UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_________________________
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019 OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO ________________. |
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Commission File No. 0-13375
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LSI Industries Inc. |
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(Exact name of registrant as specified in its charter) |
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Ohio |
31-0888951 |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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10000 Alliance Road, Cincinnati, Ohio |
45242 |
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(Address of principal executive offices) |
(Zip Code) |
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(513) 793-3200 |
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Registrant’s telephone number, including area code) |
Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____
Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
YES X NO ____
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer [ ] |
Accelerated filer [ X ] |
Emerging growth company [ ] |
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Non-accelerated filer [ ] |
Smaller reporting company [ X ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ____ NO X
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Common Stock, no par value |
LYTS |
NASDAQ Global Select Market |
As of April 30, 2019 there were 25,937,670 shares of the registrant's common stock, no par value per share, outstanding.
LSI INDUSTRIES INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2018
INDEX
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PART I. Financial Information |
Begins on Page |
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ITEM 1. |
Financial Statements (Unaudited) |
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Condensed Consolidated Statements of Operations |
3 |
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Condensed Consolidated Balance Sheets |
4 |
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| Condensed Consolidated Statements of Shareholders’ Equity | 6 | |||
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Condensed Consolidated Statements of Cash Flows |
7 |
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Notes to Condensed Consolidated Financial Statements |
8 |
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ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
19 |
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ITEM 3. |
Quantitative and Qualitative Disclosures About Market Risk |
27 |
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ITEM 4. |
Controls and Procedures |
27 |
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PART II. Other Information |
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ITEM 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
28 |
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ITEM 5. |
Other Information | 28 |
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ITEM 6. |
Exhibits |
28 |
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Signatures |
29 |
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“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995
This Form 10-Q contains certain forward-looking statements that are subject to numerous assumptions, risks or uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Forward-looking statements may be identified by words such as “estimates,” “anticipates,” “targets,” “hopes,” “projects,” “plans,” “expects,” “intends,” “believes,” “seeks,” “may,” “will,” “see,” “should” and similar expressions and the negative versions of those words, 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. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to differ materially from those expressed or implied. Forward-looking statements include statements that address activities, events or developments that LSI expects, believes or anticipates will or may occur in the future, such as earnings estimates (including projections and guidance), other predictions of financial performance. Forward-looking statements are based on LSI’s experience and perception of current conditions, trends, expected future developments and other factors it believes are appropriate under the circumstances and are subject to numerous risks and uncertainties, many of which are beyond LSI’s control. These risks and uncertainties include, but are not limited to the following: the impact of competitive products and services; product and pricing demands, and market acceptance risks; potential costs associated with litigation and regulatory compliance; LSI’s ability to develop, produce and market quality products that meet customers’ needs; additional restructuring costs or a failure to realize anticipated savings or benefits from past or future cost reduction actions; failure to realize all of the anticipated benefits from initiatives to increase our productivity, efficiency and cash flow and to reduce costs; inventory management decisions and sourcing practices; compliance with financial and other restrictive covenants in debt agreements; information technology security threats and computer crime; 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; failure of an acquisition or acquired company to achieve its plans or objectives generally; unexpected difficulties in integrating acquired businesses; the ability to retain key employees, including key employees of acquired businesses; unfavorable economic and market conditions; the results of asset impairment assessments; the ability to maintain an effective system of internal control over financial reporting; the ability to remediate any material weakness in internal control over financial reporting; and the other risk factors LSI describes from time to time in SEC filings, such as reliance on third party manufacturers and suppliers, litigation or other proceedings, government regulation, and stock price volatility. You are cautioned to not place undue reliance on these forward-looking statements. LSI does not guarantee any forward-looking statement, and actual results may differ materially from those projected. In addition to the factors described in this paragraph, the risk factors identified in our Form 10-K and other filings LSI may make with the SEC constitute risks and uncertainties that may affect the financial performance of the Company and are incorporated herein by reference. LSI does not undertake and hereby disclaims any duty to update any forward-looking statements to reflect subsequent events or circumstances.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
Nine Months Ended |
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March 31 |
March 31 |
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(In thousands, except per share data) |
2019 |
2018 |
2019 |
2018 |
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Net sales |
$ | 72,832 | $ | 78,843 | $ | 247,330 | $ | 258,614 | ||||||||
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Cost of products and services sold |
57,180 | 58,925 | 190,207 | 189,686 | ||||||||||||
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Restructuring costs |
261 | -- | 792 | -- | ||||||||||||
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Severance costs |
54 | -- | 77 | -- | ||||||||||||
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Gross profit |
15,337 | 19,918 | 56,254 | 68,928 | ||||||||||||
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Selling and administrative expenses |
17,515 | 19,175 | 54,990 | 60,452 | ||||||||||||
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Impairment of goodwill |
-- | -- | 20,165 | 28,000 | ||||||||||||
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Severance (gain) costs |
(12 |
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-- | 457 | -- | |||||||||||
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Transition and realignment costs |
-- | -- | 120 | -- | ||||||||||||
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Restructuring costs |
107 | -- | 132 | -- | ||||||||||||
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Operating (loss) income |
(2,273 |
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743 | (19,610 |
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(19,524 |
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Interest (income) |
(6 |
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(8 |
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(37 |
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(24 |
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Interest expense |
585 | 408 | 1,749 | 1,244 | ||||||||||||
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Other expense |
183 | -- | 183 | -- | ||||||||||||
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(Loss) income before income taxes |
(3,035 |
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343 | (21,505 |
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(20,744 |
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Income tax expense (benefit) |
133 | 123 | (4,304 |
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(3,867 |
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Net (loss) income |
$ | (3,168 |
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$ | 220 | $ | (17,201 |
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$ | (16,877 |
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(Loss) Earnings per common share (see Note 4) |
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Basic |
$ | (0.12 |
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$ | 0.01 | $ | (0.66 |
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$ | (0.65 |
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Diluted |
$ | (0.12 |
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$ | 0.01 | $ | (0.66 |
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$ | (0.65 |
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Weighted average common shares outstanding |
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Basic |
26,132 | 25,875 | 26,083 | 25,835 | ||||||||||||
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Diluted |
26,132 | 26,437 | 26,083 | 25,835 | ||||||||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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(In thousands, except shares) |
March 31, |
June 30, |
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2019 |
2018 |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
$ | 1,686 | $ | 3,178 | ||||
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Accounts receivable, less allowance for doubtful accounts of $568 and $409, respectively |
52,137 | 50,609 | ||||||
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Inventories |
51,621 | 50,994 | ||||||
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Refundable income tax |
1,461 | 1,784 | ||||||
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Other current assets |
4,155 | 3,516 | ||||||
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Total current assets |
111,060 | 110,081 | ||||||
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Property, Plant and Equipment, at cost |
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Land |
6,770 | 6,470 | ||||||
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Buildings |
35,618 | 35,961 | ||||||
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Machinery and equipment |
76,677 | 77,108 | ||||||
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Construction in progress |
1,311 | 1,340 | ||||||
| 120,376 | 120,879 | |||||||
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Less accumulated depreciation |
(80,258 |
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(77,176 |
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Net property, plant and equipment |
40,118 | 43,703 | ||||||
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Goodwill |
10,373 | 30,538 | ||||||
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Other Intangible Assets, net |
33,337 | 35,409 | ||||||
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Other Long-Term Assets, net |
13,807 | 9,786 | ||||||
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Total assets |
$ | 208,695 | $ | 229,517 | ||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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March 31, |
June 30, |
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(In thousands, except shares) |
2019 |
2018 |
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LIABILITIES & SHAREHOLDERS’ EQUITY |
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Current Liabilities |
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Accounts payable |
$ | 20,631 | $ | 17,927 | ||||
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Accrued expenses |
22,169 | 24,272 | ||||||
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Total current liabilities |
42,800 | 42,199 | ||||||
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Long-Term Debt |
43,812 | 45,360 | ||||||
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Other Long-Term Liabilities |
1,844 | 2,707 | ||||||
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Commitments and Contingencies (Note 11) |
-- | -- | ||||||
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Shareholders’ Equity |
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Preferred shares, without par value; Authorized 1,000,000 shares, none issued |
-- | -- | ||||||
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Common shares, without par value; Authorized 40,000,000 shares; Outstanding 25,894,306 and 25,641,913 shares, respectively |
125,577 | 124,104 | ||||||
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Treasury shares, without par value |
(1,629 |
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(2,110 |
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Deferred compensation plan |
1,659 | 2,133 | ||||||
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Retained (loss) earnings |
(5,368 |
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15,124 | |||||
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Total shareholders’ equity |
120,239 | 139,251 | ||||||
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Total liabilities & shareholders’ equity |
$ | 208,695 | $ | 229,517 | ||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(In thousands, except per share data)
| Common Shares | Treasury Shares |
Deferred Compensation |
Retained |
Total |
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Number of Shares |
Amount |
Number of Shares |
Amount |
Plan Amount |
(Loss) Earnings |
Shareholders' Equity |
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Balance at June 30, 2017 |
25,687 | $ | 120,059 | (258 |
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$ | (2,457 |
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$ | 2,657 | $ | 39,819 | $ | 160,078 | ||||||||||||||
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Net (loss) |
— | — | — | — | — | (16,877 |
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(16,877 |
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Stock compensation awards |
31 | 234 | — | — | — | — | 234 | |||||||||||||||||||||
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Restricted stock units issued |
39 | — | — | — | — | — | — | |||||||||||||||||||||
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Shares issued for deferred compensation |
54 | 354 | — | — | — | — | 354 | |||||||||||||||||||||
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Activity of treasury shares, net |
— | — | 28 | 412 | — | — | 412 | |||||||||||||||||||||
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Deferred stock compensation |
— | — | — | — | (543 |
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— | (543 |
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Stock-based compensation expense |
— | 1,754 | — | — | — | — | 1,754 | |||||||||||||||||||||
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Stock options exercised, net |
43 | 262 | — | — | — | — | 262 | |||||||||||||||||||||
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Dividends — $0.20 per share |
— | — | — | — | — | (3,845 |
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(3,845 |
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Balance at March 31, 2018 |
25,854 | $ | 122,663 | (230 |
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$ | (2,045 |
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$ | 2,114 | $ | 19,097 | $ | 141,829 | ||||||||||||||
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Balance at June 30, 2018 |
25,884 | $ | 124,104 | (242 |
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$ | (2,110 |
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$ | 2,133 | $ | 15,124 | $ | 139,251 | ||||||||||||||
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Net (loss) |
— | — | — | — | — | (17,201 |
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(17,201 |
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Stock compensation awards |
70 | 265 | — | — | — | — | 265 | |||||||||||||||||||||
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Restricted stock units issued |
98 | — | — | — | — | — | — | |||||||||||||||||||||
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Shares issued for deferred compensation |
65 | 257 | — | — | — | — | 257 | |||||||||||||||||||||
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Activity of treasury shares, net |
— | — | 19 | 481 | — | — | 481 | |||||||||||||||||||||
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Deferred stock compensation |
— | — | — | — | (474 |
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— | (474 |
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Stock-based compensation expense |
— | 951 | — | — | — | — | 951 | |||||||||||||||||||||
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Dividends — $0.20 per share |
— | — | — | — | — | (3,882 |
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(3,882 |
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| Cumulative effect of adoption of accounting guidance (Note 2) | — | — | — | — | — | 591 | 591 | |||||||||||||||||||||
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Balance at March 31, 2019 |
26,117 | $ | 125,577 | (223 |
) |
$ | (1,629 |
) |
$ | 1,659 | $ | (5,368 |
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$ | 120,239 | |||||||||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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(In thousands) |
Nine Months Ended |
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March 31 |
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2019 |
2018 |
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Cash Flows from Operating Activities |
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Net (loss) |
$ | (17,201 |
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$ | (16,877 |
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Non-cash items included in net income |
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Depreciation and amortization |
7,787 | 7,640 | ||||||
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Deferred income taxes |
(4,077 |
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(5,650 |
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Impairment of goodwill |
20,165 | 28,000 | ||||||
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Deferred compensation plan |
264 | 332 | ||||||
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Stock compensation expense |
951 | 1,754 | ||||||
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Issuance of common shares as compensation |
265 | 234 | ||||||
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Gain on disposition of fixed assets |
(22 |
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(28 |
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Allowance for doubtful accounts |
505 | 144 | ||||||
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Inventory obsolescence reserve |
2,574 | 1,762 | ||||||
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Changes in certain assets and liabilities: |
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Accounts receivable |
2,902 | (793 |
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Inventories |
(7,368 |
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(3,441 |
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Refundable income taxes |
323 | 435 | ||||||
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Accounts payable |
2,705 | (3,077 |
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Accrued expenses and other |
(4,373 |
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(3,121 |
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Customer prepayments |
985 | 575 | ||||||
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Net cash flows provided by operating activities |
6,385 | 7,889 | ||||||
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Cash Flows from Investing Activities |
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Purchases of property, plant and equipment |
(2,348 |
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(2,178 |
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Proceeds from sale of fixed assets |
-- | 1,526 | ||||||
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Net cash (used in) investing activities |
(2,348 |
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(652 |
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Cash Flows from Financing Activities |
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Payments of long-term debt |
(89,489 |
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(77,817 |
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Borrowings of long-term debt |
87,941 | 73,408 | ||||||
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Cash dividends paid |
(3,882 |
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(3,845 |
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Exercise of stock options |
-- | 262 | ||||||
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Purchase of treasury shares |
-- | (107 |
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Shares withheld for employee taxes |
(99 |
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(122 |
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Net cash (used in) financing activities |
(5,529 |
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(8,221 |
) |
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Decrease in cash and cash equivalents |
(1,492 |
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(984 |
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Cash and cash equivalents at beginning of period |
3,178 | 3,039 | ||||||
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Cash and cash equivalents at end of period |
$ | 1,686 | $ | 2,055 | ||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
LSI INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The interim condensed consolidated financial statements are unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the interim financial statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of March 31, 2019 the results of its operations for the three and nine month periods ended March 31, 2019 and 2018, and its cash flows for the nine month periods ended March 31, 2019 and 2018. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2018 Annual Report on Form 10-K. Financial information as of June 30, 2018 has been derived from the Company’s audited consolidated financial statements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation:
A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2018 Annual Report on Form 10-K. Significant changes to our accounting policies as a result of adopting ASU-2014-09 “Revenue from Contracts with Customers” (Topic 606) are discussed below.
Revenue Recognition:
The Company recognizes revenue when it satisfies the performance obligation in its customer contracts or purchase orders. Most of the Company’s products have a single performance obligation which is satisfied at a point in time when control is transferred to the customer. Control is generally transferred at time of shipment when title and risk of ownership passes to the customer. For customer contracts with multiple performance obligations, the Company allocates the transaction price and any discounts to each performance obligation based on relative standalone selling prices. Payment terms are typically within 30 to 90 days from the shipping date, depending on our terms with the customer. The Company offers standard warranties that do not represent separate performance obligations.
Installation is a separate performance obligation, except for our digital signage products. For digital signage products, installation is not a separate performance obligation as the product and installation is the combined item promised in digital signage contracts. The Company is not always responsible for installation of products it sells and has no post-installation responsibilities other than standard warranties.
A number of the Company's products are highly customized. As a result, these customized products do not have an alternative use. For these products, the Company has a legal right to payment for performance to date and generally does not accept returns on these items. The measurement of performance is based upon cost plus a reasonable profit margin for work completed. Because there is no alternative use and there is a legal right to payment, the Company transfers control of the item as the item is being produced and therefore, recognizes revenue over time. The customized product types are as follows:
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Customer specific branded print graphics |
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Electrical components based on customer specifications |
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Digital signage and related media content |
The Company also offers installation services. Installation revenue is recognized over time as our customer simultaneously receives and consumes the benefits provided through the installation process.
For these customized products and installation services, revenue is recognized using a cost-based input method: recognizing revenue and gross profit as work is performed based on the relationship between the actual cost incurred and the total estimated cost for the contract.
Disaggregation of Revenue
The Company disaggregates the revenue from contracts with customers by the timing of revenue recognition because the Company believes it best depicts the nature, amount, and timing of our revenue and cash flows. The table presents a reconciliation of the disaggregation by reportable segments.
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Three Months Ended |
Nine Months Ended |
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(In thousands) |
March 31, 2019 |
March 31, 2019 |
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Lighting Segment |
Graphics Segment |
Lighting Segment |
Graphics Segment |
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Timing of revenue recognition |
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Products and services transferred at a point in time |
$ | 46,364 | $ | 10,339 | $ | 157,931 | $ | 42,790 | ||||||||
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Products and services transferred over time |
6,421 | 9,708 | 19,940 | 26,669 | ||||||||||||
| $ | 52,785 | $ | 20,047 | $ | 177,871 | $ | 69,459 | |||||||||
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Type of Product and Services |
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Current technology products |
$ | 46,195 | $ | 4,427 | $ | 153,771 | $ | 9,178 | ||||||||
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Legacy products |
6,133 | 11,160 | 22,156 | 45,346 | ||||||||||||
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Turnkey services and other |
457 | 4,460 | 1,944 | 14,935 | ||||||||||||
| $ | 52,785 | $ | 20,047 | $ | 177,871 | $ | 69,459 | |||||||||
New technology products include LED lighting and controls, electronic circuit boards, and digital signage solutions. Legacy products include lighting fixtures utilizing light sources other than LED technology and printed two and three dimensional graphic products. Turnkey services and other includes installation services along with shipping and handling charges.
Practical Expedients and Exemptions
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The Company’s contracts with customers have an expected duration of one year or less, as such the Company applies the practical expedient to expense sales commissions as incurred, and have omitted disclosures on the amount of remaining performance obligations. |
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Shipping costs that are not material in context of the delivery of products are expensed as incurred. |
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The Company’s accounts receivable balance represents the Company’s unconditional right to receive payment from its customers with contracts. Payments are generally due within 30 to 90 days of completion of the performance obligation and invoicing, therefore, payments do not contain significant financing components. |
|
● |
The Company collects sales tax and other taxes concurrent with revenue-producing activities which are excluded from revenue. Shipping and handling costs are treated as fulfillment activities and included in cost of products and services sold on the Consolidated Statements of Operations. |
Foreign Exchange:
Assets and liabilities of foreign operations are translated using period end exchange rates. Revenue and expenses are translated using average exchange rates during each period reported.
New Accounting Pronouncements:
On July 1, 2018, the Company adopted ASU 2014-09. “Revenue from Contracts with Customers,” (Topic 606) using the modified retrospective adoption method which requires a cumulative effect adjustment to the opening balance of retained earnings. This approach was applied to contracts that were not completed as of June 30, 2018. Results for reporting periods beginning July 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The Company recorded a net increase to beginning retained earnings of $591,000 on July 1, 2018 due to the cumulative impact of adopting Topic 606, as described below.
|
(In thousands) |
Balance as of June 30, 2018 |
Adjustments |
Opening Balance as of July 1, 2018 |
|||||||||
|
Assets: |
||||||||||||
|
Accounts receivable, net |
$ | 50,609 | $ | 4,935 | $ | 55,544 | ||||||
|
Inventories, net |
$ | 50,994 | $ | (4,167 |
) |
$ | 46,827 | |||||
|
Other long-term assets, net |
$ | 9,786 | $ | (177 |
) |
$ | 9,609 | |||||
|
Shareholders' Equity: |
||||||||||||
|
Retained earnings |
$ | 15,124 | $ | 591 | $ | 15,715 | ||||||
In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases.” The amended guidance requires an entity to recognize assets and liabilities that arise from leases. The amended guidance is effective for financial statements issued for fiscal 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 an implementation team tasked with reviewing our lease obligations and determining the impact of the new standard to its financial statements. The Company will continue to evaluate the new standard’s impact to its financial statements.
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 other than noted below.
In April 2019, the Company announced that it entered into a definitive agreement to sell its manufacturing facility in New Windsor, New York. Under the terms of the agreement, the Company will receive approximately $12 million of gross proceeds related to the sale and expects to report a gain between $3 million to $5.5 million. The transaction is expected to close on or before June 30, 2019 subject to the final approval from the New Windsor town officials.
On April 9, 2019, Howard E. Japlon, Executive Vice President, Human Resources & General Counsel of LSI, notified LSI of his resignation from his position with LSI to pursue opportunities in the Chicago, Illinois area. Also, effective April 12, 2019 Jeffrey Croskey, Chief Commercial Officer, resigned from his position with LSI to pursue other opportunities.
Reclassifications:
Certain prior year amounts have been reclassified to conform to the current year presentation within the cash flows from operating activities section and cash flows from financing activities section of the statement of cash flows. These reclassifications have no impact on net income or earnings per share.
NOTE 3 - SEGMENT REPORTING INFORMATION
The accounting guidance on Segment Reporting establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (the Company’s Chief Executive Officer or “CODM”) in making decisions on how to allocate resources and assess performance. The Company’s two operating segments are Lighting and Graphics, with one executive team under the organizational structure reporting directly to the CODM with responsibilities for managing each segment. Corporate and Eliminations, which captures the Company’s corporate administrative activities, is also reported in the segment information.
The Lighting Segment includes outdoor and indoor lighting utilizing both traditional and LED light sources that have been fabricated and assembled for the Company’s markets, primarily petroleum / convenience stores, automotive dealerships, quick-service restaurants, grocery and pharmacy store, and retail/national accounts. The Company also services lighting product customers through the commercial industrial, stock and flow, and renovation channels. The Lighting Segment also includes the design, engineering, and manufacturing of electronic circuit boards, assemblies and sub-assemblies used to manufacture certain LED light fixtures and sold directly to customers.
The Graphics Segment designs, manufactures and installs exterior and interior visual image elements such as traditional graphics, interior branding, electrical and architectural signage, active digital signage along with the management of media content related to digital signage, LED video screens, and menu board systems that are either digital or traditional by design. These products are used in visual image programs in several markets including, but not limited to the petroleum / convenience store market, multi-site retail operations, banking, and restaurants. The Graphics Segment implements, installs and provides program management services related to products sold by the Graphics Segment and by the Lighting Segment.
The Company’s corporate administration activities are reported in the Corporate and Eliminations line item. These activities primarily include intercompany profit in inventory eliminations, expense related to certain corporate officers and support staff, the Company’s internal audit staff, expense related to the Company’s Board of Directors, equity compensation expense for various equity awards granted to corporate administration employees, certain consulting expenses, investor relations activities, and a portion of the Company’s legal, auditing and professional fee expenses. Corporate identifiable assets primarily consist of cash, invested cash (if any), refundable income taxes (if any), and deferred income taxes.
There was no concentration of consolidated net sales in the three and nine months ended March 31, 2019 and 2018. There was no concentration of accounts receivable at March 31, 2019 or June 30, 2018.
Summarized financial information for the Company’s operating segments is provided for the indicated periods and as of March 31, 2019 and March 31, 2018:
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
(In thousands) |
March 31 |
March 31 |
||||||||||||||
|
2019 |
2018 |
2019 |
2018 |
|||||||||||||
|
Net Sales: |
||||||||||||||||
|
Lighting Segment |
$ | 52,785 | $ | 61,554 | $ | 177,871 | $ | 199,156 | ||||||||
|
Graphics Segment |
20,047 | 17,289 | 69,459 | 59,458 | ||||||||||||
| $ | 72,832 | $ | 78,843 | $ | 247,330 | $ | 258,614 | |||||||||
|
Operating (Loss) Income: |
||||||||||||||||
|
Lighting Segment |
$ | 691 | $ | 2,982 | $ | (13,911 |
) |
$ | (14,673 |
) |
||||||
|
Graphics Segment |
(898 |
) |
415 | 2,350 | 4,146 | |||||||||||
|
Corporate and Eliminations |
(2,066 |
) |
(2,654 |
) |
(8,049 |
) |
(8,997 |
) |
||||||||
| $ | (2,273 |
) |
$ | 743 | $ | (19,610 |
) |
$ | (19,524 |
) |
||||||
|
Capital Expenditures: |
||||||||||||||||
|
Lighting Segment |
$ | 769 | $ | 671 | $ | 1,633 | $ | 1,431 | ||||||||
|
Graphics Segment |
-- | 300 | 515 | 639 | ||||||||||||
|
Corporate and Eliminations |
-- | 17 | 200 | 108 | ||||||||||||
| $ | 769 | $ | 988 | $ | 2,348 | $ | 2,178 | |||||||||
|
Depreciation and Amortization: |
||||||||||||||||
|
Lighting Segment |
$ | 1,925 | $ | 1,865 | $ | 5,867 | $ | 5,651 | ||||||||
|
Graphics Segment |
391 | 378 | 1,183 | 1,141 | ||||||||||||
|
Corporate and Eliminations |
236 | 273 | 737 | 848 | ||||||||||||
| $ | 2,552 | $ | 2,516 | $ | 7,787 | $ | 7,640 | |||||||||
|
March 31, 2019 |
June 30, 2018 |
|||||||
|
Identifiable Assets: |
||||||||
|
Lighting Segment |
$ | 143,729 | $ | 172,799 | ||||
|
Graphics Segment |
43,674 | 39,881 | ||||||
|
Corporate and Eliminations |
21,292 | 16,837 | ||||||
| $ | 208,695 | $ | 229,517 | |||||
The segment net sales reported above represent sales to external customers. Segment operating income, which is used in management’s evaluation of segment performance, represents net sales less all operating expenses. Identifiable assets are those assets used by each segment in its operations.
The Company records a 10% mark-up on intersegment revenues. Any intersegment profit in inventory is eliminated in consolidation. Intersegment revenues were eliminated in consolidation as follows:
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
March 31 |
March 31 |
|||||||||||||||
|
(In thousands) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
|
Lighting Segment inter-segment net sales |
$ | 479 | $ | 443 | $ | 1,758 | $ | 2,150 | ||||||||
|
Graphics Segment inter-segment net sales |
$ | 96 | $ | 133 | $ | 171 | $ | 1,204 | ||||||||
The Company’s operations are located solely within North America. As a result, the geographic distribution of the Company’s net sales and long-lived assets originate within North America.
NOTE 4 - EARNINGS PER COMMON SHARE
The following table presents the amounts used to compute basic and diluted earnings per common share, as well as the effect of dilutive potential common shares on weighted average shares outstanding (in thousands, except per share data):
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
March 31 |
March 31 |
|||||||||||||||
|
2019 |
2018 |
2019 |
2018 |
|||||||||||||
|
BASIC EARNINGS PER SHARE |
||||||||||||||||
|
Net (loss) income |
$ | (3,168 |
) |
$ | 220 | $ | (17,201 |
) |
$ | (16,877 |
) |
|||||
|
Weighted average shares outstanding during the period, net of treasury shares (a) |
25,893 | 25,581 | 25,828 | 25,546 | ||||||||||||
|
Weighted average vested restricted stock units outstanding |
33 | 49 | 40 | 44 | ||||||||||||
|
Weighted average shares outstanding in the Deferred Compensation Plan during the period |
206 | 245 | 215 | 245 | ||||||||||||
|
Weighted average shares outstanding |
26,132 | 25,875 | 26,083 | 25,835 | ||||||||||||
|
Basic (loss) earnings per share |
$ | (0.12 |
) |
$ | 0.01 | $ | (0.66 |
) |
$ | (0.65 |
) |
|||||
|
DILUTED EARNINGS PER SHARE |
||||||||||||||||
|
Net (loss) income |
$ | (3,168 |
) |
$ | 220 | $ | (17,201 |
) |
$ | (16,877 |
) |
|||||
|
Weighted average shares outstanding |
||||||||||||||||
|
Basic |
26,132 | 25,875 | 26,083 | 25,835 | ||||||||||||
| Effect of dilutive securities (b): | ||||||||||||||||
|
Impact of common shares to be issued under stock option plans, and contingently issuable shares, if any |
-- | 562 | -- | -- | ||||||||||||
|
Weighted average shares outstanding (c) |
26,132 | 26,437 | 26,083 | 25,835 | ||||||||||||
|
Diluted (loss) earnings per share |
$ | (0.12 |
) |
$ | 0.01 | $ | (0.66 |
) |
$ | (0.65 |
) |
|||||
|
(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 3,787,519 common shares and 1,945,348 common shares for the three months ended March 31, 2019 and 2018, respectively, were not included in the computation of the three month diluted loss per share because the exercise price was greater than the average fair market value of the common shares. Additionally, options to purchase 3,702,031 common shares and 3,086,121 common shares for the nine months ended at March 31, 2019 and 2018, respectively, were not included in the computation of the nine month diluted loss per share because the exercise price was greater than the average fair market value of the common shares. For the three months ended in March 31, 2019 and the nine months ended March 31, 2019 and 2018, the effect of dilutive securities was not included in the calculation of diluted loss per share because there was a net loss for the period. |
NOTE 5 - INVENTORIES
The following information is provided as of the dates indicated:
|
March 31, |
June 30, |
|||||||
|
(In thousands) |
2019 |
2018 |
||||||
|
Inventories: |
||||||||
|
Raw materials |
$ | 32,669 | $ | 31,795 | ||||
|
Work-in-process |
2,363 | 3,833 | ||||||
|
Finished goods |
16,589 | 15,366 | ||||||
|
Total Inventories |
$ | 51,621 | $ | 50,994 | ||||
NOTE 6 - ACCRUED EXPENSES
The following information is provided as of the dates indicated:
|
March 31, |
June 30, |
|||||||
|
(In thousands) |
2019 |
2018 |
||||||
|
Accrued Expenses: |
||||||||
|
Compensation and benefits |
$ | 4,756 | $ | 9,394 | ||||
|
Customer prepayments |
2,055 | 1,070 | ||||||
|
Accrued sales commissions |
2,176 | 2,274 | ||||||
|
Accrued warranty |
7,372 | 6,876 | ||||||
|
Other accrued expenses |
5,810 | 4,658 | ||||||
|
Total Accrued Expenses |
$ | 22,169 | $ | 24,272 | ||||
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment. The Company may first assess qualitative factors in order to determine if goodwill and indefinite-lived intangible assets are impaired. If through the qualitative assessment it is determined that it is more likely than not that goodwill and indefinite-lived assets are not impaired, no further testing is required. If it is determined more likely than not that goodwill and indefinite-lived assets are impaired, or if the Company elects not to first assess qualitative factors, the Company’s impairment testing continues with the estimation of the fair value of the reporting unit using a combination of a market approach and an income (discounted cash flow) approach, at the reporting unit level. The estimation of the fair value of reporting unit requires significant management judgment with respect to revenue and expense growth rates, changes in working capital and the selection and use of an appropriate discount rate. The estimates of the fair value of reporting units are based on the best information available as of the date of the assessment. The fair value measurements of the reporting units are based on significant inputs not observable in the market and thus represent Level 3 measurements as defined by ASC 820 “Fair Value Measurements.” The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease an impairment charge. Company management uses its judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as adverse business conditions, economic factors and technological change or competitive activities may signal that an asset has become impaired.
A sustained and significant decline in the Company’s stock price in the second quarter of fiscal 2019 led management to believe that a triggering event occurred and that an interim goodwill impairment test was required for one of the reporting units in the Lighting Segment that contains goodwill, as of December 31, 2018. In accordance with ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which was adopted in a prior period, the requirement to perform step 2 in the impairment test was not required. The result of the impairment test on the reporting unit in the Lighting Segment indicated that goodwill was impaired by $20,165,000. The Company will continue to monitor market conditions and other events that may result in a sustained and significant drop in its stock price which would require an interim goodwill impairment test.
The Company identified its reporting units in conjunction with its annual goodwill impairment testing. The Company has two reporting units that contain goodwill. There is one reporting unit within the Lighting Segment and one reporting unit within the Graphics Segment. The Company relies upon a number of factors, judgments and estimates when conducting its impairment testing including, but not limited to, the Company’s stock price, operating results, forecasts, anticipated future cash flows and marketplace data. There are inherent uncertainties related to these factors and judgments in applying them to the analysis of goodwill impairment.
As of March 1, 2019, the Company performed its annual goodwill impairment test on the two reporting units that contain goodwill. The preliminary goodwill impairment test on one reporting unit in the Lighting Segment passed with a business enterprise value that was $38.9 million or 54% above the carrying value of this reporting unit including goodwill. The preliminary goodwill impairment test of the reporting unit with goodwill in the Graphics Segment passed with an estimated business enterprise value that was $3.0 million or 297% above the carrying value of the reporting unit including goodwill. The definitive impairment test is expected to be completed in the fourth quarter of fiscal 2019. It is anticipated that the results of the test will not change when the test is complete.
The following table presents information about the Company's goodwill on the dates or for the periods indicated:
|
Goodwill |
||||||||||||
|
(In thousands) |
Lighting |
Graphics |
||||||||||
|
Segment |
Segment |
Total |
||||||||||
|
Balance as of June 30, 2018 |
||||||||||||
|
Goodwill |
$ | 94,564 | $ | 28,690 | $ | 123,254 | ||||||
|
Accumulated impairment losses |
(65,191 |
) |
(27,525 |
) |
(92,716 |
) |
||||||
|
Goodwill, net as of June 30, 2018 |
$ | 29,373 | $ | 1,165 | $ | 30,538 | ||||||
|
Goodwill Impairment |
$ | (20,165 |
) |
$ | -- | $ | (20,165 | ) | ||||
|
Balance as of March 31, 2019 |
||||||||||||
|
Goodwill |
$ | 94,564 | $ | 28,690 | $ | 123,254 | ||||||
|
Accumulated impairment losses |
(85,356 |
) |
(27,525 |
) |
(112,881 |
) |
||||||
|
Goodwill, net as of March 31, 2019 |
$ | 9,208 | $ | 1,165 | $ | 10,373 | ||||||
The Company performed its annual review of indefinite-lived intangible assets as of March 1, 2019 and determined there was no impairment. The preliminary indefinite-lived intangible impairment test passed with a fair market value that was $19.2 million or 462% above its carrying value. The definitive indefinite-lived impairment test is expected to be completed in the fourth quarter of fiscal 2019. It is anticipated that the results of the test will not change when the test is complete.
The following table presents the gross carrying amount and accumulated amortization by each major asset class:
|
March 31, 2019 |
||||||||||||
|
Other Intangible Assets |
Gross |
|||||||||||
|
(In thousands) |
Carrying |
Accumulated |
Net |
|||||||||
|
Amount |
Amortization |
Amount |
||||||||||
|
Amortized Intangible Assets |
||||||||||||
|
Customer relationships |
$ | 35,563 | $ | 11,556 | $ | 24,007 | ||||||
|
Patents |
338 | 239 | 99 | |||||||||
|
LED technology firmware, software |
16,066 | 12,223 | 3,843 | |||||||||
|
Trade name |
2,658 | 692 | 1,966 | |||||||||
|
Total Amortized Intangible Assets |
54,625 | 24,710 | 29,915 | |||||||||
|
Indefinite-lived Intangible Assets |
||||||||||||
|
Trademarks and trade names |
3,422 | -- | 3,422 | |||||||||
|
Total Indefinite-lived Intangible Assets |
3,422 | -- | 3,422 | |||||||||
|
Total Other Intangible Assets |
$ | 58,047 | $ | 24,710 | $ | 33,337 | ||||||
|
|
|
June 30, 2018 |
|
|||||||||
|
Other Intangible Assets |
|
Gross |
|
|
|
|
|
|
|
|||
|
(In thousands) |
|
Carrying |
|
|
Accumulated |
|
|
Net |
|
|||
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
||||
|
Amortized Intangible Assets |
|
|
|
|
|
|
|
|
|
|||
|
Customer relationships |
|
$ |
35,563 |
|
|
$ |
10,011 |
$ |
25,552 |
|
||
|
Patents |
|
|
338 |
|
|
|
217 |
121 |
|
|||
|
LED technology firmware, software |
|
|
16,066 |
|
|
|
11,801 |
4,265 |
|
|||
|
Trade name |
|
|
2,658 |
|
|
|
609 |
2,049 |
|
|||
|
Total Amortized Intangible Assets |
|
|
54,625 |
|
|
|
22,638 |
31,987 |
|
|||
|
|
|
|
|
|
|
|
||||||
|
Indefinite-lived Intangible Assets |
|
|
|
|
|
|
||||||
|
Trademarks and trade names |
|
|
3,422 |
|
|
|
-- |
3,422 |
|
|||
|
Total Indefinite-lived Intangible Assets |
|
|
3,422 |
|
|
|
-- |
3,422 |
|
|||
|
|
|
|
|
|
|
|
||||||
|
Total Other Intangible Assets |
|
$ |
58,047 |
|
|
$ |
22,638 |
$ |
35,409 |
|
||
Amortization expense (in thousands) for intangible assets was $691 and $691 for the three months ended March 31, 2019 and 2018, respectively, and $2,071 and $2,071 for the nine months ended March 31, 2019 and 2018, respectively. Future amortization expense (in thousands) associated with these intangible assets is expected to be $2,761 in 2019, $2,687 in 2020, $2,682 in 2021, $2,460 in 2022, $2,412 in 2023, and $18,985 after 2023.
NOTE 8 - REVOLVING LINE OF CREDIT
In February 2019, the Company amended its secured line of credit to a $75 million facility from a $100 million facility in order to better match its financing needs with an appropriate borrowing capacity. The line of credit expires in the third quarter of fiscal 2022. Interest on the revolving line of credit is charged based upon an increment over the LIBOR rate as periodically determined, or at the bank’s base lending rate, at the Company’s option. The increment over the LIBOR borrowing rate, as periodically determined, fluctuates between 125 and 250 basis points depending upon the ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA”), as defined in the line of credit agreement. The increment over LIBOR borrowing rate will be 200 basis points for the fourth quarter of fiscal 2019. The fee on the unused balance of the $75 million committed line of credit is 20 basis points. Under the terms of this line of credit, the Company has agreed to a negative pledge of real estate assets and is required to comply with financial covenants that limit the ratio of indebtedness to EBITDA and require a minimum fixed charge coverage ratio. As of March 31, 2019, there was $43.8 million borrowed against the line of credit, and $31.2 million was available as of that date. Based on the terms of the line of credit and the maturity date, the debt has been classified as long term.
The Company is in compliance with all of its loan covenants as of March 31, 2019.
NOTE 9 - CASH DIVIDENDS
The Company paid cash dividends of $3,882,000 and $3,845,000 in the nine months ended March 31, 2019 and 2018, respectively. Dividends on restricted stock units in the amount of $40,798 and $44,946 were accrued as of March 31, 2019 and 2018, respectively. These dividends will be paid upon the vesting of the restricted stock units when shares are issued to the award recipients. In April 2019, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable May 14, 2019 to shareholders of record as of May 6, 2019. The indicated annual cash dividend rate is $0.20 per share.
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
|
(In thousands) |
Nine Months Ended March 31 |
|||||||
|
2019 |
2018 |
|||||||
|
Cash payments: |
||||||||
|
Interest |
$ | 1,669 | $ | 1,213 | ||||
|
Income taxes |
$ | 3 | $ | 1,556 | ||||
|
Non-cash investing and finance activities: |
||||||||
|
Issuance of common shares as compensation |
$ | 265 | $ | 234 | ||||
|
Issuance of common shares to fund deferred compensation plan |
$ | 257 | $ | 354 | ||||
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company is party to various negotiations, customer bankruptcies, and legal proceedings arising in the normal course of business. The Company provides reserves for these matters when a loss is probable and reasonably estimable. The Company does not disclose a range of potential loss because the likelihood of such a loss is remote. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations, cash flows or liquidity.
The Company may occasionally issue a standby letter of credit in favor of third parties. As of March 31, 2019, there were no standby letter of credit agreements.
NOTE 12 – SEVERANCE COSTS
The Company recorded severance expense of $534,000 and $91,000 in the nine months ended March 31, 2019 and 2018, respectively. This severance expense was related to reductions in staffing not related to plant restructuring. See further discussion of restructuring expenses in Note 13.
The activity in the Company’s accrued severance liability is as follows for the periods indicated:
|
Nine |
Nine |
Fiscal |
||||||||||
|
Months Ended |
Months Ended |
Year Ended |
||||||||||
|
(In thousands) |
March 31, |
March 31, |
June 30, |
|||||||||
|
2019 |
2018 |
2018 |
||||||||||
|
Balance at beginning of the period |
$ | 1,772 | $ | 235 | $ | 235 | ||||||
|
Accrual of expense |
534 | 91 | 1,900 | |||||||||
|
Payments |
(956 |
) |
(312 |
) |
(363 |
) |
||||||
|
Adjustments |
-- | (14 |
) |
-- | ||||||||
|
Balance at end of the period |
$ | 1,350 | $ | -- | $ | 1,772 | ||||||
Of the total $1,350,000 severance reserve reported as of March 31, 2019, $644,000 has been classified as a current liability and will be paid out over the next twelve months. The remaining $706,000 has been classified as a long-term liability.
NOTE 13 – RESTRUCTURING COSTS
On October 29, 2018, the Company announced plans to close its lighting manufacturing facility in New Windsor, New York. The closure is part of ongoing actions to align the Company’s supply chain to more cost effectively serve the changing requirements of the lighting market. The Company will move production to its other existing facilities. The closure will allow the Company to improve utilization of existing manufacturing capacity and will generate annual savings of approximately $4.0 million. The Company will record an estimated range of restructuring costs of $0.2 million to $0.6 million mostly next quarter and up until the time the facility is ultimately sold. Further, the Company has announced that it entered into a definitive agreement to sell the New Windsor, New York manufacturing facility for approximately $12 million in the fourth quarter which is expected to generate a book gain. The transfer of production is expected to be completed by June 30, 2019. As of March 31, 2019, the Company has incurred restructuring costs of $769,000 related to the closure of the New Windsor facility. The Company also incurred $919,000 of expense to write-down inventory which is not included in the tables below.
In the first quarter of fiscal 2019, management approved the closure of its 12,000 square foot leased facility in Hawthorne, California. The facility was used as a warehouse and for light assembly of light fixtures. The Company has moved the light assembly to its Blue Ash, Ohio facility. The restructuring charges consist primarily of transportation costs to move inventory to Blue Ash, the impairment of equipment, costs to restore the leased facility, and severance benefits. As of March 31, 2019, the Company has incurred restructuring costs of $155,000 related to the closure of the Hawthorne facility. The Company also incurred $148,000 of expense to write-down inventory which is a re-valuation of the previous estimate and which is not included in the tables below.
The following table presents information about restructuring costs for the periods indicated:
|
Three |
Nine Months |
Three |
Nine Months |
|||||||||||||
|
Months Ended |
Ended |
Months Ended |
Ended |
|||||||||||||
|
(In thousands) |
March 31, |
March 31, |
March 31, |
March 31, |
||||||||||||
|
2019 |
2019 |
2018 |
2018 |
|||||||||||||
|
Severance and other termination benefits |
$ | 263 | $ | 484 | $ | -- | $ | -- | ||||||||
|
Facility repairs |
52 | 99 | -- | -- | ||||||||||||
|
Impairment of fixed assets and accelerated depreciation |
-- | 228 | -- | -- | ||||||||||||
|
Other restructuring costs |
53 | 113 | -- | -- | ||||||||||||
|
Total |
$ | 368 | $ | 924 | $ | -- | $ | -- | ||||||||
The following table presents restructuring costs incurred by line item in the consolidated statement of operations in which the costs are included:
|
Three Months Ended |
Nine Months Ended |
|||||||
|
(In thousands) |
March 31 |
March 31 |
||||||
|
2019 |
2019 |
|||||||
|
Cost of Goods Sold |
261 | 792 | ||||||
|
Operating Expenses |
107 | 132 | ||||||
|
Total |
368 | 924 | ||||||
Additionally, the above tables do not include expense of $1,067,000 recorded during the nine months ended March 31, 2019 related to the write-down of inventory included as cost of sales as part of facility closures.
The following table presents a roll forward of the beginning and ending liability balances related to the restructuring costs:
|
(In thousands) |
||||||||||||||||||||
|
Balance as of June 30, 2018 |
Restructuring Expense |
Payments |
Adjustments |
Balance as of March 31, 2019 |
||||||||||||||||
|
Severance and termination benefits |
$ | -- | $ | 484 | $ | (22 |
) |
$ | -- | $ | 462 | |||||||||
|
Facility Repairs |
-- | 99 | (62 |
) |
-- | 37 | ||||||||||||||
|
Other restructuring costs |
-- | 113 | (74 |
) |
-- | 39 | ||||||||||||||
|
Total |
$ | -- | $ | 696 | $ | (158 |
) |
$ | -- | $ | 538 | |||||||||
The above table does not include fixed asset impairment and accelerated depreciation expense of $228,000 recorded in the first nine months of fiscal 2019.
Refer to Note 12 for information regarding additional severance expenses that are not included in the restructuring costs identified in this footnote.
NOTE 14 – INCOME TAXES
The Company's effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year's taxable income as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions. The Company has announced that it has entered into a definitive agreement to sell its New Windsor, New York facility. The closing of the sale is expected in the fourth quarter and is expected to generate a gain. This gain will be offset by a capital loss carryforward resulting in a tax benefit. This event was part of the calculation of the estimated annual income tax rate.
In the second quarter of fiscal 2019, a deferred tax asset of $4.8 million was created as a result of the impairment of goodwill in the Lighting reporting unit. In the first quarter of fiscal 2018, a deferred tax asset of $10.7 million was created as a result of the impairment of goodwill in the Lighting reporting unit.
The Tax Cuts and Jobs Act (the “Act”) was signed into law in December 2017 and makes numerous changes to the Internal Revenue Code. Among other changes, the Act reduces the U.S. corporate income tax rate to 21% effective January 1, 2018. Because the Act became effective mid-way through the Company’s fiscal 2018 tax year, the Company had a U.S. statutory income tax rate of 34% in the first quarter of fiscal 2018, before the new tax law was enacted, and will have a 21% U.S statutory income tax rate for fiscal years 2019 and after.
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
March 31 |
March 31 |
|||||||||||||||
|
2019 |
2018 |
2019 |
2018 |
|||||||||||||
|
Reconciliation to effective tax rate: |
||||||||||||||||
|
Provision for income taxes at the anticipated annual tax rate |
(0.7 |
)% |
28.9 |
% |
13.6 | % | 28.9 |
% |
||||||||
|
Enactment of tax law changes |
-- | -- | -- | (22.8 |
) |
|||||||||||
|
Uncertain tax positions |
(0.1 |
) |
5.4 | 0.6 | 0.7 | |||||||||||
|
Difference between deferred and current tax rate related to the impairment of goodwill |
-- | -- | 6.7 | 12.3 | ||||||||||||
|
Other |
-- | -- | -- | -- | ||||||||||||
|
Tax impact related to share based compensation |
(3.6 |
) |
1.6 | (0.9 |
) |
(0.5 |
) |
|||||||||
|
Effective tax rate |
(4.4 |
)% |
35.9 |
% |
20.0 | % | 18.6 |
% |
||||||||
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company’s condensed consolidated financial statements, accompanying notes and the “Safe Harbor” Statement, each as appearing earlier in this report, should be referred to in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
Net Sales by Business Segment |
||||||||||||||||
|
(In thousands) |
Three Months Ended |
Nine Months Ended |
||||||||||||||
|
March 31 |
March 31 |
|||||||||||||||
|
2019 |
2018 |
2019 |
2018 |
|||||||||||||
|
Lighting Segment |
$ | 52,785 | $ | 61,554 | $ | 177,871 | $ | 199,156 | ||||||||
|
Graphics Segment |
20,047 | 17,289 | 69,459 | 59,458 | ||||||||||||
| $ | 72,832 | $ | 78,843 | $ | 247,330 | $ | 258,614 | |||||||||
|
Operating Income (Loss) by Business Segment |
||||||||||||||||
|
(In thousands) |
Three Months Ended |
Nine Months Ended |
||||||||||||||
|
March 31 |
March 31 |
|||||||||||||||
|
2019 |
2018 |
2019 |
2018 |
|||||||||||||
|
Lighting Segment |
$ | 691 | $ | 2,982 | $ | (13,911 |
) |
$ | (14,673 |
) |
||||||
|
Graphics Segment |
(898 |
) |
415 | 2,350 | 4,146 | |||||||||||
|
Corporate and Eliminations |
(2,066 |
) |
(2,654 |
) |
(8,049 |
) |
(8,997 |
) |
||||||||
| $ | (2,273 |
) |
$ | 743 | $ | (19,610 |
) |
$ | (19,524 |
) |
||||||
Summary Comments
We are in the business of designing, manufacturing and marketing lighting, graphics and technology solutions for both indoor and outdoor applications. Historically, sales of our products have been subject to cyclical variations caused by competitive pressures that affect selling prices, changes in general economic conditions, and other factors. Our operating results in the fiscal 2019 third quarter reflect the continued competitiveness in both our project and stock and flow markets, a shift in focus to pursue higher value-add customer opportunities, a mix of new larger customers, a shift in project mix, and pricing below prior year levels for the quarter driven by select price moves in key vertical markets. This combination of factors resulted in lower gross margins and operating earnings compared to prior year. The cyclical nature of our business could continue to adversely affect our liquidity and financial results.
Fiscal 2019 third quarter net sales of $72,832,000 decreased $6.0 million or 8% as compared to third quarter fiscal 2018 net sales of $78,843,000. Net sales were favorably influenced by increased net sales of the Graphics Segment (up $2.8 million or 16%) more than offset by decreased net sales of the Lighting Segment (down $8.8 million or 14%).
Fiscal 2019 first nine months net sales of $247,330,000 decreased $11.3 million or 4% as compared to first nine months fiscal 2018 net sales of $258,614,000. Net sales were favorably influenced by increased net sales of the Graphics Segment (up $10.0 million or 17%) more than offset by decreased net sales of the Lighting Segment (down $21.3 million or 11%).
Fiscal 2019 third quarter operating loss of $(2,273,000) represents a $3.0 million change from operating income of $0.7 million in the third quarter of fiscal 2018. The $3.0 million change from operating income in fiscal 2018 to an operating loss in fiscal 2019 was primarily the result of decreased net sales and decreased gross profit offset by a decrease in selling and administrative expenses.
Fiscal 2019 first nine months operating loss of $(19,610,000) represents a $0.1 million increase in operating loss from an operating loss of $(19,524,000) in the nine months of fiscal 2018. Both fiscal years recorded goodwill impairment charges in the Lighting Segment. There was a $20.2 million goodwill impairment charge in fiscal 2019 and a $28.0 million goodwill impairment charge in fiscal 2018. Adjusted operating income for the first nine months of fiscal 2019 of $3.2 million decreased $5.4 million from adjusted fiscal 2018 operating income of $8.6 million. Refer to “Non-GAAP Financial Measures” below. The decrease in adjusted operating income was the result of decreased net sales and decreased gross profit offset by a decrease in selling and administrative expenses. Also contributing to the period-over-period results is a one-time adjustment to the Company’s paid-time-off policy in fiscal 2019 which resulted in a favorable pre-tax adjustment to earnings of $1.2 million.
Non-GAAP Financial Measures
The Company believes it is appropriate to evaluate its performance after making adjustments to the as-reported U.S. GAAP operating income, net income, and earnings per share. Adjusted operating income, net income and earnings per share, which exclude the impact of goodwill impairment, severance costs, the tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes, transition and re-alignment costs, and restructuring and plant closure costs, are non-GAAP financial measures. We believe that these adjusted supplemental measures are useful in assessing the operating performance of our business. These supplemental measures are used by our management, including our chief operating decision maker, to evaluate business results. We exclude these items because they are not representative of the ongoing results of operations of our business. Below is a reconciliation of these non-GAAP measures to operating income, net income, and earnings per share for the periods indicated.
|
(in thousands, unaudited) |
Third Quarter |
|||||||
|
FY 2019 |
FY 2018 |
|||||||
|
Reconciliation of operating (loss) income to adjusted operating income: |
||||||||
|
Operating (loss) income as reported |
$ | (2,273 |
) |
$ | 743 | |||
|
Adjustment for severance cost |
42 | 8 | ||||||
|
Adjustment for restructuring, plant closure costs, and related inventory write-downs |
368 | -- | ||||||
|
Adjusted operating (loss) income |
$ | (1,863 |
) |
$ | 751 | |||
|
(in thousands, except per share data; unaudited) |
Third Quarter |
|||||||||||||||
|
FY 2019 |
Diluted EPS |
FY 2018 |
Diluted EPS |
|||||||||||||
|
Reconciliation of net loss to adjusted net income: |
||||||||||||||||
|
Net (loss) income and (loss) income per share as reported |
$ | (3,168 |
) |
$ | (0.12 |
) |
$ | 220 | $ | 0.01 | ||||||
|
Adjustment for severance costs, inclusive of the income tax effect |
(14 |
)(1) |
-- | 6 | (4) | -- | ||||||||||
|
Tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes |
897 | (2) | 0.03 | -- | -- | |||||||||||
|
Tax impact from the reduction of the deferred tax assets |
-- | -- | -- | -- | ||||||||||||
|
Adjustment for restructuring, plant closure costs, and related inventory write-downs inclusive of the income tax effect |
115 | (3) | -- | -- | -- | |||||||||||
|
Adjusted net (loss) income and (loss) earnings per share |
$ | (2,170 |
) |
$ | (0.08 |
) |
$ | 226 | $ | 0.01 | ||||||
The reconciliation of reported earnings per share to adjusted earnings per share may not produce identical amounts due to rounding differences and due to the difference between basic and dilutive weighted average shares outstanding in the computation of earnings per share.
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) 56
(2) 0
(3) 253
(4) 2
|
(in thousands, unaudited) |
Nine Months |
|||||||
|
FY 2019 |
FY 2018 |
|||||||
|
Reconciliation of operating (loss) to adjusted operating income: |
||||||||
|
Operating (loss) as reported |
$ | (19,610 |
) |
$ | (19,524 |
) |
||
|
Adjustment for goodwill impairment |
20,165 | 28,000 | ||||||
|
Adjustment for severance costs |
534 | 91 | ||||||
|
Adjustment for transition and re-alignment costs |
120 | -- | ||||||
|
Adjustment for restructuring, plant closure costs, and related inventory write-downs |
1,991 | -- | ||||||
|
Adjusted operating income |
$ | 3,200 | $ | 8,567 | ||||
|
(in thousands, except per share data; unaudited) |
|
Nine Months |
|
|||||||||||||
|
|
|
FY 2019 |
|
|
Diluted EPS |
|
|
FY 2018 |
|
|
Diluted EPS |
|
||||
|
Reconciliation of net loss to adjusted net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss per share as reported |
|
$ |
(17,201 |
) |
|
$ |
(0.66 |
) |
|
$ |
(16,877 |
) |
|
$ |
(0.65 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Adjustment for goodwill impairment, inclusive of the income tax effect |
|
|
15,361 |
(1) |
|
|
0.59 |
|
|
17,361 |
(6) |
|
|
0.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Adjustment for severance costs, inclusive of the income tax effect |
372 |
(2) |
0.01 |
67 |
(7) |
-- |
||||||||||
|
Adjustment for transition and re-alignment costs, inclusive of the income tax effect |
94 |
(3) |
-- |
-- |
-- |
|||||||||||
|
Tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes |
897 |
(4) |
0.03 |
|||||||||||||
|
Tax impact from the reduction of the deferred tax assets |
-- |
-- |
4,676 |
(8) |
0.18 |
|||||||||||
|
Adjustment for restructuring, plant closure costs, and related inventory write-downs inclusive of the income tax effect |
|
|
1,386 |
(5) |
|
|
0.05 |
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Adjusted net income and earnings per share |
|
$ |
908 |
|
$ |
0.03 |
|
$ |
5,227 |
|
|
$ |
0.20 |
|
||
The reconciliation of reported earnings per share to adjusted earnings per share may not produce identical amounts due to rounding differences and due to the difference between basic and dilutive weighted average shares outstanding in the computation of earnings per share.
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) 4,804
(2) 162
(3) 26
(4) 0
(5) 605
(6) 10,639
(7) 24
(8) 0
Results of Operations
THREE MONTHS ENDED MARCH 31, 2019 COMPARED TO THREE MONTHS ENDED MARCH 31, 2018
|
Lighting Segment |
||||||||
|
(In thousands) |
Three Months Ended |
|||||||
|
March 31 |
||||||||
|
2019 |
2018 |
|||||||
|
Net Sales |
$ | 52,785 | $ | 61,554 | ||||
|
Gross Profit |
$ | 12,331 | $ | 15,944 | ||||
|
Operating Income |
$ | 691 | $ | 2,982 | ||||
Lighting Segment net sales of $52,785,000 in the third quarter of fiscal 2019 decreased $8.8 million or 14% from fiscal 2018 same period net sales of $61,554,000. The 14% drop in sales is attributed to continued competitiveness in the Company’s project and stock and flow markets. The Company also elected not to run any quarter-end promotional programs in the third quarter of fiscal 2019 as compared to several promotional programs which were conducted at the end of the third quarter of fiscal 2018. In addition, the Company’s realignment of its sales organization and focus on market priorities were disruptive and contributed to the decline in third quarter sales.
Gross profit of $12,331,000 in the third quarter of fiscal 2019 decreased $3.6 million or 23% from the same period of fiscal 2018 and decreased from 25.7% to 23.2% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The Company incurred restructuring and plant closure costs that were recorded in cost of sales related to the closure of its New Windsor, New York facility of $261,000 in fiscal 2019 with no comparable costs in fiscal 2018. The remaining decrease in amount of gross profit is due to the effect of reduced sales volume, competitive pricing pressures, and inflationary pressures of certain commodities, partially offset by manufacturing efficiencies as a result of the Company’s lean initiatives.
Selling and administrative expenses of $11,640,000 in the third quarter of fiscal year 2019 decreased $1.3 million or 10% from the same period of fiscal 2018 selling and administrative expenses of $12,962,000. The reduction in selling and administrative expenses is driven by lower commission expense due to lower sales volume along with a reduction in spending to match lower sales.
The Lighting Segment third quarter fiscal 2019 operating income of $691,000 decreased $2.3 million from operating income of $2,982,000 in the same period of fiscal 2018 mostly due to the reduction in sales volume and gross profit partially offset by lower selling and administrative expenses.
Graphics Segment
|
Graphics Segment |
||||||||
|
(In thousands) |
Three Months Ended |
|||||||
|
March 31 |
||||||||
|
2019 |
2018 |
|||||||
|
Net Sales |
$ | 20,047 | $ | 17,289 | ||||
|
Gross Profit |
$ | 3,018 | $ | 3,977 | ||||
|
Operating (Loss) Income |
$ | (898 |
) |
$ | 415 | |||
Graphics Segment net sales of $20,047,000 in the third quarter of fiscal 2019 increased $2.7 million or 16% from fiscal 2018 same period net sales of $17,289,000. Most of the increase in sales is from growth in sales to the petroleum market.
Gross profit of $3,018,000 in the third quarter of fiscal 2019 decreased $1.0 million or 24% from the same period of fiscal 2018. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 22.8% in the third quarter of fiscal 2018 to 15.0% in the third quarter of fiscal 2019. The reduction in gross profit on higher sales is partially due to a mix shift to large customers in both the print and digital technology applications. These large projects including hundreds and potentially thousands of individual locations, with lengthy project life cycles, are competitive and initially generate lower margins. The business will work to improve the margins on these projects over their life cycle.
Selling and administrative expenses of $3,916,000 in the third quarter of fiscal 2019 increased $0.4 million or 10% from the same period of fiscal 2018 primarily as a result of an increase in outside service expense and bad debt expense.
The Graphics Segment third quarter fiscal 2019 operating loss of $(898,000) decreased $1.3 million from operating income of $415,000 in the same period of fiscal 2018. The decrease of $1.3 million was primarily the net result of a shift in customer mix on higher sales and an increase in selling and administrative expenses.
|
Corporate and Eliminations |
||||||||
|
(In thousands) |
Three Months Ended |
|||||||
|
March 31 |
||||||||
|
2019 |
2018 |
|||||||
|
Gross (Loss) |
$ | (12 |
) |
$ | (3 |
) |
||
|
Operating (Loss) |
$ | (2,066 |
) |
$ | (2,654 |
) |
||
The gross (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $2,054,000 in the third quarter of fiscal 2019 decreased $0.6 million or 23% from the same period of the prior year. The change is primarily the result of a reduction in both outside service expense and research and development expense.
Consolidated Results
The Company reported $579,000 net interest expense in the third quarter of fiscal 2019 compared to $400,000 net interest expense in the third quarter of fiscal 2018. The change in interest expense from fiscal 2018 to fiscal 2019 is the result of higher interest rates on the Company’s line of credit. The Company also recorded other expense of $183,000 in the third quarter related to net foreign currency transaction losses from transactions with its customers and suppliers through its Mexican subsidiary.
The $133,000 income tax expense in the third quarter of fiscal 2019 compared to a pre-tax loss is the result of a cumulative change to the Company’s estimated annual tax rate. The Company has announced that it has entered into a definitive agreement to sell its New Windsor, New York facility. The closing of the sale is expected in the fourth quarter and is expected to generate a gain resulting from the sale. This gain will be offset by a capital loss carryforward resulting in a tax benefit. This event was part of the calculation of the estimated annual income tax rate. The $123,000 income tax expense in the third quarter of fiscal 2018 represents a consolidated effective tax rate of 35.9%. This is the net result of adjusting the Company’s year-to-date tax expense to an overall income tax rate of 28.9% influenced by the first quarter goodwill impairment and by certain permanent book-tax differences and adjustments related to uncertain income tax positions.
The Company reported a net loss of $(3,168,000) in the third quarter of fiscal 2019 compared to net income of $220,000 in the same period of the prior year. The change from net income in fiscal 2018 to a net loss in the third quarter of fiscal 2019 is the net result of decreased net sales, decreased gross profit, decreased selling and administrative expenses, and increased interest expense. Also impacting the period-over-period comparison is $368,000 of restructuring charges and $183,000 of net foreign currency transactions losses of which there were no comparable events in fiscal 2018. Diluted loss per share of $(0.12) was reported in the third quarter of fiscal 2019 as compared to $ 0.01 diluted earnings per share in the same period of fiscal 2018. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the third quarter of fiscal 2019 were 26,132,000 shares as compared to 26,437,000 shares in the same period last year.
NINE MONTHS ENDED MARCH 31, 2019 COMPARED TO NINE MONTHS ENDED MARCH 31, 2018
|
Lighting Segment |
||||||||
|
(In thousands) |
Nine Months Ended |
|||||||
|
March 31 |
||||||||
|
2019 |
2018 |
|||||||
|
Net Sales |
$ | 177,871 | $ | 199,156 | ||||
|
Gross Profit |
$ | 42,548 | $ | 53,876 | ||||
|
Operating (Loss) |
$ | (13,911 |
) |
$ | (14,673 |
) |
||
Lighting Segment net sales of $177,871,000 in the first nine months of fiscal 2019 decreased 11% from fiscal 2018 same period net sales of $199,156,000. The 11% drop in sales is attributed to continued competitiveness in the Company’s project and stock and flow markets. In addition, the Company’s realignment of its sales organization and is focus on market priorities were disruptive and contributed to the decline in year-over-year sales.
Gross profit of $42,548,000 in the first nine months of fiscal 2019 decreased $11.3 million or 21% from the same period of fiscal 2018 and decreased from 26.8% to 23.7% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The Company incurred restructuring and plant closure costs that were recorded in cost of sales related to the closure of its Hawthorne, California and New Windsor, New York facilities of $1,859,000 in fiscal 2019 with no comparable costs in fiscal 2018. The remaining decrease in amount of gross profit is due to the effect of reduced sales volume, competitive pricing pressures, and inflationary pressures of certain commodities, partially offset by manufacturing efficiencies as a result of the Company’s lean initiatives.
Selling and administrative expenses of $56,459,000 in the first nine months of fiscal year 2019 decreased $12.1 million or 21% from the same period of fiscal 2018 selling and administrative expenses of $68,549,000, primarily due to the $20.2 million and $28.0 million goodwill impairment charges in the first nine months of fiscal 2019 and fiscal 2018 respectively. When the goodwill impairment charges are removed from both fiscal year results, there was a $4.3 million or 12% reduction in selling and administrative expenses. The reduction in selling and administrative expenses is mostly driven by lower commission expense which is due to lower sales volume along with a reduction in spending to match lower sales.
The Lighting Segment first nine month fiscal 2019 operating loss of $(13,911,000) decreased $0.8 million from an operating loss of $(14,673,000) in the same period of fiscal 2018 primarily due to a $20.2 million pre-tax goodwill impairment charge in fiscal 2019 compared to a $28.0 million pre-tax goodwill impairment charge in fiscal 2018. When the goodwill impairment charges are removed from both fiscal years along with the restructuring charges of $1,991,000 ($1,859,000 in cost of sales and $132,000 in selling and administrative expenses) and severance expense ($77,000 in cost of sales and $160,000 in selling and administrative expense) from the current fiscal year, fiscal 2019 adjusted operating income of $8,482,000 was $4.9 million lower than fiscal 2018 adjusted operating income of $13,335,000. The reduction in sales volume and gross profit was partially offset by lower selling and administrative expenses.
|
Graphics Segment |
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|
(In thousands) |
Nine Months Ended |
|||||||
|
March 31 |
||||||||
|
2019 |
2018 |
|||||||
|
Net Sales |
$ | 69,459 | $ | 59,458 | ||||
|
Gross Profit |
$ | 13,727 | $ | 15,086 | ||||
|
Operating Income |
$ | 2,350 | $ | 4,146 | ||||
Graphics Segment net sales of $69,459,000 in the first nine months of fiscal 2019 increased $10.0 million or 17% from fiscal 2018 same period net sales of $59,458,000. Most of the increase in sales is from growth in sales to the Petroleum and Quick Service Restaurant markets including digital technology.
Gross profit of $13,727,000 in the first nine months of fiscal 2019 decreased $1.4 million or 9% from the same period of fiscal 2018. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 24.9% in the first nine months of fiscal 2018 to 19.7% in the first nine of fiscal 2019. The reduction in gross profit on higher sales is partially due to a mix shift to large customers in both the print and digital technology applications. These large projects, with lengthy life cycles, are competitive and initially generate lower margins. The business will work to improve the margins on these projects over its life cycle.
Selling and administrative expenses of $11,377,000 in the first nine months of fiscal 2019 increased $0.4 million or 4% from the same period of fiscal 2018. A reduction in wage and benefit was more than offset by an increase in bad debt expense and outside service expense.
The Graphics Segment first nine months fiscal 2019 operating income of $2,350,000 decreased $1.8 million or 43% from operating income of $4,146,000 in the same period of fiscal 2018. The decrease of $1.8 million was primarily the net result of lower gross margin on higher sales and an increase in selling and administrative expenses.
|
Corporate and Eliminations |
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|
(In thousands) |
Nine Months Ended |
|||||||
|
March 31 |
||||||||
|
2019 |
2018 |
|||||||
|
Gross (Loss) |
$ | (21 |
) |
$ | (34 |
) |
||
|
Operating (Loss) |
$ | (8,049 |
) |
$ | (8,997 |
) |
||
The gross (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $8,028,000 in the first nine months of fiscal 2019 decreased $0.9 million from the same period of the prior year. The change is primarily the result of a reduction in wage and benefit expense and research and development cost partially offset by an increase in legal and professional fees.
Consolidated Results
The Company reported $1,712,000 net interest expense in the first nine months of fiscal 2019 compared to $1,220,000 net interest expense in the first nine months of fiscal 2019. The change in interest expense from fiscal 2018 to fiscal 2019 is the result of higher interest rates on the Company’s line of credit. The Company also recorded other expense of $183,000 in the third quarter related to net foreign currency transaction losses from transactions with its customers and suppliers through its Mexican subsidiary.
The $4,304,000 income tax benefit in the first nine months of fiscal 2019 represents a consolidated effective tax rate of 20.0%, which is inclusive of a cumulative change to the estimated annual tax rate mostly due to the tax treatment related to the fourth quarter sale of its New Windsor, New York facility. The Company has announced that it has entered into a definitive agreement to sell its New Windsor, New York facility. The closing of the sale is expected in the fourth quarter and is expected to generate a gain resulting from the sale. This gain will be offset by a capital loss carryforward resulting in a tax benefit. Also impacting the consolidated tax benefit is the second quarter goodwill impairment charge and a 30% tax rate on taxable income from pre-tax profits recognized by the Company’s Mexican subsidiary. The $3,867,000 tax benefit in the first nine months of fiscal 2018 represents a consolidated effective rate of 18.6%. This is the net result of an overall income tax rate of 28.9% influenced by the first quarter goodwill impairment, by the second quarter $4.7 million tax adjustment related to the revaluation of the Company’s deferred tax assets, and by certain permanent book-tax differences and adjustments related to uncertain income tax positions.
The Company reported a net loss of $(17,201,000) in the first nine months of fiscal 2019 compared to net loss of $(16,877,000) in the same period of the prior year. The increase in the net loss from fiscal 2018 to the net loss in the first nine months of fiscal 2019 is mostly driven by decreased net sales, decreased gross profit, decreased selling and administrative expenses, increased interest expense, and a larger tax benefit. Diluted loss per share of $(0.66) was reported in the first nine months of fiscal 2019 as compared to $(0.65) diluted loss per share in the same period of fiscal 2018. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first nine months of fiscal 2019 were 26,083,000 shares as compared to 25,835,000 shares in the same period last year.
Liquidity and Capital Resources
The Company considers its level of cash on hand, borrowing capacity, current ratio and working capital levels to be its most important measures of short-term liquidity. For long-term liquidity indicators, the Company believes its ratio of long-term debt to equity and its historical levels of net cash flows from operating activities to be the most important measures.
At March 31, 2019 the Company had working capital of $68.3 million, compared to $67.9 million at June 30, 2018. The ratio of current assets to current liabilities was 2.59 to 1 as compared to a ratio of 2.61 to 1 at June 30, 2018. The $0.4 million increase in working capital from June 30, 2018 to March 31, 2019 was primarily related to the net effect of decreased cash and cash equivalents ($1.5 million), increased net accounts receivable ($1.5 million), increased net inventory ($0.6 million), a decrease in accrued expenses ($2.1 million), a decrease in refundable income taxes ($0.3 million), an increase on other current assets ($0.6 million), and an increase in accounts payable ($2.7 million). Of the $1.5 million increase in accounts receivable, $4.6 million of the total increase is attributed to the adoption of the new revenue guidance. The Company proactively manages its working capital, including reduction of the accounts receivable days sales outstanding (DSO) and reduction of inventory levels, without reducing service to its customers.
The Company generated $6.4 million of cash from operating activities in the first nine months of fiscal 2019 as compared to a source of cash of $7.9 million in the same period of the prior year. This $1.5 million decrease in net cash flows from operating activities is primarily the net result of an increase rather than a decrease in accounts payable (favorable change of $5.8 million), a decrease rather than an increase in net accounts receivable (favorable change of $3.7 million), a greater increase in net inventory (unfavorable change of $4.0 million), a greater decrease in accrued expenses and other (unfavorable change of $1.3 million), and an increase in net loss from fiscal 2018 to fiscal 2019 along with unfavorable change of non-cash add-backs to the change in net loss (unfavorable change of $6.1 million).
Net accounts receivable were $52.1 million and $50.6 million at March 31, 2019 and June 30, 2018, respectively. DSO was 60 days at March 31, 2019 compared to DSO of 53 days at June 30, 2018. 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 $51.6 million at March 31, 2019 increased $0.6 million from $51.0 million at June 30, 2018. The increase of $0.6 million is the result of an increase in gross inventory of $1.5 million and an increase in obsolescence reserves of $0.9 million. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory increased $3.7 million in the first nine months of fiscal 2019 in the Graphics Segment which was partially offset by a decrease in net inventory in the Lighting Segment of $3.0 million.
Cash generated from operations and borrowing capacity under the Company’s line of credit is the Company’s primary source of liquidity. The Company has a secured $75 million revolving line of credit with its bank, with $30.6 million of the credit line available as of April 14, 2019. (The Company amended its revolving line of credit in the third quarter of fiscal 2019 and reduced its available line of credit from $100 million to $75 million in order to better match its financing needs with an appropriate borrowing capacity.) This line of credit is a $75 million five-year credit line expiring in the third quarter of fiscal 2022. The Company believes that its $75 million line of credit plus cash flows from operating activities are adequate for the Company’s fiscal 2019 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.
The Company used cash of $2.3 million related to investing activities in the first nine months of fiscal 2019 as compared to a use of $0.7 million in the same period of the prior year, resulting in an unfavorable change of $1.6 million. Capital expenditures for the first nine months of fiscal 2019 increased $0.1 million to $2.3 million from the same period in fiscal 2018. The Company sold its Woonsocket manufacturing facility for $1.5 million in fiscal 2018 which contributed to the change in cash flow from investing activities from fiscal 2018 to fiscal 2019.
In April 2019, the Company announced that it entered into a definitive agreement to sell its manufacturing facility in New Windsor, New York. Under the terms of the agreement, the Company will receive approximately $12 million of gross proceeds related to the sale. The transaction is expected to close on or before June 30, 2019 subject to the final approval from the New Windsor town officials.
The Company had a $5.5 million use of cash related to financing activities in the nine months of fiscal 2019 compared to a use of cash of $8.2 million in the first nine months of fiscal 2018. The $2.7 million favorable change in cash flow was primarily the net result of a reduction in net payments against the Company’s revolving line of credit.
The Company has, or could have, on its balance sheet financial instruments consisting primarily of cash and cash equivalents, short-term investments, revolving lines of credit, and long-term debt. The fair value of these financial instruments approximates carrying value because of their short-term maturity and/or variable, market-driven interest rates.
Off-Balance Sheet Arrangements
The Company has no financial instruments with off-balance sheet risk and has no off-balance sheet arrangements, except for various operating leases. However, none of these operating leases, individually or in the aggregate have or are reasonably likely to have a current effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material.
Cash Dividends
In April 2019, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable May 14, 2019 to shareholders of record as of May 6, 2019. The indicated annual cash dividend rate for fiscal 2019 is $0.20 per share. The Board of Directors has adopted a policy regarding dividends which indicates that dividends will be determined by the Board of Directors in its discretion based upon its evaluation of earnings, cash flow requirements, financial condition, debt levels, stock repurchases, future business developments and opportunities, and other factors deemed relevant.
Critical Accounting Policies and Estimates
A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2018 Annual Report on Form 10-K.
New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases.” The amended guidance requires an entity to recognize assets and liabilities that arise from leases. The amended guidance is effective for financial statements issued for fiscal and interim periods within those years, beginning after December 15, 2018, or the Company’s fiscal 2020, with early adoption permitted. The Company has an implementation team tasked with reviewing our lease obligations and determining the impact of the new standard to its financial statements. The Company will continue to evaluate the new standard’s impact on its financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company’s exposure to market risk since June 30, 2018. Additional information can be found in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, which appears on page 13 of the Annual Report on Form 10-K for the fiscal year ended June 30, 2018.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as such term is defined Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
We conducted, under the supervision of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2019, our disclosure controls and procedures were effective. Management believes that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly presented in all material respects in accordance with GAAP for interim financial statements, and the Company’s Chief Executive Officer and Chief Financial Officer have certified that, based on their knowledge, the condensed consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for each of the periods presented in this report.
Changes in Internal Control
During the first nine months ended March 31, 2019, the Company enacted additional controls related to the adoption of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” 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 March 31, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, except as otherwise described in this Item 4.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
NONE
ITEM 5. OTHER INFORMATION
On February 28, 2019 the company entered into a Fourth Amendment to Loan Documents with its bank, PNC Bank, National Association (“Fourth Amendment”). The Fourth Amendment decreases the company’s revolving line of credit from $100 million to $75 million and modifies the covenant requiring the company to maintain a Leverage Ratio (as defined in the Loan Documents) of 3.50 to 1.00. The foregoing description of the Fourth Amendment does not purport to be complete. The Fourth Amendment is filed with this report as Exhibit 10.1 and is incorporated by reference into this report in its entirety
ITEM 6. EXHIBITS
Exhibits:
|
10.1 |
|
| 10.2 | Fourth Amendment to Loan Documents dated February 28, 2019 between PNC Bank, National Association and LSI Industries Inc. |
|
31.1 |
Certification of Principal Executive Officer required by Rule 13a-14(a) |
|
31.2 |
Certification of Principal Financial Officer required by Rule 13a-14(a) |
|
32.1 |
|
32.2 |
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
LSI Industries Inc. |
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|
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|
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|
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By: |
/s/ James A. Clark |
|
|
|
|
James A. Clark |
|
|
|
|
Chief Executive Officer and President |
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|
|
|
(Principal Executive Officer) |
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|
|
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|
|
|
|
By: |
/s/ James E. Galeese |
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James E. Galeese |
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|
Executive President and Chief Financial Officer |
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|
|
|
(Principal Financial Officer) |
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May 8, 2019 |
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