lyts20160331_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 MARCH 31, 2016.

 

 

 

 

 

 

 

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 April 26, 2016 there were 24,918,082 shares of the Registrant's common stock, no par value per share, outstanding.

 

 
 

 

 

LSI INDUSTRIES INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2016

 

INDEX

 

 

 

 

PART I.  Financial Information

  

Begins on Page

  

  

  

  

  

  

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

  

23

  

  

  

  

  

  

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

  

37

  

  

  

  

  

  

ITEM 4.

Controls and Procedures

  

37

  

  

  

  

  

PART II.  Other Information

  

  

  

  

  

  

  

  

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

  

38

  

  

  

  

  

  

ITEM 6.

Exhibits

  

38

  

  

  

  

  

Signatures

 

39

 

“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

March 31

   

Nine Months Ended

March 31

 

(In thousands, except per share data)

 

2016

   

2015

   

2016

   

2015

 
                                 

Net sales

  $ 70,740     $ 68,603     $ 241,352     $ 231,784  
                                 

Cost of products and services sold

    54,191       52,298       177,528       176,316  
                                 

Gross profit

    16,549       16,305       63,824       55,468  
                                 

Loss on sale of subsidiary (see Note 13)

    --       --       --       565  
                                 

(Gain) on sale of building

    --       --       --       (343

)

                                 

Selling and administrative expenses

    15,817       15,723       51,949       49,906  
                                 

Operating income

    732       582       11,875       5,340  
                                 

Interest (income)

    (28

)

    (8

)

    (54

)

    (17

)

                                 

Interest expense

    9       11       27       34  
                                 

Income before income taxes

    751       579       11,902       5,323  
                                 

Income tax expense

    229       186       3,848       1,815  
                                 

Net income

  $ 522     $ 393     $ 8,054     $ 3,508  
                                 
                                 

Earnings per common share (see Note 4)

                               

Basic

  $ 0.02     $ 0.02     $ 0.32     $ 0.14  

Diluted

  $ 0.02     $ 0.02     $ 0.32     $ 0.14  
                                 
                                 

Weighted average common shares outstanding

                               

Basic

    25,080       24,528       24,918       24,470  

Diluted

    25,700       24,643       25,494       24,550  

 

 

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)  

March 31,

2016

   

June 30,

2015

 
                 

ASSETS

               
                 

Current Assets

               
                 

Cash and cash equivalents

  $ 33,779     $ 26,409  
                 

Accounts receivable, less allowance for doubtful accounts of $326 and $317, respectively

    37,890       43,661  
                 

Inventories

    46,193       43,083  
                 

Refundable income taxes

    630       99  
                 

Other current assets

    6,590       7,562  
                 

Total current assets

    125,082       120,814  
                 

Property, Plant and Equipment, at cost

               

Land

    6,982       6,952  

Buildings

    38,614       37,706  

Machinery and equipment

    80,032       76,383  

Construction in progress

    3,108       588  
      128,736       121,629  

Less accumulated depreciation

    (81,488

)

    (78,441

)

Net property, plant and equipment

    47,248       43,188  
                 

Goodwill

    10,508       10,508  
                 

Other Intangible Assets, net

    5,713       6,092  
                 

Other Long-Term Assets, net

    1,711       1,777  
                 

Total assets

  $ 190,262     $ 182,379  

 

 

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)

 

March 31,

2016

   

June 30,

2015

 
                 

LIABILITIES & SHAREHOLDERS’ EQUITY

               
                 

Current Liabilities

               

Accounts payable

  $ 11,756     $ 14,721  

Accrued expenses

    21,687       22,126  
                 

Total current liabilities

    33,443       36,847  
                 

Other Long-Term Liabilities

    2,365       2,580  
                 

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 24,902,319 and 24,392,938 shares, respectively

    112,768       106,353  

Retained earnings

    41,686       36,599  
                 

Total shareholders’ equity

    154,454       142,952  
                 

Total liabilities & shareholders’ equity

  $ 190,262     $ 182,379  

 

 

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

 

 
Page 5

 

 

 LSI INDUSTRIES INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

(In thousands)

 

Nine Months Ended

March 31

 
   

2016

   

2015

 

Cash Flows from Operating Activities

               

Net income

  $ 8,054     $ 3,508  

Non-cash items included in net income

               

Depreciation and amortization

    4,903       4,728  
                 

Deferred income taxes

    (126

)

    (584

)

Deferred compensation plan

    328       62  

Stock option expense

    2,542       1,153  

Issuance of common shares as compensation

    168       144  

(Gain) on disposition of building

    --       (343

)

(Gain) on disposition of fixed assets

    (87 )     (2

)

Loss on sale of subsidiary

    --       565  

Allowance for doubtful accounts

    162       268  

Inventory obsolescence reserve

    1,351       1,093  
                 

Changes in certain assets and liabilities:

               

Accounts receivable

    5,588       6,579  

Inventories

    (4,440

)

    901  

Refundable income taxes

    (531

)

    1,885  

Accounts payable

    (3,176

)

    (1,884

)

Accrued expenses and other

    812       4,340  

Customer prepayments

    (310

)

    (625

)

Net cash flows provided by operating activities

    15,238       21,788  
                 

Cash Flows from Investing Activities

 

 

   

 

 

   

Purchases of property, plant and equipment

    (8,410

)

    (3,439

)

Proceeds from sale of subsidiary, net of cash sold

    --       1,494  

Proceeds from sale of fixed assets

    124       953  

Net cash flows (used in) investing activities

    (8,286

)

    (992

)

                 

Cash Flows from Financing Activities

               

Cash dividends paid

    (2,959

)

    (2,172

)

Exercise of stock options

    3,604       401  

Purchase of treasury shares

    (317

)

    (165

)

Issuance of treasury shares

    90       93  

Net cash flows provided by (used in) financing activities

    418       (1,843

)

                 

Increase in cash and cash equivalents

    7,370       18,953  
                 

Cash and cash equivalents at beginning of period

    26,409       9,013  
                 

Cash and cash equivalents at end of period

  $ 33,779     $ 27,966  

 

 

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

 

 
Page 6

 

  

 LSI INDUSTRIES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The interim condensed consolidated financial statements are unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the interim financial statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of March 31, 2016, the results of its operations for the three and nine month periods ended March 31, 2016 and 2015, and its cash flows for the nine month periods ended March 31, 2016 and 2015. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2015 Annual Report on Form 10-K.  Financial information as of June 30, 2015 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 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 five sources of revenue:  revenue from product sales; revenue from installation of products; service revenue generated from providing integrated design, project and construction management, site engineering and site permitting; revenue from the management of media content and digital hardware related to active digital signage; and revenue from shipping and handling.

 

Product revenue is recognized on product-only orders upon passing of title and risk of loss, generally at time of shipment.  However, product revenue related to orders where the customer requires the Company to install the product is recognized when the product is installed.  The Company provides product warranties and certain post-shipment service, support and maintenance of certain solid state LED video screens and billboards.

 

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

 

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

 

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

 

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

 

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

 

 
Page 7

 

 

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

 

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)

 

March 31,

2016

   

June 30,

2015

 
                 

Accounts receivable

  $ 38,216     $ 43,978  

Less: Allowance for doubtful accounts

    (326

)

    (317

)

Accounts receivable, net

  $ 37,890     $ 43,661  

 

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. The FDIC limit for insurance coverage on non-interest bearing accounts is $250,000. As of March 31, 2016 and June 30, 2015, the Company had bank balances of $37,093,000 and $28,494,000, 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 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 (in years)

    28 - 40  

Machinery and equipment (in years)

    3 - 10  

Computer software (in years)

    3 - 8  

 

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

 

The Company recorded $1,603,000 and $1,465,000 of depreciation expense in the third quarter of fiscal 2016 and 2015, respectively, and $4,524,000 and $4,328,000 of depreciation expense in the first nine months of fiscal 2016 and 2015, 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 seven and twenty years.  The Company evaluates definite-lived intangible assets for permanent impairment when triggering events are identified. Neither indefinite-lived intangible assets nor the excess of cost over fair value of assets acquired ("goodwill") are amortized, however they are subject to review for impairment.  See additional information about goodwill and intangibles in Note 7.

 

Fair Value:

 

The Company has financial instruments consisting primarily of cash and cash equivalents, revolving lines of credit, 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 accounting guidance was used to measure the fair value of these nonfinancial assets and nonfinancial liabilities.

 

Product Warranties:

 

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

 

Nine

Months Ended

March 31,

2016

   

Nine

Months Ended

March 31,

2015

   

Fiscal

Year Ended

June 30,

2015

 
                         

Balance at beginning of the period

  $ 3,408     $ 2,662     $ 2,662  

Additions charged to expense

    4,018       2,588       3,185  

Deductions for repairs and replacements

    (2,606

)

    (1,802

)

    (2,439

)

Balance at end of the period

  $ 4,820     $ 3,448     $ 3,408  

 

 
Page 9

 

 

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, outside legal costs and filing fees related to obtaining patents, supplies, depreciation and other administrative costs. The Company expenses as research and development all costs associated with development of software used in solid-state LED products.  All costs are expensed as incurred and are included in selling and administrative expenses.  Research and development costs related to both product and software development totaled $1,562,000 and $1,096,000 for the three months ended March 31, 2016 and 2015, respectively, and $4,193,000 and $4,397,000 for the nine months ended March 31, 2016 and 2015, respectively.

 

Cost of Products and Services Sold:

 

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

 

Earnings Per Common Share:

 

The computation of basic earnings per common share is based on the weighted average common shares outstanding for the period net of treasury shares held in the Company’s non-qualified deferred compensation plan.  The computation of diluted earnings per share is based on the weighted average of common shares outstanding for the period and includes common share equivalents.  Common share equivalents include the dilutive effect of stock options, restricted stock units, contingently issuable shares and common shares to be issued under a deferred compensation plan, all of which totaled 893,000 shares and 440,000 shares for the three months ended March 31, 2016 and 2015, respectively, and 846,000 shares and 401,000 shares for the nine months ended March 31, 2016 and 2015, respectively. See further discussion of earnings per common share in Note 4.

 

New Accounting Pronouncements:

 

In June 2014, the Financial Accounting Standards Board issued ASU 2014-09, “Revenue from Contracts with Customers.” This amended guidance supersedes and replaces all existing U.S. GAAP revenue recognition guidance. The guidance established a new revenue recognition model, changes the basis for deciding when revenue is recognized over a point in time, provides new and more detailed guidance on specific revenue topics, and expands and improves disclosures about revenue. The amended guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2017, or the Company’s fiscal year 2019. The Company has not yet determined the impact the amended guidance will have on its financial statements.

 

 
Page 10

 

 

Comprehensive Income:

 

The Company does not have any comprehensive income items other than net income. The functional currency of the Company’s former Canadian operation was 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.

 

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 - SEGMENT REPORTING INFORMATION

 

The accounting guidance on segment reporting establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (the Company’s Chief Executive Officer or “CODM”) in making decisions on how to allocate resources and assess performance. In the third quarter of fiscal 2015, the Company realigned its operating segments to be in alignment with the financial information received by the then new Chief Executive Officer. The Company’s three operating segments are Lighting, Graphics, and Technology, each of which has a president who is responsible for that business and reports to the CODM. An All Other Category as well as Corporate and Eliminations will also be reported in the segment information. As a result of the realignment of the Company’s operating segments in the third quarter of fiscal 2015, all prior period segment information has been revised so as to be comparable with the new segment reporting structure.

 

The changes made and realignment of the Company’s operating segments involved the following:

 

1)

The segment formerly known as the Electronic Components Segment was renamed as the Technology Segment.

 

2)

The LED Video Screen product line was moved out of the Lighting Segment and into the Technology Segment.

 

3)

The Company’s installation management business (LSI Adapt) and the menu board business (LSI Images) were moved out of the All Other Category and into the Graphics Segment.

 

The Lighting Segment includes outdoor, indoor, and landscape lighting utilizing both traditional and LED light sources, that have been fabricated and assembled for several markets including 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).

 

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

 

 
Page 11

 

 

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

 

The All Other Category includes only the Company’s former subsidiary that designed and produced high-performance light engines, large format video screens using solid-state LED technology, and certain specialty LED lighting. This subsidiary was sold on September 30, 2014 (See Note 13).

 

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 or nine months ended March 31, 2016 or in the three and nine months ended March 31, 2015.  There was no concentration of accounts receivable at March 31, 2016 or June 30, 2015.

 

Summarized financial information for the Company’s operating segments is provided for the indicated periods and as of March 31, 2016 and June 30, 2015:

 

(In thousands)

 

Three Months Ended

March 31

   

Nine Months Ended

March 31

 
   

2016

   

2015

   

2016

   

2015

 

Net Sales:

                               

Lighting Segment

  $ 49,331     $ 48,865     $ 168,007     $ 164,382  

Graphics Segment

    17,162       13,363       59,949       49,656  

Technology Segment

    4,247       6,375       13,396       17,705  

All Other Category

    --       --       --       41  
    $ 70,740     $ 68,603     $ 241,352     $ 231,784  
                                 

Operating Income (Loss):

                               

Lighting Segment

  $ 1,106     $ 2,913     $ 11,970     $ 11,230  

Graphics Segment

    1,174       (320

)

    5,370       798  

Technology Segment

    888       855       3,221       1,986  

All Other Category

    --       --       --       (183

)

Corporate and Eliminations

    (2,436

)

    (2,866

)

    (8,686

)

    (8,491

)

    $ 732     $ 582     $ 11,875     $ 5,340  
                                 

Capital Expenditures:

                               

Lighting Segment

  $ 1,074     $ 319     $ 2,923     $ 1,529  

Graphics Segment

    2,145       29       3,254       935  

Technology Segment

    1,626       97       1,850       448  

All Other Category

    --       --       --       4  

Corporate and Eliminations

    181       437       383       523  
    $ 5,026     $ 882     $ 8,410     $ 3,439  

Depreciation and Amortization:

                               

Lighting Segment

  $ 730     $ 778     $ 2,152     $ 2,229  

Graphics Segment

    293       262       721       768  

Technology Segment

    392       281       1,111       944  

All Other Category

    --       --       --       31  

Corporate and Eliminations

    314       269       919       756  
    $ 1,729     $ 1,590     $ 4,903     $ 4,728  

 

 

 
Page 12

 

 

   

March 31,

2016

   

June 30, 2015

 

Identifiable Assets:

               

Lighting Segment

  $ 87,654     $ 90,713  

Graphics Segment

    33,060       29,477  

Technology Segment

    30,140       28,423  

All Other Category

    --       --  

Corporate and Eliminations

    39,408       33,766  
    $ 190,262     $ 182,379  

 

 

The segment net sales reported above represent sales to external customers.  Segment operating income, which is used in management’s evaluation of segment performance, represents net sales less all operating expenses. Identifiable assets are those assets used by each segment in its operations. Corporate identifiable assets primarily consist of cash, invested cash (if any), refundable income taxes, and deferred income tax assets.

 

The Company records a 10% mark-up on intersegment revenues. Any intersegment profit in inventory is eliminated in consolidation. Intersegment revenues were eliminated in consolidation as follows:

 

   

Three Months Ended

March 31

   

Nine Months Ended

March 31

 

(In thousands)

 

2016

   

2015

   

2016

   

2015

 
                                 

Lighting Segment inter-segment net sales

  $ 715     $ 533     $ 2,143     $ 2,030  
                                 

Graphics Segment inter-segment net sales

  $ 275     $ 132     $ 1,281     $ 388  
                                 

Technology inter-segment net sales

  $ 8,920     $ 6,788     $ 27,236     $ 21,735  
                                 

All Other Category inter-segment net sales

  $ --     $ --     $ --     $ 308  

  

The Company considers its geographic areas to be:  1) the United States, and 2) Canada.  The Company’s operations are in the United States, with one operation previously in Canada.  As a result of the sale of a subsidiary on September 30, 2014, the Company no longer has a presence in Canada (See Note 13). The geographic distribution of the Company’s net sales and long-lived assets are as follows:

 

(In thousands)

 

Three Months Ended

March 31

   

Nine Months Ended

March 31

 
   

2016

   

2015

   

2016

   

2015

 

Net Sales (a):

                               

United States

  $ 70,740     $ 68,603     $ 241,352     $ 231,743  

Canada

    --       --       --       41  
    $ 70,740     $ 68,603     $ 241,352     $ 231,784  

 

   

March 31,

2016

   

June 30,

2015

 

Long-lived Assets (b):

               

United States

  $ 48,959     $ 44,965  

Canada

    --       --  
    $ 48,959     $ 44,965  

 

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

March 31

   

Nine Months Ended

March 31

 
   

2016

   

2015

   

2016

   

2015

 
                                 

BASIC EARNINGS PER SHARE

                               
                                 

Net income

  $ 522     $ 393     $ 8,054     $ 3,508  
                                 

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

    24,807       24,203       24,648       24,149  

Weighted average vested restricted stock units outstanding

    22       --       25       --  

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

    251       325       245       321  

Weighted average shares outstanding

    25,080       24,528       24,918       24,470  
                                 

Basic earnings per share

  $ 0.02     $ 0.02     $ 0.32     $ 0.14  
                                 

DILUTED EARNINGS PER SHARE

                               
                                 

Net income

  $ 522     $ 393     $ 8,054     $ 3,508  
                                 

Weighted average shares outstanding

                               
                                 

Basic

    25,080       24,528       24,918       24,470  
                                 

Effect of dilutive securities (b):

                               

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

    620       115       576       80  
                                 

Weighted average shares outstanding (c)

    25,700       24,643       25,494       24,550  
                                 

Diluted earnings per share

  $ 0.02     $ 0.02     $ 0.32     $ 0.14  

 

 

(a)

Includes shares accounted for as treasury stock according to accounting standards.

 

  

(b)

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

 

  

(c)

Options to purchase 1,032,250 common shares and 1,729,273 common shares at March 31, 2016 and 2015, respectively, and options to purchase 1,391,300 common shares and 2,272,823 common shares at March 31, 2016 and 2015, respectively, were not included in the computation of the three month and nine month periods for diluted earnings per share, respectively, because the exercise price was greater than the average fair market value of the common shares.

 

 
Page 14

 

 

NOTE 5 – INVENTORIES

 

The following information is provided as of the dates indicated:

 

(In thousands)

 

March 31,

2016

   

June 30,

2015

 
                 

Inventories:

               

Raw materials

  $ 29,284     $ 27,920  

Work-in-process

    3,971       4,658  

Finished goods

    12,938       10,505  

Total Inventories

  $ 46,193     $ 43,083  

 

NOTE 6 - ACCRUED EXPENSES

 

The following information is provided as of the dates indicated:

 

(In thousands)

 

March 31,

2016

   

June 30,

2015

 
                 

Accrued Expenses:

               

Compensation and benefits

  $ 11,060     $ 11,614  

Customer prepayments

    1,014       1,324  

Accrued sales commissions

    2,058       1,982  

Accrued warranty

    4,820       3,408  

Other accrued expenses

    2,735       3,798  

Total Accrued Expenses

  $ 21,687     $ 22,126  

 

 
Page 15

 

 

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 the accounting standard on goodwill and intangible assets. The Company may first assess qualitative factors in order to determine if goodwill and indefinite-lived intangible assets are impaired. If through the qualitative assessment it is determined that it is more likely than not that goodwill and indefinite-lived assets are not impaired, no further testing is required. If it is determined more likely than not that goodwill and indefinite-lived assets are impaired, or if the Company elects not to first assess qualitative factors, the Company’s impairment testing continues with the estimation of the fair value of reporting units and indefinite-lived intangible assets using a combination of a market approach and an income (discounted cash flow) approach 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.

 

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.

 

As of March 1, 2016, the Company performed its annual goodwill impairment test on the three reporting units that contain goodwill. The preliminary goodwill impairment test in the Lighting Segment passed with a business enterprise value that was $89.0 million or 112% above the carrying value of this reporting unit including goodwill. The preliminary goodwill impairment test of the one reporting unit with goodwill in the Graphics Segment passed with an estimated business enterprise value that was $1.7 million or 183% above the carrying value of the reporting unit including goodwill. The preliminary goodwill impairment test of the reporting unit in the Technology Segment that contains goodwill passed with an estimated business enterprise value that was $15.4 million or 59% above the carrying value of this reporting unit including goodwill. The impairment test is expected to be completed in the fourth quarter of fiscal 2016. It is anticipated that the results of the test will not change when the test is complete.

 

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

 

Goodwill

                                       

(In thousands)

 

Lighting

Segment

   

Graphics

Segment

   

Technology

Segment

   

All Other

Category

   

Total

 
                                         

Balance as of June 30, 2015

                                       

Goodwill

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

Accumulated impairment losses

    (34,778

)

    (27,525

)

    (2,413

)

    --       (64,716

)

Goodwill, net as of June 30, 2015

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

Balance as of March 31, 2016

                                       

Goodwill

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

Accumulated impairment losses

    (34,778

)

    (27,525

)

    (2,413

)

    --       (64,716

)

Goodwill, net as of March 31, 2016

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

 

The Company performed its annual review of indefinite-lived intangible assets as of March 1, 2016 and determined there was no impairment. The preliminary indefinite-lived intangible impairment test passed with a fair market value that was $8.4 million or 245% above its carrying value. The impairment test is expected to be completed in the fourth quarter of fiscal 2016. It is anticipated that the results of the test will not change when the test is complete.

 

In the first quarter of fiscal 2015, the Company sold LSI Saco Technologies Inc. A customer relationship intangible asset with a gross carrying amount of $1,036,000 and accumulated amortization of $428,000 was sold as a result of the sale of LSI Saco Technologies (See Note 13).

 

 
Page 16

 

 

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

 

   

March 31, 2016

 

Other Intangible Assets

 

Gross

                 

(In thousands)

 

Carrying

   

Accumulated

   

Net

 
   

Amount

   

Amortization

   

Amount

 

Amortized Intangible Assets

                       

Customer relationships

  $ 9,316       7,509       1,807  

Patents

    338       145       193  

LED technology firmware, software

    11,228       10,969       259  

Trade name

    460       460       --  

Non-compete agreements

    710       678       32  

Total Amortized Intangible Assets

    22,052       19,761       2,291  
                         

Indefinite-lived Intangible Assets

                       

Trademarks and trade names

    3,422       --       3,422  

Total Indefinite-lived Intangible Assets

    3,422       --       3,422  
                         

Total Other Intangible Assets

  $ 25,474       19,761       5,713  

 

 

   

June 30, 2015

 

Other Intangible Assets

 

Gross

                 
   

Carrying

   

Accumulated

   

Net

 

(In thousands)

 

Amount

   

Amortization

   

Amount

 

Amortized Intangible Assets

                       

Customer relationships

  $ 9,316     $ 7,290     $ 2,026  

Patents

    338       120       218  

LED technology firmware, software

    11,228       10,910       318  

Trade name

    460       460       --  

Non-compete agreements

    710       602       108  

Total Amortized Intangible Assets

    22,052       19,382       2,670  
                         

Indefinite-lived Intangible Assets

                       

Trademarks and trade names

    3,422       --       3,422  

Total Indefinite-lived Intangible Assets

    3,422       --       3,422  
                         

Total Other Intangible Assets

  $ 25,474     $ 19,382     $ 6,092  

 

(In thousands)

 

Amortization Expense of

Other Intangible Assets

 
   

 

March 31, 2016

   

March 31, 2015

 
                 

Three Months Ended

  $ 126     $ 125  

Nine Months Ended

  $ 379     $ 400  

 

 
Page 17

 

 

The Company expects to record annual amortization expense as follows:

 

(In thousands)  
         

2016

  $ 505  

2017

  $ 409  

2018

  $ 400  

2019

  $ 400  

2020

  $ 327  

After 2020

  $ 629  

 

NOTE 8 - REVOLVING LINE OF CREDIT

 

In March 2016, the Company renewed its $30 million unsecured revolving credit line. The line of credit expires in the third quarter of fiscal 2019. 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 150 and 190 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 12.5 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. There are no borrowings against the line of credit as of March 31, 2016.

 

The Company is in compliance with all of its loan covenants as of March 31, 2016.

 

NOTE 9 - CASH DIVIDENDS

 

The Company paid cash dividends of $2,959,000 and $2,172,000 in the nine months ended March 31, 2016 and 2015, respectively. Dividends on restricted stock units in the amount of $7,965 were accrued in the nine months ended March 31, 2016. These dividends will be paid upon the vesting of the restricted stock units when shares are issued to the award recipients. In April 2016, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable May 10, 2016 to shareholders of record as of May 2, 2016. The new indicated annual cash dividend rate is $0.20 per share.

 

NOTE 10 - EQUITY COMPENSATION

 

Stock Based Compensation 

 

The Company has an equity compensation plan that was approved by shareholders in November 2012 and that covers all of its full-time employees, outside directors and certain advisors.  This 2012 Stock Incentive Plan replaced all previous equity compensation plans of the Company. The options granted and stock awards made pursuant to this Plan are granted at fair market value at the date of grant or award.  Service-based options granted to non-employee directors become exercisable 25% each ninety days (cumulative) from the date of grant and options granted to employees generally become exercisable 25% per year (cumulative) beginning one year after the date of grant. Performance-based options granted to employees become exercisable 33.3% per year (cumulative) beginning one year after the date of grant. The maximum contractual term of the Company’s stock options is ten years.  If a stock option holder’s employment with the Company terminates by reason of death, disability or retirement, as defined in the Plan, the Plan generally provides for acceleration of vesting.  The number of shares reserved for issuance is 1,603,993 shares, all of which were available for future grant or award as of March 31, 2016.  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. Service based and performance based stock options were granted and restricted stock units (“RSUs”) were awarded during the nine months ended March 31, 2016. As of March 31, 2016, a total of 3,043,565 options for common shares were outstanding from this Plan as well as one previous stock option plan (which has also been approved by shareholders), and of these, a total of 1,362,810 options for common shares were vested and exercisable.  As of March 31, 2016, the approximate unvested stock option expense that will be recorded as expense in future periods is $2,797,019.  The weighted average time over which this expense will be recorded is approximately 30 months. Additionally, as of March 31, 2016 a total of 65,500 RSUs were outstanding. The approximate unvested stock compensation expense that will be recorded as expense in future periods for the RSUs is $291,620. The weighted average time over which this expense will be recorded is approximately 33 months.

 

 
Page 18

 

 

Stock Options

 

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

 

   

Three Months Ended

March 31

   

Nine Months Ended

March 31

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Dividend yield

    1.72 %     0.83 %     1.29 %     1.11 %

Expected volatility

    43 %     53 %     44 %     56 %

Risk-free interest rate

    1.46 %     1.57 %     1.66 %     1.63 %

Expected life (in years)

 

6.0

   

6.0

   

6.0

   

6.0

 

 

 

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

 

At March 31, 2015, the 713,323 options granted during the first nine months of fiscal 2015 to employees had exercise prices ranging from $5.96 to $7.88 per share, fair values ranging from $2.19 to $3.49 per share, and remaining contractual lives of between nine years, six months and 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 3.3% forfeiture rate effective January 1, 2016. Previous estimated forfeiture rates were between 2.0% and 3.3% for the period January 1, 2013 through December 31, 2015. 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 $360,952 and $271,669 of expense related to stock options in the three months ended March 31, 2016 and 2015, respectively, and $2,191,659 and $1,153,494 of expense related to stock options in the nine months ended March 31, 2016 and 2015, respectively.  As of March 31, 2016, the Company had 2,998,087 stock options that were vested and that were expected to vest, with a weighted average exercise price of $8.95 per share, an aggregate intrinsic value of $10,304,852 and weighted average remaining contractual terms of 6.7 years.

 

Information related to all stock options for the nine months ended March 31, 2016 and 2015 is shown in the following tables:

 

   

Nine Months Ended March 31, 2016

 
   

Shares

   

Weighted

Average

Exercise

Price

   

Weighted

Average

Remaining

Contractual Term

(in years)

   

Aggregate

Intrinsic

Value

 
                                 

Outstanding at 6/30/15

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

Granted

    1,026,800     $ 9.39                  

Forfeitures

    (150,800

)

  $ 15.73                  

Exercised

    (509,871

)

  $ 7.33                  
                                 

Outstanding at 3/31/16

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

Exercisable at 3/31/16

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

 

 
Page 19

 

 

   

Nine Months Ended March 31, 2015

 
   

Shares

   

Weighted

Average

Exercise

Price

   

Weighted

Average

Remaining

Contractual Term

(in years)

   

Aggregate

Intrinsic

Value

 
                                 

Outstanding at 6/30/14

    2,677,464     $ 9.57       5.4     $ 1,674,010  
                                 

Granted

    713,323     $ 6.76                  

Forfeitures

    (559,525

)

  $ 10.23                  

Exercised

    (103,875

)

  $ 6.01                  
                                 

Outstanding at 3/31/15

    2,727,387     $ 8.84       6.3     $ 2,519,836  
                                 

Exercisable at 3/31/15

    1,650,439     $ 10.15       4.5     $ 1,099,822  

 

The following table presents information related to unvested stock options:

 

    Shares    

Weighted-Average

Grant Date

Fair Value

 
                 

Non-vested at June 30, 2015

    1,080,198     $ 2.99  

Granted

    1,026,800     $ 3.64  

Vested

    (390,443 )   $ 2.94  

Forfeited

    (35,800 )   $ 3.31  

Non-vested at March 31, 2016

    1,680,755     $ 3.39  

 

The weighted average grant date fair value of options granted during the nine month periods ended March 31, 2016 and 2015 was $3.64 and $3.26, respectively. The aggregate intrinsic value of options exercised during the nine month periods ended March 31, 2016 and 2015 was $1,474,444 and $126,203, respectively. The aggregate grant date fair value of options that vested during the nine month periods ended March 31, 2016 and 2015 was $1,149,022 and $777,436, respectively. The Company received $3,737,233 and $624,248 of cash from employees who exercised options in the nine month periods ended March 31, 2016 and 2015, respectively. In the first nine months of fiscal 2016 the Company recorded $518,515 as a reduction of federal income taxes payable, $133,172 as a reduction in common stock, $95,543 as a reduction of income tax expense, and $556,144 as a reduction of the deferred tax asset related to the exercises of stock options in which the employees sold the common shares prior to the passage of twelve months from the date of exercise. In the first nine months of fiscal 2015 the Company recorded $44,071 as a reduction of federal income taxes payable, $223,003 as a reduction in common stock, $18,473 as a reduction of income tax expense, and $248,601 as a reduction of the deferred tax asset related to the exercises of stock options in which the employees sold the common shares prior to the passage of twelve months from the date of exercise.

 

Restricted Stock Units

 

A total of 72,000 RSUs with a weighted average fair value of $9.39 per share were awarded to employees during the nine months ended March 31, 2016. The Company determined the fair value of the awards based on the closing price of the Company’s common stock on the date the RSUs were awarded. The RSUs have a four year ratable vesting period. The RSUs are non-voting, but accrue cash dividends at the same per share rate as those cash dividends declared and paid on LSI’s common stock. Dividends on RSUs in the amount of $7,965 were accrued as of March 31, 2016. Accrued dividends are paid to the holder upon vesting of the RSUs and issuance of shares. Of the 72,000 RSUs awarded, 5,000 were issued and 1,500 were forfeited during the first nine months of fiscal year 2016. As of March 31, 2016, the 65,500 restricted stock units outstanding had a remaining contractual life of 9 years, 3 months. Of the 65,500 RSUs outstanding as of March 31, 2016, 63,369 are expected to vest in the future. An estimated forfeiture rate of 3.3% was used in the calculation of expense related to the restricted stock units. The Company recorded $30,837 and $350,369 of expense related to RSUs in the three and nine month periods ended March 31, 2016. There were no RSUs awarded prior to July 1, 2015.

 

 
Page 20

 

 

Director and Employee Stock Compensation Awards

 

The Company awarded a total of 17,240 and 21,050 common shares in the nine months ended March 31, 2016 and 2015, respectively, as stock compensation awards. These common shares were valued at their approximate $168,000 and $144,000 fair market values based on their stock price at dates of issuance multiplied by the number of common shares awarded, respectively, pursuant to the compensation programs for non-employee directors who receive a portion of their compensation as an award of Company stock and for employees who received a nominal recognition award in the form of Company stock. Stock compensation awards are made in the form of newly issued common shares of the Company.

 

Deferred Compensation Plan 

 

The Company has a Non-qualified Deferred Compensation Plan providing for both Company contributions and participant deferrals of compensation. This plan is fully funded in a Rabbi Trust. All plan investments are in common shares of the Company. As of March 31, 2016 there were 28 participants, all with fully vested account balances. A total of 249,330 common shares with a cost of $2,372,257, and 321,838 common shares with a cost of $2,986,498 were held in the plan as of March 31, 2016 and June 30, 2015, 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 according to accounting guidance. The Company used approximately $316,900 and $165,100 to purchase 32,696 and 23,519 common shares of the Company in the open stock market during the nine months ended March 31, 2016 and 2015, respectively, for either employee salary deferrals or Company contributions into the non-qualified deferred compensation plan. For fiscal year 2016, the Company estimates the Rabbi Trust for the Nonqualified Deferred Compensation Plan will make net repurchases in the range of 35,000 to 39,000 common shares of the Company. The Company does not currently repurchase its own common shares for any other purpose.

 

NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION

 

(In thousands)

 

Nine Months Ended

March 31

 
   

2016

   

2015

 

Cash payments:

               

Interest

  $ 32     $ 37  

Income taxes

  $ 4,863     $ 811  
                 

Issuance of common shares as compensation

  $ 168     $ 144  

 

NOTE 12 - COMMITMENTS AND CONTINGENCIES

 

As part of the acquisition of Virticus Corporation on March 19, 2012, a contingent Earn-Out liability was established. This discounted liability was 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 fiscal 2013, as a result of modified sales forecasts for LSI Controls (fka, LSI Virticus), the fair value of the Earn-Out liability was adjusted to zero. As of March 31, 2016, the maximum potential undiscounted liability related to the Earn-Out is $2 million. This would be based upon the achievement of a defined level of sales of lighting control systems in fiscal years 2016 through 2017. The likelihood of this occurring is considered not 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 March 31, 2016, there was an irrevocable letter of credit totaling $0.4 million to a foreign supplier related to the purchase of inventory.

 

 
Page 21

 

 

NOTE 13 SALE OF SUBSIDIARY

 

On September 30, 2014, the Company sold the stock of its wholly-owned subsidiary LSI Saco Technologies Inc., located in Montreal, Canada, for $1.9 million cash. The sale resulted in a pre-tax loss of $565,000. As a result of the sale, the Company terminated the $5 million unsecured revolving line of credit for this Canadian operation. LSI Saco reported $41,000 of net customer sales and an $183,000 operating loss in the first quarter of fiscal 2015 prior to the sale. LSI Saco was reported in the All Other Category. The sale of LSI Saco was not considered the sale of a discontinued operation because the Company migrated most of its manufacturing, research and development, and selling activities from LSI Saco to the Company’s Cincinnati, Ohio location.

 

NOTE 14 – SEVERANCE COSTS

 

Pursuant to a management succession agreement entered into in fiscal 2004 as subsequently amended, the Company’s former Chief Executive Officer, Robert J. Ready, relinquished this title and related management responsibilities when the Company hired and appointed a new Chief Executive Officer in October 2014. Mr. Ready remained on the Company’s Board of Directors until his death in March 2015, but was no longer Chairman of the Board following the November 2014 Annual Meeting of Shareholders. The management succession agreement provided for 18 months of compensation to be paid to Mr. Ready, which resulted in a severance charge in the second quarter of fiscal 2015 of $800,000. Severance payments totaling $224,000 were made in the second and third quarters of fiscal 2015. The remaining $576,000 severance liability was recognized as income when Mr. Ready died in March 2015. Pursuant to the management succession agreement a $1 million self-insured death benefit was paid to Mr. Ready’s beneficiary in the fourth quarter of fiscal 2015.

 

In January 2015, the Company initiated a reduction in force and recorded severance charges of $340,000 and facility exit charges of $21,200 in the third quarter of fiscal 2015. This reduction in force and employee retirements that occurred early in the third quarter of fiscal 2015 represented approximately 8.3% of the Company’s total salaried workforce and approximately $3.7 million of annual total compensation and benefit reductions.

 

The Company recorded severance charges of $223,000 and $178,000 in the Graphics Segment in the second and third quarters of fiscal 2016, respectively.

 

 

The activity in the Company’s Accrued Severance Liability is as follows for the periods indicated:

 

(In thousands)

 

Nine

Months Ended

March 31,

2016

   

Nine

Months Ended

March 31,

2015

   

Fiscal

Year Ended

June 30,

2015

 
                         

Balance at beginning of the period

  $ 379     $ --     $ --  

Accrual of expense

    401       1,297       1,718  

Payments

    (544

)

    (530

)

    (704

)

Adjustments

    (67

)

    (635

)

    (635

)

Balance at end of the period

  $ 169     $ 132     $ 379  

 

NOTE 15 – INCOME TAXES

 

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

 

 
Page 22

 

 

   

Three Months Ended

March 31

   

Nine Months Ended

March 31

 
   

2016

   

2015

   

2016

   

2015

 

Reconciliation to effective tax rate:

                               
                                 

Provision for income taxes at the anticipated annual tax rate

    34.4

%

    45.0

%

    34.5

%

    41.4

%

Impact of foreign operations

    --       --       --       (0.2

)

Enactment of tax law changes

    --       --       (0.9

)

    (2.6

)

Uncertain tax positions

    (2.9

)

    (0.9

)

    (0.5

)

    (1.2

)

Other

    (1.0

)

    (12.0

)

    (0.8

)

    (3.3

)

Effective tax rate

    30.5

%

    32.1

%

    32.3

%

    34.1

%

 

The Protecting Americans from Tax Hike Act of 2015 that made permanent the tax credit for research and development (“R&D”) retroactive back to January 1, 2015, was signed into law in December 2015. Therefore, the Company recorded an estimated R&D tax credit benefit of $111,000 in December 2015 for the second half of fiscal year 2015, and estimated an R&D tax credit in its calculation of the estimated income tax rate for fiscal 2016. Other items in the December 2015 tax bill are expected to have an immaterial impact on the Company’s income tax expense.

 

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

March 31

   

Nine Months Ended

March 31

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Lighting Segment

  $ 49,331     $ 48,865     $ 168,007     $ 164,382  

Graphics Segment

    17,162       13,363       59,949       49,656  

Technology Segment

    4,247