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).
Our 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; Recent Developments
LSI Industries is a leading producer of high-performance, American-made lighting solutions. Our strength in outdoor lighting applications creates opportunities for us to introduce additional solutions to our valued customers. LSI’s indoor and outdoor products and services, including our digital and print graphics capabilities, are valued by architects, engineers, distributors and contractors for their quality, reliability and innovation. Our 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.
Although we are aggressively managing our response to the recent COVID-19 pandemic primarily through our focus on employee safety, customer service and support and cost-effective business continuity, the pandemic’s impact on our full year fiscal 2020 results and beyond is uncertain. We believe that the most significant elements of uncertainty relate to the intensity and duration of the impact on construction, renovation, and consumer spending as well as the ability of our sales channels, supply chains, manufacturing, and distribution to continue to operate with minimal disruption for the remainder of fiscal 2020 and beyond, all of which could negatively impact our financial position, results of operations, cash flows, and outlook. While we remain fully operational at all manufacturing facilities and practice safe engagement with our customers, agents and suppliers, we are attempting to mitigate the possible impacts of the COVID-19 pandemic on our business by taking certain expense management actions. Also, even though we have not recently experienced any issues with our supply chains, we have taken steps to diversify our supply chains so that we are not dependent on a sole supplier for certain raw materials. Because the duration and resulting economic disruption of the COVID-19 pandemic are unknown and impossible to determine at this time, we are uncertain regarding the extent to which the COVID-19 pandemic could have a material adverse effect on our ability to operate, results of operations, financial condition, liquidity and capital investments.
Net Sales by Business Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
March 31
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting Segment
|
|
$
|
49,013
|
|
|
$
|
52,785
|
|
|
$
|
165,640
|
|
|
$
|
177,871
|
|
Graphics Segment
|
|
|
21,997
|
|
|
|
20,047
|
|
|
|
76,448
|
|
|
|
69,459
|
|
|
|
$
|
71,010
|
|
|
$
|
72,832
|
|
|
$
|
242,088
|
|
|
$
|
247,330
|
|
Operating Income (Loss) by Business Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
March 31
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting Segment
|
|
$
|
1,102
|
|
|
$
|
691
|
|
|
$
|
13,411
|
|
|
$
|
(13,911
|
)
|
Graphics Segment
|
|
|
4,015
|
|
|
|
(898
|
)
|
|
|
6,394
|
|
|
|
2,350
|
|
Corporate and Eliminations
|
|
|
(2,486
|
)
|
|
|
(2,066
|
)
|
|
|
(8,575
|
)
|
|
|
(8,049
|
)
|
|
|
$
|
2,631
|
|
|
$
|
(2,273
|
)
|
|
$
|
11,230
|
|
|
$
|
(19,610
|
)
|
Summary Comments
As we mentioned in the prior two quarters, we are 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.
Net sales of $71.0 million for the three months ended March 31, 2020 decreased $1.8 million or 3% as compared to net sales of $72.8 million for the three months ended March 31, 2019. Net sales were favorably influenced by increased net sales of the Graphics Segment (an increase of $1.9 million or 10%) more than offset by decreased net sales of the Lighting Segment (a decrease of $3.8 million or 7%).
Net sales of $242.1 million for the nine months ended March 31, 2020 decreased $5.2 million or 2% as compared to net sales of $247.3 million for the nine months ended March 31, 2019. Net sales were favorably influenced by increased net sales of the Graphics Segment (an increase of $7.0 million or 10%) more than offset by decreased net sales of the Lighting Segment (a decrease of $12.2 million or 7%).
Operating income of $2.6 million for the three months ended March 31, 2020 represents a $4.9 million improvement from operating loss of ($2.3) million in the three months ended March 31, 2019. The $4.9 million improvement from operating loss in fiscal 2019 was impacted by the sale of the North Canton, Ohio facility in the third quarter of fiscal 2020 which favorably resulted in a pre-tax gain of $3.7 million. When the impact of the sale of the North Canton facility, other restructuring and other plant closure costs and severance are removed from the operating results, adjusted operating loss, a Non-GAAP measure, was ($0.4) million in the three months ended March 31, 2020 compared to ($1.9) million in the three months ended March 31, 2019. Refer to “Non-GAAP Financial Measures” below. The improvement in adjusted operating loss was the net result of higher value sales mix, lower selling and administrative expenses and cost savings from the closure of the New Windsor, New York facility.
Operating income of $11.2 million for the nine months ended March 31, 2020 represents a $30.8 million improvement from an operating loss of ($19.6) million in the nine months ended March 31, 2019. The $30.8 million improvement from operating loss in fiscal 2019 was impacted by the sale of the New Windsor, New York facility in the first quarter of fiscal 2020 which favorably resulted in a pre-tax gain of $4.8 million, the sale of the North Canton, Ohio facility in the third quarter of fiscal 2020 which favorably resulted in a pre-tax gain of $3.7 million, and a pre-tax $20.2 million goodwill impairment charge in the second quarter of fiscal 2019 with no comparable event in fiscal 2020. The period-over-period improvement in operating income was partially offset by 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 sales of the New Windsor and North Canton facilities, 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 $3.9 million in the nine months ended March 31, 2020 compared to $3.2 million in the nine months ended March 31, 2019. Refer to “Non-GAAP Financial Measures” below. The increase in adjusted operating income was the net result of higher value sales mix, lower selling and administrative expenses and cost savings from the closure of the New Windsor, New York facility.
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. Also included below are Non-GAAP financial measures including Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA and Adjusted EBITDA), Free Cash Flow and Net Debt. 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 along with the calculation of EBIDTA and Adjusted EBITDA, Free Cash Flow and Net Debt.
Reconciliation of operating income (loss) to adjusted operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) as reported
|
|
$
|
2,631
|
|
|
$
|
(2,273
|
)
|
|
|
|
|
|
|
|
|
|
Restructuring, plant closure (gain) costs and related inventory write-downs
|
|
|
(3,055
|
)
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
Severance costs
|
|
|
19
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Loss
|
|
$
|
(405
|
)
|
|
$
|
(1,863
|
)
|
Reconciliation of net income (loss) to adjusted net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
(In thousands, except per share data)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) as reported
|
|
$
|
1,861
|
|
|
$
|
0.07
|
|
|
$
|
(3,168
|
)
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring, plant closure (gain) costs and related inventory write-downs
|
|
|
(2,769
|
)
|
(1)
|
|
(0.10
|
)
|
|
|
115
|
|
(3)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance costs
|
|
|
17
|
|
(2)
|
|
-
|
|
|
|
(14
|
)
|
(4)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes
|
|
|
(174
|
)
|
|
|
(0.01
|
)
|
|
|
897
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss adjusted
|
|
$
|
(1,065
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(2,170
|
)
|
|
$
|
0.08
|
|
The income tax effects of the adjustments in the tables above were calculated using the estimated U.S. effective income tax rates for the periods indicated. The income tax effects were as follows (in thousands):
(1) ($286)
(2) $2
(3) $253
(4) $56
Reconciliation of operating income (loss) to adjusted operating income:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) as reported
|
|
$
|
11,230
|
|
|
$
|
(19,610
|
)
|
|
|
|
|
|
|
|
|
|
Restructuring, plant closure (gain) costs and related inventory write-downs
|
|
|
(7,367
|
)
|
|
|
1,991
|
|
|
|
|
|
|
|
|
|
|
Severance costs
|
|
|
73
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
20,165
|
|
|
|
|
|
|
|
|
|
|
Transition and re-alignment costs
|
|
|
-
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income
|
|
$
|
3,936
|
|
|
$
|
3,200
|
|
Reconciliation of net income (loss) to adjusted net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
(In thousands, except per share data)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) as reported
|
|
$
|
8,079
|
|
|
$
|
0.31
|
|
|
$
|
(17,201
|
)
|
|
$
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring, plant closure (gain) costs and related inventory write-downs
|
|
|
(5,995
|
)
|
(1)
|
|
(0.23
|
)
|
|
|
1,386
|
|
(3)
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance costs
|
|
|
61
|
|
(2)
|
|
-
|
|
|
|
372
|
|
(4)
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
15,361
|
|
(5)
|
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition and re-alignment costs
|
|
|
-
|
|
|
|
-
|
|
|
|
94
|
|
(6)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes
|
|
|
(609
|
)
|
|
|
(0.02
|
)
|
|
|
897
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income adjusted
|
|
$
|
1,536
|
|
|
$
|
0.06
|
|
|
$
|
908
|
|
|
$
|
0.03
|
|
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) ($1,372)
(2) $12
(3) $605
(4) $162
(5) $4,804
(6) $26
Reconciliation of operating income (loss) to EBITDA and Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
March 31
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) as reported
|
|
$
|
2,631
|
|
|
$
|
(2,273
|
)
|
|
$
|
11,230
|
|
|
$
|
(19,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
2,080
|
|
|
|
2,552
|
|
|
|
6,631
|
|
|
|
7,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
4,711
|
|
|
$
|
279
|
|
|
$
|
17,861
|
|
|
$
|
(11,823
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring, plant closure (gain) costs and related inventory write-downs
|
|
|
(3,055
|
)
|
|
|
368
|
|
|
|
(7,367
|
)
|
|
|
1,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance costs
|
|
|
19
|
|
|
|
42
|
|
|
|
73
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition and re-alignment costs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
1,675
|
|
|
$
|
689
|
|
|
$
|
10,567
|
|
|
$
|
10,987
|
|
Reconciliation of cash flow from operations to free cash flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
March 31
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow from Operations
|
|
$
|
(3,806
|
)
|
|
$
|
(1,243
|
)
|
|
$
|
17,097
|
|
|
$
|
6,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of facilities
|
|
|
7,700
|
|
|
|
-
|
|
|
|
20,032
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(419
|
)
|
|
|
(769
|
)
|
|
|
(1,538
|
)
|
|
|
(2,348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free Cash Flow
|
|
$
|
3,475
|
|
|
$
|
(2,012
|
)
|
|
$
|
35,591
|
|
|
$
|
4,037
|
|
Reconciliation of Net Debt
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt as reported
|
|
$
|
7,919
|
|
|
$
|
39,541
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as reported
|
|
|
820
|
|
|
|
966
|
|
|
|
|
|
|
|
|
|
|
Net Debt
|
|
$
|
7,099
|
|
|
$
|
38,575
|
|
Results of Operations
THREE MONTHS ENDED MARCH 31, 2020 COMPARED TO THREE MONTHS ENDED MARCH 31, 2019
Lighting Segment
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
49,013
|
|
|
$
|
52,785
|
|
Gross Profit
|
|
$
|
12,637
|
|
|
$
|
12,331
|
|
Operating Income (Loss)
|
|
$
|
1,102
|
|
|
$
|
691
|
|
Lighting Segment net sales of $49.0 million in the three months ended March 31, 2020 decreased 7% from net sales of $52.8 million in the same period in fiscal 2019. The 7% drop in sales is attributed to the continued transition toward a less commoditized, higher-value sales mix.
Gross profit of $12.6 million in the three months ended March 31, 2020 increased $0.3 million or 3% from the same period of fiscal 2019 and increased from 23.2% to 25.4% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The Lighting Segment incurred restructuring and plant closure costs that were recorded in cost of sales related to the closure of the New Windsor, New York facility $0.3 million in fiscal 2019. The increase in gross profit is also due to product mix and moving away from low-margin commodity business to higher margin market applications. Also contributing to the period-over-period improvement in gross profit are the cost savings from the closure of the New Windsor facility
Selling and administrative expenses of $11.5 million in the three months ended March 31, 2020 remained relatively flat from the same period of fiscal 2019.
Lighting Segment operating income of $1.1 million for the three months ended March 31, 2020 increased $0.4 million from operating income of $0.7 million in the same period of fiscal 2019 primarily due to restructuring and plant closure costs and severance related to the closure of its New Windsor facility in fiscal 2019.
Graphics Segment
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
21,997
|
|
|
$
|
20,047
|
|
Gross Profit
|
|
$
|
3,293
|
|
|
$
|
3,018
|
|
Operating Income (Loss)
|
|
$
|
4,015
|
|
|
$
|
(898
|
)
|
Graphics Segment net sales of $22.0 million in the three months ended March 31, 2020 increased $1.9 million or 10% from net sales of $20.0 million in the same period in fiscal 2019. The increase in sales is from growth in sales to the Petroleum market vertical.
Gross profit of $3.3 million in the three months ended March 31, 2020 increased $0.3 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) for the three months ended March 31, 2020 remained relatively flat from the same period of fiscal 2019.
Selling and administrative expenses, which showed a gain of ($0.7) million in the three months ended March 31, 2020, improved $4.6 million from $3.9 million in the same period of fiscal 2019. The $4.6 million improvement was primarily as a result of the $3.7 million pre-tax gain on the sale of the North Canton, Ohio facility in the third quarter of fiscal 2020. When the $3.7 million gain is removed from the third quarter of fiscal 2020 results, there was a $0.9 million or 23% decrease in selling and administrative expenses. The decrease in selling and administrative expenses was due to decreased wages and benefit expense due to lower headcount and a reduction in bad debt expense.
Graphics Segment operating income of $4.0 million in the three months ended March 31, 2020 increased $4.9 million from operating loss of ($0.9) million in the same period of fiscal 2019. The increase of $4.9 million was primarily the net result of the $3.7 million pre-tax gain on the sale of the North Canton, Ohio facility in the three months ended March 31, 2020. When all Non-GAAP items are removed from both fiscal years, Non-GAAP adjusted operating income for the three months ended March 31, 2020 was $1.0 million, or $1.9 million higher than Non-GAAP adjusted operating loss of ($0.9) million for the three months ended March 31, 2019 (refer to the Non-GAAP table below for a reconciliation of Graphics Segment operating income (loss) to adjusted operating income). The increase is due to the increase in sales and a decrease in selling and administrative expenses.
Reconciliation of Graphics Segment operating income (loss) to adjusted operating income (loss):
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
$
|
4,015
|
|
|
$
|
(898
|
)
|
Restructuring, plant closure (gain) costs and related inventory write-downs
|
|
|
(3,044
|
)
|
|
|
-
|
|
Severance
|
|
|
27
|
|
|
|
(9
|
)
|
Adjusted operating income (loss)
|
|
$
|
998
|
|
|
$
|
(907
|
)
|
Corporate and Eliminations
|
|
March 31
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
$
|
12
|
|
|
$
|
(12
|
)
|
Operating (Loss)
|
|
$
|
(2,486
|
)
|
|
$
|
(2,066
|
)
|
The gross profit (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $2.5 million in the three months ended March 31, 2020 increased $0.4 million or 22% from the same period of fiscal 2019. The increase is primarily the result of filling key vacancies in selling and administration.
Consolidated Results
We reported $0.1 million net interest expense in the three months ended March 31, 2020 compared to $0.6 million net interest expense in the three months ended March 31, 2019. The decrease in interest expense from fiscal 2019 to fiscal 2020 is the result of lower levels of debt outstanding on our line of credit. We also recorded other expense of $0.6 million in the three months ended March 31, 2020 compared to $0.2 million in the three months ended March 31, 2019, both of which are related to net foreign exchange currency transaction losses through our Mexican subsidiary. The increase in other expense for the three months ended March 31, 2020 was due to the devaluation of the Mexican Peso as a result of market conditions surrounding the COVID-19 pandemic.
We recorded less than $1,000 of income tax expense in the three months ended March 31, 2020 which was driven by a favorable deferred tax asset adjustment related to a Net Operating Loss (NOL) carryback from the CARES Act. The $0.1 million income tax expense in the three months ended March 31, 2019 was the result of a cumulative change to our estimated annual tax rate driven by the expected gain on the sale of the New Windsor, New York facility.
We reported net income of $1.9 million in the three months ended March 31, 2020 compared to net loss of ($3.2) million in the same period of fiscal 2019. The improvement in the net loss in the three months ended March 31, 2019 to net income in the three months ended March 31, 2020 is mostly driven by the pre-tax gain of $3.7 million on the sale of the North Canton, Ohio facility. When the impact of all Non-GAAP items is removed from both fiscal years, Non-GAAP adjusted net loss was ($1.1) million for the three months ended March 31, 2020 compared to adjusted net loss of ($2.2) million for the three months ended March 31, 2019 (Refer to the Non-GAAP tables above). The increase in Non-GAAP adjusted net income is primarily the net result of an improved gross profit margin, decreased interest expense, and a lower effective tax rate, partially offset by decreased net sales and higher foreign exchange currency transaction losses. Diluted earnings per share of $0.07 was reported in the three months ended March 31, 2020 as compared to ($0.12) 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 three months ended March 31, 2020 were 26,301,000 shares as compared to 26,132,000 shares in the same period last year.
NINE MONTHS ENDED MARCH 31, 2020 COMPARED TO NINE MONTHS ENDED MARCH 31, 2019
Lighting Segment
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
165,640
|
|
|
$
|
177,871
|
|
Gross Profit
|
|
$
|
45,357
|
|
|
$
|
42,548
|
|
Operating Income (Loss)
|
|
$
|
13,411
|
|
|
$
|
(13,911
|
)
|
Lighting Segment net sales of $165.6 million in the nine months ended March 31, 2020 decreased 7% from net sales of $177.9 million in the same period in fiscal 2019. 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 $45.4 million in the nine months ended March 31, 2020 increased $2.8 million or 7% from the same period of fiscal 2019 and increased from 23.7% to 27.0% 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 are the cost savings from the closure of the New Windsor facility.
Selling and administrative expenses of $31.9 million in the nine months ended March 31, 2020 decreased $24.5 million from selling and administrative expenses of $56.5 million in the same period in fiscal 2019, primarily due to the $4.8 million pre-tax gain on the sale of the New Windsor, New York facility in fiscal 2020 and the $20.2 million pre-tax goodwill impairment charge in fiscal 2019. When the $4.8 million gain is removed from fiscal 2020 results and the goodwill impairment charge is removed from fiscal 2019 results, there was a $0.5 million or 1% 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 in fiscal 2020 which is the result of lower sales volume.
Lighting Segment operating income of $13.4 million in the nine months ended March 31, 2020 increased $27.3 million from an operating loss of ($13.9) million 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 fiscal 2020 and a $20.2 million pre-tax goodwill impairment charge in fiscal 2019. When all Non-GAAP items are removed from both fiscal years, fiscal 2020 Non-GAAP adjusted operating income of $8.8 million was $0.3 million higher than fiscal 2019 Non-GAAP adjusted operating income of $8.5 million (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:
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
$
|
13,411
|
|
|
$
|
(13,911
|
)
|
Restructuring and plant closure (gain) costs
|
|
|
(4,674
|
)
|
|
|
1,991
|
|
Severance
|
|
|
18
|
|
|
|
237
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
20,165
|
|
Adjusted operating income
|
|
$
|
8,755
|
|
|
$
|
8,482
|
|
Graphics Segment
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
76,448
|
|
|
$
|
69,459
|
|
Gross Profit
|
|
$
|
12,384
|
|
|
$
|
13,727
|
|
Operating Income
|
|
$
|
6,394
|
|
|
$
|
2,350
|
|
Graphics Segment net sales of $76.4 million in the nine months ended March 31, 2020 increased $7.0 million or 10% net sales of $69.5 million in the same period of fiscal 2019. Growth was realized across the petroleum and digital signage product applications.
Gross profit of $12.4 million in the nine months ended March 31, 2020 decreased $1.3 million or 10% from the same period of fiscal 2019. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 19.7% in the nine months ended March 31, 2019 to 16.1% in the nine months ended March 31, 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, 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 $6.0 million in the nine months ended March 31, 2020 decreased $5.4 million or 47% from the same period of fiscal 2019 primarily as a result of the $3.7 million pre-tax gain on the sale of the North Canton, Ohio facility in the third quarter of fiscal 2020. When the $3.7 million gain is removed from the third quarter of fiscal 2020 results, there was a $1.6 million or 14% decrease in selling and administrative expenses. The decrease in selling and administrative expenses was due to decreased wages and benefit expense due to lower headcount and a reduction in bad debt expense.
Graphics Segment operating income of $6.4 million in the nine months ended March 31, 2020 increased $4.0 million from operating income of $2.4 million in the same period of fiscal 2019. The increase of $4.0 million was primarily the result of the $3.7 million pre-tax gain on the sale of the North Canton, Ohio facility.
Corporate and Eliminations
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
$
|
20
|
|
|
$
|
(21
|
)
|
Operating (Loss)
|
|
$
|
(8,575
|
)
|
|
$
|
(8,049
|
)
|
The gross profit (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $8.6 million in the nine months ended March 31, 2020 increased $0.6 million from the same period of fiscal 2019. The increase is primarily the result of filling key vacancies in selling and administration.
Consolidated Results
We reported $0.8 million net interest expense in the nine months ended March 31, 2020 compared to $1.7 million net interest expense in the nine months ended March 31, 2019. The decrease in interest expense from fiscal 2019 to fiscal 2020 is primarily the result of reduced borrowings against our line of credit. We also recorded other expense of $0.6 million in the nine months ended March 31, 2020 compared $0.2 million in the nine months ended March 31, 2019, both of which are related to net foreign exchange currency transaction losses through our Mexican subsidiary. The increase in other expense for the three months ended March 31, 2020 was due to the devaluation of the Mexican Peso as a result of market conditions surrounding the COVID-19 pandemic.
The $1.7 million income tax expense in the nine months ended March 31, 2020 represents a consolidated effective tax rate of 17.6%. The effective tax rate is mostly driven by the following: 1) a discrete item related to stock-based compensation expense; 2) a deferred tax asset adjustment related to a NOL carryback from the CARES Act, and; 3) the utilization of a capital loss carryforward related to the capital gain on the sale of the North Canton, Ohio facility. The $4.3 million income tax benefit in the nine months ended March 31, 2019 represents a consolidated effective tax rate of 20.0%, which is inclusive of a cumulative change to the estimated annual tax rate mostly due to the tax treated related to the fourth quarter of fiscal 2019 sale of the New Windsor, New York facility. Also impacting the consolidated tax benefit in the first nine months of fiscal 2019 is the second quarter goodwill impairment charge.
We reported net income of $8.1 million in the nine months ended March 31, 2020 compared to net loss of ($17.2) million in the same period of fiscal 2019. The change from the net loss in the nine months ended March 31, 2019 to the net income in the nine months ended March 31, 2020 is driven by the $3.7 million pre-tax gain on the sale of the North Canton, Ohio facility and the $4.8 million pre-tax gain on the sale of the New Windsor, New York facility in fiscal 2020 and the $20.2 million pre-tax goodwill impairment charge in fiscal 2019. When the impact of all Non-GAAP items is removed from both fiscal years, the fiscal 2020 Non-GAAP adjusted net income of $1.5 million increased $0.6 million from fiscal 2019 adjusted net income of $0.9 million (Refer to the Non-GAAP tables above). The increase in Non-GAAP adjusted net income is primarily the net result of an improved gross profit margin, decreased interest expense, and a lower effective tax rate, partially offset by decreased net sales and higher foreign exchange currency transaction losses. Diluted earnings per share of $0.31 was reported in the nine months ended March 31, 2020 as compared to ($0.66) 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 nine months ended March 31, 2020 were 26,423,000 shares as compared to 26,083,000 shares in the same period of fiscal 2019.
Liquidity and Capital Resources
We consider our level of cash on hand, borrowing capacity, current ratio and working capital levels to be our most important measures of short-term liquidity. For long-term liquidity indicators, we believe our ratio of long-term debt to equity and our historical levels of net cash flows from operating activities to be the most important measures.
At March 31, 2020, we had working capital of $56.4 million, compared to $71.1 million at June 30, 2019. The ratio of current assets to current liabilities was 2.45 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 $7.2 million decrease in working capital from June 30, 2019 to March 31, 2020 (as adjusted and excludes held for sale assets) is primarily driven by an $8.8 million decrease in accounts receivable, a $1.1 million decrease in accrued expense and a $0.9 million increase in refundable income taxes.
We generated $17.1 million of cash from operating activities in the nine months ended March 31, 2020 as compared to $6.4 million in the same period of fiscal 2019. This $10.7 million increase in net cash flows from operating activities is the result of our improved earnings as well as our ongoing strategy to aggressively manage our working capital which includes the reduction of accounts receivable days sales outstanding (DSO), increasing inventory turns while simultaneously reducing inventory levels, and effectively managing our supply chain which includes partnering with our suppliers to find the appropriate service level while effectively managing payment terms.
Net accounts receivable were $46.0 million and $54.7 million at March 31, 2020 and June 30, 2019, respectively. DSO decreased to 59 days at March 31, 2020 from 63 days at June 30, 2019. We believe that our receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.
Net inventories of $43.6 million at March 31, 2020 increased $0.1 million from $43.5 million at June 30, 2019. The decrease of $0.1 million is the result of a decrease in gross inventory of $0.9 million and a decrease in obsolescence reserves of $1.0 million. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory increased $1.7 million in the first nine months of fiscal 2020 in the Lighting Segment which was partially offset by a decrease in net inventory in the Graphics Segment of $1.6 million. We increased inventory in the Lighting Segment in anticipation for higher demand during the coming summer months.
Cash generated from operations and borrowing capacity under our line of credit is our primary source of liquidity. We have a secured $75 million revolving line of credit with our bank, with $63.7 million of the credit line available as of April 17, 2020. This line of credit is a $75 million five-year credit line expiring in the third quarter of fiscal 2022. We are in compliance with all of our loan covenants. We believe that our $75 million line of credit plus cash flows from operating activities are adequate for calendar year 2020 operational and capital expenditure needs. However, as the impact of COVID-19 on the economy and our operations evolves, we will continue to assess our liquidity needs.
We had a source of cash of $18.5 million related to investing activities in the nine months ended March 31, 2020 as compared to a use of $2.3 million in the same period of fiscal 2019, resulting in a favorable change of $20.8 million. Capital expenditures decreased from $2.3 million in the nine months ended March 31, 2019 to $1.5 million in the nine months ended March 31, 2020. We sold our New Windsor, New York manufacturing facility for $12.3 million in the first quarter of fiscal 2020 and our North Canton, Ohio facility for $7.7 million in the third quarter of fiscal 2020, which were the primary contributing factors to the increase in cash flow from investing activities from fiscal 2019 to fiscal 2020.
We used $35.5 million of cash related to financing activities in the nine months ended March 31, 2020 compared to $5.5 million in the nine months ended March 31, 2019. The $30.0 million 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.
We have on our 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
We have no financial instruments with off-balance sheet risk and have no off-balance sheet arrangements.
Cash Dividends
In April 2020, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable May 12, 2020 to shareholders of record as of May 4, 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 our 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.