ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note About Forward-Looking Statements
This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including this section. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in in our Annual Report on Form 10-K in the following sections: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures about Market Risk,” and “Risk Factors.” All of those risks and uncertainties are incorporated herein by reference. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of LSI Industries Inc. MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended June 30, 2019, and our financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).
The Company’s condensed consolidated financial statements, accompanying notes and the “Safe Harbor” Statement, each as appearing earlier in this report, should be referred to in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
LSI Industries is a leading producer of high-performance, American-made lighting solutions. The Company’s strength in outdoor lighting applications creates opportunities for it to introduce additional solutions to its valued customers. LSI’s indoor and outdoor products and services, including its digital and print graphics capabilities, are valued by architects, engineers, distributors and contractors for their quality, reliability and innovation. The Company’s products are used extensively in automotive dealerships, petroleum stations, quick service restaurants, grocery stores and pharmacies, retail establishments, sports complexes, parking lots and garages, and commercial and industrial buildings.
Net Sales by Business Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31
|
|
|
December 31
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting Segment
|
|
$
|
53,436
|
|
|
$
|
63,654
|
|
|
$
|
116,627
|
|
|
$
|
125,086
|
|
Graphics Segment
|
|
|
28,941
|
|
|
|
25,887
|
|
|
|
54,451
|
|
|
|
49,412
|
|
|
|
$
|
82,377
|
|
|
$
|
89,541
|
|
|
$
|
171,078
|
|
|
$
|
174,498
|
|
Operating Income (Loss) by Business Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31
|
|
|
December 31
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting Segment
|
|
$
|
3,150
|
|
|
$
|
(18,452
|
)
|
|
$
|
12,309
|
|
|
$
|
(14,602
|
)
|
Graphics Segment
|
|
|
1,362
|
|
|
|
861
|
|
|
|
2,379
|
|
|
|
3,248
|
|
Corporate and Eliminations
|
|
|
(2,752
|
)
|
|
|
(2,680
|
)
|
|
|
(6,089
|
)
|
|
|
(5,983
|
)
|
|
|
$
|
1,760
|
|
|
$
|
(20,271
|
)
|
|
$
|
8,599
|
|
|
$
|
(17,337
|
)
|
Summary Comments
Fiscal 2020 second quarter net sales of $82,377,000 decreased $7.2 million or 8% as compared to second quarter fiscal 2019 net sales of $89,541,000. Net sales were favorably influenced by increased net sales of the Graphics Segment (an increase of $3.0 million or 12%) more than offset by decreased net sales of the Lighting Segment (a decrease of $10.2 million or 16%).
Fiscal 2020 first half net sales of $171,078,000 decreased $3.4 million or 2% as compared to first half fiscal 2019 net sales of $174,498,000. Net sales were favorably influenced by increased net sales of the Graphics Segment (an increase of $5.0 million or 10%) more than offset by decreased net sales of the Lighting Segment (a decrease of $8.4 million or 7%).
Fiscal 2020 second quarter operating income of $1.8 million represents a $22.1 million improvement from operating loss of $(20.3) million in the second quarter of fiscal 2019. The $22.1 million improvement from operating loss in fiscal 2019 was primarily the result of a pre-tax $20.2 million goodwill impairment charge in the Lighting Segment in the second quarter of fiscal 2019. When the impact of the goodwill impairment charge along with other restructuring and plant closure costs are removed from operating results, adjusted operating income, a non-GAAP financial measure, was $2.1 million in the second quarter of fiscal 2020 compared to $1.5 million in the second quarter of fiscal 2019. Refer to “Non-GAAP Financial Measures” below. The increase in adjusted operating income was the result of a decrease in selling and administrative expenses coupled with an improved margin on lower net sales. The Company is transitioning from low margin commodity business to focus on higher margin applications and solutions, resulting in lower sales in the short term and improved margins.
Fiscal 2020 first half operating income of $8.6 million represents a $25.9 million improvement from an operating loss of $(17.3) million in the first half of fiscal 2019. The $25.9 million improvement from operating loss in fiscal 2019 was impacted by the sale of the Company’s New Windsor, New York facility in the first quarter of fiscal 2020 which favorably resulted in a pre-tax gain of $4.8 million and a pre-tax $20.2 million goodwill impairment charge in the second quarter of fiscal 2019. Also contributing to the period-over-period improvement in operating income is a one-time adjustment to a Company benefit plan in fiscal 2019 which resulted in a favorable pre-tax adjustment to earnings of $1.2 million. When the impact of the sale of the New Windsor facility, the goodwill impairment charge and other restructuring and plant closure costs are removed from the operating results, adjusted operating income, a non-GAAP measure, was $4.3 million in the first half of fiscal 2020 compared to $5.1 million in the first half of fiscal 2019. Refer to “Non-GAAP Financial Measures” below. The decrease in adjusted operating income was the net result of decreased net sales, improved margins on lower sales and a decrease in selling and administrative expenses. As we mention above, the Company is transitioning from low margin commodity business to focus on higher margin applications and solutions, resulting in lower sales in the short term and improved margins.
Non-GAAP Financial Measures
We believe it is appropriate to evaluate our 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, 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.
Reconciliation of operating income (loss) to adjusted operating income:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) as reported
|
|
$
|
1,760
|
|
|
$
|
(20,271
|
)
|
|
|
|
|
|
|
|
|
|
Restructuring and plant closure costs
|
|
|
276
|
|
|
|
1,033
|
|
|
|
|
|
|
|
|
|
|
Severance costs
|
|
|
54
|
|
|
|
492
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
20,165
|
|
|
|
|
|
|
|
|
|
|
Transition and re-alignment costs
|
|
|
-
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income
|
|
$
|
2,090
|
|
|
$
|
1,539
|
|
Reconciliation of net income (loss) to adjusted net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31
|
|
(In thousands, except per share data)
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) as reported
|
|
$
|
1,743
|
|
|
|
$
|
0.07
|
|
|
$
|
(15,782
|
)
|
|
|
$
|
(0.61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and plant closure costs
|
|
|
223
|
|
(1)
|
|
|
0.01
|
|
|
|
817
|
|
(3)
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance costs
|
|
|
44
|
|
(2)
|
|
|
-
|
|
|
|
385
|
|
(4)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
|
-
|
|
|
|
15,361
|
|
(5)
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition and re-alignment costs
|
|
|
-
|
|
|
|
|
-
|
|
|
|
94
|
|
(6)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes
|
|
|
(435
|
)
|
|
|
|
(0.02
|
)
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income adjusted
|
|
$
|
1,575
|
|
|
|
$
|
0.06
|
|
|
$
|
875
|
|
|
|
$
|
0.03
|
|
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) $53
(2) $10
(3) $216
(4) $107
(5) $4,804
(6) $26
Reconciliation of operating income (loss) to adjusted operating income:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
December 31
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) as reported
|
|
$
|
8,599
|
|
|
$
|
(17,337
|
)
|
|
|
|
|
|
|
|
|
|
Restructuring and plant closure (gain) costs
|
|
|
(4,312
|
)
|
|
|
1,623
|
|
|
|
|
|
|
|
|
|
|
Severance costs
|
|
|
54
|
|
|
|
492
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
20,165
|
|
|
|
|
|
|
|
|
|
|
Transition and re-alignment costs
|
|
|
-
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income
|
|
$
|
4,341
|
|
|
$
|
5,063
|
|
Reconciliation of net income (loss) to adjusted net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
December 31
|
|
(In thousands, except per share data)
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) as reported
|
|
$
|
6,218
|
|
|
|
$
|
0.24
|
|
|
$
|
(14,033
|
)
|
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and plant closure (gain) costs
|
|
|
(3,226
|
)
|
(1)
|
|
|
(0.12
|
)
|
|
|
1,271
|
|
(3)
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance costs
|
|
|
44
|
|
(2)
|
|
|
-
|
|
|
|
385
|
|
(4)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
|
-
|
|
|
|
15,361
|
|
(5)
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition and re-alignment costs
|
|
|
-
|
|
|
|
|
-
|
|
|
|
94
|
|
(6)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes
|
|
|
(435
|
)
|
|
|
|
(0.02
|
)
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income adjusted
|
|
$
|
2,601
|
|
|
|
$
|
0.10
|
|
|
$
|
3,078
|
|
|
|
$
|
0.12
|
|
The reconciliation of reported net income (loss) and earnings (loss) 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.
The income tax effects of the adjustments in the tables above were calculated using the estimated U.S. effective income tax rates for the periods indicated. The income tax effects were as follows (in thousands):
(1) $(1,086)
(2) $10
(3) 352
(4) 107
(5) 4,804
(6) 26
Results of Operations
THREE MONTHS ENDED DECEMBER 31, 2019 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2018
Lighting Segment
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
53,436
|
|
|
$
|
63,654
|
|
Gross Profit
|
|
$
|
15,501
|
|
|
$
|
14,742
|
|
Operating Income (Loss)
|
|
$
|
3,150
|
|
|
$
|
(18,452
|
)
|
Lighting Segment net sales of $53,436,000 in the second quarter of fiscal 2020 decreased 16% from fiscal 2019 same period net sales of $63,654,000. The 16% drop in sales is attributed to the continued transition toward a less commoditized, higher-value sales mix and the softness in select vertical markets.
Gross profit of $15,501,000 in the second quarter of fiscal 2020 increased $0.8 million or 5% from the same period of fiscal 2019, and increased from 22.8% to 28.5% 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 $1,008,000 in fiscal 2019 with no comparable costs in fiscal 2020. The increase in gross profit is also due to product mix and moving away from low-margin commodity business to higher value opportunities which contributed to the improvement in gross profit margin.
Selling and administrative expenses of $12,351,000 in the second quarter of fiscal year 2020 decreased $20.8 million from the same period of fiscal 2019 selling and administrative expenses of $33,194,000, primarily due to the $20.2 million pre-tax goodwill impairment charge in the second quarter of fiscal 2019. When the goodwill impairment charge is removed from fiscal 2019 results, there was a $0.7 million or 5% reduction in selling and administrative expenses. The reduction in selling and administrative expenses is mostly driven by lower commission expense due to lower sales volume.
Lighting Segment second quarter fiscal 2020 operating income of $3,150,000 increased $21.6 million from operating loss of $(18,452,000) in the same period of fiscal 2019 primarily due to a $20.2 million pre-tax goodwill impairment charge in the second quarter of fiscal 2019. When all non-GAAP charges are removed from both fiscal years, fiscal 2020 adjusted operating income, a non-GAAP financial measure, was $3,166,000 compared to $2,929,000 in fiscal 2019 (refer to the non-GAAP table below for a reconciliation of Lighting Segment operating income (loss) to adjusted operating income). The reduction in sales volume was partially offset by higher gross profit margin and lower selling and administrative expenses.
Reconciliation of Lighting Segment operating income (loss) to adjusted operating income:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
$
|
3,150
|
|
|
$
|
(18,452
|
)
|
Restructuring and plant closure costs
|
|
|
(2
|
)
|
|
|
1,033
|
|
Severance
|
|
|
18
|
|
|
|
183
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
20,165
|
|
Adjusted operating income
|
|
$
|
3,166
|
|
|
$
|
2,929
|
|
Graphics Segment
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
28,941
|
|
|
$
|
25,887
|
|
Gross Profit
|
|
$
|
4,465
|
|
|
$
|
4,927
|
|
Operating Income (Loss)
|
|
$
|
1,362
|
|
|
$
|
861
|
|
Graphics Segment net sales of $28,941,000 in the second quarter of fiscal 2020 increased $3.0 million or 12% from fiscal 2019 same period net sales of $25,887,000. Most of the increase in sales is from growth in sales to the Petroleum market.
Gross profit of $4,465,000 in the second quarter of fiscal 2020 decreased $0.5 million or 9% from the same period of fiscal 2019. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 19.0% in the second quarter of fiscal 2019 to 15.4% in the second quarter of fiscal 2020. As reported in the previous quarter, 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 $3,103,000 in the second quarter of fiscal 2020 decreased $1.0 million or 24% from the same period of fiscal 2019 as a result of decreased wages and benefit expense due to lower headcount and a reduction in bad debt expense.
Graphics Segment second quarter fiscal 2020 operating income of $1,362,000 increased $0.5 million or 58% from operating income of $861,000 in the same period of fiscal 2019. The increase of $0.5 million was primarily the net result of an increase in sales and a decrease in selling and administrative expenses partially offset by decreased gross profit and decreased gross profit margin as a percentage of sales.
Corporate and Eliminations
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|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Gross (Loss)
|
|
$
|
(2
|
)
|
|
$
|
(13
|
)
|
Operating (Loss)
|
|
$
|
(2,752
|
)
|
|
$
|
(2,680
|
)
|
The gross (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $2,750,000 in the second quarter of fiscal 2020 increased $0.1 million or 3% from the same period of the prior year. The increase is primarily the result of several increases and decreases across several cost categories.
Consolidated Results
The Company reported $233,000 net interest expense in the second quarter of fiscal 2020 compared to $615,000 net interest expense in the second quarter of fiscal 2019. The decrease in interest expense from fiscal 2019 to fiscal 2020 is the result of lower levels of debt outstanding on the Company’s line of credit. The Company also recorded $91,000 of other income related to net foreign exchange currency transaction gains from transactions with its customers and suppliers through its Mexican subsidiary.
The $125,000 income tax benefit in the second quarter of fiscal 2020 was driven by a lower estimated annualized income tax rate at the end of the second quarter compared to the income tax rate at the end of the first quarter. The lower estimated annualized income tax rate is due to the utilization of a capital loss carryforward related to the anticipated capital gain on the sale of the North Canton, Ohio facility. The $5,104,000 income tax benefit in the second quarter of fiscal 2019 represented a consolidated effective tax rate of 24.4%, which is slightly higher than the expected annual rate of 23% due to the fiscal 2019 second quarter goodwill impairment.
The Company reported net income of $1,743,000 in the second quarter of fiscal 2020 compared to net loss of $(15,782,000) in the same period of the prior year. The improvement in the net loss in the second quarter of fiscal 2019 to net income in the second quarter of fiscal 2020 is mostly driven by the $20.2 million pre-tax goodwill impairment charge in the second quarter of fiscal 2019 with no comparable charge in the second quarter of fiscal 2020. To a lesser degree, there were other non-GAAP charges in both fiscal years besides the goodwill impairment impacting the comparable quarter-over-quarter results (refer to the non-GAAP tables above.) When the impact of all non-GAAP charges is removed from both fiscal years, the fiscal 2020 adjusted net income, a non-GAAP financial measure, of $1,575,000 increased $0.7 million from fiscal 2019 adjusted net income of $875,000. The increase in adjusted net income is primarily the net result of lower net sales, improved gross margin percentage on lower net sales, decreased interest expense, decreased selling and administrative expenses, and a lower tax rate. Diluted earnings per share of $0.07 was reported in the second quarter of fiscal 2020 as compared to $(0.61) diluted loss per share in the same period of fiscal 2019. The weighted average common shares outstanding for purposes of computing diluted earnings (loss) per share in the second quarter of fiscal 2020 were 26,534,000 shares as compared to 26,083,000 shares in the same period last year.
SIX MONTHS ENDED DECEMBER 31, 2019 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2018
Lighting Segment
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|
|
|
|
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|
|
|
Six Months Ended
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|
|
|
December 31
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
116,627
|
|
|
$
|
125,086
|
|
Gross Profit
|
|
$
|
32,720
|
|
|
$
|
30,217
|
|
Operating Income (Loss)
|
|
$
|
12,309
|
|
|
$
|
(14,602
|
)
|
Lighting Segment net sales of $116,627,000 in the first half of fiscal 2020 decreased 7% from fiscal 2019 same period net sales of $125,086,000. The reduction in sales is attributed to the continued transition toward a less commoditized, higher-value sales mix and the softness in select vertical markets.
Gross profit of $32,720,000 in the first half of fiscal 2020 increased $2.5 million or 8% from the same period of fiscal 2019 and increased from 23.9% to 27.7% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The growth in gross profit and gross profit as a percentage of sales is due to continued favorable price/mix. Also contributing to the period-over-period improvement in gross profit is the initial cost savings from the closure of the Company’s New Windsor, New York facility.
Selling and administrative expenses of $20,411,000 in the first half of fiscal 2020 decreased $24.4 million from the same period of fiscal 2019 selling and administrative expenses of $44,819,000, primarily due to the $4.8 million pre-tax gain on the sale of the New Windsor, New York facility in the first half of fiscal 2020 and the $20.2 million pre-tax goodwill impairment charge in the first half of fiscal 2019. When the $4.8 million gain is removed from fiscal 2020 results and the goodwill impairment charge was removed from fiscal 2019 results, there was a $0.6 million or 2% increase in selling and administrative expenses. The increase in selling and administrative expenses is mostly driven by a one-time adjustment to a Company benefit plan in fiscal 2019 with no comparable event in fiscal 2020 partially offset by lower commission expense which is the result of decreased sales volume.
Lighting Segment first half fiscal 2020 operating income of $12,309,000 increased $26.9 million from an operating loss of $(14,602,000) in the same period of fiscal 2019 primarily due to the $4.8 million pre-tax gain on the sale of the New Windsor, New York facility in the first half of fiscal 2020 and a $20.2 million pre-tax goodwill impairment charge in the first half of fiscal 2019. When all non-GAAP charges are removed from both fiscal years, fiscal 2020 Non-GAAP adjusted operating income of $7,676,000 was $0.3 million higher than fiscal 2019 Non-GAAP adjusted operating income of $7,369,000 (refer to the non-GAAP table below for a reconciliation of Lighting Segment operating income (loss) to adjusted operating income). The increase in Non-GAAP adjusted operating income is due to higher gross profit and improved gross profit as a percentage of sales partially offset by a decrease in sales volume and higher selling and administrative expenses.
Reconciliation of Lighting Segment operating income (loss) to adjusted operating income:
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
December 31
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
$
|
12,309
|
|
|
$
|
(14,602
|
)
|
Restructuring and plant closure costs
|
|
|
(4,651
|
)
|
|
|
1,623
|
|
Severance
|
|
|
18
|
|
|
|
183
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
20,165
|
|
Adjusted operating income
|
|
$
|
7,676
|
|
|
$
|
7,369
|
|
Graphics Segment
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
December 31
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
54,451
|
|
|
$
|
49,412
|
|
Gross Profit
|
|
$
|
9,091
|
|
|
$
|
10,709
|
|
Operating Income
|
|
$
|
2,379
|
|
|
$
|
3,248
|
|
Graphics Segment net sales of $54,451,000 in the first half of fiscal 2020 increased $5.0 million or 10% from fiscal 2019 same period net sales of $49,412,000. Growth was realized across the petroleum and digital signage product applications.
Gross profit of $9,091,000 in the first half of fiscal 2020 decreased $1.6 million or 15% from the same period of fiscal 2019. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 21.6% in the first half of fiscal 2019 to 16.7% in the first half of fiscal 2020. The decrease in amount of gross profit is due to the net effect of increased net sales (customer plus inter-segment net sales) offset by a change in customer program mix. Graphics gross margin was unfavorably impacted by several factors including: new and early stage petroleum products and start-up costs associated therewith, improved inventory levels and impact of lower absorption, alignment of manufacturing resources required to support the transition from print to digital in certain market applications, and a one-time adjustment to a Company benefit plan in fiscal 2019 with no comparable event in fiscal 2020.
Selling and administrative expenses of $6,712,000 in the first half of fiscal 2020 decreased $0.7 million or 10% from the same period of fiscal 2019 primarily as a result of decreased wages and benefit expense due to lower headcount and a reduction in bad debt expense.
Graphics Segment first half fiscal 2020 operating income of $2,379,000 decreased $0.9 million or 27% from operating income of $3,248,000 in the same period of fiscal 2019. The decrease of $0.9 million was primarily the net result of increased net sales and lower selling and administrative costs more than offset by decreased gross profit and decreased gross profit margin as a percentage of sales.
Corporate and Eliminations
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
December 31
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
$
|
8
|
|
|
$
|
(9
|
)
|
Operating (Loss)
|
|
$
|
(6,089
|
)
|
|
$
|
(5,983
|
)
|
The gross profit (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $6,097,000 in the first half of fiscal 2020 increased $0.1 million from the same period of the prior year. The increase is primarily the result of several increases and decreases across several cost categories.
Consolidated Results
The Company reported $664,000 net interest expense in the first half of fiscal 2020 compared to $1,133,000 net interest expense in the first half of fiscal 2019. The decrease in interest expense from fiscal 2019 to fiscal 2020 is primarily the result of reduced borrowings against the Company’s line of credit. The Company also recorded $9,000 of other income related to net foreign exchange currency transaction gains from transactions with its customers and suppliers through its Mexican subsidiary.
The $1,726,000 income tax expense in the first half of fiscal 2020 represents a consolidated effective tax rate of 21.7% influenced mostly by a discrete item related to stock-based compensation expense and the utilization of a capital loss carryforward related to the anticipated capital gain on the sale of the North Canton, Ohio facility. The $4,437,000 income tax benefit in the first half of fiscal 2019 represents a consolidated effective tax rate of 24.0%, which is slightly higher than the expected annual rate of 23% due to the goodwill impairment.
The Company reported a net income of $6,218,000 in the first half of fiscal 2020 compared to net loss of $(14,033,000) in the same period of the prior year. The improvement from the net loss in the first half of fiscal 2019 to the net income in the first half of fiscal 2020 is driven by the $4.8 million pre-tax gain on the sale of the Company’s New Windsor, New York facility in the first half of fiscal 2020 and the $20.2 million pre-tax goodwill impairment charge in the first half of fiscal 2019. To a lesser degree, there were other non-GAAP charges in both fiscal years besides the gain on the New Windsor, New York facility and goodwill impairment charge (Refer to the Non-GAAP tables above.) When the impact of all non-GAAP charges is removed from both fiscal years, the fiscal 2020 Non-GAAP adjusted net income of $2,601,000 decreased $0.5 million from fiscal 2019 adjusted net income of $3,078,000. The decrease in Non-GAAP adjusted net income is primarily the net result of decreased net sales partially offset by an improved gross profit margin, decreased selling and administrative expenses, decreased interest expense, and a lower effective tax rate. Diluted earnings per share of $0.24 was reported in the first half of fiscal 2020 as compared to $(0.54) diluted loss per share in the same period of fiscal 2019. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first half of fiscal 2020 were 26,364,000 shares as compared to 26,058,000 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 December 31, 2019, the Company had working capital of $51.6 million, compared to $71.1 million at June 30, 2019. The ratio of current assets to current liabilities was 2.24 to 1 as compared to a ratio of 2.78 to 1 at June 30, 2019. The balance sheet at June 30, 2019 included an asset held for sale of $7.5 million which was sold in the first quarter of fiscal 2020. When June 30, 2019 current assets are revised to exclude the asset held for sale, adjusted working capital, a non-GAAP financial measure, and the ratio of current assets to current liability are $63.6 million and 2.59 to 1, respectively, as of June 30, 2019. The $12.0 million decrease in working capital from June 30, 2019 to December 31, 2019 (as adjusted and excludes held for sale assets) is primarily driven by a $10.2 million decrease in accounts receivable and an increase in accounts payable of $1.9 million.
The Company generated $20.9 million of cash from operating activities in the first half of fiscal 2020 as compared to $7.6 million in the same period of the prior year. This $13.3 million increase in net cash flows from operating activities is the result of the Company’s ongoing strategy to aggressively manage its working capital which includes the reduction of accounts receivable days sales outstanding (DSO), increasing inventory turns while simultaneously reducing inventory levels, and effectively managing the Company’s supply chain which includes partnering with its suppliers to find the appropriate service level while effectively managing payment terms.
Net accounts receivable were $44.5 million and $54.7 million at December 31, 2019 and June 30, 2019, respectively. DSO decreased to 54 days at December 31, 2019 from 63 days at June 30, 2019. The Company believes that its receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.
Net inventories of $43.3 million at December 31, 2019 decreased $0.2 million from $43.5 million at June 30, 2019. The decrease of $0.2 million is the result of a decrease in gross inventory of $0.4 million and a decrease in obsolescence reserves of $0.2 million. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory decreased $1.4 million in the first half of fiscal 2020 in the Graphics Segment which was partially offset by an increase in net inventory in the Lighting Segment of $1.2 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 $66.6 million of the credit line available as of January 16, 2020. This line of credit is a $75 million five-year credit line expiring in the third quarter of fiscal 2022. The Company believes that its $75 million line of credit plus cash flows from operating activities are adequate for the Company’s fiscal 2020 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.
The Company had a source of cash of $11.2 million related to investing activities in the first half of fiscal 2020 as compared to a use of $1.6 million in the same period of the prior year, resulting in a favorable change of $12.8 million. Capital expenditures for the first half of fiscal 2020 decreased from $1.6 million in fiscal 2019 to $1.1 million in fiscal 2020. The Company sold its New Windsor, New York manufacturing facility for $12.3 million in the first quarter of fiscal 2020 which was the primary contributing factor to the increase in cash flow from investing activities from fiscal 2019 to fiscal 2020.
The Company used $31.8 million of cash related to financing activities in the first half of fiscal 2020 compared to a source of cash of $0.3 million in the first half of fiscal 2019. The $32.1 million unfavorable change in cash flow was primarily the net result of payments of long-term debt in excess of borrowings which was primarily driven by cash flow from operations.
The Company has 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.
Cash Dividends
In February 2020, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable February 26, 2020 to shareholders of record as of February 18, 2020. The indicated annual cash dividend rate for fiscal 2020 is $0.20 per share. The Board of Directors has adopted a policy regarding dividends which indicates that dividends will be determined by the Board of Directors in its discretion based upon its evaluation of earnings, cash flow requirements, financial condition, debt levels, stock repurchases, future business developments and opportunities, and other factors deemed relevant.
Critical Accounting Policies and Estimates
A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2019 Annual Report on Form 10-K.