LSI Industries
Annual Report 2016

Plain-text annual report

CUSTOM GRAPHIC SOLUTION CUSTOM GRAPHIC SOLUTION PRODUCED FOR WHOLE FOODS MARKET. PRODUCED FOR WHOLE FOODS MARKET. Celebrating our 40th year of serving image- Celebrating our 40th year of serving image- focused customers, LSI continues to expand the focused customers, LSI continues to expand the value we bring as a trusted partner in developing value we bring as a trusted partner in developing superior image solutions through our world-class superior image solutions through our world-class lighting, graphics, and technology capabilities. lighting, graphics, and technology capabilities. Our core strategy of “Lighting + Graphics + Our core strategy of “Lighting + Graphics + Technology = Complete Image Solutions” Technology = Complete Image Solutions” differentiates us from our competitors. differentiates us from our competitors. We are committed to advancing solid-state We are committed to advancing solid-state LED technology to make affordable, high LED technology to make affordable, high performance, energy- efficient lighting and performance, energy- efficient lighting and custom graphic products that bring value to our custom graphic products that bring value to our customers. We have a vast offering of innovative customers. We have a vast offering of innovative solutions for virtually any lighting or graphics solutions for virtually any lighting or graphics application. In addition, we provide sophisticated application. In addition, we provide sophisticated lighting and energy management control lighting and energy management control solutions to help customers manage their energy solutions to help customers manage their energy performance. Further, we provide a full range performance. Further, we provide a full range of design support, engineering, installation and of design support, engineering, installation and project management services to our customers. project management services to our customers. We are a vertically integrated U.S.- based We are a vertically integrated U.S.- based manufacturer concentrating on serving customers manufacturer concentrating on serving customers in North America and Latin America. Our major in North America and Latin America. Our major markets include commercial / industrial lighting, markets include commercial / industrial lighting, petroleum / convenience store and multi-site retail petroleum / convenience store and multi-site retail (including automobile dealerships, restaurants (including automobile dealerships, restaurants and national retail accounts). Headquartered in and national retail accounts). Headquartered in Cincinnati, Ohio, LSI has facilities in Ohio, Kansas, Cincinnati, Ohio, LSI has facilities in Ohio, Kansas, Kentucky, New York, North Carolina, Rhode Island, Kentucky, New York, North Carolina, Rhode Island, and Texas. The Company’s commons shares are and Texas. The Company’s commons shares are traded on the NASDAQ Global Select Market traded on the NASDAQ Global Select Market under the symbol LYTS. under the symbol LYTS. LED-ILLUMINATED INTEGRATED FASCIA SYSTEM LED-ILLUMINATED VALANCES, BRANDED DOORS, TRADE DRESS KITS LED CANOPY LIGHTING LED DIRECT LIGHTING DIMENSIONAL LOGO PRINTED GRAPHICS AND SIGNAGE LED HI-BAY LIGHTING DIMENSIONAL DEPARTMENT SIGNAGE ARCHITECTURAL DÉCOR DRIVE THRU MENU BOARD DIGITAL SIGNAGE HI-PERFORMANCE LED DOWNLIGHTING TM Retail Interaction with Smart Phones Beacons, NFC Sensors, Cameras Power from Lighting or Digital Signage INVESTING IN THE FUTURE WITH SMART ENVIRONMENTS Simple, yet effective Lighting Control. OUR CUSTOMERS QSR/FAST CASUAL GROCERY RETAIL PETROLEUM/ CONVENIENCE AUTOMOTIVE BANKING SPECIALTY/ NICHE TO OUR SHAREHOLDERS When I wrote this letter one year ago, LSI had completed its “Turnaround Phase” and returned to more profitable operations, increased its cash dividend rate, and strengthened its balance sheet. The year just completed was the first of what I then coined LSI’s “Continuous Improvement” phase. Meaning that we would continue, through our well-established LSI Business System, to find ways to drive down costs, increase sales, and improve our competitive position. How did we do? Well, during fiscal 2016 our revenues increased 5%, gross margin was up 180 basis points, and net income advanced 84%. Solid improvement to be sure, but I know we can do better. During the year we introduced new LED lighting and control products; achieved ISO-9001-2015 certification at our lighting facilities; added key senior executives and engineering talent; worked to strengthen our sales and marketing teams; and invested in capital equipment to further improve efficiencies. Looking forward, we believe we are well positioned to deliver top-line growth and an even greater rate of profitability. Succinctly stated, our major initiatives include (1) sales growth in our core business units, (2) continued cost improvements, (3) facility consolidation, (4) investments in digital signage and smart lighting, and (5) external growth through acquisitions. My mission priority, and that of the LSI management team, is to drive industry-superior sales and earnings growth, increase cash dividends, and deliver shareholder value. All the while, we understand and respect that our customer-centric philosophy is of paramount importance as we strive to provide best-in-class service and develop innovative new products. We continue to differentiate our capabilities through our strategy of “Lighting + Graphics + Technology = Image” as a solution to our customers’ image needs. Our daily focus is to demonstrate to customers how LSI can be their value-added, trusted partner in developing superior image solutions with our world-class lighting, graphics, and technology capabilities. During fiscal 2016, John K. Morgan joined our Board of Directors. Mr. Morgan served as Chairman, President and CEO of Zep Inc. from October 2007 until his retirement in June 2015. Prior to joining Zep, Mr. Morgan held several positions at Acuity Brands from 2001 through 2007, including Executive Vice President of Acuity Brands and President and CEO of Acuity Specialty Products. We welcome John, and look forward to his contributions. I want to personally offer a sincere thank you to our customers, employees, sales representatives, distributors, suppliers, directors, and shareholders for their support and contributions that made fiscal 2016 a successful year. I look forward to reporting solid and measurable improvements as fiscal year 2017 progresses. Respectfully, Dennis W. Wells President, Chief Executive Officer and Director 2016 FINANCIAL RESULTS REVENUES ($ in millions) $307.9 $299.5 $322.2 GROSS MARGIN 26.0% 24.2% 22.5% 21.8% 21.5% $280.9 $268.4 ‘12 ‘13 ‘14 ‘15 ‘16 ‘12 ‘13 ‘14 ‘15 ‘16 DILUTED EPS $0.37 EBITDA ($ in millions) $20.6 $0.21 $14.1 $13.9 $8.5 $7.8 $0.13 $0.04 ($0.01) ‘12 ‘13 ‘14 ‘15 ‘16 ‘12 ‘13 ‘14 ‘15 ‘16 EXECUTIVE OFFICERS EXECUTIVE OFFICERS EXECUTIVE OFFICERS Dennis Wells Dennis Wells Dennis Wells President and President and President and Chief Executive Officer Chief Executive Officer Chief Executive Officer Director Director Director Ron Stowell Ron Stowell Ron Stowell Vice President, Vice President, Vice President & Treasurer Chief Financial Officer & Chief Financial Officer & Treasurer Treasurer Shawn Toney President, Lighting Shawn Toney Shawn Toney President, Lighting President, Lighting Jeff Croskey Jeff Croskey Jeff Croskey President, Graphics President, Graphics President, Graphics John Bagwell John Bagwell John Bagwell President, Technology President, Technology President, Technology Andy Foerster Andy Foerster Andy Foerster Executive Vice President & Executive Vice President & Executive Vice President & Chief Technology Officer Chief Technology Officer Chief Technology Officer Paul Foster Paul Foster Paul Foster Executive Vice President Executive Vice President Executive Vice President LSI Business System & LSI Business System & LSI Business System & Human Resources Human Resources Human Resources John Myron John Myron John Myron Corporate Vice President Corporate Vice President Corporate Vice President Manufacturing Manufacturing Manufacturing Sylvia Astrop Sylvia Astrop Sylvia Astrop Sr. Vice President Sr. Vice President Procurement Sr. Vice President Procurement Procurement Steve Brunker Steve Brunker Chief Information Officer Chief Information Officer Steve Brunker Chief Information Officer BOARD OF DIRECTORS BOARD OF DIRECTORS BOARD OF DIRECTORS Gary P. Kreider Gary P. Kreider Gary P. Kreider Chairman, LSI Industries Inc. Chairman, LSI Industries Inc. Chairman, LSI Industries Inc. Sr. Partner (Retired) of Keating, Sr. Partner (Retired) of Keating, Sr. Partner (Retired) of Keating, Muething & Klekamp PLL Muething & Klekamp PLL Muething & Klekamp PLL Dennis W. Wells, President and Dennis W. Wells, President and Dennis W. Wells, President and Chief Executive Officer Chief Executive Officer Chief Executive Officer LSI Industries Inc. LSI Industries Inc. LSI Industries Inc. Robert P. Beech Robert P. Beech Robert P. Beech Entrepreneur-in-Residence Entrepreneur-in-Residence Entrepreneur-in-Residence CincyTech USA CincyTech USA CincyTech USA Back Row L to R: Back Row L to R: Back Row L to R: Steve Brunker, John Bagwell, Paul Foster, John Myron, Steve Brunker, John Bagwell, Paul Foster, John Myron, Steve Brunker, John Bagwell, Paul Foster, John Myron, Ron Stowell Ron Stowell Ron Stowell Middle Row L to R: Middle Row L to R: Middle Row L to R: Shawn Toney, Sylvia Astrop Shawn Toney, Sylvia Astrop Shawn Toney, Sylvia Astrop Front Row L to R: Front Row L to R: Front Row L to R: Jeff Croskey, Dennis Wells, Andy Foerster Jeff Croskey, Dennis Wells, Andy Foerster Jeff Croskey, Dennis Wells, Andy Foerster Dennis B. Meyer Dennis B. Meyer Dennis B. Meyer Director (Retired) Director (Retired) Director (Retired) Midmark Corporation Midmark Corporation Midmark Corporation Wilfred T. O’Gara Wilfred T. O’Gara Wilfred T. O’Gara Chief Executive Officer Chief Executive Officer Chief Executive Officer The O’Gara Group, LLC The O’Gara Group, LLC The O’Gara Group, LLC Mark A. Serrianne Mark A. Serrianne Mark A. Serrianne Chairman of the Board (Retired) Chairman of the Board (Retired) Chairman of the Board (Retired) Northlich, Inc Northlich, Inc Northlich, Inc James P. Sferra James P. Sferra James P. Sferra Executive Vice President (Retired) Executive Vice President (Retired) Executive Vice President (Retired) LSI Industries Inc. LSI Industries Inc. LSI Industries Inc. Robert A. Steele Robert A. Steele Robert A. Steele Vice Chairman Healthcare Vice Chairman Healthcare Vice Chairman Healthcare (Retired) (Retired) (Retired) Procter & Gamble Co. Procter & Gamble Co. Procter & Gamble Co. John K. Morgan John K. Morgan John K. Morgan Chairman, President & Chairman, President & Chairman, President & Chief Executive Officer (Retired) Chief Executive Officer (Retired) Chief Executive Officer (Retired) Zep Inc. Zep Inc. Zep Inc. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (cid:1) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2016. OR (cid:2) 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 (State or other jurisdiction of incorporation or organization) 10000 Alliance Road Cincinnati, Ohio 45242 (Address of principal executive offices) IRS Employer I.D. No. 31-0888951 (513) 793-3200 (Telephone number of principal executive offices) Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common shares, no par value The NASDAQ Stock Market LLC (NASDAQ Global Select Market) Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:1) No (cid:1) Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes (cid:1) No (cid:1) Indicate by check mark 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 (cid:1) No (cid:1) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:1) Indicate by check mark 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 (cid:1) No (cid:1) Indicate by check mark 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 (cid:1) Accelerated filer (cid:1) Non-accelerated filer (cid:1) Smaller reporting company (cid:1) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:1) No (cid:1) As of December 31, 2015, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $300,176,800 based upon a closing sale price of $12.19 per share as reported on The NASDAQ Global Select Market. At August 27, 2016 there were 24,978,016 no par value Common Shares issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s Proxy Statement filed with the Commission for its 2016 Annual Meeting of Shareholders are incorporated by reference in Part III, as specified. LSI INDUSTRIES INC. 2016 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Begins on Page ITEM 1. BUSINESS ITEM 1A. RISK FACTORS ITEM 1B. UNRESOLVED STAFF COMMENTS ITEM 2. PROPERTIES ITEM 3. LEGAL PROCEEDINGS ITEM 4. MINE SAFETY DISCLOSURES PART I PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ITEM 6. SELECTED FINANCIAL DATA ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ITEM 9A. CONTROLS AND PROCEDURES ITEM 9B. OTHER INFORMATION ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ITEM 11. EXECUTIVE COMPENSATION PART III ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 1 6 10 10 11 11 11 13 13 13 14 15 15 15 15 15 15 15 15 16 “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995 This Annual Report on Form 10-K 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, the Company’s ability to maintain an effective system of internal control over financial reporting, our ability to remediate any material weaknesses in our internal control over financial reporting and any 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 this Annual Report on 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. ITEM 1. BUSINESS Our Company PART I We are a customer-centric company that positions itself as a value-added, trusted partner in developing superior image solutions through our lighting, graphics, and technology capabilities. Our products and services include digital signage, screen graphics, and structural graphics capabilities, a wide variety of high quality indoor and outdoor lighting products, lighting control systems, and related professional services including engineering, installation, and project management. We also provide graphics and lighting products on a stand-alone basis. Our company is the leading provider of corporate visual image solutions to the petroleum / convenience store industry. We use this leadership position to penetrate national retailers and multi-site retailers, including quick service and casual restaurants, retail chain stores and automobile dealerships, located primarily in the United States as well as internationally. We seek to expand our market share in the traditional commercial / industrial lighting market by combining our LED product innovation and lighting control solutions utilizing the latest technology along with a strong emphasis on high service levels and market focused solutions. Our solutions are targeted at both renovation and new construction markets. We design and develop most aspects of the solid-state LED lighting, from the electronic circuit board, to the software to drive and control the LEDs, to the structure of the LED product. We also provide a variety of lighting control solutions which allow our customers to reduce energy and maintenance costs. In addition to designing and producing screen graphics and structural graphics, we design and produce most aspects of our digital signage offering where customers are provided a turnkey solution that includes design, software, hardware content development, implementation, service and support. We believe that national retailers and other companies in the markets we serve are increasingly seeking single-source suppliers with the project management skills and service expertise necessary to execute a comprehensive visual image program. The integration of our graphics, lighting, and technology coupled with our professional services capabilities allows our customers to outsource to us the development of an entire visual image program from the planning and design stage through installation. Our approach is to combine our lighting products and custom graphics applications utilizing the latest technology along with our professional service capabilities to create complete customer-focused visual image solutions. We also offer our lighting products and graphics elements on a stand-alone basis to service our existing image solutions customers, to establish a presence in a new market or to create a relationship with a new customer. We believe that our ability to combine lighting, graphics, and technology coupled with professional services into a comprehensive visual image solution differentiates us from our competitors who offer only stand-alone products for lighting or graphics and who lack professional services offerings. During the past several years, we have continued to enhance our ability to provide comprehensive corporate visual image solutions by adding additional graphics capabilities such as digital signage and media content management, wireless lighting control systems, new and innovative LED lighting products and professional services through acquisitions and internal development. Our focus on product development and innovation creates products that are essential components of our customers’ corporate visual image strategy. Our spending on research and development was $5.5 million in fiscal 2016 and $5.6 million in fiscal 2015, and $8.2 million in fiscal 2014. We develop and manufacture lighting including solid-state LED lighting, lighting control systems, and graphics and distribute them through an extensive multi-channel distribution network that allows us to effectively service our target markets. Representative customers include BP, Chevron Texaco, 7-Eleven, ExxonMobil, Shell, Burger King, Dairy Queen, Taco Bell, Wendy’s, Best Buy, CVS Caremark, Phillips 66, Target Stores, Wal-Mart Stores, Chrysler, Ford, General Motors, Nissan, and Toyota. We service our customers at the corporate, franchise and local levels. We also focus on the elimination of non-value added activities throughout our organization through the LSI Business System, a Lean Management System utilizing kaizen events and lean tools to drive continuous improvement in our processes. The LSI Business System improves shareholder value by increasing customer satisfaction and eliminating waste, both of which will improve the bottom line. We are committed to this company-wide initiative through employee education and training with the ultimate goal to make it part of the corporate culture and way of thinking of all employees. Our business is organized as follows: the Lighting Segment, which represented 70% of our fiscal 2016 net sales; the Graphics Segment, which represented 24% of our fiscal 2016 net sales; and the Technology Segment, which represented 6% of our fiscal 2016 net sales. See Note 2 of Notes to Consolidated Financial Statements beginning on page 46 of this Form 10-K for additional information on business segments. Net sales by segment are as follows (in thousands): - 1 - Lighting Segment Graphics Segment Technology Segment All Other Category Total Net Sales Lighting Segment $ $ 2016 226,889 77,039 18,268 -- 2015 219,920 64,895 23,001 41 $ 2014 222,604 50,970 24,515 1,374 $ 322,196 $ 307,857 $ 299,463 Our Lighting Segment manufactures and markets outdoor and indoor lighting and lighting controls for the commercial, industrial and multi-site retail markets including the petroleum / convenience store, quick-service, and automotive markets. Our products are designed and manufactured to provide maximum value and meet the high-quality, competitively- priced product requirements of the markets we serve. We generally avoid specialty or custom-designed, low-volume products for single order opportunities. Our concentration is on our high-volume, standard product lines that meet our customers’ needs. By focusing our product offerings, we achieve significant manufacturing and cost efficiencies. Our lighting fixtures, poles and brackets are produced in a variety of designs, styles and finishes. Important functional variations include types of mounting, such as pole, bracket and surface, and the nature of the light requirement, such as interior and exterior down-lighting, wall-wash lighting, canopy lighting, flood-lighting, area lighting and security lighting. Our engineering staff performs photometric analyses and wind load safety studies for all light fixtures and also designs our fixtures and lighting systems. Our lighting products utilize a variety of different light sources, with the primary light source being solid- state LED, along with high-intensity discharge and fluorescent. The major products and services offered within our lighting segment include: exterior area lighting, interior lighting, canopy lighting, landscape lighting, lighting controls, light poles, lighting system design, and photometric layouts. All of our products are designed for performance, reliability, ease of installation and service, as well as attractive appearance. The Company also has a focus on designing lighting system solutions and implementing strategies related to energy savings in substantially all markets served. We offer our customers expertise in developing and utilizing high-performance solid-state LED solutions, which when combined with the Company’s lighting fixture expertise and technology, has the potential to result in a broad spectrum of white light LED fixtures that offer equivalent or improved lighting performance with significant energy and maintenance savings as compared to the present metal halide and fluorescent lighting fixtures. Lighting Segment net sales of $226,889,000 in fiscal 2016 increased 3.2% from fiscal 2015 net sales of $219,920,000. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $155.5 million in fiscal 2016 (68.5% of total lighting net sales), representing a $24.1 million or 18.4% increase from fiscal 2015 net sales of solid-state LED light fixtures of $131.3 million (59.7% of total lighting net sales). There was a reduction in the Company’s traditional lighting sales (metal halide and fluorescent light sources) from fiscal 2015 to fiscal 2016 as customers converted from traditional lighting to light fixtures having solid-state LED technology. Graphics Segment Our Graphics Segment manufactures and sells exterior and interior visual image elements related to signage and graphics, including integrated digital solutions. These products are used in graphics displays and visual image programs in several markets, including the petroleum / convenience store market and multi-site retail operations. Our extensive lighting and graphics expertise, product offering, visual image solution implementation capabilities and other professional services represent significant competitive advantages. We work with corporations and design firms to establish and implement cost effective corporate visual image programs to advance our customer’s brand. Increasingly, we have become the primary supplier of exterior and interior graphics for our customers. We also offer installation management services for those customers who require the installation of interior or exterior products (utilizing pre-qualified independent subcontractors throughout the United States). Our business can be significantly impacted by participation in a customer’s “image conversion program,” especially if it were to involve a “roll out” of that new image to a significant number of that customer’s and its franchisees’ retail sites. The impact to our business can be very positive with growth in net sales and profitability when we are engaged in an image - 2 - conversion program. This can be followed in subsequent periods by lesser amounts of business or negative comparisons following completion of an image conversion program, unless we are successful in replacing that completed business with participation in new image conversion programs of similar size with one or more customers. An image conversion program can potentially involve any or all of the following improvements, changes or refurbishments at a customer’s retail site: interior or exterior lighting (see discussion above about our lighting segment), interior or exterior store signage and graphics, and installation of these products in both the prototype and roll out phases of their program. The major products and services offered within our Graphics Segment include the following: signage and canopy graphics, pump dispenser graphics, building fascia graphics and ACM systems, decals, interior signage and marketing graphics, aisle markers, wall mural graphics, fleet graphics, prototype program graphics, and digital signage and media content management. Our Company also manages and executes the implementation of large rollout programs. Graphics Segment net sales of $77,039,000 in fiscal 2016 increased $12.1 million or 18.7% from fiscal 2015 net sales of $64,895,000. The $12.1 million increase in Graphics Segment net sales is primarily the net result of sales to the petroleum / convenience store market ($16.9 million net increase), sales to the national drug store market ($0.8 million decrease), sales to the quick-service restaurant market ($4.0 million net decrease), sales to the banking industry ($0.4 million decrease), sales to the retail grocery market ($1.7 million increase), and changes in volume to several other markets ($1.3 million decrease). The Graphics Segment net sales of graphic identification products that contain solid-state LED light sources and LED lighting for signage totaled $2.7 million in fiscal 2016, representing a $1.3 million increase from fiscal 2015 net sales of $1.4 million. Technology Segment Our Technology Segment designs, engineers, and manufactures electronic circuit boards, assemblies, lighting controls and large format solid state LED video displays. Applications for these products include, but are not limited to, OEM, transportation, commercial, industrial, entertainment, sports, and medical markets. This segment also has significant inter- segment sales to the Lighting Segment to support that segment’s customer sales of solid-state LED lighting and lighting controls. Technology Segment net customer sales of $18,268,000 in fiscal 2016 decreased 20.6% from fiscal 2015 net sales of $23,001,000. The $4.7 million decrease in Technology Segment net sales is primarily the net result of a $2.4 million decrease in sales to the transportation market, a $0.3 million decrease in sales to original equipment manufacturers, a $0.8 million decrease in sales to the medical markets, a $1.3 million decrease in sales to the sports market, and a $0.1 million net increase in sales to various other markets. The decrease in net customer sales is due to the cyclic nature of the markets the Company serves in this segment. While net customer sales decreased, the Technology Segment inter-segment sales increased $6.3 million or 21.5%. The increase in inter-segment sales is the direct result of the Lighting Segment’s increase in net sales of light fixtures having solid-state LED technology along with light fixtures with integrated controls. The Technology Segment’s intercompany support of electronic circuit boards and lighting control systems to the Lighting Segment is core to the strategic growth of the Company. The Technology Segment’s net sales of LED video screens were $0.7 million in fiscal 2016 compared to $2.3 million net sales of video screens in fiscal 2015. Goodwill and Intangible Asset Impairment There was no impairment of the Company’s goodwill or indefinite-lived intangible assets in fiscal 2016 or 2015. Our Competitive Strengths Single Source Comprehensive Visual Image Solution Provider. We believe that we are the only company serving our target markets that combines significant graphics capabilities, lighting products and installation implementation capabilities to create comprehensive image solutions. We believe that our position as a single-source provider creates a competitive advantage over competitors who can only address either the lighting or the graphics component of a customer’s corporate visual image program. Using our broad visual image solutions capabilities, our customers can maintain complete control over the creation of their visual image programs while avoiding the added complexity of coordinating separate lighting and graphics suppliers and service providers. We can use high technology software to produce computer-generated virtual prototypes of a customer’s new or improved retail site image. We believe that these capabilities are unique to our target markets and they allow our customers to make educated, cost-effective decisions quickly. - 3 - Proven Ability to Penetrate Target Markets. We have grown our business by establishing a leadership position in many of the markets we serve, including petroleum / convenience stores, automobile dealerships and specialty retailers. Although our relationship with our customers may begin with the need for a single product or service, we leverage our broad product and service offering to identify additional products and solutions. We promote the combination of graphics, lighting, and technology, along with image element offerings, and services to create comprehensive solutions for our customers. Focus on Product Innovation. We believe that our ability to successfully identify, develop and patent new products has allowed us to expand our market opportunity and enhance our market position. Our product innovation initiatives are designed to increase the value of our product offering by addressing the needs of our customers and target markets through retrofit enhancements to existing products or the development of new products. New product development includes developing an expanding portfolio of technology patents related to the design of LED based products. We believe our product innovation process creates value for our customers by producing products that offer energy efficiency, low maintenance requirements and long-term operating performance at competitive prices based upon the latest technologies available. Strong Relationships with our Customers. We have used our innovative products and high-quality services to develop close, long-standing relationships with a large number of our customers. Many of our customers are recognized among the leaders in their respective markets, including customers such as Wal-Mart, BP, Phillips 66, Exxon Mobil, Carmax, Chevron, CVS Caremark, Stop & Shop, and Burger King. Their use of our products and services raises the visibility of our capabilities and facilitates the acceptance of our products and services in their markets. Within each of these markets, our ability to be a single source provider of image solutions often creates repeat business opportunities through corporate reimaging programs. We have served some of our customers since our inception in 1976. Well-capitalized Balance Sheet. As part of our long-term operating strategy, we believe the Company maintains a conservative capital structure. With a strong equity base, we are able to preserve operating flexibility in times of industry expansion and contraction. In the current business environment, a strong balance sheet demonstrates financial viability to our existing and targeted customers. In addition, a strong balance sheet enables us to invest in the company through research and development and allows the Company to invest in capital projects that support the Company’s growth. Aggressive Use of Our Marketing Center. The capabilities of our Image Center, Innovation Center, Inspiration Center and, I-Zone Marketing Center provide us with a distinct competitive advantage to demonstrate the effectiveness of integrating graphics, lighting, and technology into a complete corporate visual image program. These four centers, which demonstrate the depth and breadth of our product and service offerings, have become an effective component of our sales process. Maintain our Vertically Integrated Business Model. We consider our Company to be a vertically integrated manufacturer rather than just a product assembler. We focus on developing lighting and graphics products coupled with technology, and outsource certain non-core processes and product components as necessary. Commitment to Continuous Improvement. We are committed to a philosophy of continuous improvement through the LSI’s Business System which is a Lean Management System utilizing Kaizen events and lean tools to identify and eliminate waste and increase customer satisfaction with the ultimate goal to improve shareholder value. Sales, Marketing and Customers Sales: Our lighting products including lighting controls, are sold primarily throughout the United States, but also in Canada, Australia, and Latin America (about 5.9% of consolidated net sales are outside the United States) using a combination of regional sales managers and independent sales representatives exclusively serving primarily the commercial / industrial market along with several of the other markets we serve. Although in some cases we sell directly to national accounts, more frequently we are designated as a preferred vendor for product sales to customer-owned as well as franchised, licensed and dealer operations. Our graphics products, which in many instances are program-driven, are sold primarily through our own sales force. Our marketing approach and means of distribution vary by product line and by type of market. Sales are developed through a wide variety of contacts such as, but not limited to, national retail marketers, branded product companies, franchise and dealer operations. In addition, sales are also achieved through recommendations from local architects, engineers, petroleum and electrical distributors and contractors. The Company utilizes the latest technology to track sales leads and customer quotes with the ultimate goals to turn these into orders from our customers. - 4 - Our sales are partially seasonal as installation of outdoor lighting and graphic systems in the northern states decreases during the winter months. Marketing: The capabilities of our Image Center, Innovation Center, Inspiration Center, and iZone Marketing Center are important parts of our sales process. These four centers, unique within the lighting and graphics industry, are facilities that can produce a computer-generated virtual prototype of a customer’s facility on a large screen through the combination of high technology software and audio/visual presentation. The i-Zone marketing center is a digitally controlled facility containing a large solid-state LED video screen and several displays that showcase our LED technology and LED products. With these capabilities, our customers can instantly explore a wide variety of lighting and graphics alternatives to develop consistent day and nighttime images. These centers give our customers more options, greater control, and more effective time utilization in the development of lighting, graphics and visual image solutions, all with much less expense than traditional prototyping. In addition to being cost and time effective for our customers, we believe that the capabilities of these marketing centers capabilities result in the best solution for our customers’ needs. The Image and iZone marketing centers also contain comprehensive indoor and outdoor product display areas that allow our customers to see many of our products and services in one setting. This aids our customers in making quick and effective lighting and graphic design decisions through hands-on product demonstrations and side-by-side comparisons. More importantly, these capabilities allow us to expand our customer’s interest from just a single product into other products and solutions. We believe that the capabilities of these centers have further enhanced our position as a highly qualified outsourcing partner capable of guiding a customer through image alternatives utilizing our lighting and graphics products and services. We believe this capability distinguishes us from our competitors and will become increasingly beneficial in attracting additional customers. In addition to the capabilities of our Image Center, Innovation Center, Inspiration Center, and iZone Marketing Center, the Company markets its products and service capabilities to end users in multiple channels through a broad spectrum of marketing and promotional methods, including direct customer contact, trade shows, on-site training, print advertising in industry publications, product brochures and other literature, as well as the internet and social media. Manufacturing and Operations We design, engineer and manufacture substantially all of our lighting and graphics products through a vertically integrated business model. By emphasizing high-volume production of standard product lines, we achieve significant manufacturing efficiencies. We periodically invest in new machinery and equipment utilizing the latest technology in order to leverage the manufacturing efficiencies gained from our high-volume production. When appropriate, we utilize alliances with domestic and international vendors to outsource certain products and components. LED products and related software are engineered, designed and final-assembled by the Company, while a portion of the manufacturing has been performed by select qualified vendors. We are not dependent on any one supplier for any of our component parts. The principal raw materials and purchased components used in the manufacturing of our products are steel, aluminum, castings, fabrications, LEDs, power supplies, powder paint, steel and aluminum poles, wire harnesses, acrylic and glass lenses, inks, various graphics substrates such as foam board and vinyls, and digital screens. We source these materials and components from a variety of suppliers. Although an interruption of these supplies and components could disrupt our operations, we believe generally that alternative sources of supply exist and could be readily arranged. We strive to reduce price volatility in our purchases of raw materials and components through annual contracts with strategic suppliers. Our Lighting operations generally carry a certain level of sub-assemblies in inventory and relatively small amounts of finished goods inventory, except for certain products that are stocked to meet quick delivery requirements. Most often, lighting products are made to order and shipped shortly after they are manufactured. Our Graphics operations manufacture custom graphics products for customers who require us to stock certain amounts of finished goods in exchange for their commitment to that inventory. In some Graphics programs, customers also give us a cash advance for the inventory that we stock for them. The Company’s operations dealing with LED products generally carry LED and LED component inventory due to longer lead times. Our Technology Segment operations purchase electronic components from multiple suppliers and manufacture custom electronic circuit boards and lighting control systems. Most products are made to order and, as a result, these operations do not carry very many finished goods. We currently operate out of ten manufacturing facilities and two sales/service/technology facilities in eight U.S. states. - 5 - Our Lighting Business operations received ISO 9001:2015 Certification thru ANAB (Cert# 5369-Eagle Registrations Inc.), with plans to seek additional certifications in future years. Our manufacturing operations are subject to various federal, state and local regulatory requirements relating to environmental protection and occupational health and safety. We do not expect to incur material capital expenditures with regard to these matters and believe our facilities are in compliance with such regulations. Competition We experience strong competition in all segments of our business, and in all markets served by our product lines. Although we have many competitors, some of which have greater financial and other resources, we do not compete with the same companies across our entire product and service offerings. We believe product quality and performance, price, customer service, prompt delivery, and reputation to be important competitive factors. We also have several product and process patents which have been obtained in the normal course of business which provide a competitive advantage in the marketplace. Additional Information Our sales are partially seasonal as installation of outdoor lighting and graphic systems in the northern states lessens during the harshest winter months. We had a backlog of orders, which we believe to be firm, of $29.1 million and $33.8 million at June 30, 2016 and 2015, respectively. All orders are expected to be shippable or installed within twelve months. We have 1,292 full-time employees and 186 agency employees as of June 30, 2016. We offer a comprehensive compensation and benefits program to most employees, including competitive wages, a cash-based incentive plan that is based upon the achievement of the Company’s business plan goals, a profit-sharing plan and retirement plan, and a 401(k) savings plan, a nonqualified deferred compensation plan (for certain employees), an equity compensation plan, and medical and dental insurance. We file reports with the Securities and Exchange Commission (“SEC”) on Forms 10-K, 10-Q and 8-K. You may read and copy any materials filed with the SEC at its public reference room at 100 F. Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain that information by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet website that contains reports, proxy and information statements and other information regarding us. The address of that site is http://www.sec.gov. Our internet address is http://www.lsi-industries.com. We make available free of charge through our internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practical after we electronically file them with the SEC. LSI is not including the other information contained on its website as part of or incorporating it by reference into this Annual Report on Form 10-K. LSI Industries Inc. is an Ohio corporation, incorporated in 1976. ITEM 1A. RISK FACTORS In addition to the other information set forth in this report, you should carefully consider the following factors which could materially affect our business, financial condition, cash flows or future results. Any one of these factors could cause the Company’s actual results to vary materially from recent results or from anticipated future results. The risks described below are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. The markets in which we operate are subject to competitive pressures that could affect selling prices, and therefore could adversely affect our operating results. Our businesses operate in markets that are highly competitive, and we compete on the basis of price, quality, service and/or brand name across the industries and markets served. Some of our competitors for certain products, primarily in the Lighting Segment, have greater sales, assets and financial resources. Some of our competitors are based in foreign countries and have cost structures and prices in foreign currencies. Accordingly, currency fluctuations could cause our U.S. dollar-priced products to be less competitive than our competitors’ products which are priced in other currencies. Competitive pressures could affect prices we charge our customers or demand for our products, which could adversely affect our operating results. Additionally, customers for our products may attempt to reduce the number of vendors from - 6 - which they purchase in order to reduce the size and diversity of their inventories and their transaction costs. To remain competitive, we will need to invest continuously in research and development, manufacturing, marketing, customer service and support, and our distribution networks. We may not have sufficient resources to continue to make such investments and we may be unable to maintain our competitive position. Lower levels of economic activity in our end markets could adversely affect our operating results. Our businesses operate in several market segments including, but not limited to, commercial, industrial, retail, petroleum / convenience store and automotive. Operating results can be negatively impacted by volatility in these markets. Future downturns in any of the markets we serve could adversely affect our overall sales and profitability. Our operating results may be adversely affected by unfavorable economic, political and market conditions. Economic and political conditions worldwide have from time to time contributed to slowdowns in our industry at large, as well as to the specific segments and markets in which we operate. When combined with ongoing customer consolidation activity and periodic manufacturing and inventory initiatives, an uncertain macro-economic and political climate, including but not limited to the effects of possible weakness in domestic and foreign financial and credit markets, could lead to reduced demand from our customers and increased price competition for our products, increased risk of excess and obsolete inventories and uncollectible receivables, and higher overhead costs as a percentage of revenue. If the markets in which we participate experience further economic downturns, as well as a slow recovery period, this could negatively impact our sales and revenue generation, margins and operating expenses, and consequently have a material adverse effect on our business, financial condition and results of operations. Price increases or significant shortages of raw materials and components could adversely affect our operating margin. The Company purchases large quantities of raw materials and components — mainly steel, aluminum, light bulbs and fluorescent tubes, lighting ballasts, sockets, wire harnesses, plastic lenses, glass lenses, vinyls, inks, LEDs, electronic components and corrugated cartons. Materials comprise the largest component of costs, representing approximately 58% and 59% of the cost of sales in 2016 and 2015, respectively. While we have multiple sources of supply for most of our material requirements, significant shortages could disrupt the supply of raw materials. Further increases in the price of these raw materials and components could further increase the Company’s operating costs and materially adversely affect margins. Although the Company attempts to pass along increased costs in the form of price increases to customers, the Company may be unsuccessful in doing so for competitive reasons. Even when price increases are successful, the timing of such price increases may lag significantly behind the incurrence of higher costs. On occasion, there are selected electronic component parts and certain other parts shortages in the market place, some of which have affected the Company’s manufacturing operations and shipment schedules even though multiple suppliers may be available. The lead times of these suppliers can increase and the prices of some of these parts have increased during periods of shortages. Fluorescent tubes and other light bulbs contain rare earth minerals, which have become more expensive and in short supply throughout the world, thereby affecting the Company’s supply and cost of these light sources. We have a concentration of net sales to the petroleum / convenience store market, and any substantial change in this market could have an adverse affect on our business. Approximately 35% of our net sales in fiscal year 2016 are concentrated in the petroleum / convenience store market. Sales to this market segment are dependent upon the general conditions prevailing in and the profitability of the petroleum and convenience store industries and general market conditions. Our petroleum market business can be subject to reactions by the petroleum industry to world political events, particularly those in the Middle East, and to the price and supply of oil. Major disruptions in the petroleum industry generally result in a curtailment of retail marketing efforts, including expansion and refurbishing of retail outlets, by the petroleum industry and adversely affect our business. Any substantial change in purchasing decisions by one or more of our larger customers whether due to actions by our competitors, customer financial constraints, industry factors or otherwise, could have an adverse effect on our business. Difficulties with integrating acquisitions could adversely affect operating costs and expected benefits from those acquisitions. We have pursued and may continue to seek potential acquisitions to complement and expand our existing businesses, increase our revenues and profitability, and expand our markets. We cannot be certain that we will be able to identify, acquire or profitably manage additional companies or successfully integrate such additional companies without - 7 - substantial costs, delays or other problems. Also, companies acquired recently and in the future may not achieve revenues, profitability or cash flows that justify our investment in them. We expect to spend significant time and effort in expanding our existing businesses and identifying, completing and integrating acquisitions. We expect to face competition for acquisition candidates which may limit the number of acquisition opportunities available to us, possibly leading to a decrease in the rate of growth of our revenues and profitability, and may result in higher acquisition prices. The success of these acquisitions we do make will depend on our ability to integrate these businesses into our operations. We may encounter difficulties in integrating acquisitions into our operations, retaining key employees of acquired companies and in managing strategic investments. Therefore, we may not realize the degree or timing of the benefits anticipated when we first enter into a transaction. Goodwill and intangible assets that are recorded on the balance sheet from a previous or future acquisition could be written off if circumstances arise whereby the goodwill or intangible assets have been impaired. We have pursued and will continue to seek potential acquisitions, at the appropriate time, to complement and expand our existing businesses, increase our revenues and profitability, and expand our markets through acquisitions. As a result of acquisitions, we have significant goodwill and intangible assets recorded on our balance sheet. We will continue to evaluate the recoverability of the carrying amount of our goodwill and intangible assets on an ongoing basis, and we may incur substantial non-cash impairment charges, which would adversely affect our financial results. There can be no assurance that the outcome of such reviews in the future will not result in substantial impairment charges. Impairment assessment inherently involves judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact our assumptions as to prices, costs, holding periods or other factors that may result in changes in our estimates of future cash flows. Although we believe the assumptions we used in testing for impairment are reasonable, significant changes in any one of our assumptions could produce a significantly different result. If there were to be a decline in our market capitalization and a decline in estimated forecasted discounted cash flows, there could be an impairment of the goodwill and intangible assets. A non-cash impairment charge could be material to the earnings of the reporting period in which it is recorded. If we do not develop the appropriate new products or if customers do not accept new products, we could experience a loss of competitive position which could adversely affect future revenues. The Company is committed to product innovation on a timely basis to meet customer demands. Development of new products for targeted markets requires the Company to develop or otherwise leverage leading technologies in a cost- effective and timely manner. Failure to meet these changing demands could result in a loss of competitive position and seriously impact future revenues. Products or technologies developed by others may render the Company’s products or technologies obsolete or noncompetitive. A fundamental shift in technologies in key product markets could have a material adverse effect on the Company’s operating results and competitive position within the industry. More specifically, the development of new or enhanced products is a complex and uncertain process requiring the anticipation of technological and market trends. Rapidly changing product technologies could adversely impact operating results due to potential technological obsolescence of certain inventories or increased warranty expense related to newly developed LED lighting products. We may experience design, manufacturing, marketing or other difficulties, such as an inability to attract a sufficient number of experienced engineers that could delay or prevent our development, introduction or marketing of new products or enhancements and result in unexpected expenses. Such difficulties could cause us to lose business from our customers and could adversely affect our competitive position. In addition, added expenses could decrease the profitability associated with those products that do not gain market acceptance. Our business is cyclical and seasonal, and in downward economic cycles our operating profits and cash flows could be adversely affected. Historically, sales of our products have been subject to cyclical variations caused by changes in general economic conditions. Our revenues in our third quarter ending March 31 are also affected by the impact of weather on construction and installation programs and the annual budget cycles of major customers. The demand for our products reflects the capital investment decisions of our customers, which depend upon the general economic conditions of the markets that our customers serve, including, particularly, the petroleum and convenience store industries. During periods of expansion in construction and industrial activity, we generally have benefited from increased demand for our products. Conversely, downward economic cycles in these industries result in reductions in sales and pricing of our products, which may reduce our profits and cash flow. During economic downturns, customers also tend to delay purchases of new products. The cyclical and seasonal nature of our business could at times adversely affect our liquidity and financial results. - 8 - A loss of key personnel or inability to attract qualified personnel could have an adverse affect on our operating results. The Company’s future success depends on the ability to attract and retain highly skilled technical, managerial, marketing and finance personnel, and, to a significant extent, upon the efforts and abilities of senior management. The Company’s management philosophy of cost-control results in a lean workforce. Future success of the Company will depend on, among other factors, the ability to attract and retain other qualified personnel, particularly management, research and development engineers and technical sales professionals. The loss of the services of any key employees or the failure to attract or retain other qualified personnel could have a material adverse effect on the Company’s results of operations. The costs of litigation and compliance with environmental regulations, if significantly increased, could have an adverse affect on our operating profits. We are, and may in the future be, a party to any number of legal proceedings and claims, including those involving patent litigation, product liability, employment matters, and environmental matters, which could be significant. Given the inherent uncertainty of litigation, we can offer no assurance that existing litigation or a future adverse development will not have a material adverse impact. We are also subject to various laws and regulations relating to environmental protection and the discharge of materials into the environment, and it could potentially be possible we could incur substantial costs as a result of the noncompliance with or liability for clean up or other costs or damages under environmental laws. Regulations related to conflict minerals could adversely impact our business. The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as conflict minerals, originating from the Democratic Republic of Congo (DRC) and adjoining countries. As a result, the SEC adopted annual disclosure and reporting requirements for those companies who use conflict minerals mined from the DRC and adjoining countries in their products. We incurred certain costs associated with complying with these disclosure requirements, including the due diligence to determine the sources of conflict minerals used in our products. Ongoing compliance with these rules could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering “conflict free" conflict minerals, we cannot be sure that we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if we determine that certain of our products contain minerals that are not conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products through the procedures we have already implemented or may implement. The turnover of commissioned sales representatives could cause a significant disruption in sales volume. Commissioned sales representatives are critical to generating business in the Lighting Segment. From time to time, commissioned sales representatives representing a particular region resign or are terminated and replaced with new commissioned sales representatives. During this period of transition from the previous agency to the new one, sales in the particular region will likely fall as business is disrupted. It may take several months for the new sales representative to generate sales that will equal or exceed the previous sales representative. There is also the risk that the new sales agency will not attain the sales volume of the previous agency. These sales representative changes may occur individually as one agency is replaced due to lack of performance. On the other hand, these sales representative changes can be widespread as a result of the competitive nature of the lighting industry as LSI and its competition vie for the strongest sales agency in a particular region. Changes in a customer’s demands and commitment to proprietary inventory could result in significant inventory write-offs. Upgrading or replacing a customer’s current image requires the manufacture of inventory that is specific to the particular customer. This is particularly true in the Graphics Segment. In as many instances as possible, we require a commitment from the customer before the inventory is produced. Our request for a commitment can range from a single site or store to a large roll-out program involving many sites or stores. The risk does exist that a customer cannot or will not honor its commitment to us. The reasons a customer cannot or will not honor its commitment can range from the bankruptcy of the customer, to the change in the image during the roll-out program, to canceling the program before its completion and before the inventory is sold to the customer. In each of these instances, we could be left with significant - 9 - amounts of inventory required to support the customer’s re-imaging. While all efforts are made to hold the customer accountable for its commitment, there is the risk that a significant amount of inventory could be deemed obsolete or no longer usable which could result in significant inventory write-offs. If we are unable to adequately protect our intellectual property, we may lose some of our competitive advantage. Our success is determined in part by our ability to obtain United States and foreign patent protection for our technology and to preserve our trade secrets. Our ability to compete and the ability of our business to grow could suffer if our intellectual property rights are not adequately protected. There can be no assurance that our patent applications will result in patents being issued or that current or additional patents will afford protection against competitors. We rely on a combination of patents, copyrights, trademarks and trade secret protection and contractual rights to establish and protect our intellectual property. Failure of our patents, copyrights, trademarks and trade secret protection, non-disclosure agreements and other measures to provide protection of our technology and our intellectual property rights could enable our competitors to more effectively compete with us and have an adverse effect on our business, financial condition and results of operations. In addition, our trade secrets and proprietary know-how may otherwise become known or be independently discovered by others. No guarantee can be given that others will not independently develop substantially equivalent proprietary information or techniques, or otherwise gain access to our proprietary technology. Sudden or unexpected changes in a customer’s creditworthiness could result in significant accounts receivable write-offs. The Company takes a conservative approach when extending credit to its customers. Customers are granted an appropriate credit limit based upon the due diligence performed on the customer which includes, among other things, the review of the company’s financial statements and banking information, various credit checks, payment history the customer has with the Company. At any given time, the Company can have a significant amount of credit exposure with its larger customers. While the Company is frequently monitoring its outstanding receivables with its customers, the likelihood does exist that a customer with large credit exposure is unable to make payment on its outstanding receivables which could result in a significant write-off of accounts receivable. Failure of the Company’s operating or information system or a compromise of security with respect to its operating system or portable electronic devices could adversely affect the Company’s results of operations and financial condition or the effectiveness of internal controls over operations and financial reporting. Information technology system failures, network disruptions and breaches of data security caused by such factors, including, but not limited to, earthquakes, fire, theft, fraud, malicious attack or other causes could disrupt the Company’s operations by causing delays or cancellation of customer orders, negatively affecting the Company’s online offerings and services, impeding the manufacture or shipment of products, processing transactions and reporting financial results, resulting in the unintentional disclosure of customer or Company information, or damage to the Company’s reputation. While management has taken steps to address these concerns by implementing network security and internal control measures, there can be no assurance that a system failure or loss or data security breach will not materially adversely affect the Company’s financial condition and operating results. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES The Company has twelve facilities: Description Size Location Status 1) 2) LSI Industries Corporate Headquarters and lighting fixture manufacturing 243,000 sq. ft. (includes 66,000 sq. ft. of office space) Cincinnati, OH Owned LSI Industries pole manufacturing and dry powder-coat painting 122,000 sq. ft. Cincinnati, OH Owned 3) LSI Industries technology center 9,000 sq. ft. Cincinnati, OH Leased - 10 - 4) LSI Industries lighting assembly 12,000 sq. ft. Hawthorne, CA Leased 5) 6) LSI Metal Fabrication and LSI Images manufacturing and dry powder-coat painting 96,000 sq. ft. (includes 5,000 sq. ft. of office space) Independence, KY Owned LSI Integrated Graphics office; screen printing manufacturing; and architectural graphics manufacturing 141,000 sq. ft. (includes 34,000 sq. ft. of office space) Houston, TX Leased 7) Grady McCauley office and manufacturing 212,000 sq. ft. (includes 20,000 sq. North Canton, OH Owned ft. of office space) 8) 9) LSI MidWest Lighting office and manufacturing 138,000 sq. ft. (includes 6,000 sq. ft. of office space) Kansas City, KS Owned LSI Retail Graphics office and manufacturing 33,000 sq. ft. (includes 5,000 sq. ft. of office space) Woonsocket, RI Owned 10) LSI Lightron office and manufacturing 170,000 sq. ft. (includes 10,000 sq. ft. of office space) New Windsor, NY Owned and Leased (a) 11) LSI Adapt offices 2,000 sq. ft. North Canton, OH Pineville, NC 12) LSI ADL Technology office and manufacturing 57,000 sq. ft. (includes 5,000 sq. ft. of office space) Columbus, OH Owned Leased Owned (a) The land at this facility is leased and the building is owned. The Company considers these facilities (total of 1,235,000 square feet) adequate for its current level of operations. ITEM 3. LEGAL PROCEEDINGS Nothing to report. ITEM 4. MINE SAFETY DISCLOSURES None. PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (a) Common share information appears in Note 17 — SUMMARY OF QUARTERLY RESULTS (UNAUDITED) under “Range of share prices” beginning on page 63 of this Form 10-K. Information related to “Earnings (loss) per share” and “Cash dividends paid per share” appears in SELECTED FINANCIAL DATA on page 64 of this Form 10-K. LSI’s shares of common stock are traded on the NASDAQ Global Select Market under the symbol “LYTS.” The Company’s Board of Directors has adopted a dividend policy 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. The Company has paid annual cash dividends beginning in fiscal 1987 through fiscal 1994, and quarterly cash dividends since fiscal 1995. The Company’s indicated annual rate for payment of a cash dividend at the end of fiscal 2016 was $0.20 per share. - 11 -  At August 27, 2016, there were 620 shareholders of record. The Company believes this represents approximately 3,000 beneficial shareholders. (b) The Company does not purchase into treasury its own common shares for general purposes. However, the Company does purchase its own common shares, through a Rabbi Trust, as investments of employees/participants of the LSI Industries Inc. Nonqualified Deferred Compensation Plan. Purchases of Company common shares for this Plan in the fourth quarter of fiscal 2016 were as follows: ISSUER PURCHASES OF EQUITY SECURITIES (a) Total Number of (b) Average Part of Publicly (d) Maximum Number (c) Total Number of (or Approximate Dollar Shares Purchased as Value) of Shares that May Yet Be Purchased Period 4/1/16 to 4/30/16 5/1/16 to 5/31/16 6/1/16 to 6/30/16 Total Shares Price Paid Announced Plans or Under the Plans or Purchased per Share — $ 2,752 $ 1,174 $ 3,926 $ — 11.89 11.15 11.67 Programs Programs — 2,752 1,174 3,926 (1) (1) (1) (1) (1) All acquisitions of shares reflected above have been made in connection with the Company’s Nonqualified Deferred Compensation Plan, which does not contemplate a limit on shares to be acquired. The following graph compares the cumulative total shareholder return on the Company’s common shares during the five fiscal years ended June 30, 2016 with a cumulative total return on the NASDAQ Stock Market Index (U.S. companies) and the Dow Jones Electrical Equipment Index. The comparison assumes $100 was invested June 30, 2011 in the Company’s Common Shares and in each of the indexes presented; it also assumes reinvestment of dividends. - 12 - COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among LSI Industries Inc., the NASDAQ Composite Index, and the Dow Jones US Electrical Components & Equipment Index $250 $200 $150 $100 $50 $0 6/11 6/12 6/13 6/14 6/15 6/16 LSI Industries Inc. NASDAQ Composite Dow Jones US Electrical Components & Equipment *$100 invested on 6/30/11 in stock or index, including reinvestment of dividends. Fiscal year ending June 30. Copyright© 2016 Dow Jones & Co. All rights reserved. The stock price performance included in this graph is not necessarily indicative of future stock price performance. ITEM 6. SELECTED FINANCIAL DATA “Selected Financial Data” begins on page 64 of this Form 10-K. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appears on pages 20 through 33 of this Form 10-K. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in variable interest rates, changes in prices of raw materials and component parts, and changes in foreign currency translation rates. Each of these risks is discussed below. Interest Rate Risk The Company earns interest income on its cash, cash equivalents, and short-term investments (if any) and pays interest expense on its debt (if any). Because of variable interest rates, the Company is exposed to the risk of interest rate fluctuations, which impact interest income, interest expense, and cash flows. With the current balance in the Company’s short-term cash investments and absence of any outstanding variable rate debt, the adverse exposure to interest rate fluctuations has decreased considerably. The Company’s $30,000,000 line of credit is subject to interest rate fluctuations, should the Company borrow certain amounts on this line of credit. Additionally, the Company expects to generate cash from its operations that will subsequently be used to pay down as much of the debt (if any is outstanding) as possible or invest cash in short-term investments (if no debt is outstanding), while still funding the growth of the Company. - 13 - Raw Material Price Risk The Company purchases large quantities of raw materials and components, mainly steel, aluminum, castings, fabrications, LEDs, power supplies, powder paint, wire harnesses, plastic and glass lenses, vinyls, inks, electronic components, and corrugated cartons. The Company’s operating results could be affected by the availability and price fluctuations of these materials. The Company’s strategic sourcing plans include mitigating risk by utilizing multiple suppliers for a commodity to avoid significant dependence on any single supplier. Other than the possibility of industry- wide supply shortages, the Company has not experienced any significant supply problems in recent years. In a prior fiscal year, the Company dealt with a lengthy longshoreman’s negotiations on the west coast that caused some minor delays. Also in a prior fiscal year, the Company experienced supply shortages of certain electronic components and certain other parts which caused some production and shipment delays. Price risk for these materials is related to price increases in commodity items that affect all users of the materials, including the Company’s competitors. For the fiscal year ended June 30, 2015, the raw material component of cost of goods sold subject to price risk was approximately $138 million. The Company does not actively hedge or use derivative instruments to manage its risk in this area. The Company does, however, seek and qualify new suppliers, negotiate with existing suppliers, and arranges stocking agreements to mitigate risk of supply and price increases. On occasion, the Company’s Lighting Segment has announced price increases with customers in order to offset raw material price increases. In May 2015, the Company announced a 6% to 8% price increase for all non-LED lighting and pole products. The price increase went into effect for all orders placed on or after July 1, 2015. The Company’s Graphics Segment generally establishes new sales prices, reflective of the then current raw material prices, for each custom graphics program as it begins. Foreign Currency Translation Risk The Company has essentially no foreign currency risk as all operations are conducted in U.S. dollars. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements Financial Statements: Management’s Report On Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm Consolidated Statements of Operations for the years ended June 30, 2016, 2015, and 2014 Consolidated Balance Sheets at June 30, 2016 and 2015 Consolidated Statements of Shareholders’ Equity for the years ended June 30, 2016, 2015, and 2014 Consolidated Statements of Cash Flows for the years ended June 30, 2016, 2015, and 2014 Notes to Consolidated Financial Statements Financial Statement Schedules: Schedule II – Valuation and Qualifying Accounts for the years ended June 30, 2016, 2015, and 2014 Begins on Page 34 35 36 37 38 40 41 42 63 Schedules other than those listed above are omitted for the reason(s) that they are either not applicable or not required or because the information required is contained in the financial statements or notes thereto. Selected quarterly financial data is found in Note 17 of the accompanying consolidated financial statements. - 14 - ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. 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 the 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 June 30, 2016, our disclosure controls and procedures were effective. Management believes that the consolidated financial statements included in this Annual Report on Form 10-K are fairly presented in all material respects in accordance with U.S GAAP, and the Company’s Chief Executive Officer and Chief Financial Officer have certified that, based on their knowledge, the consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations, statement of shareholders’ equity, and cash flows for each of the periods presented in this report. Changes in Internal Control There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a- 15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2016, 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 9A. See Management’s Report On Internal Control Over Financial Reporting on page 34. ITEM 9B. OTHER INFORMATION None. PART III ITEMS 10, 11, 12, 13 and 14 of Part III are incorporated by reference to the LSI Industries Inc. Proxy Statement for its Annual Meeting of Shareholders to be held November 17, 2016, as filed with the Commission pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS The description of equity compensation plans required by Regulation S-K, Item 201(d) is incorporated by reference to the LSI Industries Inc. Proxy Statement for its Annual Meeting of Shareholders to be held November 17, 2016, as filed with the Commission pursuant to Regulation 14A. The following table presents information about the Company’s equity compensation plans (LSI Industries Inc. 2003 Equity Compensation Plan and the 2012 Stock Incentive Plan) as of June 30, 2016. - 15 - (a) Number of securities to be issued upon (b) Weighted average (c) Number of securities remaining available for future issuance under equity Plan category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total exercise of outstanding exercise price of options, warrants and outstanding options, (excluding securities warrants and rights reflected in column (a)) compensation plans rights 3,038,990 — 3,038,990 PART IV $8.98 — $8.98 1,612,095 — 1,612,095 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this report: (1) Consolidated Financial Statements Appear as part of Item 8 of this Form 10-K. (2) Exhibits — Exhibits set forth below are either on file with the Securities and Exchange Commission and are incorporated by reference as exhibits hereto, or are filed with this Form 10-K. Exhibit No. Exhibit Description 3.1 Articles of Incorporation of LSI (incorporated by reference to Exhibit 3.1 to LSI’s Form S-3 Registration Statement File No. 33-65043). 3.2 Amended Article Fourth of LSI’s Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to LSI’s Form 8-K filed November 19, 2009). 3.3 Amended and Restated Code of Regulations of LSI (incorporated by reference to Exhibit 3 to LSI’s Form 8-K filed January 22, 2009). 10.1 Second Amendment to Loan Documents dated March 31, 2016 by and between the Registrant and PNC Bank, National Association (incorporated by reference to Exhibit 10.1 to LSI’s Form 10-Q filed April 29, 2016). 10.9* LSI Industries Inc. Retirement Plan (Amended and Restated as of April 22, 2015) (incorporated by reference to Exhibit 10.9 to LSI’s Form 10-K filed September 8, 2015). 10.10* LSI Industries Inc. 2003 Equity Compensation Plan (Amended and Restated through November 19, 2009) (incorporated by reference to Exhibit 10.1 to LSI’s Form 8-K filed November 19, 2009). 10.11* Amended and Restated 2012 Stock Incentive Plan as of November 19, 2015 (incorporated by reference to Exhibit 10.1 to LSI’s Form 10-Q filed February 4, 2016). 10.12* Trust Agreement Establishing the Rabbi Trust Agreement by and between LSI Industries Inc. and Prudential Bank & Trust, FSB (incorporated by reference to Exhibit 10.1 to LSI’s Form 8-K filed January 5, 2006). - 16 - 10.13* LSI Industries Inc. Nonqualified Deferred Compensation Plan (Amended and Restated as of November 20, 2014) (incorporated by reference to Exhibit 10.2 to LSI’s Form 10-Q filed February 5, 2015). 10.14* Amended Agreement dated January 25, 2005 with James P. Sferra (incorporated by reference to Exhibit 10.2 to LSI’s Form 8-K filed January 27, 2005). 10.15* Amendment to Amended Agreement dated September 16, 2014 between LSI Industries Inc. and James P. Sferra (incorporated by reference to Exhibit 10.15 to LSI’s Form 10-K filed September 8, 2015). 10.16* LSI Industries Inc. Fiscal Year 2015 Named Executive Officer Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to LSI’s Form 8-K filed December 8, 2014). 10.17* Employment Agreement between Dennis W. Wells and LSI (incorporated by reference to Exhibit 10.3 to LSI’s Form 8-K filed October 1, 2014). 10.18* Separation Agreement and Release between David W. McCauley and LSI Industries Inc. dated July 17, 2015 (incorporated by reference to Exhibit 10.18 to LSI’s Form 10-K filed September 8, 2015). 10.19* Change of Control Policy (incorporated by reference to Exhibit 10.1 to LSI’s Form 8-K filed October 3, 2011). 10.20* LSI Industries Inc. Long Term Incentive Plan FY2016 for Named Executive Officers (incorporated by reference to Exhibit 10.1 to LSI’s Form 8-K filed July 6, 2015). 10.21* LSI Industries Inc. Short Term Incentive Plan FY2016 for Named Executive Officers (incorporated by reference to Exhibit 10.2 to LSI’s Form 8-K filed July 6, 2015). 10.22* Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.3 to LSI’s Form 8-K filed July 6, 2015). 10.23* Form of Nonqualified Stock Option Award Agreement - - Performance-Based (incorporated by reference to Exhibit 10.4 to LSI’s Form 8-K filed July 6, 2015). 10.24* Form of Nonqualified Stock Option Award Agreement - - Service-Based (incorporated by reference to Exhibit 10.5 to LSI’s Form 8-K filed July 6, 2015). 10.25* Form of Incentive Stock Option Award Agreement (incorporated by reference to Exhibit 10.6 to LSI’s Form 8-K filed July 6, 2015). 10.26* LSI Industries Inc. Long Term Incentive Plan FY2017 for Named Executive Officers (incorporated by reference to Exhibit 10.1 to LSI’s Form 8-K filed July 5, 2016). 10.27* LSI Industries Inc. Short Term Incentive Plan FY2017 for Named Executive Officers (incorporated by reference to Exhibit 10.1 to LSI’s Form 8-K filed August 22, 2016). 10.28 Form of Indemnification Agreement between LSI and certain indemnities (incorporated by reference to Exhibit 10.1 to LSI’s Form 8-K filed June 23, 2016). 14 Code of Ethics (incorporated by reference to Exhibit 14 to LSI’s Form 10-K for the fiscal year ended June 30, 2004). 21 Subsidiaries of the Registrant 23.1 Consent of Independent Registered Public Accounting Firm (Grant Thornton LLP) 24 Power of Attorney (included as part of signature page) 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) - 17 - 32.1 18 U.S.C. Section 1350 Certification of Principal Executive Officer 32.2 18 U.S.C. Section 1350 Certification of Principal Financial Officer 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema 101.CAL XBRL Taxonomy Extension Calculation Linkbase 101.LAB XBRL Taxonomy Extension Label Linkbase 101.PRE XBRL Taxonomy Extension Presentation Linkbase 101.DEF XBRL Taxonomy Extension Definition Document * Management Compensatory Agreements LSI will provide shareholders with any exhibit upon the payment of a specified reasonable fee, which fee shall be limited to LSI’s reasonable expenses in furnishing such exhibit. The exhibits identified herein as being filed with the SEC have been so filed with the SEC but may not be included in this version of the Annual Report to Shareholders. Pursuant to the requirements of Section 13 or 15(d) 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. SIGNATURES September 7, 2016 Date LSI INDUSTRIES INC. BY: /s/ Dennis W. Wells Dennis W. Wells Chief Executive Officer and President We, the undersigned directors and officers of LSI Industries Inc. hereby severally constitute Dennis W. Wells and Ronald S. Stowell, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, in our names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K filed with the Securities and Exchange Commission. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. - 18 - Signature /s/ Dennis W. Wells Dennis W. Wells Date: September 7, 2016 /s/ Ronald S. Stowell Ronald S. Stowell Date: September 7, 2016 /s/ Robert P. Beech Robert P. Beech Date: September 7, 2016 /s/ Gary P. Kreider Gary P. Kreider Date: September 7, 2016 /s/ Dennis B. Meyer Dennis B. Meyer Date: September 7, 2016 /s/ Wilfred T. O’Gara Wilfred T. O’Gara Date: September 7, 2016 /s/ Mark A. Serrianne Mark A. Serrianne Date: September 7, 2016 /s/ James P. Sferra James P. Sferra Date: September 7, 2016 /s/ John K. Morgan John K. Morgan Date: September 7, 2016 /s/ Robert A. Steele Robert A. Steele Date: September 7, 2016 Title Chief Executive Officer and President; Director (Principal Executive Officer) Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) Director Chairman of the Board of Directors Director Director Director Director Director Director - 19 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company’s “forward looking statements” and disclosures as presented earlier in this Form 10-K in the “Safe Harbor” Statement, as well as the Company’s consolidated financial statements and accompanying notes presented later in this Form 10-K should be referred to when reading Management’s Discussion and Analysis of Financial Condition and Results of Operations. Net Sales by Business Segment (In thousands) Lighting Segment Graphics Segment Technology Segment All Other Category Total Net Sales Operating Income (Loss) by Business Segment (In thousands) Lighting Segment Graphics Segment Technology Segment All Other Category Corporate and Eliminations Total Operating Income Summary Comments 2016 226,889 77,039 18,268 -- 322,196 2016 15,785 5,429 3,845 -- (11,103) 13,956 $ $ $ $ 2015 219,920 64,895 23,001 41 307,857 2015 14,775 1,156 2,949 (183) (11,164) 7,533 $ $ $ $ 2014 222,604 50,970 24,515 1,374 299,463 2014 10,524 (2,086) 1,633 (854) (6,899) 2,318 $ $ $ $ Fiscal 2016 net sales of $322,196,000 increased $14.3 million or 4.7% as compared to fiscal 2015 net sales of $307,857,000. Net sales were favorably influenced by increased net sales of the Lighting Segment (up $7.0 million or 3.2%) and Graphics Segment (up $12.1 million or 18.7%). Net sales were unfavorably influenced by net sales of the Technology Segment (down $4.7 million or 20.6%). Fiscal 2016 operating income of $13,956,000 increased 85.3% from operating income of $7,533,000 in fiscal 2015. The $6.4 million increase in operating income was the net result of increased net sales, an increase in gross profit and an increase in gross profit as a percentage of net sales from 24.2% in fiscal 2015 to 26.0% in fiscal 2016, an increase in selling and administrative expenses, and the net effect of the gain on the sale of a facility more than offset by the loss on the sale of a subsidiary in fiscal 2015 with no comparable events in fiscal 2016. Fiscal 2015 net sales of $307,857,000 increased $8.4 million or 2.8% as compared to fiscal 2014. Net sales in fiscal 2015 were favorably influenced by increased net sales of the Graphics Segment (up $13.9 million or 27.3%). Net sales were unfavorably influenced in fiscal 2015 by net sales of the Lighting Segment (down $2.7 million or 1.2%), the Technology Segment (down $1.5 million or 6.2%), and the All Other Category (down $1.3 million or 97%). Fiscal 2015 operating income of $7,533,000 increased 225% from operating income of $2,318,000 in fiscal 2014. The $5.2 million increase in operating income was the net result of increased net sales, an increase in gross profit as a percentage of net sales from 21.8% in fiscal 2014 to 24.2% in fiscal 2015, an increase in selling and administrative expenses primarily due to an increase in compensation and benefits expense, an intangible asset impairment expense of $0.8 million in fiscal 2014 with no comparable expense in fiscal 2015, and the net effect of the gain on the sale of a facility more than offset by the loss on the sale of a subsidiary in fiscal 2015 with no comparable events in fiscal 2014. The Company recorded intangible asset impairment expense in the Technology Segment in fiscal 2014 totaling $805,000. There was no intangible asset impairment expense in fiscal 2015 or 2016. There was no goodwill impairment expense in fiscal 2014, 2015, or 2016. - 20 - The Company’s total net sales related to solid-state LED technology in light fixtures and video screens for sports, advertising and entertainment markets have been recorded as indicated in the table below. In addition, the Company sells certain elements of graphic identification programs that contain solid-state LED light sources. (In thousands) First Quarter Second Quarter First Half Third Quarter Nine Months Fourth Quarter Full Year LED Net Sales FY 2016 FY 2015 % change (FY 16 vs FY 15) FY 2014 % change (FY 15 vs FY 14) $ 38,911 $ 42,325 81,236 33,755 114,991 43,862 30,898 37,432 68,330 30,878 99,208 35,779 $ 158,853 $ 134,987 25.9% 13.1% 18.9% 9.3% 15.9% 22.6% 17.7% 25,293 27,466 52,759 25,452 78,211 30,210 108,421 22.2% 36.3% 29.5% 21.3% 26.8% 18.4% 24.5% LED net sales include sales of LED lighting products, certain graphics products containing LEDs, and LED video and sports screens. Fiscal 2016 LED net sales of $158,853,000 were up $23.9 million or 17.7% from the same period of the prior year. The $158,853,000 total LED net sales and the $23.9 million increase are primarily the result of Lighting Segment LED net sales of $155.5 million (up $24.1 million or 18.4%), Graphics Segment LED net sales of $2.7 million (up $1.3 million or 93.0%), and Technology Segment LED net sales of LED video screens of $0.7 million (down $1.6 million or 68.9%). LED net sales include sales of LED lighting products, certain graphics products containing LEDs, and LED video and sports screens. Fiscal 2015 LED net sales of $134,987,000 were up $26.6 million or 24.5% from the same period of the prior year. The $134,987,000 total LED net sales and the $26.6 million increase are primarily the result of Lighting Segment LED net sales of $131.3 million (up $31.4 million or 31.5%), Graphics Segment LED net sales of $1.4 million (down $1.0 million or 43.1%), and Technology Segment LED net sales of LED video screens of $2.3 million (down $2.8 million or 55.1%). There were $1.1 million of LED net sales to the All Category in fiscal 2014 with no corresponding sales in fiscal 2015. Non-GAAP Financial Measures The Company believes it is appropriate to evaluate its performance after making adjustments to net income for the 2016, 2015 and 2014 fiscal years reported in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). Adjusted operating income, net income and earnings per share, which exclude the adjustment of the New York State tax code change, goodwill and intangible asset impairments, severance costs, self-insured death benefit, gain on sale of a manufacturing facility, loss on sale of a subsidiary, and the tax benefit of utilization of a portion of the related long- term capital loss 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 financial measures to operating income, net income, and adjusted diluted earnings per share for the periods indicated. - 21 - (In thousands; unaudited) FY 2016 FY 2015 FY 2014 Reconciliation of operating income to adjusted operating income: Operating income as reported $ 13,956 $ 7,533 $ 2,318 Adjustment for goodwill and intangible asset impairments Adjustment for severance costs Adjustment for a self-insured death benefit expense Adjustment for the gain on sale of a manufacturing facility Adjustment for the loss on sale of a subsidiary — 469 — — — — 805 1,083 1,000 (343) 565 — — — — Adjusted operating income $ 14,425 $ 9,838 $ 3,123 (In thousands, except per share data; unaudited) Amount EPS Amount Diluted Reconciliation of net income (loss) to adjusted net income: FY 2016 FY 2015 Diluted EPS Amount EPS FY 2014 Diluted Net income as reported $ 9,482 $ 0.37 $ 5,151 $ 0.21 $ 930 $ 0.04 Adjustment for the New York State tax code change — — — — 362(1) 0.01 Adjustment for goodwill and intangible asset impairments, inclusive of the income tax effect Adjustment for severance costs, inclusive of the income tax effect Adjustment for self-insured death benefit expense, inclusive of the income tax effect Adjustment for the gain on the sale of a manufacturing facility, inclusive of the income tax effect Adjustment for the loss on sale of a subsidiary, inclusive of the income tax effect Income tax effect of utilization of a long-term capital loss — — — — 514(2) 0.02 318(8) 0.01 691(3) 0.03 — — — — — — — 637(4) 0.03 — — — (224)(5) (0.01) — — 565(6) 0.02 — — (101)(7) 0.00 — — — — Adjusted net income and earnings per share $ 9,800 $ 0.38 $ 6,719 $ 0.27 $ 1,806 $ 0.07 - 22 - 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) (2) (3) (4) (5) n/a $291 $(392) $(363) $119 (6) $0 (7) $0 (8) $151 Results of Operations 2016 Compared to 2015 Lighting Segment (In thousands) Net Sales Gross Profit Operating Income 2016 2015 $ $ $ 226,889 $ 56,674 $ 15,785 $ 219,920 54,542 14,775 Lighting Segment net sales of $226,889,000 in fiscal 2016 increased 3.2% from fiscal 2015 net sales of $219,920,000. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $155,485,000 in fiscal 2016, representing a $24.1 million or 18.4% increase from fiscal 2015 net sales of solid-state LED light fixtures of $131.3 million. Net sales of light fixtures having solid-state LED technology accounted for 68.5% of total Lighting Segment net sales. There was a reduction in the Company’s traditional lighting sales (metal halide and fluorescent light sources) from fiscal 2015 to fiscal 2016 as customers converted from traditional lighting to light fixtures having solid-state LED technology. Gross profit of $56,674,000 in fiscal 2016 increased $2.1 million or 3.9% from fiscal 2015, and increased from 24.5% to 24.7% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The increase in amount of gross profit is due to the net effect of increased net sales, the improved procurement of material, competitive pricing pressures, and improved manufacturing efficiencies as a result of the Company’s lean initiatives. Also contributing to the changes in gross profit is increased employee compensation and benefits expense ($0.8 million), increased supplies expense ($0.2 million), increased repair and maintenance expense ($0.2 million), increased outside services ($0.1 million), decreased utilities ($0.1 million), increased depreciation expense ($0.1 million), increased rent expense ($0.2 million), increased customer relations expense ($0.3 million), and increased warranty expense ($1.8 million). The Company experienced a higher than normal level of warranty claims in the third quarter of fiscal 2016, primarily driven by older generation LED drivers. Selling and administrative expenses of $40,889,000 in fiscal 2016 increased $1.1 million or 2.8% from fiscal 2015 primarily as the net result of increased employee compensation and benefits expense ($0.3 million), increased travel and entertainment expenses ($0.2 million), increased samples expense ($0.3 million), decreased convention and show expense ($0.1 million), decreased literature expense ($0.1 million), decreased outside services ($0.1 million), decreased depreciation expense ($0.2 million), decreased bad debt expense ($0.1 million), increased sales commissions at a slightly higher commission rate due to higher net sales ($0.7 million), decreased lease expense ($0.1 million), an increase in corporate shared service costs ($1.8 million), and a decrease in research and development expenses ($1.4 million). - 23 - The Lighting Segment fiscal 2016 operating income of $15,785,000 increased $1.0 million or 6.8% from operating income of $14,775,000 in fiscal 2015. This increase of $1.0 million was the net result of increased net sales, an increase in gross profit and an increase in the gross margin as a percentage of net sales, and increased selling and administrative expenses. Graphics Segment (In thousands) Net Sales Gross Profit Operating Income 2016 2015 $ $ $ 77,039 $ 19,147 $ 5,429 $ 64,895 12,630 1,156 Graphics Segment net sales of $77,039,000 in fiscal 2016 increased $12.1 million or 18.7% from fiscal 2015 net sales of $64,895,000. The $12.1 million increase in Graphics Segment net sales is primarily the net result of sales to the petroleum / convenience store market ($16.9 million net increase), sales to the national drug store market ($0.8 million decrease), sales to the quick-service restaurant market ($4.0 million net decrease), sales to the banking industry ($0.4 million decrease), sales to the retail grocery market ($1.7 million increase), and changes in volume to several other markets ($1.3 million decrease). The Graphics Segment net sales of graphic identification products that contain solid-state LED light sources and LED lighting for signage totaled $2.7 million in fiscal 2016, representing a $1.3 million increase from fiscal 2015 net sales of $1.4 million. Gross profit of $19,147,000 in fiscal 2016 increased $6.5 million or 51.6% from fiscal 2015, and increased from 19.3% to 24.3% as a percentage of Graphics Segment net sales (customer plus inter-segment net sales). The increase in the amount of gross profit is due to the net effect of increased net sales, customer and product mix related to large petroleum/convenience store rollout programs, lower margins on installation sales, increased freight expense on higher sales, increased property and real estate taxes ($0.3 million), increased outside service expense ($0.2 million), decreased utility expense ($0.1 million), an increase in corporate shared services ($0.2 million), and increased compensation and benefits expense ($0.6 million). Selling and administrative expenses of $13,718,000 in fiscal 2016 increased $1.9 million or 16.1% from fiscal 2015 primarily as a result of increased compensation and benefits expense ($1.3 million), increased travel and entertainment expense ($0.2 million), increased convention and show expense ($0.2 million), and increased commission expense ($0.1 million). In fiscal 2015, the Graphics Segment recorded a gain on the sale of one of its facilities in Woonsocket, Rhode Island of $343,000 with no comparable event in fiscal 2016. Graphics Segment fiscal 2016 operating income of $5,429,000 increased $4.3 million or 370% from fiscal 2015 and is the net result of increased net sales, increased gross profit and increased gross profit as a percentage of net sales, increased selling and administrative expenses, and a gain on the sale of a facility in fiscal 2015 with no corresponding event in fiscal 2016. Technology Segment (In thousands) Net Sales Gross Profit Operating Income 2016 2015 $ $ $ 18,268 $ 7,999 $ 3,845 $ 23,001 7,275 2,949 Technology Segment net customer sales of $18,268,000 in fiscal 2016 decreased 20.6% from fiscal 2015 net sales of $23,001,000. The $4.7 million decrease in Technology Segment net sales is primarily the net result of a $2.4 million decrease in sales to the transportation market, a $0.3 million decrease in sales to original equipment manufacturers, a $0.8 million decrease in sales to the medical markets, a $1.3 million decrease in sales to the sports market, and a $0.1 million net increase in sales to various other markets. The decrease in sales is due to the cyclic nature of the markets the Company serves in this segment. While net customer sales decreased, the Technology Segment inter-segment sales increased $6.3 million or 21.5%. The increase in inter-segment sales is the direct result of the Lighting Segment’s increase in net sales of light fixtures having solid-state LED technology along with light fixtures with integrated controls. The Technology Segment’s intercompany support of electronic circuit boards and lighting control systems to the Lighting Segment is core to the strategic growth of the - 24 - Company. The Technology Segment’s net sales of LED video screens were $0.7 million in fiscal 2016 compared to $2.3 million net sales of video screens in fiscal 2015. Gross profit of $7,999,000 in fiscal 2016 increased $0.7 million or 10.0% from fiscal 2015, and increased from 13.9% to 14.8% as a percentage of Technology Segment net sales (customer plus inter-segment net sales). The $0.7 million increase in amount of gross profit is due to the net effect of decreased customer net sales more than offset by increased inter-segment sales, an improvement in operational efficiencies, decreased employee compensation and benefits expense ($0.4 million), decreased supplies ($0.2 million), and increased depreciation expense ($0.1 million). Selling and administrative expenses of $4,154,000 in fiscal 2016 decreased $0.2 million or 4.0% from fiscal 2015 primarily as the net result of decreased research and development expense ($0.5 million) and increased compensation and benefits expenses ($0.4 million). Technology Segment fiscal 2016 operating income of $3,845,000 increased $0.9 million or 30.4% from operating income of $2,949,000 in fiscal 2015. The increase of $0.9 million was the net result of decreased net customer sales more than offset by increased inter-segment sales, increased gross profit from the net increase in total net sales (customer and intersegment net sales), and decreased selling and administrative expenses. All Other Category (In thousands) Net Sales Gross Profit Operating (Loss) 2016 2015 $ $ $ -- $ -- $ -- $ 41 21 (183) Due to the sale of LSI Saco on September 30, 2014, there is no longer comparable data for the All Other Category. Corporate and Eliminations (In thousands) Gross Profit Operating (Loss) 2016 2015 $ $ (149) $ (11,103) $ (19) (11,164) The negative gross profit relates to the intercompany profit in inventory elimination. Selling and administrative expenses of $10,954,000 in fiscal 2016 increased $0.3 million or 3.5% from fiscal 2015. The increase in expense is primarily the result of increased employee compensation and benefits expense ($0.1 million), a decrease in legal fee expense ($0.3 million), increased outside service expense ($0.3 million), increased depreciation expense ($0.2 million), an increase in telephone expense ($0.2 million), and an increase in repair and maintenance expense ($0.2 million), an increase in corporate shared service costs allocated to the segments (favorable change of $2.5 million), and an increase in research and development expense ($2.0 million). The increase in research and development spending is the result of the creation of a corporate research and development department with its sole purpose to develop leading edge products utilizing: 1) the latest energy saving controls; 2) LED light source technology; and 3) the “internet of things” connectivity. In fiscal 2015, the Company recognized a $565,000 loss on the sale of its Montreal subsidiary, LSI Saco, with no corresponding event in fiscal 2016. Consolidated Results The Company reported net interest income of $48,000 in fiscal 2016 as compared to net interest expense of $19,000 in fiscal 2015. Commitment fees related to the unused portions of the Company’s lines of credit and interest income on invested cash are included in the net interest expense amounts in both fiscal 2016 and 2015. The change from net interest expense in fiscal 2015 to net interest income in fiscal 2016 is the result of the growth in invested cash. The $4,522,000 income tax expense in fiscal 2016 represents a consolidated effective tax rate of 32.3%, influenced by certain permanent book-tax differences, an $111,000 tax benefit related to the retroactive reinstatement of the R&D tax credit, and by a tax benefit related to uncertain income tax positions. The $2,363,000 income tax expense in fiscal 2015 represents a - 25 - consolidated effective tax rate of 31.4% influenced by certain permanent book-tax differences, by certain U.S. federal tax credits, by a benefit related to uncertain income tax positions, and a $136,000 tax benefit related to the retroactive reinstatement of the R&D tax credit. The Company reported net income of $9,482,000 in fiscal 2016 as compared to net income of $5,151,000 in fiscal 2015. This represents an 84.1% increase in net income in fiscal 2016 compared to fiscal 2015. The increase in net income is primarily the net result of increased net sales, increased gross profit, increased operating expenses, the gain on the sale of a facility more than offset by the loss on the sale of a subsidiary in fiscal 2015 with no comparable events in fiscal 2016, and increased income tax expense. Diluted earnings per share were $0.37 in fiscal 2016 as compared to diluted earnings per share of $ 0.21 in fiscal 2015. The weighted average common shares outstanding for purposes of computing diluted earnings per share in fiscal 2016 were 25,592,000 shares as compared to 24,638,000 shares in fiscal 2015. 2015 Compared to 2014 Lighting Segment (In thousands) Net Sales Gross Profit Operating Income 2015 2014 $ $ $ 219,920 $ 54,542 $ 14,775 $ 222,604 49,467 10,524 Lighting Segment net sales of $219,920,000 in fiscal 2015 decreased 1.2% from fiscal 2014 net sales of $222,604,000. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $131.3 million in fiscal 2015, representing a $31.4 million or 31.5% increase from fiscal 2014 net sales of solid-state LED light fixtures of $99.9 million. Net sales of light fixtures having solid-state LED technology accounted for 59.7% of total Lighting Segment net sales. There was a reduction in the Company’s traditional lighting sales (metal halide and fluorescent light sources) from fiscal 2014 to fiscal 2015 as customers converted from traditional lighting to light fixtures having solid-state LED technology. While total sales have declined from the same period last fiscal year, some of the drop in sales can also be attributed to product mix as customers migrate to lower priced lighting fixtures. Gross profit of $54,542,000 in fiscal 2015 increased $5.1 million or 10.3% from fiscal 2014, and increased from 21.9% to 24.5% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The Company was able to offset the reduction in customer net sales with an increase in gross profit. The increase in amount of gross profit is due to the net effect of decreased net sales, effective management of material and labor costs, competitive pricing pressures, improved manufacturing efficiencies, decreased freight expense on lower product sales, decreased supplies expense ($0.3 million), increased outside services ($0.4 million), decreased utilities ($0.1 million), increased depreciation expense ($0.2 million), and decreased warranty expense ($0.6 million). Selling and administrative expenses of $39,767,000 in fiscal 2015 increased $0.8 million or 2.1% from fiscal 2014 primarily as the net result of increased employee compensation and benefits expense ($1.0 million), increased travel and entertainment expenses ($0.2 million), increased convention and show expense ($0.3 million), increased bad debt expense ($0.1 million), decreased research and development expense ($1.6 million), increased sales commission ($0.1 million), and increased lease expense ($0.1 million). The Lighting Segment fiscal 2015 operating income of $14,775,000 increased $4.2 million or 40.4% from operating income of $10,524,000 in fiscal 2014. This increase of $4.2 million was the net result of decreased net sales, an increase in gross profit and an increase in the gross margin as a percentage of net sales, and increased selling and administrative expenses. Graphics Segment (In thousands) Net Sales Gross Profit Operating Income (Loss) 2015 2014 $ $ $ 64,895 $ 12,630 $ 1,156 $ 50,970 8,409 (2,086) - 26 - Graphics Segment net sales of $64,895,000 in fiscal 2015 increased 27.3% from fiscal 2014 net sales of $50,970,000. The $13.9 million increase in Graphics Segment net sales is primarily the net result of image conversion programs and sales to several petroleum / convenience store customers ($3.0 million net increase), a national drug store retailer ($0.4 million decrease), several quick-service restaurant chains ($8.4 million increase), two commercial customers ($0.9 million increase), one banking customer ($0.8 million increase), and changes in volume or completion of several other smaller graphics programs in various markets ($1.2 million increase). The Graphics Segment net sales of graphic identification products that contain solid-state LED light sources and LED lighting for signage totaled $1.4 million in fiscal 2015, representing a $1.0 million decrease from fiscal 2014 net sales of $2.4 million. Gross profit of $12,630,000 in fiscal 2015 increased $4.2 million or 50.2% from fiscal 2014, and increased from 16.2% to 19.3% as a percentage of Graphics Segment net sales (customer plus inter-segment net sales). The increase in the amount of gross profit is due to the net effect of increased net sales, lower margins on installation sales, increased freight expense, increased supplies ($0.1 million), increased outside service expense ($0.1 million), and increased compensation and benefit expense ($0.6 million). Selling and administrative expenses of $11,817,000 in fiscal 2015 increased $1.3 million or 12.6% from fiscal 2014 primarily as a result of increased benefits and compensation expense ($0.9 million) and increased outside service expense ($0.2 million). In fiscal 2015, the Graphics Segment recorded a gain on the sale of one of its facilities in Woonsocket, Rhode Island of $343,000 with no comparable event in fiscal 2014. The Graphics Segment fiscal 2015 operating income of $1,156,000 improved $3.2 million from an operating loss of $(2,086,000) in 2014 and is the net result of increased net sales, increased gross margin, and increased selling and administrative expenses. Technology Segment (In thousands) Net Sales Gross Profit Operating Income 2015 2014 $ $ $ 23,001 $ 7,275 $ 2,949 $ 24,515 8,133 1,633 Technology Segment net sales of $23,001,000 in fiscal 2015 decreased 6.2% from fiscal 2014 net sales of $24,515,000. The $1.5 million decrease in Technology Segment net sales is primarily the net result of a $0.5 million decrease in sales to the telecommunications market, a $0.3 million decrease in sales to the transportation market, a $1.4 million increase in sales to original equipment manufacturers, a $0.3 million increase in sales to the medical markets, a $2.8 million decrease in sales to the sports market, and a $0.4 million increase in sales to various other markets. While the net customer sales decreased, the Technology Segment inter-segment sales also decreased $4.8 million or 14.1% due to decreased intercompany sales of LED circuit board assemblies used in light fixtures having solid-state LED technology. The Company has chosen to outsource some of the components of its circuit board assembly in order to meet the growing demand for LED lighting and to make production capacity available for other LED component parts and assemblies. Gross profit of $7,275,000 in fiscal 2015 decreased $0.9 million or 10.5% from fiscal 2014, and increased from 13.8% to 13.9% as a percentage of Technology Segment net sales (customer plus inter-segment net sales). The $0.9 million decrease in amount of gross profit is due to the net effect of decreased customer net sales, decreased inter-segment sales, decreased employee compensation and benefits expense ($0.1 million), decreased supplies ($0.2 million), increased outside service expense ($0.2 million), and increased repair and maintenance expense ($0.1 million). Selling and administrative expenses of $4,326,000 in fiscal 2015 decreased $1.4 million or 24.0% from fiscal 2014 primarily as the net result of decreased research and development expense ($1.3 million), increased compensation and benefits expenses ($0.3 million), decreased repair and maintenance expense ($0.1 million), decreased amortization expense ($0.3 million), and increased outside service expense ($0.1 million). In fiscal 2014, the Technology Segment recorded an intangible asset impairment expense of $0.8 million with no comparable intangible asset impairment expense in fiscal 2015. The Technology Segment fiscal 2015 operating income of $2,949,000 increased $1.3 million or 80.8% from operating income of $1,633,000 in fiscal 2014. The $1.3 million increase was the net result of decreased net customer sales, decreased intersegment sales, decreased gross profit, an improvement of the gross profit margin percentage on lower customer and - 27 - intersegment sales, decreased selling and administrative expenses, decreased research and development expense, and a $0.8 million intangible asset impairment expense in fiscal 2014 with no comparable intangible asset impairment expense in fiscal 2015. All Other Category (In thousands) Net Sales Gross Profit Operating (Loss) 2015 2014 $ $ $ 41 $ 21 $ (183) $ 1,374 (140) (854) Due to the sale of LSI Saco on September 30, 2014, there is no longer comparable data for the All Other Category. Fiscal 2015 results represent only the first quarter of the fiscal year whereas fiscal 2014 results represent twelve months. Corporate and Eliminations (In thousands) Gross Profit Operating (Loss) 2015 2014 $ $ (19) $ (11,164) $ (571) (6,899) The negative gross profit relates to the intercompany profit in inventory elimination. Selling and administrative expenses of $10,580,000 in fiscal 2015 increased $4.3 million or 67.2% from fiscal 2014. The increase in expense is primarily the result of increased employee compensation and benefits expense ($1.7 million), an increase in legal fee expense ($0.3 million), increased outside service expense ($0.7 million), increased depreciation expense ($0.2 million), a $0.5 million increase in severance costs and a $1.0 million increase in self-insured death benefits, both recorded in fiscal 2015 with no comparable net effect in fiscal 2014. In fiscal 2015, the Company recognized a $565,000 loss on the sale of its Montreal subsidiary, LSI Saco Technologies, with no corresponding event in fiscal 2014. Consolidated Results The Company reported net interest expense of $19,000 in fiscal 2015 as compared to net interest expense of $51,000 in fiscal 2014. Commitment fees related to the unused portions of the Company’s lines of credit and interest income on invested cash are included in the net interest expense amounts in both fiscal 2015 and 2014. The $2,363,000 income tax expense in fiscal 2015 represents a consolidated effective tax rate of 31.4% influenced by certain permanent book-tax differences, by certain U.S. federal tax credits, by a benefit related to uncertain income tax positions, and a $136,000 tax benefit related to the retroactive reinstatement of the R&D tax credit. The $1,337,000 income tax expense in fiscal 2014 represents a consolidated effective tax rate of 59.0%. This is the net result of an income tax rate of 44.5% for the Company’s U.S. operations, influenced by certain permanent book-tax differences that were significant relative to the amount of taxable income, an increase in the valuation reserve against New York State tax credits of $362,000 resulting from changes to the New York tax code, by certain U.S. federal and Canadian income tax credits, by a benefit related to uncertain income tax positions, and by a full valuation reserve on the Company’s Canadian tax position. The Company reported net income of $5,151,000 in fiscal 2015 as compared to net income of $930,000 in fiscal 2014. This represents a 454% increase in net income in fiscal 2015 compared to fiscal 2014. The increase in net income is primarily the net result of increased net sales, increased gross profit, increased operating expenses, the gain on the sale of a facility more than offset by the loss on the sale of a subsidiary in fiscal 2015 with no comparable events in fiscal 2014, intangible impairment expense in fiscal 2014 with no comparable expense in fiscal 2015, and increased income tax expense. Diluted earnings per share were $0.21 in fiscal 2015 as compared to diluted earnings per share of $ 0.04 in fiscal 2014. The weighted average common shares outstanding for purposes of computing diluted earnings per share in fiscal 2015 were 24,638,000 shares as compared to 24,546,000 shares when computing diluted earnings per share in fiscal 2014. - 28 - 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 June 30, 2016, the Company had working capital of $88.5 million, compared to $80.8 million at June 30, 2015. The ratio of current assets to current liabilities was 3.26 to 1 as compared to a ratio of 3.19 to 1 at June 30, 2015. The $7.7 million increase in working capital from June 30, 2015 to June 30, 2016 was primarily related to the net effect of increased cash and cash equivalents ($7.4 million), increased net accounts receivable ($3.3 million), increased accrued expenses ($3.2 million), decreased accounts payable ($0.8 million), increased net inventory ($1.1 million), decreased other current assets ($1.6 million), and decreased refundable income tax ($0.1 million). The Company has a strategy of aggressively managing working capital, including the reduction of the accounts receivable days sales outstanding (DSO) and reduction of inventory levels, without reducing service to our customers. The Company generated $17.8 million of cash from operating activities in fiscal 2016 as compared to cash from operating activities of $20.9 million in fiscal 2015. This $3.1 million decrease in net cash flows from operating activities is primarily the net result of a greater increase net accounts receivable (unfavorable change of $1.9 million), an increase rather than an decrease in net inventories (unfavorable change of $2.6 million), a smaller decrease in refundable income tax (unfavorable change of $1.7 million), a larger net profit in fiscal 2016 compared to fiscal 2015 (favorable change of $4.3 million), a smaller increase in accrued expenses and other (unfavorable change of $1.0 million), a loss on the sale of a subsidiary with no comparable event in fiscal 2016 (unfavorable change of $0.6 million), a greater decrease in customer prepayments (unfavorable change of $0.1 million), a greater increase in net deferred tax assets (unfavorable change of $0.9 million), an increase rather than a decrease in the deferred compensation liability (favorable change of $0.9 million), a decrease rather than an increase in accounts payable (unfavorable change of $2.0 million), an increase in depreciation and amortization (favorable change of $0.3 million), the gain on the sale of a building in fiscal 2015 with no comparable event in fiscal 2016 (favorable change of $0.3 million), and an increase in stock compensation expense (favorable change of $1.7 million) . Net accounts receivable were $47.0 million and $43.7 million at June 30, 2016 and 2015, respectively. The increase of $3.3 million in net receivables is primarily due to the net effect of a higher amount of net sales in the fourth quarter of fiscal 2016 as compared to the fourth quarter of fiscal 2015, partially offset by a lower days sales outstanding (DSO). The DSO decreased to 47 days at June 30, 2016 from 49 days at June 30, 2015. 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 $44.1 million at June 30, 2016 increased $1.1 million from June 30, 2015 levels. The increase of $1.1 million is the result of an increase in gross inventory of $1.3 million partially offset by an increase in inventory obsolescence reserves of $0.1 million and an increase in the elimination of profit in inventory of $0.1 million. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory decreases occurred in fiscal 2016 in the Graphics Segment of approximately $0.8 million and in the Technology Segment of approximately $0.5 million. There was an increase in inventory in the Lighting Segment $2.5 million. Cash generated from operations and borrowing capacity under the Company’s line of credit facility is the Company’s primary source of liquidity. The Company has an unsecured $30 million revolving line of credit with its bank. This line of credit is a $30 million three year committed credit facility expiring in the third quarter of fiscal 2019. As of August 22, 2016, $0.3 million of the $30 million line of credit has been reserved for a standby line of credit with a foreign supplier. The Company believes that its $30 million line of credit plus cash flows from operating activities are adequate for the Company’s fiscal 2016 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants. The Company used $10.1 million in cash for investing activities in fiscal 2016 as compared to a use of $2.3 million in fiscal 2015, resulting in an unfavorable change of $7.9 million. Capital expenditures for fiscal 2016 increased $5.5 million to $10.2 million from fiscal 2015. The largest components of the fiscal 2016 capital expenditures are tooling and equipment related to the Company’s Lighting and Graphics Segments. The Company recorded proceeds from the sale of one of its Woonsocket, Rhode Island facilities and the sale of small miscellaneous fixed assets of $1,006,000 in fiscal 2015, compared to proceeds of $68,000 from the sale of various fixed assets in fiscal 2016. The Company also recorded net proceeds from the sale of its LSI Saco subsidiary in fiscal 2015 of $1.5 million in fiscal 2015 with no comparable transaction in fiscal 2016. The Company used $0.2 million of cash related to financing activities in fiscal 2016 compared to a use of cash of $1.3 million in fiscal 2015. The $1.1 million favorable change in cash flow was the result of a $3.2 million increase in the - 29 - exercise of stock options in fiscal 2016 compared to the exercise of stock options in fiscal 2015, partially offset by a $1.3 million increase in dividends paid to shareholders and by a $0.8 million unfavorable change in the net activity of treasury shares. 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 the operating leases identified in the table below. Contractual Obligations as of June 30, 2016 (a) Total Less than 1 year 1-3 years 3-5 years More than 5 years Payments Due by Period Acquisition Contingent Earn-Out Obligations (b) Operating Lease Obligations Purchase Obligations Total Contractual Obligations $ $ -- $ -- $ -- $ -- $ 2,627 18,198 20,825 $ 1,285 18,143 19,428 $ 1,337 55 1,392 $ 5 -- 5 $ -- -- -- -- (a) The liability for uncertain tax positions of $0.6 million is not included due to the uncertainty of timing of payments. (b) Refer to Note 13 — Commitments and Contingencies, for an explanation as to the contingent earn-out liability. Cash Dividends On August 17, 2016, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share (approximately $1,250,000) in connection with the fourth quarter of fiscal 2016 payable September 7, 2016 to shareholders of record on August 29, 2016. The indicated annual cash dividend rate is $0.20 per share. The Board of Directors has adopted a dividend policy 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 The Company is required to make estimates and judgments in the preparation of its financial statements that affect the reported amounts of assets, liabilities, revenues and expenses, and related footnote disclosures. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The Company continually reviews these estimates and their underlying assumptions to ensure they remain appropriate. The Company believes the items discussed below are among its most significant accounting policies because they utilize estimates about the effect of matters that are inherently uncertain and therefore are based on management’s judgment. Significant changes in the estimates or assumptions related to any of the following critical accounting policies could possibly have a material impact on the financial statements. Revenue Recognition Revenue is recognized when title to goods and risk of loss have passed to the customer, there is persuasive evidence of a purchase arrangement, delivery has occurred or services have been rendered, and collectability is reasonably assured. 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 - 30 - 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. The Company also evaluates the appropriateness of revenue recognition in accordance with the accounting standard on software revenue recognition. Our solid-state LED video screens, billboards and active digital signage contain software elements which the Company has determined are incidental. Income Taxes The Company accounts for income taxes in accordance with the accounting guidance for income taxes. Accordingly, deferred income taxes are provided on items that are reported as either income or expense in different time periods for financial reporting purposes than they are for income tax purposes. Deferred income tax assets and liabilities are reported on the Company’s balance sheet. Significant management judgment is required in developing the Company’s income tax provision, including the estimation of taxable income and the effective income tax rates in the multiple taxing jurisdictions in which the Company operates, the estimation of the liability for uncertain income tax positions, the determination of deferred tax assets and liabilities, and any valuation allowances that might be required against deferred tax assets. The Company has adopted ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.” As a result of early adoption of this accounting guidance, prior periods have been adjusted, which only impacted the financial statement presentation and not the measurement of deferred tax liabilities and assets. The Company operates in multiple taxing jurisdictions and is subject to audit in these jurisdictions. The Internal Revenue Service and other tax authorities routinely review the Company’s tax returns. These audits can involve complex issues which may require an extended period of time to resolve. In management’s opinion, adequate provision has been made for potential adjustments arising from these examinations. In September 2013, the Internal Revenue Service issued Treasury Decision 9636, which enacted final tax regulations regarding the capitalization and expensing of amounts paid to acquire, produce, or improve tangible property. The regulations also include guidance regarding the retirement of depreciable property. The regulations were effective in taxable years beginning on or after January 1, 2014, or the Company’s fiscal year 2015. The impact to the Company’s financial statements was immaterial. - 31 - The Company is recording estimated interest and penalties related to potential underpayment of income taxes as a component of tax expense in the Condensed Consolidated Statements of Operations. The reserve for uncertain tax positions is not expected to change significantly in the next twelve months. Asset Impairment Carrying values of reporting units with goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment in accordance with the accounting standard on goodwill and intangible assets. The Company may first assess qualitative factors in order to determine if goodwill is impaired. If through the qualitative assessment it is determined that it is more likely than not that goodwill is not impaired, no further testing is required. If it is determined that it is more likely than not that goodwill is impaired, or if the Company elects not to first assess qualitative factors, the Company’s impairment testing continues with the estimation of the fair value of 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. Carrying values for long-lived tangible assets and definite-lived intangible assets, excluding goodwill and indefinite- lived intangible assets, are reviewed for possible impairment as circumstances warrant. Impairment reviews are conducted at the judgment of Company management when it believes that a change in circumstances in the business or external factors warrants a review. Circumstances such as the discontinuation of a product or product line, a sudden or consistent decline in the forecast for a product, changes in technology or in the way an asset is being used, a history of negative operating cash flow, or an adverse change in legal factors or in the business climate, among others, may trigger an impairment review. The Company’s initial impairment review to determine if a potential impairment charge is required is based on an undiscounted cash flow analysis at the lowest level for which identifiable cash flows exist. The analysis requires judgment with respect to changes in technology, the continued success of product lines and future volume, revenue and expense growth rates, and discount rates. Credit and Collections The Company maintains allowances for doubtful accounts receivable for probable estimated losses resulting from either customer disputes or the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against income. The Company determines its allowance for doubtful accounts by first considering all known collectability problems of customers’ accounts, and then applying certain percentages against the various aging categories based on the due date of the remaining receivables. The resulting allowance for doubtful accounts receivable is an estimate based upon the Company’s knowledge of its business and customer base, and historical trends. The amount ultimately not collected may differ from the reserve established, particularly in the case where percentages are applied against aging categories. In all cases, it is management’s goal to carry a reserve against the Company’s accounts receivable which is adequate based upon the information available at that time so that net accounts receivable is properly stated. The Company also establishes allowances, at the time revenue is recognized, for returns and allowances, discounts, pricing and other possible customer deductions. These allowances are based upon historical trends. Warranty Reserves The Company maintains a warranty reserve which is reflective of its limited warranty policy. The warranty reserve covers the estimated future costs to repair or replace defective product or installation services, whether the product is returned, scrapped or repaired in the field. The warranty reserve is first determined based upon known claims or issues, and then by the application of a specific percentage of sales to cover general claims. The percentage applied to sales to calculate general claims is based upon historical claims as a percentage of sales. Management addresses the adequacy of its warranty reserves on a quarterly basis to ensure the reserve is accurate based upon the most current information. - 32 - Inventory Reserves The Company maintains an inventory reserve for probable obsolete and excess inventory. The Company first determines its obsolete inventory reserve by considering specific known obsolete items, and then by applying certain percentages to specific inventory categories based upon inventory turns. The Company uses various tools, in addition to inventory turns, to identify which inventory items have the potential to become obsolete. Judgment is used to establish excess and obsolescence inventory reserves and management adjusts these reserves as more information becomes available about the ultimate disposition of the inventory item. Management values inventory at lower of cost or market. New Accounting Pronouncements In June 2014, the Financial Accounting Standards Board issued ASU 2014-09, “Revenue from Contracts with Customers.” This amended guidance supersedes and replaces all existing U.S. GAAP revenue recognition guidance. The guidance established a new revenue recognition model, changes the basis for deciding when revenue is recognized, provides new and more detailed guidance on specific revenue topics, and expands and improves disclosures about revenue. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing.” In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers: Narrow Scope Improvements and Practical Expedients.” Both of these standards clarify or improve guidance from ASU 2014-09. These standards are effective for fiscal years and interim periods within those years, beginning after December 15, 2017, or the Company’s fiscal year 2019. The Company is evaluating the impact the amended guidance will have on its financial statements. In July 2015, the Financial Accounting Standards Board issued ASU 2015-11, “Simplifying the Measurement of Inventory.” The amended guidance requires an entity to measure in scope inventory at lower of cost and net realizable value. The amended guidance is effective for fiscal years beginning after December 15, 2016, or the Company’s fiscal year 2018, with early adoption permitted. The Company is evaluating the impact the amended guidance will have on its financial statements. In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which eliminates the current requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts in the statement of financial position. This update requires that deferred tax liabilities and assets be classified as noncurrent. This update is effective for financial statements issued for fiscal years beginning April 1, 2017. This update may be applied either prospectively or retrospectively. However, early adoption is permitted and we have chosen to adopt the standard retrospectively as of June 30, 2016. As a result, prior periods have been adjusted to reflect this change. This update impacted the presentation, but not the measurement of deferred tax liabilities and assets. In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases.” The amended guidance requires an entity to recognize assets and liabilities that arise from leases. The amended guidance is effective for financial statements issued for fiscal years and interim periods within those years, beginning after December 15, 2018, or the Company’s fiscal year 2020, with early adoption permitted. The Company has not yet determined the impact the amended guidance will have on its financial statements. In March 2016, the Financial Accounting Standards Board issued ASU 2016-08, “Principal versus Agent Considerations.” The amendment is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The amended guidance is effective for financial statements issued for fiscal years and interim periods within those years, beginning after December 15, 2017, or the Company’s fiscal year 2019, with early adoption permitted in fiscal years beginning after December 15, 2016. The Company has not yet determined the impact the amended guidance will have on its financial statements. In March 2016, the Financial Accounting Standards Board issued ASU 2016-09, “Improvements to Employee Share- Based Payment Accounting.” This amended guidance simplifies several aspects of the accounting for share-based payment award transactions. The amended guidance is effective for financial statements issued for fiscal years and interim periods within those years, beginning after December 15, 2016, or the Company’s fiscal year 2018, with early adoption permitted. The Company has not yet determined the impact the amended guidance will have on its financial statements. - 33 - MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The Management of LSI Industries Inc. and subsidiaries (the “Company” or “LSI”) is responsible for the preparation and accuracy of the financial statements and other information included in this report. LSI’s Management is also responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rules 13a-15(f). Under the supervision and with the participation of Management, including LSI’s principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting as of June 30, 2016, based on the criteria set forth in “the 2013 Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the reality that judgments in decision making can be faulty, the possibility of human error, and the circumvention or overriding of the controls and procedures. In meeting its responsibility for the reliability of the financial statements, the Company depends upon its system of internal accounting controls. The system is designed to provide reasonable assurance that assets are safeguarded and that transactions are properly authorized and recorded. The system is supported by policies and guidelines, and by careful selection and training of financial management personnel. The Company also has a Disclosure Controls Committee, whose responsibility is to help ensure appropriate disclosures and presentation of the financial statements and notes thereto. Additionally, the Company has an Internal Audit Department to assist in monitoring compliance with financial policies and procedures. The Board of Directors meets its responsibility for overview of the Company’s financial statements through its Audit Committee which is composed entirely of independent Directors who are not employees of the Company. The Audit Committee meets periodically with Management and Internal Audit to review and assess the activities of each in meeting their respective responsibilities. Grant Thornton LLP has full access to the Audit Committee to discuss the results of their audit work, the adequacy of internal accounting controls, and the quality of financial reporting. Based upon LSI’s evaluation, the Company’s principal executive officer and principal financial officer concluded that internal control over financial reporting was effective as of June 30, 2016. We reviewed the results of Management’s assessment with the Audit Committee of our Board of Directors. Additionally, our independent registered public accounting firm audited and independently assessed the effectiveness of the Company’s internal control over financial reporting. Grant Thornton LLP, an independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting, which is presented in the financial statements. Dennis W. Wells Chief Executive Officer and President (Principal Executive Officer) Ronald S. Stowell Vice President, Chief Financial Officer, and Treasurer (Principal Financial Officer) - 34 - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders LSI Industries Inc. We have audited the internal control over financial reporting of LSI Industries Inc. (an Ohio corporation) and subsidiaries (the “Company”) as of June 30, 2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report On Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended June 30, 2016, and our report dated September 7, 2016 expressed an unqualified opinion on those financial statements. /s/ GRANT THORNTON LLP Cincinnati, Ohio September 7, 2016 - 35 - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders LSI Industries Inc. We have audited the accompanying consolidated balance sheets of LSI Industries Inc. (an Ohio corporation) and subsidiaries (the “Company”) as of June 30, 2016 and 2015, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2016. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LSI Industries Inc. and subsidiaries as of June 30, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note 1 to the consolidated financial statements, the Company adopted new accounting guidance during the year ended June 30, 2016 related to the presentation of deferred income taxes. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 30, 2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 7, 2016 expressed an unqualified opinion. /s/ GRANT THORNTON LLP Cincinnati, Ohio September 7, 2016 - 36 - LSI INDUSTRIES INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended June 30, 2016, 2015, and 2014 (In thousands, except per share data) 2016 2015 2014 Net sales $ 322,196 $ 307,857 $ 299,463 Cost of products and services sold 238,525 233,408 234,165 Gross profit 83,671 74,449 65,298 Loss on sale of subsidiary (see Note 15) Gain on sale of building — — 565 (343) — — Selling and administrative expenses 69,715 66,694 62,175 Intangible asset impairment — — 805 Operating income Interest (income) Interest expense Income before income taxes Income tax expense Net income Earnings per common share (see Note 3) Basic Diluted Weighted average common shares outstanding Basic Diluted 13,956 7,533 2,318 (84) 36 (26) 45 14,004 7,514 4,522 2,363 (17) 68 2,267 1,337 9,482 $ 5,151 $ 930 0.38 0.37 $ $ 0.21 0.21 $ $ 0.04 0.04 24,988 24,496 24,388 25,592 24,638 24,546 $ $ $ The accompanying notes are an integral part of these financial statements. - 37 - LSI INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS June 30, 2016 and 2015 (In thousands, except shares) ASSETS Current Assets 2016 2015 Cash and cash equivalents $ 33,835 $ 26,409 Accounts receivable, less allowance for doubtful accounts of $226 and $317, respectively Inventories Refundable income taxes Prepaid and other current assets Total current assets Property, Plant and Equipment, at cost Land Buildings Machinery and equipment Construction in progress Less accumulated depreciation Net property, plant and equipment Goodwill Other Intangible Assets, net Other Long-Term Assets, net Total assets The accompanying notes are an integral part of these financial statements. 46,975 43,661 44,141 43,083 — 99 2,792 4,408 127,743 117,660 6,978 39,317 82,628 838 129,761 (82,299) 47,462 6,952 37,706 76,383 588 121,629 (78,441) 43,188 10,508 10,508 5,586 4,261 6,092 3,242 $ 195,560 $ 180,690 - 38 - LIABILITIES & SHAREHOLDERS’ EQUITY Current Liabilities Accounts payable Accrued expenses Total current liabilities Other Long-Term Liabilities Commitments and contingencies (Note 13) 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 24,982,219 and 24,392,938 shares, respectively Retained earnings Total shareholders’ equity 2016 2015 $ 13,892 25,341 $ 14,721 22,126 39,233 36,847 807 891 — — 113,653 41,867 106,353 36,599 155,520 142,952 Total liabilities & shareholders’ equity $ 195,560 $ 180,690 The accompanying notes are an integral part of these financial statements. - 39 - LSI INDUSTRIES INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the years ended June 30, 2016, 2015, and 2014 (In thousands, except per share data) Common Shares Number of Shares Key Executive Deferred Compensation Number of Amount Shares Amount Total Retained Shareholders’ Earnings Equity Balance at June 30, 2013 24,346 $ 105,283 (289) $ (2,791) $ 39,198 $ 141,690 Net income Stock compensation awards Purchase of treasury shares, net Deferred stock compensation Stock option expense Stock options exercised, net Dividends — $0.24 per share — 23 — — — 61 — — 193 — 99 1,005 399 — — — (18) — — — — — — (124) — — — — 930 — — — — — (5,780) 930 193 (124) 99 1,005 399 (5,780) Balance at June 30, 2014 24,430 106,979 (307) (2,915) 34,348 138,412 Net income Stock compensation awards Distribution of treasury shares, net Deferred stock compensation Stock option expense Stock options exercised, net Dividends — $0.12 per share — 27 — — — 163 — — 191 — (761) 1,239 850 — — — 80 — — — — — — 770 — — — — 5,151 — — — — — (2,900) 5,151 191 770 (761) 1,239 850 (2,900) Balance at June 30, 2015 24,620 108,498 (227) (2,145) 36,599 142,952 Net income Stock compensation awards Restricted stock units issued Purchase of treasury shares, net Deferred stock compensation Stock-based compensation expense Stock options exercised, net Dividends — $0.17 per share — 23 5 — — — 562 — — 248 — — 151 2,903 4,021 — — — — (1) — — — — — — — (23) — — — — 9,482 — — — — — — (4,214) 9,482 248 — (23) 151 2,903 4,021 (4,214) Balance at June 30, 2016 25,210 $ 115,821 (228) $ (2,168) $ 41,867 $ 155,520 The accompanying notes are an integral part of these financial statements. - 40 - LSI INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended June 30, 2016, 2015, and 2014 (In thousands) Cash Flows From Operating Activities Net income Non-cash items included in net income Depreciation and amortization Goodwill and intangible asset impairment Deferred income taxes Deferred compensation plan Stock based compensation expense Issuance of common shares as compensation Gain on disposition of building Loss on disposition of fixed assets Loss on sale of subsidiary Allowance for doubtful accounts Inventory obsolescence reserve Change in certain assets and liabilities Accounts receivable Inventories Refundable income taxes Accounts payable Accrued expenses and other Customer prepayments 2016 2015 2014 $ 9,482 $ 5,151 $ 930 6,677 — (1,117) 151 2,903 248 — (1) — 55 1,726 6,331 — (226) (761) 1,239 191 (343) 9 565 220 1,493 (3,369) (2,784) 99 (1,130) 5,116 (271) (1,631) 1 1,815 910 6,115 (149) 6,226 805 856 99 1,005 193 — 36 — 6 1,464 3,232 (4,779) (538) 1,229 269 526 Net cash flows provided by operating activities 17,785 20,930 11,559 Cash Flows From Investing Activities Purchases of property, plant, and equipment Proceeds from sale of subsidiary, net of cash sold Proceeds from sale of fixed assets (10,211) — 68 (4,754) 1,494 1,006 (5,245) — 255 Net cash flows (used in) investing activities (10,143) (2,254) (4,990) Cash Flows From Financing Activities Cash dividends paid Purchase of treasury shares Issuance of treasury shares Exercise of stock options (4,214) (363) 340 4,021 (2,900) (205) 975 850 (5,780) (188) 64 399 Net cash flows (used in) financing activities (216) (1,280) (5,505) Increase in cash and cash equivalents 7,426 17,396 1,064 Cash and cash equivalents at beginning of year 26,409 9,013 7,949 Cash and cash equivalents at end of year $ 33,835 $ 26,409 $ 9,013 The accompanying notes are an integral part of these financial statements. - 41 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation: The consolidated financial statements include the accounts of LSI Industries Inc. (an Ohio corporation) and its subsidiaries (collectively, the “Company”), all of which are wholly owned. All intercompany transactions and balances have been eliminated in consolidation. Revenue Recognition: Revenue is recognized when title to goods and risk of loss have passed to the customer, there is persuasive evidence of a purchase arrangement, delivery has occurred or services have been rendered, and collectability is reasonably assured. 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 (light emitting diode) video screens, revenue is recognized upon customer acceptance of the video screen at the job site. Sales are recorded net of estimated returns, rebates and discounts. Amounts received from customers prior to the recognition of revenue are accounted for as customer pre-payments and are included in accrued expenses. The Company has 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. 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 one month to one year. Shipping and handling revenue coincides with the recognition of revenue from sale of the product. In situations where the Company is responsible for re-imaging programs with multiple sites, each site is viewed as a separate unit of accounting and has stand-alone value to the customer. Revenue is recognized upon the Company’s complete performance at the location, which may include a site survey, graphics products, lighting products, and installation of products. The selling price assigned to each site is based upon an agreed upon price between the Company and its customer and reflects the estimated selling price for that site relative to the selling price for sites with similar image requirements. The Company also evaluates the appropriateness of revenue recognition in accordance with the accounting standards on software revenue recognition. Our solid-state LED video screens and active digital signage contain software elements which the Company has determined are incidental. - 42 - Credit and Collections: The Company maintains allowances for doubtful accounts receivable for probable estimated losses resulting from either customer disputes or the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against income. The Company determines its allowance for doubtful accounts by first considering all known collectability problems of customers’ accounts, and then applying certain percentages against the various aging categories based on the due date of the remaining receivables. The resulting allowance for doubtful accounts receivable is an estimate based upon the Company’s knowledge of its business and customer base, and historical trends. Receivables deemed uncollectable are written-off against the allowance for doubtful accounts receivable after all collection efforts have been exhausted. The Company also establishes allowances, at the time revenue is recognized, for returns, discounts, pricing and other possible customer deductions. These allowances are based upon historical trends. The following table presents the Company’s net accounts receivable at the dates indicated. (In thousands) Accounts receivable Less: Allowance for doubtful accounts Accounts receivable, net Cash and Cash Equivalents: June 30, 2016 June 30, 2015 $ $ 47,201 $ (226) 46,975 $ 43,978 (317) 43,661 The cash balance includes cash and cash equivalents which have original maturities of less than three months. Cash and cash equivalents consist primarily of bank deposits and a bank money market account that is stated at cost, which approximates fair value. The Company maintains balances at financial institutions in the United States. In the United States, the FDIC limit for insurance coverage on non-interest bearing accounts is $250,000. As of June 30, 2016 and June 30, 2015, the Company had bank balances of $37,883,000 and $28,494,000, respectively, without insurance coverage. Inventories and Inventory Reserves: Inventories are stated at the lower of cost or market. Cost of inventories includes the cost of purchased raw materials and components, direct labor, as well as manufacturing overhead which is generally applied to inventory based on direct labor and on material content. Cost is determined on the first-in, first-out basis. The Company maintains an inventory reserve for probable obsolescence of its obsolete and excess inventory. The Company first determines its obsolete inventory reserve by considering specific known obsolete items, and then by applying certain percentages to specific inventory categories based upon inventory turns. The Company uses various tools, in addition to inventory turns, to identify which inventory items have the potential to become obsolete. Judgment is used to establish excess and obsolescence inventory reserves and management adjusts these reserves as more information becomes available about the ultimate disposition of the inventory item. 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 Machinery and equipment Computer software 28 - 40 years 3 - 10 years 3 - 8 years Costs related to the purchase, internal development, and implementation of the Company’s fully integrated enterprise resource planning/business operating software system are either capitalized or expensed. Leasehold improvements are depreciated over the shorter of fifteen years or the remaining term of the lease. - 43 - The Company sold one of two buildings at its Woonsocket, Rhode Island operation, which is included in the Graphics Segment, in the first quarter of fiscal 2015. The sale of this property was the result of the consolidation of the operations into the remaining facility in order to eliminate redundancies and improve manufacturing efficiencies. The selling price of the building was in excess of its carrying value. The Company recorded $6,171,000, $5,804,000 and $5,411,000 of depreciation expense in the years ended June 30, 2016, 2015 and 2014, respectively. 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 6. 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 on fair value measurement was used to measure the fair value of these nonfinancial assets and nonfinancial liabilities. Product Warranties: The Company offers a limited warranty that its products are free from defects in workmanship and materials. The specific terms and conditions vary somewhat by product line, but generally cover defective products returned within one to five years, with some exceptions where the terms extend to 10 years, from the date of shipment. The Company records warranty liabilities to cover the estimated future costs for repair or replacement of defective returned products as well as products that need to be repaired or replaced in the field after installation. The Company calculates its liability for warranty claims by applying estimates to cover unknown claims, as well as estimating the total amount to be incurred for known warranty issues. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Changes in the Company’s warranty liabilities, which are included in accrued expenses in the accompanying consolidated balance sheets, during the periods indicated below were as follows: (In thousands) Balance at beginning of the period Additions charged to expense Deductions for repairs and replacements Balance at end of the period Employee Benefit Plans: June 30, 2016 June 30, 2015 $ $ 3,408 $ 5,069 (3,408) 5,069 $ 2,662 3,185 (2,439) 3,408 The Company has a defined contribution retirement plan and a discretionary profit sharing plan covering substantially all of its non-union employees in the United States, and a nonqualified deferred compensation plan covering certain employees. The costs of employee benefit plans are charged to expense and funded annually. Total costs were $2,327,000 in 2016, $1,880,000 in 2015, and $1,961,000 in 2014. - 44 - 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 $5,549,000, $5,598,000 and $8,226,000 for the fiscal years ended June 30, 2016, 2015 and 2014, 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. Advertising Expense: The Company recorded $288,000, $305,000, and $322,000 of advertising expense in 2016, 2015 and 2014, respectively. Advertising costs are expensed the first time the advertising occurs. Expense related to printed product or capabilities literature, brochures, etc. is recorded on a ratable basis over the useful life of that printed media. Earnings Per Common Share: The computation of basic earnings per common share is based on the weighted average common shares outstanding for the period net of treasury shares held in the Company’s nonqualified deferred compensation plan. The computation of diluted earnings per share is based on the weighted average common shares outstanding for the period and includes common share equivalents. Common share equivalents include the dilutive effect of stock options, restricted stock units, contingently issuable shares and common shares to be issued under a deferred compensation plan, all of which totaled 872,000 shares in fiscal 2016, 451,000 shares in fiscal 2015, and 462,000 shares in fiscal 2014. See further discussion in Note 3. Income Taxes: The Company accounts for income taxes in accordance with the accounting guidance for income taxes. Accordingly, deferred income taxes are provided on items that are reported as either income or expense in different time periods for financial reporting purposes than they are for income tax purposes. Deferred income tax assets and liabilities are reported on the Company’s balance sheet. Significant management judgment is required in developing the Company’s income tax provision, including the estimation of taxable income and the effective income tax rates in the multiple taxing jurisdictions in which the Company operates, the estimation of the liability for uncertain income tax positions, the determination of deferred tax assets and liabilities, and any valuation allowances that might be required against deferred tax assets. New Accounting Pronouncements: In June 2014, the Financial Accounting Standards Board issued ASU 2014-09, “Revenue from Contracts with Customers.” This amended guidance supersedes and replaces all existing U.S. GAAP revenue recognition guidance. The guidance established a new revenue recognition model, changes the basis for deciding when revenue is recognized, provides new and more detailed guidance on specific revenue topics, and expands and improves disclosures about revenue. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing.” In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers: Narrow Scope Improvements and Practical Expedients.” Both of these standards clarify or improve guidance from ASU 2014-09. These standards are effective for fiscal years and interim periods within those years, beginning after December 15, 2017, or the Company’s fiscal year 2019. The Company is evaluating the impact the amended guidance will have on its financial statements. - 45 - In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which eliminates the current requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts in the statement of financial position. This update requires that deferred tax liabilities and assets be classified as noncurrent. This update is effective for financial statements issued for fiscal years beginning April 1, 2017. This update may be applied either prospectively or retrospectively. However, early adoption is permitted and we have chosen to adopt the standard retrospectively as of June 30, 2016. As a result, prior periods have been adjusted to reflect this change. This update impacted the presentation, but not the measurement of deferred tax liabilities and assets. Comprehensive Income: The Company does not have any comprehensive income items other than net income (loss). 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 consolidated financial statements were filed. No items were identified during this evaluation that required adjustment to or disclosure in the accompanying financial statements. Reclassifications: Certain prior year balance sheet amounts have been reclassified to conform to the new accounting guidance on balance sheet classification of deferred taxes. These reclassifications have no impact on net income, earnings per share, or operating cash flows. Use of Estimates: The preparation of 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 2 — BUSINESS SEGMENT 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 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 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). - 46 - 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. The Technology Segment designs, engineers, 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, sports, 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 15). 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 were no customers or customer programs representing a concentration of 10% or more of the Company’s net sales in the fiscal years ended June 30, 2016, 2015 and 2014. There was no concentration of accounts receivable at June 30, 2016 or 2015. - 47 - Summarized financial information for the Company’s reportable business segments is provided for the indicated periods and as of June 30, 2016, June 30, 2015, June 30, 2014: (In thousands) Net Sales: Lighting Segment Graphics Segment Technology Segment All Other Category Total Net Sales Operating Income (Loss): Lighting Segment Graphics Segment Technology Segment All Other Category Corporate and Eliminations Total Operating Income Capital Expenditures: Lighting Segment Graphics Segment Technology Segment All Other Category Corporate and Eliminations Total Capital Expenditures Depreciation and Amortization: Lighting Segment Graphics Segment Technology Segment All Other Category Corporate and Eliminations Total Depreciation and Amortization Identifiable Assets: Lighting Segment Graphics Segment Technology Segment All Other Category Corporate and Eliminations Total Identifiable Assets 2016 2015 2014 $ 226,889 77,039 18,268 — $ 322,196 $ 219,920 $ 222,604 64,895 50,970 23,001 24,515 1,374 41 $ 307,857 $ 299,463 $ $ $ $ $ $ 15,785 5,429 3,845 — (11,103) 13,956 4,255 3,605 1,935 — 416 10,211 2,930 1,015 1,518 — 1,214 6,677 $ $ $ $ $ $ 14,775 $ 10,524 (2,086) 1,156 1,633 2,949 (854) (183 (6,899) 2,318 7,533 $ (11,164 1,905 $ 1,100 1,146 4 599 4,754 $ 2,965 $ 979 1,341 31 1,015 6,331 $ 3,294 461 726 20 744 5,245 2,779 950 1,563 161 773 6,226 June 30, 2016 June 30, 2015 $ $ 95,168 32,450 29,388 — 38,554 195,560 $ 90,713 29,477 28,423 — 32,077 $ 180,690 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. - 48 - 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: (In thousands) 2016 2015 2014 Lighting Segment intersegment net sales Graphics Segment intersegment net sales Technology Segment intersegment net sales All Other Category intersegment net sales $ $ $ $ 2,935 $ 1,760 $ 35,733 $ — $ 2,752 559 29,412 308 $ $ $ $ 3,534 1,088 34,238 2,286 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 15). The geographic distribution of the Company’s net sales and long-lived assets are as follows: (In thousands) Net Sales (a): United States Canada Total Net Sales Long-Lived Assets (b): United States Canada Total Long-Lived Assets 2016 2015 2014 $ $ $ $ 322,196 — 322,196 June 30, 2016 51,723 — 51,723 $ $ $ $ 307,816 41 307,857 June 30, 2015 46,430 — 46,430 $ $ $ $ 298,089 1,374 299,463 June 30, 2014 47,125 190 47,315 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. - 49 - NOTE 3 — 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): (In thousands, except per share data) BASIC EARNINGS PER SHARE 2016 2015 2014 Net income $ 9,482 $ 5,151 $ 930 Weighted average shares outstanding during the period, net of treasury shares (a) Weighted restricted stock units outstanding during the period Weighted average shares outstanding in the Deferred Compensation Plan during the period 24,720 24 24,187 — 24,084 — 244 309 304 Weighted average shares outstanding 24,988 24,496 24,388 Basic earnings per share DILUTED EARNINGS PER SHARE Net income Weighted average shares outstanding $ $ 0.38 $ 0.21 $ 0.04 9,482 $ 5,151 $ 930 Basic 24,988 24,496 24,388 Effect of dilutive securities (b): Impact of common shares to be issued under stock option plans, and contingently issuable shares, if any 604 142 158 Weighted average shares outstanding (c) 25,592 24,638 24,546 Diluted earnings per share $ 0.37 $ 0.21 $ 0.04 (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 1,331,300 common shares, 1,882,722 common shares, and 1,974,775 common shares at June 30, 2016, 2015, and 2014, respectively, were not included in the computation of diluted earnings per share because the exercise price was greater than the average fair market value of the common shares. - 50 - NOTE 4 — INVENTORIES The following information is provided as of the dates indicated: (In thousands) Inventories: Raw materials Work-in-process Finished goods Total Inventories NOTE 5 — ACCRUED EXPENSES The following information is provided as of the dates indicated: (In thousands) Accrued Expenses: Compensation and benefits Customer prepayments Accrued sales commissions Accrued warranty Other accrued expenses Total Accrued Expenses June 30, 2016 June 30, 2015 $ $ 28,979 4,418 10,744 44,141 $ $ 27,920 4,658 10,505 43,083 June 30, 2016 June 30, 2015 $ $ 11,983 1,053 2,792 5,069 4,444 25,341 $ $ 11,614 1,324 1,982 3,408 3,798 22,126 NOTE 6 — GOODWILL AND OTHER INTANGIBLE ASSETS Carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment. The Company may first assess qualitative factors in order to determine if goodwill and indefinite-lived intangible assets are impaired. If through the qualitative assessment it is determined that it is more likely than not that goodwill and indefinite-lived assets are not impaired, no further testing is required. If it is determined more likely than not that goodwill and indefinite-lived assets are impaired, or if the Company elects not to first assess qualitative factors, the Company’s impairment testing continues with the estimation of the fair value of goodwill and indefinite-lived intangible assets using a combination of a market approach and an income (discounted cash flow) approach, at the reporting unit level, that requires significant management judgment with respect to revenue and expense growth rates, changes in working capital and the selection and use of an appropriate discount rate. The estimates of fair value of reporting units are based on the best information available as of the date of the assessment. The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease an impairment charge. Company management uses its judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as adverse business conditions, economic factors and technological change or competitive activities may signal that an asset has become impaired. 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 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 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 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 Company has performed an assessment of goodwill from the date of the annual test through the balance sheet date for possible triggering events and has concluded that there were no triggering events that would indicate the assets are impaired. - 51 - As of March 1, 2015, the Company performed its annual goodwill impairment test on the three reporting units that contain goodwill. The goodwill impairment test in the Lighting Segment passed with a business enterprise value that was $36.2 million or 45% above the carrying value of this reporting unit. The goodwill impairment test of a reporting unit with goodwill in the Graphics Segment passed with an estimated business enterprise value that was $4.0 million or 344% above the carrying value of the reporting unit. As part of the Company realigning its business segments discussed in Note 2, the goodwill that was previously reported in the All Other Category is now reported in the Graphics Segment. The goodwill impairment test of the reporting unit in the Technology Segment that contains goodwill passed with an estimated business enterprise value that was $14.9 million or 58% above the carrying value of this reporting unit. 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 All Other Category Segment Total Balance as of June 30, 2016 Goodwill Accumulated impairment losses Goodwill, net as of June 30, 2016 Balance as of June 30, 2015 Goodwill Accumulated impairment losses Goodwill, net as of June 30, 2015 $ $ $ $ 34,913 $ (34,778) 135 $ 28,690 $ (27,525) 1,165 $ 11,621 $ (2,413) 9,208 $ 34,913 $ (34,778) 135 $ 28,690 $ (27,525) 1,165 $ 11,621 $ (2,413) 9,208 $ -- $ -- -- $ -- $ -- -- $ 75,224 (64,716) 10,508 75,224 (64,716) 10,508 As of June 30, 2014, the Company performed an impairment test on two definite-lived intangible assets at the LSI Controls reporting unit (formerly LSI Virticus) in the Technology Segment. The triggering event for this impairment analysis was the shortfall in lighting control sales relative to forecast. The income (discounted cash flow) approach was used to determine the fair market value of the intangible assets. As a result of the analysis, it was determined that two definite-lived intangible assets were fully impaired, totaling $805,000 of impairment expense in fiscal 2014. 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 $1,306,000 and accumulated amortization of $428,000 was sold as a result of the sale of LSI Saco Technologies (See Note 15). As of March 1, 2016, the Company performed its annual review of indefinite-lived intangible assets and determined there was no impairment. The indefinite-lived intangible asset impairment test passed with a fair market value that was $ 8.4 million or 245% above its carrying value. The Company has performed an assessment of its intangible assets from the date of the annual test through the balance sheet date for possible triggering events and has concluded that there were no triggering events that would indicate the assets are impaired. As of March 1, 2015, the Company performed its annual review of indefinite-lived intangible assets and determined there was no impairment. The indefinite-lived intangible asset impairment test passed with a fair market value that was $6.6 million or 192% above its carrying value. - 52 - The gross carrying amount and accumulated amortization by major other intangible asset class is as follows: Other Intangible Assets (In thousands) Amortized Intangible Assets Customer relationships Patents LED technology firmware, software Trade name Non-compete agreements Total Amortized Intangible Assets Indefinite-lived Intangible Assets Trademarks and trade names Total Indefinite-lived Intangible Assets June 30, 2016 Gross Carrying Amount Accumulated Amortization Net Amount $ 9,316 $ 338 11,228 460 710 22,052 7,581 $ 154 10,989 460 704 19,888 3,422 3,422 — — 1,735 184 239 — 6 2,164 3,422 3,422 Total Other Intangible Assets $ 25,474 $ 19,888 $ 5,586 Other Intangible Assets (In thousands) Amortized Intangible Assets Customer relationships Patents LED technology firmware, software Trade name Non-compete agreements Total Amortized Intangible Assets Indefinite-lived Intangible Assets Trademarks and trade names Total Indefinite-lived Intangible Assets June 30, 2015 Gross Carrying Amount Accumulated Amortization Net Amount $ 9,316 $ 338 11,228 460 710 22,052 3,422 3,422 7,290 $ 120 10,910 460 602 19,382 -- -- 2,026 218 318 -- 108 2,670 3,422 3,422 Total Other Intangible Assets $ 25,474 $ 19,382 $ 6,092 (In thousands) Amortization Expense of Other Intangible Assets 2016 2015 2014 Amortization Expense $ 506 $ 527 $ 815 - 53 - The Company expects to record amortization expense as follows: (In thousands) 2017 2018 2019 2020 2021 After 2021 $ $ $ $ $ $ 409 400 400 327 321 307 NOTE 7 — REVOLVING LINES OF CREDIT AND LONG-TERM DEBT 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. As of June 30, 2016, $0.7 million of the $30 million line of credit was reserved for two letters of credit with a foreign supplier. The Company is in compliance with all of its loan covenants as of June 30, 2016. NOTE 8 — CASH DIVIDENDS The Company paid cash dividends of $4,214,000, $2,900,000 and $5,780,000 in fiscal years 2016, 2015 and 2014, respectively. Dividends on restricted stock units in the amount of $10,625 were accrued as of June 30, 2016. These dividends will be paid upon the vesting of the restricted stock units when shares are issued to the award recipients. In August 2016, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable September 7, 2016 to shareholders of record August 29, 2016. NOTE 9 — EQUITY COMPENSATION Stock Options The Company has an equity compensation plan that was approved by shareholders in November 2012 and that covers all of its full-time employees, outside directors and certain advisors. This 2012 Stock Incentive Plan replaced all previous equity compensation plans. 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% every 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 1,612,095 shares, all of which were available for future grant or award as of June 30, 2016. This plan allows for the grant of incentive stock options, nonqualified 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 in fiscal 2016. As of June 30, 2016, a total of 2,976,490 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 1,312,985 options for common shares were vested and exercisable. As of June 30, 2016, the approximate unvested stock option expense that will be recorded as expense in future periods is $2,458,925. The weighted average time over which this expense will be recorded is approximately 27 months. Additionally, as of June 30, 2016 a total of 62,500 RSUs were outstanding. The approximate unvested stock compensation expense that will be recorded as expense in future periods for the RSUs is $234,320. The weighted average time over which this expense will be recorded is approximately 32 months. - 54 - 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. Dividend yield Expected volatility Risk-free interest rate Expected life 2016 2015 2014 1.3% 44% 1.7% 6.0 yrs 1.1% 55% 1.6% 6.0 yrs 3.3% 53% 1.7% 5.5 yrs At June 30, 2016, the 1,026,800 options granted during fiscal 2016 to both employees and non-employee directors 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 and nine years, eight months. At June 30, 2015, the 734,323 options granted to employees during fiscal 2015 had exercise prices ranging from $5.96 to $8.23 per share, fair values ranging from $2.19 to $3.89 per share, and remaining contractual lives of between nine years five months and nine years nine months. At June 30, 2014, the 436,000 options granted to employees during fiscal 2014 had exercise prices ranging from of $7.20 to $8.44 per share, fair values ranging from $2.64 to $3.64 per share, and remaining contractual lives of between nine years two months and nine years six 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 April 1, 2016. Previous estimated forfeiture rates were between 2.0% and 3.3% over the period January 1, 2013 through March 31, 2016. The expected volatility of the Company’s stock was calculated based upon the historic monthly fluctuation in stock price for a period approximating the expected life of option grants. The risk-free interest rate is the rate of a five year Treasury security at constant, fixed maturity on the approximate date of the stock option grant. The expected life of outstanding options is determined to be less than the contractual term for a period equal to the aggregate group of option holders’ estimated weighted average time within which options will be exercised. It is the Company’s policy that when stock options are exercised, new common shares shall be issued. The Company recorded $2,519,092, $1,238,897 and $1,004,676 of expense related to stock options in fiscal years 2016, 2015 and 2014, respectively. As of June 30, 2016, the Company had 2,939,224 stock options that were vested and that were expected to vest, with a weighted average exercise price of $8.98 per share, an aggregate intrinsic value of $8,246,362 and weighted average remaining contractual terms of 6.5 years. Information related to all stock options for the years ended June 30, 2016, 2015 and 2014 is shown in the following tables: Twelve Months Ended June 30, 2016 Weighted Average Exercise Price Weighted Average Remaining Contractual Term Shares Aggregate Intrinsic Value Outstanding at 6/30/15 2,677,436 $ 8.85 6.1 years $ 4,914,601 Granted Forfeitures Exercised 1,026,800 $ (165,800) $ (561,946) $ 9.39 15.15 7.34 Outstanding at 6/30/16 2,976,490 $ 8.97 6.6 years $ 8,338,974 Exercisable at 6/30/16 1,312,985 $ 9.75 4.0 years $ 3,819,127 - 55 - Twelve Months Ended June 30, 2015 Weighted Average Exercise Price Weighted Average Remaining Contractual Term Shares Aggregate Intrinsic Value Outstanding at 6/30/14 2,677,464 $ 9.57 5.4 years $ 1,674,010 Granted Forfeitures Exercised 734,323 $ (571,275) $ (163,076) $ 6.83 10.26 6.70 Outstanding at 6/30/15 2,677,436 $ 8.85 6.1 years $ 4,914,601 Exercisable at 6/30/15 1,597,238 $ 10.18 4.3 years $ 2,250,093 Twelve Months Ended June 30, 2014 Weighted Average Exercise Price Weighted Average Remaining Contractual Term Shares Aggregate Intrinsic Value Outstanding at 6/30/13 2,341,150 $ 9.95 5.6 years $ 1,544,896 Granted Forfeitures Exercised 436,000 $ (39,050) $ (60,636) $ 7.24 11.59 6.22 Outstanding at 6/30/14 2,677,464 $ 9.57 5.4 years $ 1,674,010 Exercisable at 6/30/14 1,874,326 $ 10.74 4.0 years $ 750,925 The following table presents information related to unvested stock options: Weighted-Average Grant Date Shares Fair Value Unvested at June 30, 2015 Granted Vested Forfeited Unvested at June 30, 2016 1,080,198 1,026,800 (395,693) (47,800) 1,663,505 $2.99 $3.64 $2.95 $3.30 $3.39 The weighted average grant date fair value of options granted was $3.64, $3.27 and $2.67 per share in fiscal years 2016, 2015 and 2014, respectively. The aggregate intrinsic value of options exercised during the years ended June 30, 2016, 2015 and 2014 were $1,695,213, $212,106 and $142,715, respectively. The aggregate grant date fair value of options that vested during 2016, 2015 and 2014 was $1,168,192, $822,827 and $777,825, respectively. The Company received $4,124,047, $1,092,002 and $377,401 of cash from employees and former employees or beneficiaries who exercised options in fiscal years 2016, 2015 and 2014, respectively. Additionally, in fiscal 2016 the Company recorded $595,483 as a reduction of federal income taxes payable, $102,010 as a reduction in common stock, $141,349 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 - 56 - employees sold the common shares prior to the passage of twelve months from the date of exercise. In fiscal 2015 the Company recorded $71,643 as a reduction of federal income taxes payable, $242,385 as a reduction in common stock, $30,149 as a reduction of income tax expense, and $283,888 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 twelve months ended June 30, 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 $10,625 were accrued as of June 30, 2016. Accrued dividends are paid to the award recipient upon vesting of the RSUs and issuance of the common shares. Of the 72,000 RSUs awarded, 5,000 common shares were issued and 4,500 RSUs were forfeited during fiscal year 2016. As of June 30, 2016, the 62,500 restricted stock units outstanding had a remaining contractual life of three years. Of the 62,500 RSUs outstanding as of June 30, 2016, 60,794 are expected to vest in the future. An estimated forfeiture date of 3.3% was used in the calculation of expense related to the restricted stock units. The Company recorded $383,483 of expense related to RSUs during fiscal year 2016. The Company awarded no RSUs prior to July 1, 2015. Director and Employee Stock Compensation Awards The Company awarded a total of 23,838 common shares in fiscal 2016, a total of 26,850 common shares in fiscal 2015, and a total of 23,205 common shares in fiscal 2014 as stock compensation awards. These common shares were valued at their approximate $248,000, $191,000 and $192,100 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 receive a nominal recognition award in the form of common stock. Stock compensation awards are made in the form of newly issued common shares of the Company. Deferred Compensation Plan The Company has a nonqualified 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 June 30, 2016 there were 28 participants, all with fully vested account balances. A total of 228,100 common shares with a cost of $2,167,700, and 226,600 common shares with a cost of $2,145,100 were held in the plan as of June 30, 2016 and 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 nonqualified deferred compensation plan. The Company used approximately $363,400 and $205,600 to purchase 36,685 and 27,902 common shares of the Company in the open stock market during fiscal years 2016 and 2015, respectively, for either employee salary deferrals or Company contributions into the nonqualified deferred compensation plan. For fiscal year 2017, the Company estimates the Rabbi Trust for the Nonqualified Deferred Compensation Plan will make net repurchases in the range of 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 10 — LEASES AND PURCHASE COMMITMENTS Purchase commitments, including minimum annual rental commitments, of the Company totaled $20,824,000 and $23,942,000 as of June 30, 2016 and June 30, 2015, respectively. The Company leases certain of its facilities and equipment under operating lease arrangements. The facility leases contain the option to renew for periods ranging from one to five years. Rental expense was $2,027,000 in 2016, $1,876,000 in 2015, and $1,783,000 in 2014. Minimum annual rental commitments under non-cancelable operating leases are indicated in the table below: 2017 $1,285,000 2018 $1,046,000 2019 $255,000 2020 $36,000 2021 $5,000 2022 & Beyond -- - 57 - NOTE 11 — INCOME TAXES The following information is provided for the years ended June 30: (In thousands) Components of income before income taxes: United States Foreign Income before income taxes Provision for income taxes: Current U.S. federal State and local Foreign Total current Deferred Total provision for income taxes (In thousands) Reconciliation to federal statutory rate: Federal statutory tax rate State and local taxes, net of federal benefit Impact of foreign operations Federal and state tax credits Goodwill Valuation allowance Domestic production activities deduction Uncertain tax position activity Other Sale of subsidiary Effective tax rate $ $ $ $ 2016 2015 2014 14,004 $ — 14,004 $ 7,697 $ (183) 7,514 $ 3,121 (854) 2,267 5,056 $ 582 — 5,638 (1,116) 4,522 $ 2,364 $ 237 (12) 2,589 (226) 2,363 $ 500 35 (54) 481 856 1,337 2016 2015 2014 35.0% 2.2 0.0 (2.6) — — (4.2) (0.6) 2.5 — 32.3% 34.0% 2.4 0.7 (3.7) — (3.8) (4.0) (1.3) 2.1 5.0 31.4% 34.0% 6.9 1.2 (6.3) 0.1 30.8 (2.8) (11.3) 6.4 — 59.0% The components of deferred income tax assets and (liabilities) at June 30, 2016 and 2015 are as follows: (In thousands) Reserves against current assets Accrued expenses Goodwill, acquisition costs and intangible assets Deferred compensation Stock-based compensation State net operating loss carryover and credits Long term capital loss carryforward U.S. Federal net operating loss carryover and credits Deferred income tax asset before valuation reserve Valuation reserve Deferred income tax asset Depreciation Goodwill, acquisition costs and intangible assets Deferred income tax liability $ 2016 2015 $ 679 3,690 — 842 1,473 1,878 4,272 456 13,290 (6,150) 7,140 (4,270) (289) (4,559) 273 2,881 255 791 1,213 1,889 4,272 506 12,080 (6,161) 5,919 (4,454) — (4,454) Net deferred income tax asset $ 2,581 $ 1,465 - 58 - As of June 30, 2016 and 2015, the Company has recorded a deferred tax asset in the amount of $456,000 and $506,000, respectively, related to U.S. Federal net operating loss and research and development credit carryovers acquired in the acquisition of Virticus Corporation. The net operating losses will expire over a period of 3 years, beginning in June 30, 2029. The research and development credits will expire over a period of 2 years, beginning in June 30, 2029. The annual utilization is limited by Internal Revenue Code Section 382. However, the Company has determined these assets, more likely than not, will be realized. As of June 30, 2016 and 2015, the Company has recorded a deferred state income tax asset in the amount of $1,716,000, net of federal tax benefits, related to non-refundable New York state tax credits. These credits do not expire, but pursuant to New York state legislation enacted in fiscal 2014, the Company has determined that this asset, more likely than not, will not be realized. As of June 30, 2016 and 2015, the Company has recorded a full valuation reserve in the amount of $1,716,000. There was no change in the deferred state income tax asset or related valuation reserve in fiscal 2016. The Company recorded a $6,000 deferred state income tax benefit in fiscal year 2015, and additional deferred state income tax expense of $489,000 (of which $362,000 related to the state tax code change), in fiscal year 2014. As of June 30, 2016 and 2015, the Company has recorded a deferred state income tax asset in the amount of $162,000 and $173,000, respectively, related to a state net operating loss carryover and a state research and development credit in Oregon acquired during the acquisition of Virticus Corporation. The Company has determined this asset more likely than not, will not be realized and that a full valuation reserve is required. The Oregon net operating loss will expire over a period of 4 years, beginning in June 30, 2027. Related to the Oregon research and development credit, $11,000 expired during fiscal 2016 and the remaining balance of $25,000 will expire during fiscal 2017. During fiscal 2015, the Company recorded deferred tax assets related to the sale of its Canadian subsidiary related to a long term capital loss carryforward totaling $4,272,000. The Company has determined that this asset, more likely than not, will not be realized within the 5 year carryforward period and that a full valuation reserve is required. The long term capital loss carryforward will expire in June 30, 2020. Considering all issues discussed above, the Company has recorded valuation reserves of $6,150,000 and $6,161,000 as of June 30, 2016 and 2015, respectively. The Company accounts for uncertain tax positions in accordance with accounting standards. At June 30, 2016, tax, interest, and penalties, net of potential federal tax benefits, were $421,000, $244,000, and $142,000, respectively, of the total reserve for uncertain tax positions of $807,000. Of the $807,000 reserve for uncertain tax positions, $665,000 would have an unfavorable impact on the effective tax rate if recognized. At June 30, 2015, tax, interest, and penalties, net of potential federal tax benefits, were $447,000, $292,000, and $152,000 respectively, of the total reserve for uncertain tax positions of $891,000. Of the $891,000 reserve for uncertain tax positions, $739,000 would have an unfavorable impact on the effective tax rate if recognized. The liability for uncertain tax positions is included in Other Long-Term Liabilities. The Company recognized a $26,000 net tax benefit in fiscal 2016, a $40,000 net tax benefit in fiscal 2015, and a $147,000 net tax benefit in fiscal 2014 related to the change in reserves for uncertain tax positions. The Company recognized interest net of federal benefit and penalties of $48,000 and $10,000, respectively, in fiscal 2016, $41,000 and $17,000, respectively, in fiscal 2015, and $62,000 and $50,000, respectively in fiscal 2014. The Company is recording estimated interest and penalties related to potential underpayment of income taxes as a component of tax expense in the Consolidated Statements of Operations. The reserve for uncertain tax positions is not expected to change significantly in the next twelve months. The fiscal 2016, 2015 and 2014 gross tax activity in the liability for uncertain tax positions was as follows: (in thousands) 2016 2015 2014 Balance at beginning of the fiscal year Decreases — tax positions in prior period Increases — tax positions in current period Settlements and payments Lapse of statute of limitations Balance at end of the fiscal year $ $ 687 (161) 122 — — 648 $ $ 746 (134) 75 — — 687 $ $ 969 (225) 2 — — 746 - 59 - The Company files a consolidated federal income tax return in the United States, and files various combined and separate tax returns in several state and local jurisdictions. With limited exceptions, the Company is no longer subject to U.S. Federal, state and local tax examinations by tax authorities for fiscal years ending prior to June 30, 2013. NOTE 12 — SUPPLEMENTAL CASH FLOW INFORMATION (In thousands) Cash payments for: Interest Income taxes Issuance of common shares as compensation NOTE 13 — COMMITMENTS AND CONTINGENCIES 2016 2015 2014 $ $ $ 50 5,079 248 $ $ $ 48 1,078 191 $ $ $ 76 978 193 As part of the acquisition of Virticus Corporation in March 2012, a contingent earn-out liability of $877,000 was recorded based on the fair value of estimated earn-out payments. 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 Virticus, the fair value of the earn-out liability was adjusted to zero. As of June 30, 2016, the maximum potential undiscounted liability related to the earn-out is $236,000, which is based upon the achievement of a defined level of sales of lighting control systems in fiscal year 2017. The likelihood of this occurring is not considered probable. The Company is party to various negotiations, customer bankruptcies, and legal proceedings arising in the normal course of business. The Company provides reserves for these matters when a loss is probable and reasonably estimable. The Company does not disclose a range of potential loss because the likelihood of such a loss is remote. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations, cash flows or liquidity. The Company may occasionally issue a standby letter of credit in favor of third parties. As of June 30, 2016, there was an irrevocable letter of credit totaling $0.4 million and a standby letter of credit totaling $0.3 million, both to a foreign supplier related to the purchase of inventory. 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 benefits reductions. The company recorded severance charges of $469,000 in fiscal 2016 in the Graphics Segment. - 60 - The activity in the Company’s Accrued Severance Liability was as follows for the twelve months ended June 30, 2016 and 2015: (In thousands) Fiscal Year Ended June 30, 2016 Fiscal Year Ended June 30, 2015 Balance at beginning of the period Accrual of expense Payments Adjustments Balance at end of the period $ $ 379 $ 469 (742) (67) 39 $ -- 1,718 (704) (635) 379 NOTE 15 — 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 a $(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 16 — RELATED PARTY TRANSACTIONS The Company has recorded expense for the following related party transactions in the fiscal years indicated (amounts in thousands): Keating Muething & Klekamp PLL American Engineering and Metal Working 3970957 Canada Inc. Synergy Electronic LTD 2016 2015 2014 $ $ $ $ 207 $ 522 $ — $ — $ 500 $ 300 $ 42 $ 7 $ 98 215 161 171 As of the balance sheet date indicated, the Company had the following liabilities recorded with respect to related party transactions (amounts in thousands): Keating Muething & Klekamp PLL American Engineering and Metal Working June 30, 2016 June 30, 2015 $ $ 12 6 $ $ 35 1 The Company has recognized revenue related to the following related party transactions in the fiscal years indicated (amount in thousands): 2016 2015 2014 Wesco International American Engineering and Metalworking $ $ 2,450 $ 27 $ 2,726 $ 4 $ 5,444 7 - 61 - As of the balance sheet date indicated, the Company had the following accounts receivable recorded with respect to related party transactions (amounts in thousands): Wesco International June 30, 2016 June 30, 2015 $ 57 $ 262 The law firm of Keating Muething & Klekamp PLL, of which the son of one of the Company’s independent outside directors is a partner, is the Company’s primary outside law firm providing legal services in most all areas required other than patents and intellectual property. The manufacturing firm of American Engineering and Metal Working, which is owned and operated by the son of the former president of the Company’s Graphics Segment, provides metal fabricated components. 3970957 Canada Inc., which is owned by the former president and another executive of the Company’s former LSI Saco Technologies subsidiary, owns the building that the former Canadian operation occupied and rented. Synergy Electronic LTD, which is owned and operated by the brother of an executive at the Company’s former LSI Saco Technologies, manufactures molds and materials used in video screens and research and development projects. Wesco International, of which one of the Company’s independent outside directors is a director, purchases lighting fixtures from the Company. - 62 - NOTE 17 — SUMMARY OF QUARTERLY RESULTS (UNAUDITED) (In thousands except per share data) Sept. 30 Dec. 31 March 31 June 30 Quarter Ended Fiscal Year 2016 Net sales Gross profit Net income Earnings per share Basic Diluted Range of share prices High Low 2015 Net sales Gross profit Net income Earnings per share Basic Diluted Range of share prices High Low 2014 Net sales Gross profit Net income (loss) Earnings (loss) per share Basic Diluted Range of share prices High Low $ 85,925 $ 23,349 3,750 84,687 $ 23,926 3,782 70,740 $ 16,549 522 80,844 $ 19,847 1,428 322,196 83,671 9,482 $ $ 0.15 $ 0.15 $ 0.15 $ 0.15 $ 0.02 $ 0.02 $ 0.06 $ 0.06 $ 0.38 0.37(a) $ $ 10.48 8.33 $ $ 12.80 7.89 $ $ 12.22 9.85 $ $ 13.45 10.29 $ $ 13.45 7.89 $ $ $ $ $ $ $ $ $ $ 78,466 $ 18,608 1,527 84,715 $ 20,555 1,588 68,603 $ 16,305 393 76,073 $ 18,981 1,643 307,857 74,449 5,151 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.02 $ 0.02 $ 0.07 $ 0.07 $ 0.21 0.21 8.49 $ 6.00 $ 7.70 $ 5.61 $ 9.17 $ 5.84 $ 10.24 $ 8.02 $ 10.24 5.61 80,486 $ 19,122 1,865 76,123 $ 16,757 870 68,996 $ 13,715 (1,009) 73,858 $ 15,704 (796) 299,463 65,298 930 0.08 $ 0.08 $ 0.04 $ 0.04 $ (0.04) $ (0.04) $ (0.03) $ (0.03) $ 0.04(a) 0.04(a) 9.00 $ 6.65 $ 9.60 $ 7.76 $ 9.67 $ 7.54 $ 8.78 $ 7.10 $ 9.67 6.65 (a) The total of the earnings per share for each of the four quarters does not equal the total earnings per share for the full year because the calculations are based on the average shares outstanding during each of the individual periods. At August 27, 2016, there were 620 shareholders of record. The Company believes this represents approximately 3,000 beneficial shareholders. - 63 - LSI INDUSTRIES INC. SELECTED FINANCIAL DATA (In thousands except per share data) The following data has been selected from the Consolidated Financial Statements of the Company for the periods and dates indicated: Statement of Operations Data: 2016 2015 2014 2013 2012 Net sales Cost of products and services sold Loss on sale of a subsidiary Gain (loss) on sale of a building Selling and administrative expenses Goodwill and intangible asset impairment $ 322,196 $ 238,525 — — 69,715 307,857 $ 233,408 565 (343) 66,694 299,463 $ 234,165 — — 62,175 280,790 $ 220,380 — — 57,367 268,402 208,089 — — 53,724 — — 805 2,413 258 Operating income Interest (income) Interest expense Income before income taxes Income taxes Net income (loss) Earnings (loss) per common share Basic Diluted Cash dividends paid per share Weighted average common shares Basic Diluted Balance Sheet Data: (At June 30) Working capital Total assets Long-term debt, including current maturities Shareholders’ equity 13,956 (84) 36 14,004 4,522 7,533 (26) 45 7,514 2,363 2,318 (17) 68 2,267 1,337 630 (47) 62 615 738 6,331 (25) 165 6,191 2,967 9,482 $ 5,151 $ 930 $ (123) $ 3,224 0.38 $ 0.37 $ 0.21 $ 0.21 $ 0.04 $ 0.04 $ (0.01) $ (0.01) $ 0.17 $ 0.12 $ 0.24 $ 0.36 $ 0.13 0.13 0.23 24,988 25,592 24,496 24,638 24,388 24,546 24,313 24,313 24,298 24,352 $ $ $ $ 2016 2015 2014 2013 2012 $ 88,510 $ 195,560 80,813 180,690 $ 74,349 168,688 $ 74,647 169,179 $ 81,834 175,226 — 155,520 — 142,952 — 138,412 — 141,690 — 149,368 - 64 - LSI INDUSTRIES INC. AND SUBSIDIARIES SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 2016, 2015, AND 2014 (In Thousands) COLUMN A Description COLUMN B COLUMN C Additions Charged to COLUMN D COLUMN E COLUMN F Additions Balance Beginning of Period (Deductions) Costs and From Company Expenses Acquired (Sold) Deductions (a) Balance End of Period Allowance for Doubtful Accounts: Year Ended June 30, 2016 Year Ended June 30, 2015 Year Ended June 30, 2014 Inventory Obsolescence Reserve: Year Ended June 30, 2016 Year Ended June 30, 2015 Year Ended June 30, 2014 Deferred Tax Asset Valuation Reserve: Year Ended June 30, 2016 Year Ended June 30, 2015 Year Ended June 30, 2014 $ $ $ $ $ $ $ $ $ 317 $ 294 $ 346 $ 55 $ 220 $ 6 $ — $ — $ — $ (146) $ (197) $ $ (58) 226 317 294 2,197 $ 2,298 $ 3,087 $ 1,726 $ 1,493 $ 1,464 $ — $ (417) $ — $ (1,529) $ (1,177) $ (2,253) $ 2,394 2,197 2,298 6,161 $ 6,450 $ 5,750 $ — $ — $ 700 $ — $ (283) $ — $ (11) $ (6) $ — $ 6,150 6,161 6,450 (a) For Allowance for Doubtful Accounts, deductions are uncollectible accounts charged off, less recoveries. - 65 - EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Business and Location Percent Owned by Registrant State of Incorporation Subsidiary Grady McCauley Inc. Digital image and screen printed graphics North Canton, OH LSI Adapt Inc. Project management and installation services North Canton, OH LSI ADL Technology Inc. Electronic Circuit Boards Columbus, OH LSLSI Controls Inc. Lighting control systems LSI Integrated Graphics LLC LSI Kentucky LLC LSI Lightron Inc. LSI MidWest Lighting Inc. Screen and digital printed materials, and illuminated and non-illuminated architectural graphics Houston, TX Menu board systems; metal fabrication Independence, KY Fluorescent lighting New Windsor, NY Fluorescent lighting Kansas City, KS LSI Retail Graphics LLC Interior graphics and signs Woonsocket, RI 100% Ohio 100% Ohio 100% Ohio 100% Oregon 100% Ohio 100% Ohio 100% Ohio 100% Kansas 100% Ohio EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our reports dated September 7, 2016, with respect to the consolidated financial statements, schedule, and internal control over financial reporting included in the Annual Report of LSI Industries Inc. on Form 10-K for the year ended June 30, 2016. We consent to the incorporation by reference of said reports in the Registration Statements of LSI Industries Inc. on Form S-3 (File No. 333-191032) and on Forms S-8 (File No. 333-209386, File No. 333-201890, File No. 333-201889, File No. 333-11503, File No. 333-110784, File No. 333-169264, File No. 333-183747, and File No. 333-186446). /s/ GRANT THORNTON LLP Cincinnati, Ohio September 7, 2016 Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) EXHIBIT 31.1 I, Dennis W. Wells, certify that: 1. I have reviewed this annual report on Form 10-K of LSI Industries Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: September 7, 2016 /s/ Dennis W. Wells Dennis W. Wells Principal Executive Officer Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) EXHIBIT 31.2 I, Ronald S. Stowell, certify that: 1. I have reviewed this annual report on Form 10-K of LSI Industries Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: September 7, 2016 /s/ Ronald S. Stowell Ronald S. Stowell Principal Financial Officer CERTIFICATION OF DENNIS W. WELLS Pursuant to Section 1350 of Chapter 63 of the United States Code and Rule 13a-14b EXHIBIT 32.1 In connection with the filing with the Securities and Exchange Commission of the Annual Report of LSI Industries Inc. (the “Company”) on Form 10-K for the fiscal year ended June 30, 2016 (the “Report”), I, Dennis W. Wells, Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes- Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Dennis W. Wells Dennis W. Wells Principal Executive Officer September 7, 2016 A signed original of this written statement required by Section 906 has been provided to LSI Industries Inc. and will be retained by LSI Industries Inc. and furnished to the Securities and Exchange Commission or its staff upon request. CERTIFICATION OF RONALD S. STOWELL Pursuant to Section 1350 of Chapter 63 of the United States Code and Rule 13a-14b EXHIBIT 32.2 In connection with the filing with the Securities and Exchange Commission of the Annual Report of LSI Industries Inc. (the “Company”) on Form 10-K for the fiscal year ended June 30, 2016 (the “Report”), I, Ronald S. Stowell, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes- Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Ronald S. Stowell Ronald S. Stowell Principal Financial Officer September 7, 2016 A signed original of this written statement required by Section 906 has been provided to LSI Industries Inc. and will be retained by LSI Industries Inc. and furnished to the Securities and Exchange Commission or its staff upon request. Shareholder Information Shareholder Information Legal Counsel Keating Muething & Klekamp PLL Cincinnati, Ohio Independent Registered Public Accounting Firm Grant Thornton LLP Cincinnati, Ohio Transfer Agent and Registrar Computershare Trust Company, N.A. 250 Royall Street, Mail Stop 1A Canton, Massachusetts 02021-1011 Annual Meeting The LSI Industries Inc. annual shareholders’ meeting will be held Thursday, November 17, 2016 at 11:00 a.m. at the Company’s corporate offices located at 10000 Alliance Road, Cincinnati, Ohio. Corporate Headquarters LSI Industries Inc. 10000 Alliance Road Cincinnati, Ohio 45242 Market for the Company’s Common Shares LSI Industries Inc. Common Shares are traded on the NASDAQ Global Select Market under the symbol LYTS. Internet Site The LSI Industries site on the Internet, www.lsi-industries.com, contains the Company’s 10-K and 10-Q filings, proxy statements, other SEC filings, annual reports, news releases, stock prices, and a variety of other information about LSI Industries and its products and services. Dividend Reinvestment Plan The LSI Industries Automatic Dividend Reinvestment and Stock Purchase Plan offers registered shareholders and employees an opportunity to purchase additional shares through automatic dividend reinvestment and/or optional cash investments. For additional information, contact: Computershare Trust Company, N.A. 250 Royall Street, Mail Stop 1A Canton, Massachusetts 02021-1011 (312) 588-4990 (866) 770-0656 E-mail: web.queries@computershare.com Internet: www.computershare.com LIGHTING LSI HAS A TOP 10 U.S. MARKET SHARE POSITION FOR LIGHTING PRODUCTS. GRAPHICS LSI HAS A TOP 10 U.S. MARKET SHARE POSITION FOR GRAPHICS PRODUCTS. TECHNOLOGY LSI IS DRIVING ADVANCEMENTS IN OUR ABILITY TO COMPETE IN THE SMART LIGHTING AND GRAPHICS MARKETS OF THE FUTURE. 

Continue reading text version or see original annual report in PDF format above