increase in gross profit is the net result of decreased customer net sales more than offset by an increase in inter-segment net sales.

 

Selling and administrative expenses of $532,000 in the first quarter of fiscal 2014 increased slightly compared to selling and administrative expenses of $527,000 in the same period of fiscal year 2013. The small increase in selling and administrative is primarily the result of increased employee compensation and wage expense ($0.1 million) offset by decreased research and development expense ($0.1 million).

 

The All Other Category first quarter fiscal 2014 operating profit of $4,000 compares to an operating loss of $(2,000) in the same period of fiscal 2013. The change from a small operating loss in the first quarter of fiscal 2013 to a small operating profit in fiscal 2014 was the net result of decreased customer net sales more than offset by increased inter-segment net sales.

 

Corporate and Eliminations

(In thousands)

 

Three Months Ended

 
   

September 30

 
   

2013

   

2012

 
                 

Gross (Loss)

  $ (160 )   $ (150 )

Operating (Loss)

  $ (2,111 )   $ (1,915 )

 

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

 

Administrative expenses of $1,951,000 in the first quarter of fiscal 2014 increased $0.2 million or 10.5% from the same period of the prior year. The increase in expense is primarily the result of an increase in employee compensation and wage expense ($0.1 million) and an increase in outside service expense ($0.1 million).

 

Consolidated Results

 

The Company reported net interest expense of $12,000 in the first quarter of fiscal 2014 as compared to net interest expense of $20,000 in the same period of fiscal 2013. 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. In fiscal 2013, there was interest expense related to the Virticus Earn-Out liability with no corresponding interest expense in fiscal 2014.

 

The $962,000 income tax expense in the first quarter of fiscal 2014 represents a consolidated effective tax rate of 34.0%. This is the net result of an income tax rate of 34.7% for the Company’s U.S. operations influenced by certain permanent book-tax differences, Canadian income tax credits, by a benefit related to uncertain income tax positions, and by a full valuation reserve on the Company’s Canadian tax position. The $1,177,000 income tax expense in the first quarter of fiscal 2013 represents a consolidated effective tax rate of 39.1%. This is the net result of an income tax rate of 37.8% for the Company's U.S. operations influenced by certain permanent book-tax differences that were significant relative to the amount of taxable income, Canadian income tax credits, by a benefit related to uncertain income tax positions, and by a full valuation reserve on the Company's Canadian tax position.

 

The Company reported net income of $1,865,000 in the first quarter of fiscal 2014 as compared to net income of $1,830,000 in the same period of the prior year. The slight increase in net income in the first quarter of fiscal 2014 as compared to fiscal 2013 is primarily the net result of increased net sales, increased gross profit, a lower gross margin percentage, increased operating expenses, and lower income tax expense in fiscal 2014 compared to fiscal 2013. Diluted earnings per share of $0.08 were reported in the first quarter of fiscal 2014 as compared to $0.08 diluted earnings per share in the same period of fiscal 2013. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first quarter of fiscal 2014 were 24,487,000 shares as compared to 24,373,000 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.

 

 

 
Page 24

 

 

At September 30, 2013, the Company had working capital of $77.5 million, compared to $76.7 million at June 30, 2013. The ratio of current assets to current liabilities was 3.76 to 1 as compared to a ratio of 3.93 to 1 at June 30, 2013. The $0.8 million increase in working capital from June 30, 2013 to September 30, 2013 was primarily related to the net effect of increased cash and cash equivalents ($1.4 million), increased net accounts receivable ($0.9 million), an increase in other current assets ($0.5 million), and increased net inventory ($1.0 million), partially offset by an increase in accrued expenses ($0.8 million), a decrease in refundable income taxes ($1.2 million), and an increase in accounts payable ($1.1 million). 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 $4.2 million of cash from operating activities in the first quarter of fiscal 2014 as compared to a generation of cash of $3.5 million in the same period of the prior year. This $0.7 million increase in net cash flows from operating activities is primarily the net result of the reduction in the increase in inventory (favorable change of $1.8 million), a greater decrease in refundable income tax (favorable change of $1.0 million), a greater increase in customer prepayments (favorable change of $1.4 million), a decrease rather than an increase in accrued expenses and other (unfavorable change of $2.2 million), a smaller increase in accounts payable (unfavorable change of $0.8 million), and a decrease in depreciation and amortization expense (unfavorable change of $0.4 million).

 

Net accounts receivable were $46.9 million and $46.0 million at September 30, 2013 and June 30, 2013, respectively. The increase of $0.9 million in net receivables is primarily due to the combined net effect of a higher amount of net sales in the latter two months of the first quarter of fiscal 2014 as compared to the latter two months of the fourth quarter of fiscal 2013 and by a lower DSO. The DSO decreased to 52 days at September 30, 2013 from 60 days at June 30, 2013. 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 $43.1 million at September 30, 2013 increased $1.0 million from June 30, 2013 levels. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory increases occurred in the first quarter of fiscal 2014 in the Lighting Segment of approximately $0.7 million and the Electronic Components Segment of approximately $0.5 million and a net inventory decrease occurred in the Graphics Segment of approximately $0.1 million.

 

Cash generated from operations and borrowing capacity under two line of credit facilities are the Company’s primary source of liquidity. The Company has an unsecured $30 million revolving line of credit with its U.S. bank group, with all of the $30 million of the credit line available as of October 18, 2013 This line of credit is a $30 million three year committed credit facility expiring in the third quarter of fiscal 2016. Additionally, the Company has a separate $5 million line of credit, renewable annually in the third fiscal quarter, for the working capital needs of its Canadian subsidiary, LSI Saco Technologies. As of October 18, 2013, all $5 million of this line of credit was available. The Company believes that $35 million total lines of credit plus cash flows from operating activities are adequate for the Company’s fiscal 2014 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.

 

The Company used $1.2 million of cash related to investing activities in the first quarter of fiscal 2014 as compared to a use of $1.3 million in the same period of the prior year, resulting in a favorable change of $0.1 million. Capital expenditures for the first quarter of fiscal 2014 decreased $0.1 million to $1.2 million from the same period in fiscal 2013. The largest components of the fiscal 2014 capital expenditures is the upgrade to the company’s ERP software and tooling and equipment related to the Company’s Lighting Segment.

 

The Company used $1.5 million of cash related to financing activities in the first quarter of fiscal 2014 and $1.6 million in the first quarter of fiscal 2013. There was no change in the Company’s dividend policy from the first quarter of fiscal 2013 to fiscal 2014.

 

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.

 

 

 
Page 25

 

 

Cash Dividends

 

In October 2013, the Board of Directors declared a regular quarterly cash dividend of $0.06 per share payable November 12, 2013 to shareholders of record of November 5, 2013. The Company’s cash dividend policy is that the indicated annual dividend rate will be set between 50% and 70% of the expected net income for the current fiscal year. Consideration will also be given by the Board to special year-end cash or stock dividends. The declaration and amount of any cash and stock dividends will be determined by the Company’s Board of Directors, in its discretion, based upon its evaluation of earnings, cash flow, capital requirements and future business developments and opportunities, including acquisitions.

 

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 collectibility is reasonably assured.  Revenue is typically recognized 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.  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 four 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 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.  However, product revenue related to orders where the customer requires the Company to install the product is recognized when the product is installed.  Other than normal product warranties or the possibility of installation or post-shipment service, support and maintenance of certain solid state LED video screens, billboards, or active digital signage, the Company has no post-shipment responsibilities.

 

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 have been installed at each retail site of the customer. 

 

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

 

The Company evaluates the appropriateness of revenue recognition in accordance with Accounting Standards Codification (“ASC”) Subtopic 605-25, Revenue Recognition:  Multiple–Element Arrangements. 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 ASC Subtopic 985-605, “Software:  Revenue Recognition.”  Our solid-state LED video screens, billboards and active digital signage contain software elements which the Company has determined are incidental and excluded from the scope of ASC Subtopic 985-605.

 

 

 
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Income Taxes

 

The Company accounts for income taxes in accordance with ASC Topic 740, “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 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 examinations.

 

In September 2013, the Internal Revenue Service issued Treasury Decision 9636, which enacted final tax regulations regarding the capitalization and expensing of amounts paid to acquire, produce, or improve tangible property. The regulations also include guidance regarding the retirement of depreciable property. The regulations are required to effective in taxable years beginning on or after January 1, 2014, although taxpayers may choose to apply them in taxable years beginning on or after January 1, 2012. The Company is currently assessing the impact of the final regulations on its financial statements.

 

The Company is recording estimated interest and penalties related to potential underpayment of income taxes as a component of tax expense in the 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 ASC Topic 350, “Intangibles – Goodwill and Other.”  The Company may first assess qualitative factors in order to determine if goodwill is impaired in accordance with ASU 2011 – 08, “Intangible – Goodwill and Other (Topic 350).” 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, that 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 as required by ASC Topic 360, “Property, Plant, and Equipment.”  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 collectibility 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 historical trends.

 

 

 
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Warranty Reserves

 

The Company maintains a warranty reserve which is reflective of its limited warranty policy. The warranty reserve covers the estimated future costs to repair or replace defective product or installation services, whether the product is returned, scrapped or repaired in the field. The warranty reserve is first determined based upon known claims or issues, and then by the application of a specific percentage of sales to cover general claims. The percentage applied to sales to calculate general claims is based upon historical claims as a percentage of sales. Management addresses the adequacy of its warranty reserves on a quarterly basis to ensure the reserve is accurate based upon the most current information.

 

Inventory Reserves

 

The Company maintains an inventory reserve for probable obsolescence of its 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. Significant judgment is used to establish obsolescence 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 July 2013, the Financial Accounting Standards Board issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This amended guidance is intended to eliminate the diversity that is in practice with regard to the financial statement presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amended guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2013, or the Company’s fiscal year 2015, with early adoption permissible. The adoption of this guidance is not expected to have a material impact on the financial statements.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There have been no material changes in the Registrant’s exposure to market risk since June 30, 2013.  Additional information can be found in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, which appears on page 14 of the Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

An evaluation was performed as of September 30, 2013 under the supervision and with the participation of the Registrant’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures pursuant to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934.  Based upon this evaluation, the Registrant’s Chief Executive Officer and Chief Financial Officer concluded that the Registrant’s disclosure controls and procedures were effective as of September 30, 2013, in all material respects, to ensure that information required to be disclosed in the reports the Registrant files and submits under the Exchange Act are recorded, processed, summarized and reported as and when required.

 

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 September 30, 2013, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 
Page 28

 

 

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 first quarter of fiscal 2014 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

 

7/1/13 to 7/31/13

    801     $ 8.39       801      

(1)

 

8/1/13 to 8/31/13

    16,204     $ 7.19       16,204      

(1)

 

9/1/13 to 9/30/13

    922     $ 8.35       922      

(1)

 

Total

    17,927     $ 7.25       17,927      

(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 475,000 shares of the Company to be held in and distributed by the Plan.  At September 30, 2013, the Plan held 306,432 common shares of the Company and had distributed 131,951 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

 

 
Page 29

 

 

 

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/ Robert J. Ready

 

 

 

Robert J. Ready

 

 

 

President and Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

 

 

 

By:

/s/ Ronald S. Stowell