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
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting Segment
|
|
$
|
61,554
|
|
|
$
|
61,693
|
|
|
$
|
199,156
|
|
|
$
|
192,034
|
|
Graphics Segment
|
|
|
17,289
|
|
|
|
16,463
|
|
|
|
59,458
|
|
|
|
55,939
|
|
|
|
$
|
78,843
|
|
|
$
|
78,156
|
|
|
$
|
258,614
|
|
|
$
|
247,973
|
|
Operating Income (Loss) by Business Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
March 31
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting Segment
|
|
$
|
2,982
|
|
|
$
|
4,120
|
|
|
$
|
(14,673
|
)
|
|
$
|
10,972
|
|
Graphics Segment
|
|
|
415
|
|
|
|
(480
|
)
|
|
|
4,146
|
|
|
|
1,711
|
|
Corporate and Eliminations
|
|
|
(2,654
|
)
|
|
|
(4,414
|
)
|
|
|
(8,997
|
)
|
|
|
(9,573
|
)
|
|
|
$
|
743
|
|
|
$
|
(774
|
)
|
|
$
|
(19,524
|
)
|
|
$
|
3,110
|
|
Summary Comments
Fiscal 2018 third quarter net sales of $78,843,000 increased $0.7 million or 0.9% as compared to third quarter fiscal 2017 net sales of $78,156,000. Net sales were unfavorably influenced by decreased net sales of the Lighting Segment (down $0.1 million or 0.2%) which was more than offset by increased net sales of the Graphics Segment (up $0.8 million or 5.0%). Comparable fiscal 2018 net sales excluding net sales from Atlas Lighting Products, Inc. (“Atlas”) decreased by $4.8 million or 6.7% compared to fiscal 2017 net sales. The Company acquired Atlas on February 21, 2017.
Fiscal 2018 nine month net sales of $258,614,000 increased $10.6 million or 4.3% as compared to nine month fiscal 2017 net sales of $247,973,000. Net sales were favorably influenced by increased net sales of the Lighting Segment (up $7.1 million or 3.7%) and increased net sales of the Graphics Segment (up $3.5 million or 6.3%). Comparable fiscal 2018 net sales excluding net sales from Atlas decreased by $19.8 million or 8.2% compared to fiscal 2017 net sales.
Fiscal 2018 third quarter operating income of $743,000 increased $1.5 million from an operating loss of $(774,000) in the third quarter of fiscal 2017. The change from an operating loss in fiscal 2017 to operating income in fiscal 2018 was the net result of increased net sales, increased gross profit and increased gross profit as a percentage of sales, and an increase in selling and administrative expenses excluding the items listed below. The Company also recorded an impairment expense of $479,000, acquisition costs of $1,480,000, and a gain on the sale of one of its facilities of $1,361,000 in selling and administrative expenses in the third quarter of fiscal 2017 with no corresponding event in fiscal 2018.
Fiscal 2018 nine month operating loss of $(19,524,000) represents a $22.6 million change from operating income of $3,110,000 in the first nine months of fiscal 2017. The change from operating income in fiscal 2017 to an operating loss in fiscal 2018 is primarily the result of a $28 million goodwill impairment in fiscal 2018 with no corresponding event in fiscal 2017. The Company also recorded an impairment expense of $479,000, acquisition costs of $1,480,000, restructuring costs of $796,000 net of a gain of $1,361,000 of one of its facilities, in fiscal 2017 with no corresponding cost in fiscal 2018. Also contributing to the year-over-year change from operating income in fiscal 2017 to an operating loss in fiscal 2018 is the net result of increased net sales, increased gross profit and increased gross profit as a percentage of sales, and an increase in selling and administrative expenses.
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 a goodwill and intangible asset impairment, a tax charge related to the revaluation of deferred tax assets, restructuring and plant closure costs, acquisition deal costs, a fair market value inventory adjustment, and other severance 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 2018
|
|
|
FY 2017
|
|
Reconciliation of operating income (loss) to adjusted operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) as reported
|
|
$
|
743
|
|
|
$
|
(774
|
)
|
|
|
|
|
|
|
|
|
|
Impairment of intangible asset
|
|
|
--
|
|
|
|
479
|
|
|
|
|
|
|
|
|
|
|
Adjustment for restructuring and plant closure costs (gain), and related inventory write-downs
|
|
|
--
|
|
|
|
(957
|
)
|
|
|
|
|
|
|
|
|
|
Adjustment for other severance costs
|
|
|
8
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
Adjustment for acquisition deal costs
|
|
|
--
|
|
|
|
1,480
|
|
|
|
|
|
|
|
|
|
|
Fair market value inventory write-up
|
|
|
--
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income
|
|
$
|
751
|
|
|
$
|
432
|
|
(in thousands, except per share data; unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
|
FY 2018
|
|
|
Diluted
EPS
|
|
|
FY 2017
|
|
|
Diluted
EPS
|
|
Reconciliation of net income (loss) to adjusted net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) and earnings (loss) per share as reported
|
|
$
|
220
|
|
|
$
|
0.01
|
|
|
$
|
(531
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of intangible asset, inclusive of the income tax effect
|
|
|
--
|
|
|
|
--
|
|
|
|
335
|
(1)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for restructuring and plant closure costs, inclusive of the income tax effect
|
|
|
--
|
|
|
|
--
|
|
|
|
(629
|
)
(2)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for severance costs, inclusive of the income tax effect
|
|
|
6
|
(6)
|
|
|
--
|
|
|
|
44
|
(3)
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for acquisition deal costs, inclusive of the income tax effect
|
|
|
--
|
|
|
|
--
|
|
|
|
1,030
|
(4)
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair market value in inventory write-up, inclusive of the income tax effect
|
|
|
--
|
|
|
|
--
|
|
|
|
108
|
(5)
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income and earnings per share
|
|
$
|
226
|
|
|
$
|
0.01
|
|
|
$
|
357
|
|
|
$
|
0.01
|
|
The income tax effects of the adjustments in the tables above were calculated using the estimated U.S. effective income tax rates re-computed after considering non-GAAP adjustments for the periods indicated. The income tax effects were as follows (in thousands):
(1)
$144
(2)
$(328)
(3)
$5
(4)
$450
(5)
$47
(6)
$2
(in thousands, unaudited)
|
|
Nine Months
|
|
|
|
FY 2018
|
|
|
FY 2017
|
|
Reconciliation of operating income (loss) to adjusted operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) as reported
|
|
$
|
(19,524
|
)
|
|
$
|
3,110
|
|
|
|
|
|
|
|
|
|
|
Impairment of intangible asset
|
|
|
--
|
|
|
|
479
|
|
|
|
|
|
|
|
|
|
|
Adjustment for goodwill impairment
|
|
|
28,000
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Adjustment for restructuring, plant closure costs, and related inventory write-downs
|
|
|
--
|
|
|
|
796
|
|
|
|
|
|
|
|
|
|
|
Adjustment for other severance costs
|
|
|
91
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
Adjustment for acquisition deal costs
|
|
|
--
|
|
|
|
1,480
|
|
|
|
|
|
|
|
|
|
|
Fair market value inventory write-up
|
|
|
--
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income
|
|
$
|
8,567
|
|
|
$
|
6,242
|
|
(in thousands, except per share data; unaudited)
|
|
Nine Months
|
|
|
|
FY 2018
|
|
|
Diluted
EPS
|
|
|
FY 2017
|
|
|
Diluted
EPS
|
|
Reconciliation of net income (loss) to adjusted net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) and earnings (loss) per share as reported
|
|
$
|
(16,877
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
2,304
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for goodwill impairment, inclusive of the income tax effect
|
|
|
17,361
|
(6)
|
|
|
0.67
|
|
|
|
335
|
(1)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax impact from the reduction of the deferred tax assets
|
|
|
4,676
|
|
|
|
0.18
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for restructuring and plant closure costs, inclusive of the income tax effect
|
|
|
--
|
|
|
|
--
|
|
|
|
514
|
(2)
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for other severance costs, inclusive of the income tax effect
|
|
|
66
|
(7)
|
|
|
--
|
|
|
|
164
|
(3)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for acquisition deal costs
|
|
|
--
|
|
|
|
--
|
|
|
|
1,030
|
(4)
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair market value inventory write-up
|
|
|
--
|
|
|
|
--
|
|
|
|
108
|
(5)
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income and earnings per share
|
|
$
|
5,227
|
|
|
$
|
0.20
|
|
|
$
|
4,455
|
|
|
$
|
0.17
|
|
The income tax effects of the adjustments in the tables above were calculated using the estimated U.S. effective income tax rates re-computed after considering non-GAAP adjustments for the periods indicated. The income tax effects were as follows (in thousands):
(1)
$144
(2)
$282
(3)
$58
(4)
$450
(5)
$47
(6)
$10,639
(7)
$25
The reconciliation of reported net income and earnings per share to adjusted net income and earnings per share may not agree due to rounding differences and due to the difference between basic and dilutive weighted average shares outstanding in the computation of earnings per share.
Results of Operations
THREE MONTHS ENDED MARCH
31
, 2018 COMPARED TO THREE MONTHS ENDED MARCH 31, 2017
Lighting Segment
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
61,554
|
|
|
$
|
61,693
|
|
Gross Profit
|
|
$
|
15,944
|
|
|
$
|
14,895
|
|
Operating Income
|
|
$
|
2,982
|
|
|
$
|
4,120
|
|
Lighting Segment net sales of $61,554,000 in the third quarter of fiscal 2018 decreased 0.2% from fiscal 2017 same period net sales of $61,693,000. Comparable fiscal 2018 net sales excluding net sales from Atlas decreased by $5.6 million or 10.2% from fiscal 2017 third quarter sales. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $51.2 million in the third quarter of fiscal 2018, representing a $6.3 million or 14.0% increase from fiscal 2017 third quarter net sales of solid-state LED light fixtures of $44.9 million. Light fixtures having solid-state LED technology represent 92.2% of total lighting product net sales in the third quarter of fiscal 2018 compared to 81.8% of total lighting product net sales in the third quarter of fiscal 2017. Total lighting product net sales excludes sales related to installation and shipping and handling. There was a reduction in the Company’s traditional lighting sales (metal halide and fluorescent light sources) from fiscal 2017 to fiscal 2018 as customers continue to convert from traditional lighting to light fixtures having solid-state LED technology.
Lighting Segment total net sales of solid-state LED technology in light fixtures have been recorded as indicated in the table below.
|
|
LED Net Sales
|
|
(In thousands)
|
|
FY 2018
|
|
|
FY 2017
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
52,956
|
|
|
$
|
43,146
|
|
|
|
22.7
|
%
|
Second Quarter
|
|
|
57,726
|
|
|
|
46,137
|
|
|
|
25.1
|
%
|
First Half
|
|
|
110,682
|
|
|
|
89,283
|
|
|
|
24.0
|
%
|
Third Quarter
|
|
|
51,228
|
|
|
|
44,946
|
|
|
|
14.0
|
%
|
Nine Months
|
|
|
161,910
|
|
|
|
134,229
|
|
|
|
20.6
|
%
|
Fourth Quarter
|
|
|
|
|
|
|
52,303
|
|
|
|
|
|
Full Year
|
|
|
|
|
|
$
|
186,532
|
|
|
|
|
|
Gross profit of $15,944,000 in the third quarter of fiscal 2018 increased $1.0 million or 7.0% from the same period of fiscal 2017, and increased from 24.0% to 25.7% 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 the Kansas City, Kansas manufacturing facility and the Beaverton, Oregon facility of $127,000 and plant closure costs related to an inventory write-down of $32,000 as the Company exited the manufacturing of fluorescent lighting fixtures with no comparable costs in fiscal 2018. The remaining increase in amount of gross profit is due to the net effect of improved product mix, a complete quarter of net sales in fiscal 2018 for Atlas compared to a partial quarter of net sales in fiscal 2017, manufacturing efficiencies as a result of the Company’s lean initiatives, continued inflationary pressures in certain commodities, competitive pricing pressures, and continued softness in the lighting industry.
Selling and administrative expenses of $12,962,000
in the third quarter of fiscal 2018 increased $2.2 million or 20.3% from the same period of fiscal 2017, primarily as the net result of acquiring Atlas in February 2017. Our comparable selling and administrative expenses excluding Atlas increased 3.5% in the third quarter of fiscal 2018 from the same period of fiscal 2017. The more notable quarter-over-quarter changes impacting the $2.2 million increase in selling and administrative expenses are decreased employee compensation and benefits expense ($0.3 million), decreased commission expense ($0.4 million), increased amortization expense ($0.3 million) and the gain on the sale of the Company’s Kansas City facility of $1,361,000 in fiscal 2017 partially offset by restructuring charges with no comparable event in fiscal 2018.
The Lighting Segment third quarter fiscal 2018 operating income of $2,982,000 decreased $1.1 million or 27.6% from operating income of $4,120,000 in the same period of fiscal 2017. The $1.1 million decrease in operating income was the net result of decreased net sales, an increase in gross profit and gross profit as a percentage of sales, increased selling and administrative expenses, and the gain on the sale of the Company’s Kansas City facility with no comparable event in fiscal 2018.
Graphics Segment
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
17,289
|
|
|
$
|
16,463
|
|
Gross Profit
|
|
$
|
3,977
|
|
|
$
|
3,506
|
|
Operating Income (Loss)
|
|
$
|
415
|
|
|
$
|
(480
|
)
|
Graphics Segment net sales of $17,289,000 in the third quarter of fiscal 2018 increased $0.8 million or 5.0% from fiscal 2017 same period net sales of $16,463,000. The increase in sales was led by SOAR, the Company’s digital signage business.
Gross profit of $3,977,000 in the third quarter of fiscal 2018 increased $0.5 million or 13.4% from the same period of fiscal 2017. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) increased from 21.0% in the third quarter of fiscal 2017 to 22.8% in the third quarter of fiscal 2018. The change in amount of gross profit is due to the net effect of increased net sales (customer plus inter-segment net sales), an overall improvement in gross profit margins from the Company’s product, installation and shipping and handling sales, and increased outside service expense ($0.1 million). The Company incurred $185,000 in the third quarter of fiscal 2017 related to the closure of its Woonsocket, Rhode Island facility with no comparable expense in fiscal 2018.
Administrative expenses of $3,562,000 in the third quarter of fiscal 2018 decreased $0.4 million or 10.6% from the same period of the prior year. The $0.4 million decrease is primarily the result of decreased employee compensation and benefit expense ($0.2 million decrease) and an impairment of an intangible asset in fiscal 2017 of $479,000 with no comparable charge in fiscal 2018 partially offset by small increases in other cost categories.
The Graphics Segment third quarter fiscal 2018 operating income of $415,000 increased $0.9 million from and operating loss of $(480,000) in the same period of fiscal 2017. The increase of $0.9 million from an operating loss in fiscal 2017 to an operating profit in fiscal 2018 was primarily the net result of increased net sales, increased gross profit and increased gross profit margin as a percentage of sales, and an impairment of an intangible asset in fiscal 2017 with no comparable charge in fiscal 2018.
Corporate and Eliminations
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Gross (Loss)
|
|
$
|
(3
|
)
|
|
$
|
(2
|
)
|
Operating (Loss)
|
|
$
|
(2,654
|
)
|
|
$
|
(4,414
|
)
|
The gross (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $2,651,000 in the third quarter of fiscal 2018 decreased $1.8 million or 39.9% from the same period of the prior year. The $1.8 million decrease is primarily the net result of decreased employee compensation and benefit expense of $0.5 million, increased outside service expense of $0.2 million, and acquisition expenses of $1,480,000 million in fiscal 2017 with no comparable expense in fiscal 2018.
Consolidated Results
The Company reported $400,000 net interest expense in the third quarter of fiscal 2018 compared to net interest expense of $163,000 in the third quarter of fiscal 2017. The increase in interest expense is the result of borrowing against the Company’s line of credit to acquire Atlas in February 2017. The third quarter of fiscal 2018 represents a complete quarter of interest expense whereas the third quarter of fiscal 2017 represents a partial quarter of interest expense.
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 $(406,000) income tax benefit in the third quarter of fiscal 2017 represents a consolidated effective tax rate of 43.3%. This is the net result of an income tax rate of 32.0% influenced by certain permanent book-tax differences, a tax benefit related to disqualifying dispositions, and by a benefit related to uncertain income tax positions.
The Company reported net income of $220,000 in the third quarter of fiscal 2018 as compared to a net loss of $(531,000) in the same period of the prior year. The change between a net loss in fiscal 2017 to net income in fiscal 2018 is the net result of increased net sales, increased gross profit and an improvement of gross profit as a percentage of sales, and restructuring and plant closure costs and the gain on the sale of a facility in fiscal 2017 with no comparable events in fiscal 2018. Diluted earnings of $0.01 per share was reported in the third quarter of fiscal 2018 as compared to $(0.02) diluted loss per share in the same period of fiscal 2017. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the third quarter of fiscal 2018 were 26,437,000 shares as compared to 25,452,000 shares in the same period last year.
NINE MONTHS ENDED MARCH 31, 2018 COMPARED TO NINE MONTHS ENDED MARCH 31, 2017
Lighting Segment
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
199,156
|
|
|
$
|
192,034
|
|
Gross Profit
|
|
$
|
53,876
|
|
|
$
|
47,278
|
|
Operating (Loss) Income
|
|
$
|
(14,673
|
)
|
|
$
|
10,972
|
|
Lighting Segment net sales of $199,156,000 in the first nine months of fiscal 2018 increased 3.7% from fiscal 2017 same period net sales of $192,034,000. Comparable fiscal 2018 net sales excluding net sales from Atlas decreased by $23.3 million or 12.6% from the first nine months of fiscal 2017. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $161.9 million in the first nine months of fiscal 2018, representing a $27.7 million or 20.6% increase from fiscal 2017 nine month net sales of solid-state LED light fixtures of $134.2 million. Light fixtures having solid-state LED technology represents 89.5% of total lighting product net sales in the first nine months of fiscal 2018 compared to 76.5% of total lighting product net sales in the first nine months of fiscal 2017. Total lighting product net sales excludes sales related to installation and shipping and handling. There was a reduction in the Company’s traditional lighting sales (metal halide and fluorescent light sources) from fiscal 2017 to fiscal 2018 as customers continue to convert from traditional lighting to light fixtures having solid-state LED technology
.
Gross profit of $53,876,000 in the first nine months of fiscal 2018 increased $6.6 million or 14.0% from the same period of fiscal 2017, and increased from 24.4% to 26.8% 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 the Kansas City, Kansas manufacturing facility and the Beaverton, Oregon facility of $1,491,000 and plant closure costs related to an inventory write-down of $432,000 as the Company exited the manufacturing of fluorescent lighting fixtures with no comparable costs in fiscal 2018. The remaining increase in amount of gross profit is due to the net effect of improved product mix, nine months of net sales related to Atlas in fiscal 2018 compared to slightly more than one month of sales in fiscal 2017, manufacturing efficiencies as a result of the Company’s lean initiatives, continued inflationary pressures in certain commodities, competitive pricing pressures, continued softness in the lighting industry, and cost savings related to the closure of the Kansas City and Beaverton facilities.
Selling and administrative expenses of $40,549,000
in the first nine months of fiscal 2018 excluding the $28 million goodwill impairment charge and excluding the restructuring charges related to the closure of the Kansas City facility, increased $3.0 million or 8.0% from the same period of fiscal 2017 primarily as the net result of acquiring Atlas. When the goodwill impairment charge and the restructuring charges are removed from the year-over-year comparison of selling and administrative expenses, comparable expenses excluding Atlas decreased 14.8% in the first nine months of fiscal 2018 from the same period of fiscal 2017. The more notable year-over-year changes impacting the $4.2 million increase in selling and administrative expenses are increased employee compensation and benefits expense ($1.6 million), increased research and development expense ($0.4 million), decreased commission expense ($2.0 million), and increased amortization expense ($1.5 million). The Company recorded a $28 million goodwill impairment charge in fiscal 2018 with no comparable expense in fiscal 2017. The Company also reported a gain on the sale of its Kansas City facility of $1,361,000 in fiscal 2017 partially offset by restructuring charges with no comparable event in fiscal 2018.
The Lighting Segment reported an operating loss of $(14,673,000) in the first nine months of fiscal 2018 and represents a $25,600,000 change from operating income of $10,972,000 in the same period of fiscal 2017 primarily due to a $28 million pre-tax goodwill impairment charge. The year-over-year change was also the net result of increased net sales, an increase in gross profit and gross profit as a percentage of sales, increased selling and administrative expenses, and plant closure costs including the sale of its Kansas City facility in fiscal 2017 with no comparable event in fiscal 2018.
Graphics Segment
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
59,458
|
|
|
$
|
55,939
|
|
Gross Profit
|
|
$
|
15,086
|
|
|
$
|
12,864
|
|
Operating Income
|
|
$
|
4,146
|
|
|
$
|
1,711
|
|
Graphics Segment net sales of $59,458,000 in the first nine months of fiscal 2018 increased $3.5 million or 6.3% from fiscal 2017 same period net sales of $55,939,000. The increase in sales was led by SOAR, the Company’s digital signage business.
Gross profit of $15,086,000 in the first nine months of fiscal 2018 increased $2.2 million or 17.3% from the same period of fiscal 2017. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) increased from 22.6% in the first nine months of fiscal 2017 to 24.9% in the same period in fiscal 2018. The change in amount of gross profit is due to the net effect of increased net sales (customer plus inter-segment net sales), an overall improvement in gross profit margins from the Company’s product, installation and shipping and handling sales, and decreased employee compensation and benefit expense ($0.5 million). The Company incurred $396,000 in the first nine months of fiscal 2017 related to the closure of its Woonsocket, Rhode Island facility with no comparable expense in fiscal 2018.
Selling and administrative expenses of $10,940,000 in the first nine months of fiscal 2018 decreased $0.2 million or 1.9% from fiscal 2017 selling and administrative expenses of $11,153,000. The Company recorded an intangible asset impairment expense of $479,000 in the first 9 months of fiscal 2017 with no comparable charge in fiscal 2018. There was an overall net increase in several expense categories which partially offset the overall reduction in selling and administrative expense due to the fiscal 2017 intangible asset impairment.
The Graphics Segment operating income of $4,146,000 in the first nine months of fiscal 2018 increased $2.4 million or 142% from operating income of $1,711,000 in the same period of fiscal 2017. The increase of $2.4 million was primarily the net result of increased net sales, increased gross profit and increased gross profit margin as a percentage of sales, and a reduction in selling and administrative costs.
Corporate and Eliminations
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
$
|
(34
|
)
|
|
$
|
499
|
|
Operating (Loss)
|
|
$
|
(8,977
|
)
|
|
$
|
(9,573
|
)
|
The gross profit (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $8,963,000 in the first nine months of fiscal 2018 decreased $1.1 million or 11.0% from the same period of the prior year. The $1.1 million decrease is primarily the result of restructuring costs of $0.1 million related to the consolidation of its Beaverton, Oregon facility and acquisition expenses of $1.5 million with no comparable costs in fiscal 2018 partially offset by a $0.3 million increase in outside service expense.
Consolidated Results
The Company reported $1.2 million of net interest expense in the first nine months of fiscal 2018 compared to net interest expense of $129,000 in the first nine months of fiscal 2017. The increase in interest expense is the result of borrowing against the Company’s line of credit to acquire Atlas in February 2017. Fiscal 2018 represents nine months of interest expense whereas fiscal 2017 represents slightly more than one month of interest expense.
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 $677,000 income tax expense in the first nine months of fiscal 2017 represents a consolidated effective tax rate of 22.7%. This is the net result of an income tax rate of 30.4% influenced by certain permanent book-tax differences, by a benefit related to uncertain income tax positions, a tax benefit related to disqualifying dispositions, and by a favorable adjustment to a deferred tax asset.
The Company reported a net loss of $(16,877,000) in the first nine months of fiscal 2018 as compared to net income of $2,304,000 in the same period of the prior year. The change between net income in fiscal 2017 to a net loss in fiscal 2018 is mostly driven by the $4.7 million charge in fiscal 2018 related to the re-valuation of the Company’s deferred tax assets and by the goodwill impairment. Also contributing to the year-over-year net change in net income are increased net sales, increased gross profit and an improvement of gross profit as a percentage of sales, increased selling and administrative expenses, and acquisition deal costs and restructuring and plant closure costs in fiscal 2017 with no comparable costs in fiscal 2018. Diluted loss per share of $(0.65) was reported in the first nine months of fiscal 2018 as compared to $0.09 diluted earnings per share in the same period of fiscal 2017. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first nine months of fiscal 2018 were 25,835,000 shares as compared to 25,909,000 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, 2018, the Company had working capital of $67.1 million, compared to working capital of $61.7 million at June 30, 2017. The ratio of current assets to current liabilities was 2.69 to 1 as compared to a ratio of 2.36 to 1 at June 30, 2017. The $5.4 million increase in working capital from June 30, 2017 to March 31, 2018 was primarily driven by an increase in net accounts receivable ($0.6 million), an increase in inventory ($1.7 million), a decrease in accounts payable ($3.0 million), and a decrease in accrued expenses ($2.6 million). The Company has a strategy of aggressively managing working capital, including reduction of the accounts receivable days sales outstanding (“DSO”) and reduction of inventory levels, without reducing service to its customers.
The Company generated cash of $6.9 million from operating activities in the first nine months of fiscal 2018 as compared to a source of cash of $12.9 million in the same period of the prior year. This $6.0 million decrease in net cash flows from operating activities is primarily the net result of an increase rather than a decrease in accounts receivable (unfavorable change of $6.0 million), an increase rather than a decrease in inventory (unfavorable change of $6.6 million), a larger decrease in accounts payable (unfavorable change of $2.1 million), a smaller decrease in accrued expenses and other (favorable change of $1.9 million), and a change from net income in fiscal 2017 to a net loss in fiscal 2018 more than offset by an increase in non-cash items (favorable change of $6.2 million).
Net accounts receivable were $49.5 million and $48.9 million at March 31, 2018 and June 30, 2017, respectively. DSO increased to 55 days at March 31, 2018 from 51 days at June 30, 2017. 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 $51.7 million at March 31, 2018 increased $1.7 million from $50.0 million at June 30, 2017. The increase of $1.7 million is the result of an increase in gross inventory of $2.2 million and an increase in obsolescence reserves of $0.5 million. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory increases occurred in the first nine months of fiscal 2018 in the Graphics Segment of approximately $1.4 million and in the Lighting Segment of $0.3 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 $100 million revolving line of credit with its bank, with $55.8 million of the credit line available as of April 22, 2018. This line of credit is a $100 million five year credit line expiring in the third quarter of fiscal 2022. The Company believes that its $100 million line of credit plus cash flows from operating activities are adequate for the Company’s fiscal 2018 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.
The Company used cash of $0.7 million related to investing activities in the first nine months of fiscal 2018 as compared to a use of cash of $95.5 million in the same period from the prior year, resulting in a favorable change of $94.9 million. Capital expenditures for the first nine months of fiscal 2018 decreased $1.4 million to $2.2 million from the same period in fiscal 2017. The Company sold its Woonsocket manufacturing facility for $1.5 million in fiscal 2018 and sold its Kansas City manufacturing facility for $3.1 million in fiscal 2017. The Company acquired Atlas Lighting Products in the third quarter of fiscal 2017, which used cash of $95.1 million which was mostly funded by the Company’s revolving line of credit (refer to the explanation below regarding the Company’s financing activities).
The Company used $7.2 million of cash related to financing activities in the first nine months of fiscal 2018 compared to a source of cash of $53.1 million in the first nine months of fiscal 2017. The $60.4 million unfavorable change in cash flow was primarily the result of the funding of the acquisition of Atlas through the Company’s line of credit in fiscal 2017 and the partial pay-down of the line of credit in fiscal 2018.
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 2018, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable May 15, 2018 to shareholders of record as of May 7, 2018. The indicated annual cash dividend rate for fiscal 2018 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
The Company is required to make estimates and judgments in the preparation of its financial statements that affect the reported amounts of assets, liabilities, revenues and expenses, and related footnote disclosures. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The Company continually reviews these estimates and their underlying assumptions to ensure they remain appropriate. The Company believes the items discussed below are among its most significant accounting policies because they utilize estimates about the effect of matters that are inherently uncertain and therefore are based on management’s judgment. Significant changes in the estimates or assumptions related to any of the following critical accounting policies could possibly have a material impact on the financial statements.
Revenue Recognition
Revenue is recognized when title to goods and risk of loss have passed to the customer, there is persuasive evidence of a purchase arrangement, delivery has occurred or services have been rendered, and collectability is reasonably assured. Sales are recorded net of estimated returns, rebates and discounts. Amounts received from customers prior to the recognition of revenue are accounted for as customer pre-payments and are included in accrued expenses.
The Company has multiple sources of revenue: revenue from product sales; revenue from installation of products; service revenue generated from providing integrated design, project and construction management, site engineering and site permitting, and commissioning of lighting controls; revenue from the management of media content and digital hardware related to active digital signage; and revenue from shipping and handling.
Product revenue is recognized on product-only orders upon passing of title and risk of loss, generally at time of shipment. In certain arrangements with customers, as is the case with the sale of some of our solid-state LED video screens, revenue is recognized upon customer acceptance of the video screen at the job site. Product revenue related to orders where the customer requires the Company to install the product is recognized when the product is installed. The company provides product warranties and certain post-shipment service, support and maintenance of certain solid-state LED video screens and billboards.
Installation revenue is recognized when the products have been fully installed. The Company is not always responsible for installation of products it sells and has no post-installation responsibilities, other than normal warranties.
Service revenue from integrated design, project and construction management, and site permitting is recognized when all products at a customer site have been installed.
Revenue from the management of media content and digital hardware related to active digital signage is recognized evenly over the service period with the customer. Media content service periods with most customers range from 1 month to 1 year.
Shipping and handling revenue coincides with the recognition of revenue from the sale of the product.
In situations where the Company is responsible for re-imaging programs with multiple sites, each site is viewed as a separate unit of accounting and has stand-alone value to the customer. Revenue is recognized upon the Company’s complete performance at the location, which may include a site survey, graphics products, lighting products, and installation of products. The selling price assigned to each site is based upon an agreed upon price between the Company and its customer and reflects the estimated selling price for that site relative to the selling price for sites with similar image requirements.
The Company also evaluates the appropriateness of revenue recognition in accordance with the accounting standard on software revenue recognition. Our solid-state LED video screens, billboards and active digital signage contain software elements which the Company has determined are incidental.
Income Taxes
The Company accounts for income taxes in accordance with the accounting guidance for income taxes. Accordingly, deferred income taxes are provided on items that are reported as either income or expense in different time periods for financial reporting purposes than they are for income tax purposes. Deferred income tax assets and liabilities are reported on the Company’s balance sheet. Significant management judgment is required in developing the Company’s income tax provision, including the estimation of taxable income and the effective income tax rates in the multiple taxing jurisdictions in which the Company operates, the estimation of the liability for uncertain income tax positions, the determination of deferred tax assets and liabilities, and any valuation allowances that might be required against deferred tax assets. The Company has adopted ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.” As a result of early adoption of this accounting guidance, prior periods have been re-classified, which only affected the financial statement presentation and not the measurement of deferred tax liabilities and assets.
The Company operates in multiple taxing jurisdictions and is subject to audit in these jurisdictions. The Internal Revenue Service and other tax authorities routinely review the Company’s tax returns. These audits can involve complex issues which may require an extended period of time to resolve. In management’s opinion, adequate provision has been made for potential adjustments arising from these audits.
The Company is recording estimated interest and penalties related to potential underpayment of income taxes as a component of tax expense in the Condensed Consolidated Statements of Operations. The reserve for uncertain tax positions is not expected to change significantly in the next twelve months.
The Tax Cuts and Jobs Act was signed into law on December 22nd, 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 tax year, the Company will have a U.S. statutory income tax rate of 27.7% for fiscal 2018, and will have a 21% U.S. statutory income tax rate for fiscal years thereafter. During the quarter ended December 31, 2017, the Company re-valued the deferred tax balances because of the change in U.S. tax rate resulting in a one-time deferred tax expense of $4,676,578.
Asset Impairment
Carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment in accordance with the accounting guidance on goodwill and intangible assets. The Company may first assess qualitative factors in order to determine if goodwill is impaired. If through the qualitative assessment it is determined that it is more likely than not that goodwill is not impaired, no further testing is required. If it is determined that it is more likely than not that goodwill is impaired, or if the Company elects not to first assess qualitative factors, the Company’s impairment testing continues at the reporting unit level with the estimation of the fair value of goodwill and indefinite-lived intangible assets using a combination of a market approach and an income (discounted cash flow) approach. The estimation of the fair value of goodwill and indefinite-lived intangible assets requires significant management judgment with respect to revenue and expense growth rates, changes in working capital and the selection and use of an appropriate discount rate. The estimates of fair value of reporting units are based on the best information available as of the date of the assessment. The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease an impairment charge. Company management uses its judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as adverse business conditions, a sustained drop in the Company’s stock price, economic factors and technological change or competitive activities may signal that an asset has become impaired.
Carrying values for long-lived tangible assets and definite-lived intangible assets, excluding goodwill and indefinite-lived intangible assets, are reviewed for possible impairment as circumstances warrant. Impairment reviews are conducted at the judgment of Company management when it believes that a change in circumstances in the business or external factors warrants a review. Circumstances such as the discontinuation of a product or product line, a sudden or consistent decline in the forecast for a product, changes in technology or in the way an asset is being used, a history of negative operating cash flow, or an adverse change in legal factors or in the business climate, among others, may trigger an impairment review. The Company’s initial impairment review to determine if a potential impairment charge is required is based on an undiscounted cash flow analysis at the lowest level for which identifiable cash flows exist. The analysis requires judgment with respect to changes in technology, the continued success of product lines and future volume, revenue and expense growth rates, and discount rates.
Credit and Collections
The Company maintains allowances for doubtful accounts receivable for probable estimated losses resulting from either customer disputes or the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against income. The Company determines its allowance for doubtful accounts by first considering all known collectability problems of customers’ accounts, and then applying certain percentages against the various aging categories based on the due date of the remaining receivables. The resulting allowance for doubtful accounts receivable is an estimate based upon the Company’s knowledge of its business and customer base, and historical trends. The amount ultimately not collected may differ from the reserve established, particularly in the case where percentages are applied against aging categories. In all cases, it is management’s goal to carry a reserve against the Company’s accounts receivable which is adequate based upon the information available at that time so that net accounts receivable is properly stated. The Company also establishes allowances, at the time revenue is recognized, for returns and allowances, discounts, pricing and other possible customer deductions. These allowances are based upon contractual terms and historical trends.
Warranty Reserves
The Company offers a limited warranty that its products are free from defects in workmanship and materials. The specific terms and conditions vary somewhat by product line, but generally cover defective products returned within one to five years, with some exceptions where the terms extend to ten years, from the date of shipment. The Company records warranty liabilities to cover the estimated future costs for repair or replacement of defective returned products as well as products that need to be repaired or replaced in the field after installation. The Company calculates its liability for warranty claims by applying estimates based upon historical claims as a percentage of sales to cover unknown claims, as well as estimating the total amount to be incurred for known warranty issues. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Inventory Reserves
The Company maintains an inventory reserve for probable obsolete and excess inventory. The Company first determines its obsolete inventory reserve by considering specific known obsolete items, and then by applying certain percentages to specific inventory categories based upon inventory turns. The Company uses various tools, in addition to inventory turns, to identify which inventory items have the potential to become obsolete. A combination of financial modeling and qualitative input factors are used to establish excess and obsolete inventory reserves and management adjusts these reserves as more information becomes available about the ultimate disposition of the inventory item. Management values inventory at lower of cost or market.
The Company is required to make estimates and judgments in the preparation of its financial statements that affect the reported amounts of assets, liabilities, revenues and expenses, and related footnote disclosures. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The Company continually reviews these estimates and their underlying assumptions to ensure they remain appropriate. The Company believes the items discussed below are among its most significant accounting policies because they utilize estimates about the effect of matters that are inherently uncertain and therefore are based on management’s judgment. Significant changes in the estimates or assumptions related to any of the following critical accounting policies could possibly have a material impact on the financial statements.
New Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board issued ASU 2014-09, “Revenue from Contracts with Customers.” This amended guidance supersedes and replaces all existing U.S. GAAP revenue recognition guidance. The guidance established a new revenue recognition model, changes the basis for deciding when revenue is recognized, provides new and more detailed guidance on specific revenue topics, and expands and improves disclosures about revenue. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing.” In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers: Narrow Scope Improvements and Practical Expedients.” In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” These three standards clarify or improve guidance from ASU 2014-09 and are effective for fiscal and interim periods within those years, beginning after December 15, 2017, or the Company’s fiscal 2019. The Company currently plans to adopt the new revenue guidance for the fiscal year beginning July 1, 2018 using the modified retrospective approach. The Company is reviewing accounting policies and evaluating disclosures in the financial statements related to the new standard. The Company is continuing to assess potential changes to the business processes, internal controls, and information systems related to the adoption of the new standard. While the Company is currently assessing the impact of the new standard, the Company’s revenue is primarily generated from the sale of finished products to customers. Those sales predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risks, and rewards transfer. The recognition of revenue from most product sales is largely unaffected by the new standard.
The Company’s assessment efforts to date have included reviewing current accounting policies, processes, and system requirements, as well as assigning internal resources and engaging third-party consultants to assist in the process. At this time, we do not anticipate significant changes to our systems or processes will be necessary for implementation of the standard. The Company anticipates that adoption will change the timing of revenue recognition from “point-in-time” to “over time” for a minority of our customer arrangements within our Graphics Segment. We are still examining whether any of our Lighting Segment customer arrangements will change to a “over time” revenue recognition, but currently we expect that over 90% of revenue in the Lighting Segment will be recognized at a “point-in-time” which will not change the way the Company recognizes revenue as compared to prior to the adoption of the new standard. For a minority of sales in our Graphics Segment, this change will accelerate revenue recognition from time of shipment to time of production. We anticipate the amount of accelerated revenue will consist of a portion of the balance of finished goods inventory on-hand at period end. However, the Company will not be able to make a complete determination about the impact of the standard on its consolidated financial statements until the time of adoption based upon outstanding contracts at that time. The new standard will also require additional disclosures regarding our revenue recognition policy. We are still assessing the impact of additional revenue recognition financial disclosures required by the new standard.
In July 2015, the Financial Accounting Standards Board issued ASU 2015-11, “Simplifying the Measurement of Inventory.” The amended guidance requires an entity to measure in scope inventory at lower of cost and net realizable value. The amended guidance is effective for fiscal years beginning after December 15, 2016, or the Company’s fiscal 2018. We adopted the new accounting standard in the first quarter of fiscal 2018 and there was no material impact on the Company’s consolidated financial statements.
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 not yet determined the impact the amended guidance will have on its financial statements.
In March 2016, the Financial Accounting Standards Board issued ASU 2016-08, “Principal versus Agent Considerations.” The amendment is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The amended guidance is effective for financial statements issued for fiscal and interim periods within those years, beginning after December 15, 2017, or the Company’s fiscal 2019, with early adoption permitted in fiscal years beginning after December 15, 2016. The Company has determined the amended guidance will have an immaterial impact on its financial statements.
In January 2017, the Financial Accounting Standards Board issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment”, which simplifies the testing for goodwill impairment by eliminating a previously required step. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2019, or the Company’s fiscal 2021. Early adoption of the accounting standard is permitted, and the Company elected to adopt this standard early. (See Footnote 7)
In March 2016, the Financial Accounting Standards Board issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This amended guidance simplifies several aspects of the accounting for share-based payment award transactions. The amended guidance is effective for financial statements issued for fiscal and interim periods within those years, beginning after December 15, 2016, or the Company’s fiscal 2018. We adopted this standard on July 1, 2017 and recognized excess tax benefits of $92,996 in income tax expense during the nine months ended March 31, 2018. The amount may not necessarily be indicative of future amounts that may be recognized as any excess tax benefits recognized would be dependent on future stock price, employee exercise behavior and applicable tax rates. Prior to July 1, 2017, excess tax benefits were recognized in additional paid-in capital. Additionally, excess tax benefits are now included in net cash flows provided by operating activities rather than net cash flows provided by financing activities in the Company’s Consolidated Statement of Cash Flows. The treatment of forfeitures has not changed, as the Company is electing to continue the current process of estimating forfeiture at the time of grant. The Company had no unrecognized excess tax benefits from prior periods to record upon the adoption of this ASU.
In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” This amendment provides additional guidance on the measurement of expected credit losses for financial assets based on historical experience, current conditions, and supportable forecasts. The amended guidance is effective for financial statements issued for fiscal and interim periods within those years, beginning after December 15, 2019, or the Company’s fiscal 2021. The Company is evaluating the impact of the amended guidance and the anticipated impact to the financial statements is not material.
In August 2016, the Financial Accounting Standards Board issued ASU 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments,” which provides cash flow classification guidance for certain cash receipts and cash payments. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, or the Company’s fiscal 2019. The Company is evaluating the impact the amended guidance will have on its financial statements.