UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  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, 2019 OR
	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.

(Exact name of registrant as specified in its charter)

Ohio	31-0888951
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

10000 Alliance Road, Cincinnati, Ohio	45242
(Address of principal executive offices)	(Zip Code)
(513) 793-3200
Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	LYTS	NASDAQ Global Select Market

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 every Interactive Data File required to be submitted 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 such files).

YES    X      NO ____

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

Large accelerated filer [    ]	Accelerated filer [ X ]	Emerging growth company [    ]
Non-accelerated filer [    ]	Smaller reporting company [ X ]

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

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

As of October 25, 2019, there were 26,105,943 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, 2019

INDEX

			Begins on Page
PART I.  Financial Information
	ITEM 1.	Financial Statements (Unaudited)
		Condensed Consolidated Statements of Operations	3
		Condensed Statements of Net Income	4
		Condensed Consolidated Balance Sheets	5
		Condensed Statements of Shareholders’ Equity	7
		Condensed Consolidated Statements of Cash Flows	8
		Notes to Condensed Consolidated Financial Statements	9
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	26
	ITEM 4.	Controls and Procedures	26
PART II.  Other Information
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
	ITEM 6.	Exhibits	28
Signatures			29

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)	2019			2018
Net sales	$	88,701		$	84,957
Cost of products and services sold		66,588			63,541
Restructuring costs		258			155
Gross profit		21,855			21,261
Selling and administrative expenses		19,862			18,327
Restructuring (gain)		(4,846	)		--
Operating income		6,839			2,934
Interest (income)		(1	)		(14	)
Interest expense		432			532
Other expense		82			--
Income before income taxes		6,326			2,416
Income tax expense		1,851			667
Net income	$	4,475		$	1,749
Earnings per common share (see Note 4)
Basic	$	0.17		$	0.07
Diluted	$	0.17		$	0.07
Weighted average common shares outstanding
Basic		26,236			26,032
Diluted		26,293			26,365

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

Page 3

LSI INDUSTRIES INC.

CONDENSED CONSOLIDATED STATEMENS OF NET INCOME

(Unaudited)

	Three months Ended September 30
	First Quarter
(In thousands)	FY 2020		FY 2019
Net Income	$	4,475	$	1,749
Foreign currency translation adjustment		23		--
Comprehensive Income	$	4,498	$	1,749

Page 4

LSI INDUSTRIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except shares)	September 30,			June 30,
	2019			2019
ASSETS
Current Assets
Cash and cash equivalents	$	1,579		$	966
Accounts receivable, less allowance for doubtful accounts of $993 and $879, respectively		58,442			54,728
Inventories		43,078			43,512
Refundable income taxes		885			882
Asset held for sale		--			7,512
Other current assets		3,554			3,380
Total current assets		107,538			110,980
Property, Plant and Equipment, at cost
Land		4,576			4,576
Buildings		27,083			27,015
Machinery and equipment		70,296			73,185
Construction in progress		683			455
		102,638			105,231
Less accumulated depreciation		(72,127	)		(73,255	)
Net property, plant and equipment		30,511			31,976
Goodwill		10,373			10,373
Other Intangible Assets, net		31,972			32,647
Other Long-Term Assets, net		23,127			15,124
Total assets	$	203,521		$	201,100

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

Page 5

LSI INDUSTRIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,			June 30,
(In thousands, except shares)	2019			2019
LIABILITIES & SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	23.301		$	18,664
Accrued expenses		21,871			21,211
Total current liabilities		45,172			39,875
Long-Term Debt		23,181			39,541
Other Long-Term Liabilities		12,010			1,747
Commitments and Contingencies (Note 12)		—			—
Shareholders’ Equity
Preferred shares, without par value; Authorized 1,000,000 shares, none issued		—			—
Common shares, without par value; Authorized 40,000,000 shares; Outstanding 26,049,515 and 25,967,275 shares, respectively		126,235			125,729
Treasury shares, without par value;		(1,108	)		(1,468	)
Deferred compensation plan		1,118			1,468
Retained (loss)		(3,080	)		(5,808	)
Accumulated other comprehensive income		(7	)		16
Total shareholders’ equity		123,158			119,937
Total liabilities & shareholders’ equity	$	203,521		$	201,100

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

Page 6

LSI INDUSTRIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

	Common Shares				Treasury Shares						Key Executive			Accumulated Other					Total
	Number Of				Number Of						Compensation			Comprehensive		Retained			Shareholders'
	Shares		Amount		Shares			Amount			Amount			Inccome (Loss)		Earnings			Equity
Balance at June 30, 2018		25,884	$	124,104		(242	)	$	(2,110	)	$	2,133			-	$	15,124		$	139,251
Net Income		-		-		-			-			-			-		1,749			1,749
Other comprehensive income		-		-		-			-			-			-		-			-
Stock compensation awards		17		90		-			-			-			-		-			90
Restricted stock untis issued		97		-		-			-			-			-		-			-
Shares issued for deferred compensation		27		126		-			-			-			-		-			126
Activity of treasury shares, net		-		-		16			265			-			-		-			265
Deferred stock compensation		-		-		-			-			(264	)		-		-			(264	)
Stock-based compensation expense		-		551		-			-			-			-		-			551
Dividends — $0.20 per share		-		-		-			-			-			-		(1,296	)		(1,296	)
Cumulative effect of adoption of accounting guidance		-		-		-			-			-			-		591			591
Balance at September 30, 2018		26,025	$	124,871		(226	)	$	(1,845	)	$	1,869		$	-	$	16,168		$	141,063

	Common Shares				Treasury Shares						Key Executive			Accumulated Other						Total
	Number Of				Number Of						Compensation			Comprehensive			Retained			Shareholders'
	Shares		Amount		Shares			Amount			Amount			Inccome (Loss)			Earnings			Equity
Balance at June 30, 2019		26,176	$	125,729		(209	)	$	(1,468	)	$	1,468			16		$	(5,808	)	$	119,937
Net Income		-		-		-			-			-			-			4,475			4,475
Other comprehensive income		-		-		-			-			-			(23	)		-			(23	)
Stock compensation awards		21		75		-			-			-			-			-			75
Restricted stock untis issued		18		-		-			-			-			-			-			-
Shares issued for deferred compensation		7		33		-			-			-			-			-			33
Activity of treasury shares, net		-		-		36			360			-			-			-			360
Deferred stock compensation		-		-		-			-			(350	)		-			-			(350	)
Stock-based compensation expense		-		398		-			-			-			-			-			398
Stock optons exercised, net		-		-		-			-			-			-			-			-
Dividends — $0.20 per share		-		-		-			-			-			-			(1,319	)		(1,319	)
Cumulative effect of adoption of accounting guidance		-		-		-			-			-			-			(428	)		(428	)
Balance at September 30, 2019		26,222	$	126,235		(173	)	$	(1,108	)	$	1,118		$	(7	)	$	(3,080	)	$	123,158

Page 7

LSI INDUSTRIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)	Three Months Ended
	September 30
	2019			2018
Cash Flows from Operating Activities
Net income	$	4,475		$	1,749
Non-cash items included in net income:
Depreciation and amortization		2,399			2,643
Deferred income taxes		1,823			85
Deferred compensation plan		43			127
Stock compensation expense		398			551
Issuance of common shares as compensation		75			90
Loss on disposition of fixed assets		69			--
(Gain) on disposition of facility		(4,821	)		--
Allowance for doubtful accounts		140			(19	)
Inventory obsolescence reserve		298			766
Changes in certain assets and liabilities
Accounts receivable		(3,854	)		(4,218	)
Inventories		136			(3,519	)
Refundable income taxes		(3	)		587
Accounts payable		4,611			5,723
Accrued expenses and other		440			(3,172	)
Customer prepayments		130			795
Net cash flows provided by operating activities		6,359			2,188
Cash Flows from Investing Activities
Proceeds from the sale of assets		12,338			--
Purchases of property, plant and equipment		(355	)		(648	)
Net cash flows (used in) provided by investing activities		11,983			(648	)
Cash Flows from Financing Activities
Payments of long-term debt		(51,612	)		(23,039	)
Borrowings of long-term debt		35,252			23,831
Cash dividends paid		(1,319	)		(1,296	)
Shares withheld for employees’ taxes		(50	)		(52	)
Net cash flows (used in) financing activities		(17,729	)		(556	)
Increase in cash and cash equivalents		613			984
Cash and cash equivalents at beginning of period		966			3,178
Cash and cash equivalents at end of period	$	1,579		$	4,162

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

Page 8

 LSI INDUSTRIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The interim condensed consolidated financial statements are unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the interim financial statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of September 30, 2019, the results of its operations for the three month periods ended September 30, 2019 and 2018, and its cash flows for the three month periods ended September 30, 2019 and 2018. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2018 Annual Report on Form 10-K.  Financial information as of June 30, 2019 has been derived from the Company’s audited consolidated financial statements.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2019 Annual Report on Form 10-K. Significant changes to our accounting policies as a result of adopting ASU-2014-09 “Revenue from Contracts with Customers” (Topic 606) in the first quarter of fiscal 2019 and adopting ASU 2016-02, “Leases” in the first quarter of fiscal 2019, which are discussed below.

Revenue Recognition: 

The Company recognizes revenue when it satisfies the performance obligations in its customer contracts or purchase orders. Most of the Company’s products have a single performance obligation which is satisfied at a point in time when control is transferred to the customer. Control is generally transferred at time of shipment when title and risk of ownership passes to the customer. For customer contracts with multiple performance obligations, the Company allocates the transaction price and any discounts to each performance obligation based on relative standalone selling prices. Payment terms are typically within 30 to 90 days from the shipping date, depending on our terms with the customer. The Company offers standard warranties that do not represent separate performance obligations.

Installation is a separate performance obligation, except for our digital signage products. For digital signage products, installation is not a separate performance obligation as the product and installation is the combined item promised in digital signage contracts. The Company is not always responsible for installation of products it sells and has no post-installation responsibilities other than standard warranties.

A number of the Company's products are highly customized. As a result, these customized products do not have an alternative use. For these products, the Company generally has a legal right to payment for performance to date and generally does not accept returns on these items. The measurement of performance is based upon cost plus a reasonable profit margin for work completed. Because there is no alternative use and there is a legal right to payment, the Company transfers control of the item as the item is being produced and therefore, recognizes revenue over time. The customized product types are as follows:

● Customer specific branded print graphics

● Electrical components based on customer specifications

● Digital signage and related media content

The Company also offers installation services. Installation revenue is recognized over time as our customer simultaneously receives and consumes the benefits provided through the installation process.

For these customized products and installation services, revenue is recognized using a cost-based input method: recognizing revenue and gross profit as work is performed based on the relationship between the actual cost incurred and the total estimated cost for the contract.

Page 9

Disaggregation of Revenue

The Company disaggregates the revenue from contracts with customers by the timing of revenue recognition because the Company believes it best depicts the nature, amount, and timing of our revenue and cash flows. The table presents a reconciliation of the disaggregation by reportable segments.

	Three Months Ended September 30
	Lighting Segment		Graphics Segment
Timing of revenue recognition
Products and services transferred at a point in time	$	56,525	$	17,725
Products and services transferred over time		6,666		7,785
	$	63,191	$	25,510

	Three Months Ended September 30
	Lighting Segment		Graphics Segment
Type of Product and Services
LED lighting, digital signage, electronic circuit boards	$	54,483	$	3,874
Legacy Products		8,038		16,700
Turnkey Services and Other		670		4,936
	$	63,191	$	25,510

Legacy products include lighting fixtures utilizing light sources other than LED technology and printed two- and three-dimensional graphic products. Turnkey services and other includes installation services along with shipping and handling charges.

Practical Expedients and Exemptions

● The Company’s contracts with customers have an expected duration of one year or less, as such the Company applies the practical expedient to expense sales commissions as incurred and have omitted disclosures on the amount of remaining performance obligations.

● Shipping costs that are not material in context of the delivery of products are expensed as incurred.

● The Company’s accounts receivable balance represents the Company’s unconditional right to receive payment from its customers with contracts. Payments are generally due within 30 to 90 days of completion of the performance obligation and invoicing; therefore, payments do not contain significant financing components.

● The Company collects sales tax and other taxes concurrent with revenue-producing activities which are excluded from revenue. Shipping and handling costs are treated as fulfillment activities and included in cost of products and services sold on the Consolidated Statements of Operations.

 New Accounting Pronouncements:

On July 1, 2018, the Company adopted ASU 2014-09. “Revenue from Contracts with Customers,” (Topic 606) using the modified retrospective adoption method which requires a cumulative effect adjustment to the opening balance of retained earnings. This approach was applied to contracts that were not completed as of June 30, 2018. Results for reporting periods beginning July 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The Company recorded a net increase to beginning retained earnings of $591,000 on July 1, 2018 due to the cumulative impact of adopting Topic 606, as described below.

Page 10

(In thousands)	Balance as of June 30, 2018		Adjustments			Opening Balance as of July 1, 2018
Assets:
Accounts receivable, net	$	50,609	$	4,935		$	55,544
Inventories, net	$	50,994	$	(4,167	)	$	46,827
Other long-term assets, net	$	9,786	$	(177	)	$	9,609
Shareholders’ Equity:
Retained earnings	$	15,124	$	591		$	15,715

In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases.” The amended guidance requires an entity to recognize assets and liabilities that arise from leases. The amended guidance is effective for financial statements issued for fiscal and interim periods within those years, beginning after December 15, 2018, or the Company’s fiscal 2020, with early adoption permitted. The Company adopted this guidance effective July 1, 2019 using a modified-retrospective transition method, under which it elected not to adjust comparative periods. The Company elected the package of practical expedients permitted under the new guidance to not reassess prior conclusions related to contracts containing leases, lease classification, and initial direct costs. In addition, the Company elected the practical expedient to not separate lease and non-lease component and the accounting policy election to not present leases with an initial term of twelve months or less on the balance sheet.

The Company’s most significant leases are those relating to its two manufacturing facilities along with a small office space. Besides these three real estate leases, most other leases are insignificant and consist of leases related to a vehicle, forklifts, small tooling, and various office equipment. All of the Company’s leases are operating leases and are included in other long-term assets with the corresponding liability in other long-term liabilities. Lease expense is recognized on a straight-line basis over the lease term. The Company used its incremental borrowing rate when determining the present value of lease payments. The adoption of the new lease standard resulted in the recognition of right-of-use assets (ROU assets) of $10.4 million and lease liabilities of 10.8 million which includes the impact of existing deferred rents and tenant improvement allowances on the consolidated balance sheets as of July 1, 2019 for the Company’s real estate leases. The adoption of the standard resulted in no material impact to consolidated statements of operations or consolidated statements of cash flow. (Refer to Note 15)

Subsequent Events:

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

NOTE 3 - SEGMENT REPORTING INFORMATION

The accounting guidance on Segment Reporting establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (the Company’s Chief Executive Officer or “CODM”) in making decisions on how to allocate resources and assess performance. The Company’s two operating segments are Lighting and Graphics, with one executive team under the organizational structure reporting directly to the CODM with responsibilities for managing each segment. Corporate and Eliminations, which captures the Company’s corporate administrative activities, is also reported in the segment information.

The Lighting Segment includes outdoor and indoor lighting utilizing both traditional and LED light sources that have been fabricated and assembled for the Company’s markets, primarily petroleum / convenience stores, automotive dealerships, quick-service restaurants, grocery and pharmacy stores, and retail/national accounts. The Company also services lighting product customers through the commercial industrial, stock and flow, and renovation channels. The Lighting Segment also includes the design, engineering, and manufacturing of electronic circuit boards, assemblies and sub-assemblies used to manufacture certain LED light fixtures and sold directly to customers.

Page 11

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

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

There was no concentration of consolidated net sales in the three months ended September 30, 2019 or 2018.  There was no concentration of accounts receivable at September 30, 2018 or June 30, 2019.

Summarized financial information for the Company’s operating segments is provided for the indicated periods and as of September 30, 2019 and September 30, 2018:

	Three Months Ended
(In thousands)	September 30
	2019			2018
Net Sales:
Lighting Segment	$	63,191		$	61,432
Graphics Segment		25,510			23,525
	$	88,701		$	84,957
Operating Income (Loss):
Lighting Segment	$	9,159		$	3,850
Graphics Segment		1,017			2,387
Corporate and Eliminations		(3,337	)		(3,303	)
	$	6,839		$	2,934
Capital Expenditures:
Lighting Segment	$	330		$	276
Graphics Segment		--			266
Corporate and Eliminations		25			106
	$	355		$	648
Depreciation and Amortization:
Lighting Segment	$	1,778		$	1,990
Graphics Segment		386			395
Corporate and Eliminations		235			258
	$	2,399		$	2,643

	September 30, 2019		June 30, 2019
Identifiable Assets:
Lighting Segment	$	141,647	$	142,105
Graphics Segment		44,467		40,914
Corporate and Eliminations		17,407		18,081
	$	203,521	$	201,100

Page 12

The segment net sales reported above represent sales to external customers.  Segment operating income, which is used in management’s evaluation of segment performance, represents net sales less all operating expenses. Identifiable assets are those assets used by each segment in its operations.

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

	Three Months Ended
	September 30
(In thousands)	2019		2018
Lighting Segment inter-segment net sales	$	811	$	409
Graphics Segment inter-segment net sales	$	24	$	31

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

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
	2019		2018
BASIC EARNINGS (LOSS) PER SHARE
Net income	$	4,475	$	1,749
Weighted average shares outstanding, net of treasury shares (a)		26,024		25,752
Weighted average vested restricted stock units outstanding		24		53
Weighted average shares outstanding in the Deferred Compensation Plan		188		227
Weighted average shares outstanding		26,236		26,032
Basic earnings per share	$	0.17	$	0.07
DILUTED EARNINGS (LOSS) PER SHARE
Net income (loss)	$	4,475	$	1,749
Weighted average shares outstanding
Basic		26,236		26,032
Effect of dilutive securities (b):
Impact of common shares to be issued under stock option plans, and contingently issuable shares, if any		57		333
Weighted average shares outstanding (c)		26,293		26,365
Diluted earnings per share	$	0.17	$	0.07

(a) Includes shares accounted for like treasury stock.

(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 2,861,423 common shares and 3,146,466 common shares at September 30, 2019 and 2018, respectively, were not included in the computation of the three month period for diluted earnings per share, respectively, because the exercise price was greater than the average fair market value of the common shares. 

Page 13

NOTE 5 - INVENTORIES

The following information is provided as of the dates indicated:

	September 30,		June 30,
(In thousands)	2019		2019
Inventories:
Raw materials	$	28,783	$	27,927
Work-in-process		1,757		2,193
Finished goods		12,538		13,392
Total Inventories	$	43,078	$	43,512

NOTE 6 - ACCRUED EXPENSES

The following information is provided as of the dates indicated:

	September 30,		June 30,
(In thousands)	2019		2019
Accrued Expenses:
Compensation and benefits	$	3,974	$	5,319
Customer prepayments		1,898		1,768
Accrued sales commissions		2,248		1,301
Accrued warranty		7,666		7,687
Other accrued expenses		6,085		5,136
Total Accrued Expenses	$	21,871	$	21,211

NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS

The carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment. The Company may first assess qualitative factors in order to determine if goodwill and indefinite-lived intangible assets are impaired. If through the qualitative assessment it is determined that it is more likely than not that goodwill and indefinite-lived assets are not impaired, no further testing is required. If it is determined more likely than not that goodwill and indefinite-lived assets are impaired, or if the Company elects not to first assess qualitative factors, the Company’s impairment testing continues with the estimation of the fair value of the reporting unit using a combination of a market approach and an income (discounted cash flow) approach, at the reporting unit level. The estimation of the fair value of reporting unit requires significant management judgment with respect to revenue and expense growth rates, changes in working capital and the selection and use of an appropriate discount rate. The estimates of the fair value of reporting units are based on the best information available as of the date of the assessment. The fair value measurements of the reporting units are based on significant inputs not observable in the market and thus represent Level 3 measurements as defined by ASC 820 “Fair Value Measurements.” The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease an impairment charge. Company management uses its judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as adverse business conditions, economic factors and technological change or competitive activities may signal that an asset has become impaired.

The Company identified its reporting units in conjunction with its annual goodwill impairment testing. The Company has a total of two reporting units that contain goodwill. There is one reporting unit within the Lighting Segment and one reporting unit within the Graphics Segment. The Company relies upon a number of factors, judgments and estimates when conducting its impairment testing including, but not limited to, the Company’s stock price, operating results, forecasts, anticipated future cash flows and marketplace data. There are inherent uncertainties related to these factors and judgments in applying them to the analysis of goodwill impairment.

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

Goodwill
(In thousands)	Lighting			Graphics
	Segment			Segment			Total
Balance as of June 30, 2019
Goodwill	$	94,564			28,690			123,254
Accumulated impairment losses		(85,356	)		(27,525	)		(112,881	)
Goodwill, net as of June 30, 2019	$	9,208			1,165			10,373
Balance as of September 30, 2019
Goodwill	$	94,564			28,690			123,254
Accumulated impairment losses		(85,356	)		(27,525	)		(112,881	)
Goodwill, net as of September 30, 2019	$	9,208			1,165			10,373

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

	September 30, 2019
Other Intangible Assets	Gross
(In thousands)	Carrying		Accumulated		Net
	Amount		Amortization		Amount
Amortized Intangible Assets
Customer relationships	$	35,563	$	12,585	$	22,978
Patents		338		254		84
LED technology firmware, software		16,066		12,489		3,577
Trade name		2,658		747		1,911
Total Amortized Intangible Assets		54,625		26,075		28,550
Indefinite-lived Intangible Assets
Trademarks and trade names		3,422		--		3,422
Total Indefinite-lived Intangible Assets		3,422		--		3,422
Total Other Intangible Assets	$	58,047	$	26,075	$	31,972

	June 30, 2019
Other Intangible Assets	Gross
(In thousands)	Carrying		Accumulated		Net
	Amount		Amortization		Amount
Amortized Intangible Assets
Customer relationships	$	35,563	$	12,070	$	23,493
Patents		338		247		91
LED technology		16,066		12,364		3,702
firmware, software		2,658		719		1,939
Trade name						-
Total Amortized Intangible Assets		54,625		25,400		29,225
Indefinite-lived Intangible Assets
Trademarks and trade names		3,422		--		3,422
Total Indefinite-lived Intangible Assets		3,422		--		3,422
Total Other Intangible Assets	$	58,047	$	25,400	$	32,647

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(In thousands)	Amortization Expense of Other Intangible Assets
	September 30, 2019		September 30, 2018
Three Months Ended	$	675	$	691

The Company expects to record annual amortization expense as follows:

(In thousands)
2020	$	2,687
2021	$	2,682
2022	$	2,459
2023	$	2,412
2024	$	2,412
After 2024	$	16,573

NOTE 8 - REVOLVING LINE OF CREDIT

In February 2019, the Company amended its secured line of credit to a $75 million facility from a $100 million facility in order to better match its financing needs with an appropriate borrowing capacity. The line of credit expires in the third quarter of fiscal 2022. Interest on the revolving line of credit is charged based upon an increment over the LIBOR rate as periodically determined, or at the bank’s base lending rate, at the Company’s option. The increment over the LIBOR borrowing rate, as periodically determined, fluctuates between 125 and 250 basis points depending upon the ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA”), as defined in the line of credit agreement. The increment over LIBOR borrowing rate will be 200 basis points for the first quarter of fiscal 2020. The fee on the unused balance of the $75 million committed line of credit is 20 basis points. Under the terms of this line of credit, the Company has agreed to a negative pledge of real estate assets and is required to comply with financial covenants that limit the ratio of indebtedness to EBITDA and require a minimum fixed charge coverage ratio. As of September 30, 2019, there was $23.2 million borrowed against the line of credit, and $51.8 million was available as of that date. Based on the terms of the line of credit and the maturity date, the debt has been classified as long term.

The Company is in compliance with all of its loan covenants as of September 30, 2019.

NOTE 9 - CASH DIVIDENDS

The Company paid cash dividends of $1,319,000 and $1,296,000 in the three months ended September 30, 2019 and 2018, respectively. Dividends on restricted stock units in the amount of $34,842 and $31,553 were accrued as of September 30, 2019 and 2018, respectively. These dividends will be paid upon the vesting of the restricted stock units when shares are issued to the award recipients. In November 2019, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable November 26, 2019 to shareholders of record as of November 18, 2019. The indicated annual cash dividend rate is $0.20 per share.

NOTE 10 - EQUITY COMPENSATION

In November 2019, the Company’s shareholders approved the 2019 Omnibus Award Plan. The purpose of the plan is to provide a means through which the Company may attract and retain key personnel and to provide a means by which directors, officers, and employees can acquire and maintain an equity interest in the Company. This plan replaced the 2012 Stock Incentive Plan. The number of shares of common stock authorized for issuance under the plan is 2,650,000 which will be combined with the remaining shares available under the previous plan of 1,147,429 shares as of September 30, 2019 for total number of shares available for issuance of approximately 3.8 million. The plan implements the use of a fungible share ratio that consumes 2.5 available shares for every full value share awarded by the Company as stock compensation. The 2019 Omnibus Award Plan allows for the grant of non-qualified stock options, stock appreciation rights, restricted stock awards, performance stock units, and other stock-based awards.

In the first quarter of fiscal 2020, the Company granted 455,429 non-qualified serviced-based stock options with an exercise price of $3.83 and 199,310 Performance Stock Units and 81,917 Restricted Stock Units at a fair value of $3.83. Stock compensation expense was $398,000 and $551,000 in the first quarter of fiscal 2019 and 2018, respectively.

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NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION

(In thousands)	Three Months Ended September 30
	2019		2018
Cash payments:
Interest	$	464	$	518
Income taxes	$	--	$	(39	)
Non-cash investing and financing activities:
Issuance of common shares as compensation	$	75	$	90
Issuance of common shares to fund deferred compensation plan	$	33	$	127

NOTE 12 - COMMITMENTS AND CONTINGENCIES

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

The Company may occasionally issue a standby letter of credit in favor of third parties. As of September 30, 2019, there were no such standby letters of credit issued.

NOTE 13 – SEVERANCE COSTS

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

	Three			Three			Fiscal
	Months Ended			Months Ended			Year Ended
(In thousands)	September 30,			September 30,			June 30,
	2019			2018			2019
Balance at beginning of the period	$	1,134		$	1,772		$	1,772
Accrual of expense		18			--			560
Payments		(162	)		(197	)		(1,198	)
Adjustments		--			--			--
Balance at end of the period	$	990		$	1,575		$	1,134

Of the total $990,000 reported as of September 30, 2019, $591,000 has been classified as a current liability and will be paid out over the next twelve months. The remaining $399,000 has been classified as a long-term liability.

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NOTE 14 – RESTRUCTURING COSTS

In the first quarter of fiscal 2020, the Company sold its New Windsor, New York facility. The net proceeds from the sale was $12.3 million resulting in a gain of $4.8 million. The Company also incurred additional restructuring costs totaling $233,000 related to closure of the New York facility which impacted both the Lighting and Graphics segment.

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

	Three			Three
	Months Ended			Months Ended
(In thousands)	September 30,			September 30,
	2019			2018
Severance benefits	$	--		$	19
Moving costs		--			53
Impairment of fixed assets and accelerated depreciation		49			43
Facility repairs		--			40
Gain on sale of facility		(4,821	)		--
Exit Costs		184			--
Total	$	(4,588	)	$	155

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

(In thousands)
	Balance as of June 30, 2019		Restructuring Expense		Payments			Adjustments		Balance as of September 30, 2019
Severance and termination benefits	$	236	$	--	$	(131	)	$	--	$	105
Other restructuring costs		--		184		(184	)		--		--
Total	$	236	$	184	$	(315	)	$	--	$	105

NOTE 15 - LEASES

The Company leases two of its manufacturing facilities along with a small office space, a company vehicle, several forklifts, several small tooling items, and various items of office equipment. All of the Company’s leases are operating leases and are included in other long-term assets with the corresponding liability in other long-term liabilities. Leases have a remaining term of 1 to 5 years some of which have an option to renew. The Company does not assume renewals in determining the lease term unless the renewals are deemed reasonably certain. The lease agreements do not contain any material residual guarantees or material variable lease payments.

The Company has periodically entered into short-term operating leases with an initial term of twelve months or less. These leases are not recorded on the balance sheet. For the three months ended September 30, 2019, the rent expense for these leases is immaterial.

The Company has certain leases that contain lease and non-lease components and has elected to utilize the practical expedient to account for these components together as a single lease component.

Lease expense is recognized on a straight-line basis over the lease term. The Company used its incremental borrowing rate when determining the present value of lease payments. The adoption of the new lease standard resulted in the recognition of right-of-use assets (ROU assets) of $10.4 million and lease liabilities of 10.8 million which includes the impact of existing deferred rents and tenant improvement allowances on the consolidated balance sheets as of July 1, 2019 for the Company’s real estate leases. The adoption of the new standard resulted in no material impact to the consolidated statements of operations or consolidated statements of cash flow.

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	Three Months Ended September 30, 2019
	(in thousands)
Operating lease cost		587

Supplemental Cash Flow Information:	Three Months Ended September 30, 2019
	(in thousands)
Operating cash flows from operating leases
Fixed payments		573
Liability reduction		443

	At September 30, 2019
Operating Leases:
Total operating right-of-use asset (Other long-term assets)		9,953
Accrued Liabiltities (Current liabilities)		324
Long-term operating lease liability (Other long-term liabilties)		10,368
		10,692
Weighted Average Remaining Lease Term (in years)		5.3
Weighted Average Discount Rate		4.85	%

Maturities of Lease Liability:
2020	1,846
2021	2,303
2022	2,279
2023	2,244
2024	1,918
therefter	1,680
Total lease payments	12,270
Less: Interest	(1,578	)
Present Value of Lease Liabilities	10,692

Page 19

NOTE 16 – INCOME TAXES

The Company's effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year's taxable income as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions. In the first quarter of fiscal 2020, the Company sold its New Windsor, New York facility resulting in a book gain of $4.8 million. The Company was able to utilize a deferred tax asset of $864,000 related to the sale of the facility

	Three Months Ended
	September 30
	2019			2018
Reconciliation to effective tax rate:
Provision for income taxes at the anticipated annual tax rate		24.1	%		23.0	%
Uncertain tax positions		0.5			1.3
Shared based compensation		4.3			3.3
Other		0.4			--
Effective tax rate		29.3	%		27.6	%

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

Note About Forward-Looking Statements

This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including this section. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in in our Annual Report on Form 10-K in the following sections: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures about Market Risk,” and “Risk Factors.” All of those risks and uncertainties are incorporated herein by reference. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of LSI Industries Inc. MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended June 30, 2019, and our financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

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
	2019		2018
Lighting Segment	$	63,191	$	61,432
Graphics Segment		25,510		23,525
	$	88,701	$	84,957

Operating Income (Loss) by Business Segment
(In thousands)	Three Months Ended
	September 30
	2019			2018
Lighting Segment	$	9,159		$	3,850
Graphics Segment		1,017			2,387
Corporate and Eliminations		(3,337	)		(3,303	)
	$	6,839		$	2,934

Summary Comments

Fiscal 2020 first quarter net sales of $88,701,000 increased $3.7 million or 4.4% as compared to first quarter fiscal 2019. Net sales were favorably influenced by increased net sales in both the Lighting Segment (up $1.8 million or 2.9%) and the Graphics Segment (up $2.0 million or 8.4%).

Fiscal 2020 first quarter operating income of $6.9 million increased $4.0 million from operating income of $2.9 million in the first quarter of fiscal 2019. The $4.0 million increase in operating income in fiscal 2019 was impacted by the sale of the Company’s New Windsor, New York facility in the first quarter of fiscal 2020 which favorably resulted in a pre-tax gain of $4.8 million. Also contributing to the period-over-period change in operating income is a one-time adjustment to the Company’s paid-time-off policy in fiscal 2019 which resulted in a favorable pre-tax adjustment to earnings of $1.2 million with no comparable event in fiscal 2020. When the impact of the sale of the New Windsor facility along with the other restructuring and plant closure costs are removed from the operating results along with the one-time adjustment to the Company’s paid-time-off policy in fiscal 2019, operating income period-over-period remained relatively flat. Refer to the discussions in the “results of operations” for each of the Company’s reportable segments for further explanation of the period-over-period change in sales and operating income.

Page 21

Non-GAAP Financial Measures

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

	Three Months Ended September 30
(In thousands)	2019			2018
Reconciliation of operating income to adjusted operating income
Operating Income as reported	$	6,839		$	2,934
Restructuring and plant closure costs (includes a $4.8 million gain on the sale of the facility)		(4,588	)		590
Adjusted Operating Income	$	2,251		$	3,524

	Three months ended Septeber 30
(In thousands, except per share data)	2019							2018
				Diluted						Diluted
Reconciliation of net income to adjusted net income				EPS						EPS
Net Income as reported	$	4,475		$	0.17			$	1,749	$	0.07
Restructuring and plant closure costs		(3,449	)		(0.13	)	(1)		454	$	0.01	(2)
Net Income adjusted	$	1,026		$	0.04			$	2,203	$	0.08

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

⁽¹⁾ $(1,139)

⁽²⁾ $136

Page 22

Results of Operations

THREE MONTHS ENDED SEPTEMBER 30, 2018 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2017

Lighting Segment
(In thousands)	Three Months Ended
	September 30
	2019		2018
Net Sales	$	63,191	$	61,432
Gross Profit	$	17,219	$	15,475
Operating Income	$	9,159	$	3,850

Lighting Segment net sales of $63,191,000 in the first quarter of fiscal 2020 increased 2.9% from fiscal 2019 same period net sales of $61,432,000. Sales increased despite inconsistent market conditions as the Company continues to focus on growth in core market verticals including the Automotive, Petroleum, QSR and Retail parking lot markets.

Gross profit of $17,219,000 in the first quarter of fiscal 2020 increased $1.7million or 11.3% from the same period of fiscal 2019 and increased from 25.2% to 27.2% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The growth in gross profit and gross profit as a percentage of sales is the result of an increase in sales and due to favorable price/mix. Also contributing to the period-over-period change in gross profit is the initial cost savings from the closure of the Company’s New Windsor, New York facility.

Selling and administrative expenses of $8,060,000 in the first quarter of fiscal year 2020 decreased $3.6 million from the same period of fiscal 2019 selling and administrative expenses of $11,625,000, primarily due to the $4.8 million gain on the sale of the New Windsor, New York facility. When the $4.8 million gain is removed from fiscal 2020 results, there was a $1.3 million or 11.1% increase in selling and administrative expenses. The increase in selling and administrative expenses is mostly driven by higher commission expense which is the result of increased sales volume and a one-time adjustment to the Company’s paid-time-off policy in fiscal 2019 with no comparable event in fiscal 2020.

The Lighting Segment first quarter fiscal 2019 operating income of $9,159,000 increased $5.3 million from operating income of $3,850,000 in the same period of fiscal 2019 primarily due to the $4.8million gain on the sale of its New Windsor, New York facility. When the impact of $4.8 million gain is removed from fiscal 2020 results along with the restructuring and plant closure costs in both fiscal years, fiscal 2020 Non-GAAP adjusted operating income of $4,510,000 was $70,000 higher than fiscal 2019 Non-GAAP adjusted operating income of $4,440,000. The increase in sales volume and gross profit was partially offset by higher selling and administrative expenses.   

Graphics Segment
(In thousands)	Three Months Ended
	September 30
	2019		2018
Net Sales	$	25,510	$	23,525
Gross Profit	$	4,626	$	5,782
Operating Income	$	1,017	$	2,387

Graphics Segment net sales of $25,510,000 in the first quarter of fiscal 2020 increased $2.0 million or 8.4% from fiscal 2019 same period net sales of $23,525,000. Growth was realized across three product market applications; petroleum, other retail printed graphics, and digital signage.

Gross profit of $4,626,000 in the first quarter of fiscal 2020 decreased $1.2 million or 20.0% from the same period of fiscal 2019. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 24.6% in the first quarter of fiscal 2019 to 18.1% in the first quarter of fiscal 2020. The change in amount of gross profit is due to the net effect of increased net sales (customer plus inter-segment net sales) partially offset by a change in customer program mix. Graphics gross margin was unfavorably impacted by several factors including: new and early stage petroleum projects, improved inventory levels and impact of lower absorption, alignment of manufacturing resources required to support the transition from print to digital in certain market applications, and a one-time adjustment to the Company’s paid-time-off policy in fiscal 2019 with no comparable event in fiscal 2020.

Page 23

Selling and administrative expenses of $3,609,000 in the first quarter of fiscal 2020 increased $0.2 million or 6.3% from the same period of fiscal 2019 primarily as a result of increased development cost for potential customer programs.

The Graphics Segment first quarter fiscal 2020 operating income of $1,017,000 decreased $1.4 million or 57.4% from operating income of $2,387,000 in the same period of fiscal 2019. The decrease of $1.4 million was primarily the net result of increased net sales, decreased gross profit, decreased gross profit margin as a percentage of sales, and increased selling and administrative expenses.

Corporate and Eliminations
(In thousands)	Three Months Ended
	September 30
	2019			2018
Gross Profit (Loss)	$	10		$	4
Operating (Loss)	$	(3,337	)	$	(3,303	)

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

Administrative expenses of $3,340,000 in the first quarter of fiscal 2020 increased slightly from the same period of the prior year. The change is primarily the result of several small increases and decreases across several cost categories

Consolidated Results

The Company reported $431,000 net interest expense in the first quarter of fiscal 2020 compared to $518,000 net interest expense in the first quarter of fiscal 2019. The change from interest expense from fiscal 2019 to fiscal 2020 is primarily the result of reduced borrowings against the Company’s line of credit. The Company also incurred $82,000 expense related to net foreign currency transaction losses from transactions with its customer and suppliers through its Mexican subsidiary.

The $1,851,000 income tax expense in the first quarter of fiscal 2020 represents a consolidated effective tax rate of 29.3% influenced mostly by the gain on the sale of its New Windsor, New York facility and by certain permanent book-tax differences and by an expense related to uncertain income tax positions. The $667,000 income tax expense in the first quarter of fiscal 2019 is also by certain permanent book-tax differences and by an expense related to uncertain income tax positions.

The Company reported a net income of $4,475,000 in the first quarter of fiscal 2020 compared to net income of $1,749,000 in the same period of the prior year. The change in net income between fiscal 2019 and fiscal 2020 includes the $4.8 million gain on the sale of the Company’s New Windsor, New York facility along with other restructuring and plant closure costs. The change in net income is also the net result of increased net sales, increased gross profit, increased selling and administrative expenses, decreased interest expense, and a higher tax rate. Diluted earnings per share of $0.17 was reported in the first quarter of fiscal 2020 as compared to $0.07 diluted earnings per share in the same period of fiscal 2018. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first quarter of fiscal 2020 were 26,293,000 shares as compared to 26,365,000 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.

At September 30, 2019, the Company had working capital of $62.4 million, compared to $71.1 million at June 30, 2019.  The ratio of current assets to current liabilities was 2.38 to 1 as compared to a ratio of 2.78 to 1 at June 30, 2019. The balance sheet at June 30, 2019 included an asset held for sale of $7.5 million which was sold in the first quarter of fiscal 2020. When June 30, 2019 current assets are restated to exclude the asset held for sale, adjusted working capital and current assets to current liability ratios are $63.6 million and 2.59 to 1 respectively, which provides for a more appropriate comparison to these results for September 30, 2019. The $1.2million decrease in working capital between these periods (as adjusted and excluding the sale of the New Windsor facility) is primarily driven by two offsetting variances: a $3.7million increase in accounts receivable and an increase in accounts payable of $4.6 million. 

Page 24

The Company generated $6.4 million of cash from operating activities in the first quarter of fiscal 2020 as compared to a source of cash of $2.2 million in the same period of the prior year. This $4.2 million increase in net cash flows from operating activities is the result the Company’s strategy to aggressively manage its working capital which includes the reduction of the accounts receivable days sales outstanding (DSO), increasing inventory turns while simultaneously reducing inventory levels, and effectively managing the Company’s supply chain which includes partnering with its suppliers to find the appropriate service level while effectively managing payment terms.

Net accounts receivable was $58.4 million and $54.7 million at September 30, 2019 and June 30, 2019, respectively. DSO decreased to 57 days at September 30, 2019 from 63 days at June 30, 2019. 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, 2019 decreased $0.4 million from $43.5 million at June 30, 2019. The decrease of $0.4 million is the result of a decrease in gross inventory of $0.3 million and an increase in obsolescence reserves of $0.1 million. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory decreased 0.8 million in the first quarter of fiscal 2020 in the Graphics Segment which more than offset an increase in net inventory in the Lighting Segment of $0.4 million.

Cash generated from operations and borrowing capacity under the Company’s line of credit is the Company’s primary source of liquidity. The Company has a secured $75 million revolving line of credit with its bank, with $53.0 million of the credit line available as of October 21, 2019. This line of credit is a $75 million five-year credit line expiring in the third quarter of fiscal 2022. The Company believes that its $75 million line of credit plus cash flows from operating activities are adequate for the Company’s fiscal 2020 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.

The Company had a source of cash of $12.0 million related to investing activities in the first quarter of fiscal 2020 as compared to a use of cash of $0.6 million in the same period of the prior year, resulting in a favorable change of $12.6 million. Capital expenditures for the first quarter of fiscal 2020 decreased $0.3 million to $0.4 million from the same period in fiscal 2019. The Company sold its New Windsor, New York manufacturing facility for $12.3 million in the first quarter of fiscal 2020 which contributed to the change in cash flow from investing activities from fiscal 2019 to fiscal 2020.

The Company used $17.7 million of cash related to financing activities in the first quarter of fiscal 2020 compared to a use of cash of $0.5 million in the first quarter of fiscal 2019. The $17.2 million unfavorable change in cash flow was the net result of payments in excess of borrowings of long-term debt of $17.2 million.

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

Off-Balance Sheet Arrangements

The Company has no financial instruments with off-balance sheet risk and has no off-balance sheet arrangements, except for various operating leases. However, none of these operating leases, individually or in the aggregate have or are reasonably likely to have a current effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material.

Cash Dividends

In November 2019, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable November 26, 2019 to shareholders of record as of November 18, 2019. The indicated annual cash dividend rate for fiscal 2020 is $0.20 per share. The Board of Directors has adopted a policy regarding dividends which indicates that dividends will be determined by the Board of Directors in its discretion based upon its evaluation of earnings, cash flow requirements, financial condition, debt levels, stock repurchases, future business developments and opportunities, and other factors deemed relevant.

Critical Accounting Policies and Estimates

A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2019 Annual Report on Form 10-K.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the Company’s exposure to market risk since June 30, 2019.  Additional information can be found in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, which appears on page 13 of the Annual Report on Form 10-K for the fiscal year ended June 30, 2019.

ITEM 4.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

We conducted, under the supervision of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2019, our disclosure controls and procedures were effective. Management believes that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly presented in all material respects in accordance with GAAP for interim financial statements, and the Company’s Chief Executive Officer and Chief Financial Officer have certified that, based on their knowledge, the condensed consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for each of the periods presented in this report.

Changes in Internal Control

During the quarter ended September 30, 2019, the Company enacted additional controls related to the adoption of ASU 2016-02, “Leases.” 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, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, except as otherwise described in this Item 4.

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PART II.  OTHER INFORMATION

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

NONE

PART II.

Item 5. Other Information

The following information is provided pursuant to Form 8-K under the respective items identified below:

Item 5.02 -- Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

(e)     At the November 5, 2019 Annual Meeting of the Shareholders of LSI Industries Inc. (the “Company”), shareholders approved the 2019 Omnibus Award Plan (the “2019 Plan”).  The 2019 Plan was unanimously approved by the Board of Directors subject to shareholder approval.

The objectives of the 2019 Plan are to provide long-term incentives to those persons with significant responsibility for the success and growth of the Company, to align the interests of such persons with those of the Company’s shareholders, to assist the Company in recruiting, retaining and motivating employees, directors and consultants on a competitive basis and to link compensation to performance.  Under the 2019 Plan, employees of the Company will be eligible to receive awards. The 2019 Plan provides for a variety of equity award vehicles to maintain flexibility. The 2019 Plan will permit the grant of stock options, stock appreciation rights, restricted share awards, and restricted share units. A maximum of 2,650,000 shares will be available for grants of all equity awards under the 2019 Plan.

The foregoing summary of the 2019 Plan does not purport to be complete and is qualified in its entirety by reference to the full text of the 2019 Plan attached as Annex A to the Company’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on September 25, 2019.

Item 5.07 – Submission of Matters to a Vote of Security Holders.

The Annual Meeting of Shareholders of LSI Industries Inc. (“LSI”) was held on November 5, 2019 at which the following matters were submitted to a vote of shareholders:

(a)     Votes regarding the election of six directors.

Name	For	Withheld	Broker Non-Votes
Robert P. Beech	17,659,330	966,643	5,675,844
Ronald D. Brown	17,603,436	1,022,537	5,675,844
James A. Clark	17,951,227	674,746	5,675,844
Amy L. Hanson	18,036,165	589,808	5,675,844
John K. Morgan	17,497,099	1,128,874	5,675,844
Wilfred T. O’Gara	17,678,905	947,069	5,675,844

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(b)     Votes regarding the ratification of the Audit Committee’s appointment of Grant Thornton LLP as LSI’s Independent Registered Public Accounting Firm for fiscal 2020.

For	Against	Abstain
24,088,729	153,693	59,395

(c)     Votes regarding the approval of the Company’s 2019 Omnibus Award Plan.

For	Against	Abstain
16,969,309	1,581,199	75,464

(d)     Advisory votes on the Company’s executive compensation as described in the Company’s Proxy Statement.

For	Against	Abstain	Broker Non-Votes
17,451,276	1,090,446	75,464	5,675,844

ITEM 6.  EXHIBITS

Exhibits:

10.1 FY20 Long Term Incentive Plan *++

10.2 FY20 Short Term Incentive Plan*++

10.3 Form of Performance Share Unit Award Agreement*++

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

* Management compensatory agreement

++ Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K. The omitted information is not material and would likely cause competitive harm to the Registrant if publicly disclosed. The Registrant hereby agrees to furnish a copy of any omitted portion to the SEC upon request.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	LSI Industries Inc.
	By:	/s/ James A. Clark
		James A. Clark
		Chief Executive Officer and President
		(Principal Executive Officer)
	By:	/s/ James E. Galeese
		James E. Galeese
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)
November 7, 2019

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