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
|
|
|
Six Months Ended
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting Segment
|
|
$
|
63,654
|
|
|
$
|
69,174
|
|
|
$
|
125,086
|
|
|
$
|
137,602
|
|
Graphics Segment
|
|
|
25,887
|
|
|
|
23,131
|
|
|
|
49,412
|
|
|
|
42,169
|
|
|
|
$
|
89,541
|
|
|
$
|
92,305
|
|
|
$
|
174,498
|
|
|
$
|
179,771
|
|
Operating (Loss) Income by Business Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting Segment
|
|
$
|
(18,452
|
)
|
|
$
|
5,275
|
|
|
$
|
(14,602
|
)
|
|
$
|
(17,655
|
)
|
Graphics Segment
|
|
|
861
|
|
|
|
2,255
|
|
|
|
3,248
|
|
|
|
3,731
|
|
Corporate and Eliminations
|
|
|
(2,680
|
)
|
|
|
(2,983
|
)
|
|
|
(5,983
|
)
|
|
|
(6,343
|
)
|
|
|
$
|
(20,271
|
)
|
|
$
|
4,547
|
|
|
$
|
(17,337
|
)
|
|
$
|
(20,267
|
)
|
Summary Comments
We are in the business of designing, manufacturing and marketing lighting, graphics and technology solutions for both indoor and outdoor applications. Historically, sales of our products have been subject to cyclical variations caused by competitive pressures that affect selling prices, changes in general economic conditions, and other factors. Our operating results in the fiscal 2019 second quarter reflect the continued softness and competitiveness in both our project and stock and flow markets, a shift in focus to pursue higher value-add customer opportunities, a mix of new larger customers, a shift in product mix, and pricing below prior year levels for the quarter driven by select price moves in key vertical markets and meeting specific competitive levels. This combination of factors resulted in lower gross margins and operating earnings compared to prior year. The cyclical nature of our business could continue to adversely affect our liquidity and financial results.
Fiscal 2019 second quarter net sales of $89,541,000 decreased $2.8 million or 3% as compared to second quarter fiscal 2018 net sales of $92,305,000. Net sales were favorably influenced by increased net sales of the Graphics Segment (up $2.8 million or 12%) more than offset by decreased net sales of the Lighting Segment (down $5.5 million or 8%).
Fiscal 2019 first half net sales of $174,498,000 decreased $5.3 million or 3% as compared to first half fiscal 2018 net sales of $179,771,000. Net sales were favorably influenced by increased net sales of the Graphics Segment (up $7.2 million or 17%) more than offset by decreased net sales of the Lighting Segment (down $12.5 million or 9%).
Fiscal 2019 second quarter operating loss of $(20.3) million represents a $24.8 million change from operating income of $4.6 million in the second quarter of fiscal 2018. The $24.8 million change from operating income in fiscal 2018 to an operating loss in fiscal 2019 was mostly the result of a pre-tax $20.2 million goodwill impairment charge in the Lighting Segment in the second quarter of fiscal 2019. Adjusted fiscal 2019 second quarter operating income of $1.5 million decreased $3.1 million or 66% from adjusted fiscal 2018 operating income of $4.6 million. Refer to “Non-GAAP Financial Measures” below. The decrease in adjusted operating income was the result of decreased net sales and decreased gross profit slightly offset by a decrease in selling and administrative expenses.
Fiscal 2019 first half operating loss of $(17.3) million represents a $2.9 million improvement from an operating loss of $(20.3) million in the first half of fiscal 2018. Both fiscal years recorded goodwill impairment charges in the Lighting Segment. There was a $20.2 million goodwill impairment charge in fiscal 2019 and a $28 million goodwill impairment charge in fiscal 2018. Adjusted first half fiscal 2019 operating income of $5.1 million decreased $2.8 million or 35% from adjusted fiscal 2018 operating income of $7.8 million. Refer to “Non-GAAP Financial Measures” below. The decrease in adjusted operating income was the result of decreased net sales and decreased gross profit slightly offset by a decrease in selling and administrative expenses. Also contributing to the period-over-period results is a one-time adjustment to the Company’s paid-time-off policy in fiscal 2019 which resulted in a favorable pre-tax adjustment to earnings of $1.2 million.
Non-GAAP Financial Measures
The Company believes it is appropriate to evaluate its performance after making adjustments to the as-reported U.S. GAAP operating income, net income, and earnings per share. Adjusted operating income, net income and earnings per share, which exclude the impact of goodwill impairment, severance costs, transition and re-alignment costs, and restructuring and plant closure costs, are non-GAAP financial measures. We believe that these adjusted supplemental measures are useful in assessing the operating performance of our business. These supplemental measures are used by our management, including our chief operating decision maker, to evaluate business results. We exclude these items because they are not representative of the ongoing results of operations of our business. Below is a reconciliation of these non-GAAP measures to operating income, net income, and earnings per share for the periods indicated.
(in thousands, unaudited)
|
|
Second Quarter
|
|
|
|
FY 2019
|
|
|
FY 2018
|
|
Reconciliation of operating (loss) income to adjusted operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income as reported
|
|
$
|
(20,271
|
)
|
|
$
|
4,547
|
|
|
|
|
|
|
|
|
|
|
Adjustment for goodwill impairment
|
|
|
20,165
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Adjustment for severance cost
|
|
|
492
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
Adjustment for transition and re-alignment costs
|
|
|
120
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Adjustment for restructuring, plant closure costs, and related inventory write-downs
|
|
|
1,033
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income
|
|
$
|
1,539
|
|
|
$
|
4,630
|
|
(in thousands, except per share data; unaudited)
|
|
Second Quarter
|
|
|
|
FY 2019
|
|
|
Diluted
EPS
|
|
|
FY 2018
|
|
|
Diluted
EPS
|
|
Reconciliation of net loss to adjusted net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) and (loss) per share as reported
|
|
$
|
(15,782
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
(1,468
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for goodwill impairment, inclusive of the income tax effect
|
|
|
15,361
|
(1)
|
|
|
0.60
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for severance costs, inclusive of the income tax effect
|
|
|
385
|
(2)
|
|
|
0.01
|
|
|
|
59
|
(5)
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for transition and re-alignment costs, inclusive of the income tax effect
|
|
|
94
|
(3)
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax impact from the reduction of the deferred tax assets
|
|
|
--
|
|
|
|
--
|
|
|
|
4,676
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for restructuring, plant closure costs, and related inventory write-downs inclusive of the income tax effect
|
|
|
817
|
(4)
|
|
|
0.03
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income and earnings per share
|
|
$
|
875
|
|
|
$
|
0.03
|
|
|
$
|
3,267
|
|
|
$
|
0.12
|
|
The income tax effects of the adjustments in the tables above were calculated using the estimated U.S. effective income tax rates for the periods indicated. The income tax effects were as follows (in thousands):
(1)
4,804
(2)
107
(3)
26
(4)
216
(5)
24
(in thousands, unaudited)
|
|
First Half
|
|
|
|
FY 2019
|
|
|
FY 2018
|
|
Reconciliation of operating loss to adjusted operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) as reported
|
|
$
|
(17,337
|
)
|
|
$
|
(20,267
|
)
|
|
|
|
|
|
|
|
|
|
Adjustment for goodwill impairment
|
|
|
20,165
|
|
|
|
28,000
|
|
|
|
|
|
|
|
|
|
|
Adjustment for severance cost
|
|
|
492
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
Adjustment for transition and re-alignment costs
|
|
|
120
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Adjustment for restructuring, plant closure costs, and related inventory write-downs
|
|
|
1,623
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income
|
|
$
|
5,063
|
|
|
$
|
7,816
|
|
(in thousands, except per share data; unaudited)
|
|
First Half
|
|
|
|
FY 2019
|
|
|
Diluted
EPS
|
|
|
FY 2018
|
|
|
Diluted
EPS
|
|
Reconciliation of net loss to adjusted net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) and (loss) per share as reported
|
|
$
|
(14,033
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
(17,097
|
)
|
|
$
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for goodwill impairment, inclusive of the income tax effect
|
|
|
15,361
|
(1)
|
|
|
0.60
|
|
|
|
17,361
|
(5)
|
|
|
0.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for severance costs, inclusive of the income tax effect
|
|
|
385
|
(2)
|
|
|
0.01
|
|
|
|
59
|
(6)
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for transition and re-alignment costs, inclusive of the income tax effect
|
|
|
94
|
(3)
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax impact from the reduction of the deferred tax assets
|
|
|
--
|
|
|
|
--
|
|
|
|
4,676
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for restructuring, plant closure costs, and related inventory write-downs inclusive of the income tax effect
|
|
|
1,271
|
(4)
|
|
|
0.05
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income and earnings per share
|
|
$
|
3,078
|
|
|
$
|
0.12
|
|
|
$
|
5,001
|
|
|
$
|
0.19
|
|
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
The income tax effects of the adjustments in the tables above were calculated using the estimated U.S. effective income tax rates for the periods indicated. The income tax effects were as follows (in thousands):
(1)
4,804
(2)
107
(3)
26
(4)
352
(5)
10,639
(6)
24
Results of Operations
THREE MONTHS ENDED DECEMBER 31, 2018 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2017
Lighting Segment
(In thousands)
|
|
Three Months Ended
|
|
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
63,654
|
|
|
$
|
69,174
|
|
Gross Profit
|
|
$
|
4,742
|
|
|
$
|
19,259
|
|
Operating (Loss) Income
|
|
$
|
(18,452
|
)
|
|
$
|
5,275
|
|
Lighting Segment net sales of $63,654,000 in the second quarter of fiscal 2019 decreased 8% from fiscal 2018 same period net sales of $69,174,000. The 8% drop in sales is attributed to continued softness and competitiveness in the Company’s project and stock and flow markets.
Gross profit of $14,742,000 in the second quarter of fiscal 2019 decreased $4.5 million or 23% from the same period of fiscal 2018, and decreased from 27.4% to 22.8% 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 its New Windsor, New York facility of $1,008,000 in fiscal 2019 with no comparable costs in fiscal 2018. The remaining decrease in amount of gross profit is due to the effect of reduced sales volume, competitive pricing pressures, and inflationary pressures of certain commodities, partially offset by manufacturing efficiencies as a result of the Company’s lean initiatives.
Selling and administrative expenses of $33,194,000
in the second quarter of fiscal year 2019 increased $19.2 million from the same period of fiscal 2018 selling and administrative expenses of $13,984,000, primarily due to the $20.2 million goodwill impairment charge in the second quarter of fiscal 2019. When the goodwill impairment charge is removed from fiscal 2019 results, there was a $1.0 million or 7% 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.
The Lighting Segment second quarter fiscal 2019 operating loss of $(18,452,000) decreased $23.7 million from operating income of $5,275,000 in the same period of fiscal 2018 primarily due to a $20.2 million pre-tax goodwill impairment charge. When the impact of the goodwill charge and the restructuring and plant closure costs of $1,033,000 ($1,008,000 in cost of sales and $25,000 in selling and administrative expenses) are removed from the fiscal 2019 results, fiscal 2019 adjusted operating income of $2,929,000 was $2.3 million lower than fiscal 2018 adjusted operating income of $5,275,000. The reduction in sales volume and gross profit was partially offset by lower selling and administrative expenses.
Graphics Segment
(In thousands)
|
|
Three Months Ended
|
|
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
25,887
|
|
|
$
|
23,131
|
|
Gross Profit
|
|
$
|
4,927
|
|
|
$
|
6,046
|
|
Operating Income
|
|
$
|
861
|
|
|
$
|
2,255
|
|
Graphics Segment net sales of $25,887,000 in the second quarter of fiscal 2019 increased $2.8 million or 12% from fiscal 2018 same period net sales of $23,131,000. Most of the increase in sales is from growth in sales to the Petroleum market.
Gross profit of $4,927,000 in the second quarter of fiscal 2019 decreased $1.1 million or 19% from the same period of fiscal 2018. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 25% in the second quarter of fiscal 2018 to 19% in the second quarter of fiscal 2019. The reduction in gross profit on higher sales is partially due to a mix shift to large customers in both the print and digital technology applications. These large projects, 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 $4,066,000 in the second quarter of fiscal 2019 increased $0.3 million or 7% from the same period of fiscal 2018 primarily as a result of an increase in outside service expense and bad debt expense.
The Graphics Segment second quarter fiscal 2019 operating income of $861,000 decreased $1.4 million or 62% from operating income of $2,255,000 in the same period of fiscal 2018. The decrease of $1.4 million was primarily the net result of a shift in customer mix on higher sales and an increase in selling and administrative expenses.
Corporate and Eliminations
(In thousands)
|
|
Three Months Ended
|
|
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
Gross (Loss) Profit
|
|
$
|
(13
|
)
|
|
$
|
2
|
|
Operating (Loss)
|
|
$
|
(2,680
|
)
|
|
$
|
(2,983
|
)
|
The gross (loss) profit relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $2,667,000 in the second quarter of fiscal 2019 decreased $0.3 million from the same period of the prior year. The change is primarily the result of a reduction in wage and benefit expense partially offset by an increase in legal and professional fees.
Consolidated Results
The Company reported $615,000 net interest expense in the second quarter of fiscal 2019 compared to $417,000 net interest expense in the second quarter of fiscal 2018. The change in interest expense from fiscal 2018 to fiscal 2019 is the result of higher interest rates on the Company’s line of credit and higher commitment fees on its unused portion of the line of credit.
The $5,104,000 income tax benefit in the second quarter of fiscal 2019 represents a consolidated effective tax rate of 24.4%, which is slightly higher than the expected annual rate of 23% due to the goodwill impairment. The second quarter FY 2018 effective tax rate of 135.6% and income tax expense of $5,598,000 was caused by a $4.7 million re-valuation of the Company’s deferred tax assets for the US tax rate change on the enactment date of the Tax Cut and Jobs Act in the quarter.
The Company reported a net loss of $(15,782,000) in the second quarter of fiscal 2019 compared to net loss of $(1,468,000) in the same period of the prior year. The change in the net loss in fiscal 2018 to the net loss in the second quarter of fiscal 2019 is mostly driven by the $20.2 million goodwill impairment charge in the second quarter of fiscal 2019 with no comparable charge in the second quarter of fiscal 2018. Also contributing to the quarter-over-quarter change is a $4.7 million charge in the second quarter of fiscal 2018 related to the re-valuation of the Company’s deferred tax assets with no comparable charge in fiscal 2019. To a lesser degree, there were other non-GAAP charges in both fiscal years besides the goodwill impairment and the re-valuation of the deferred tax assets 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 2019 adjusted net income of $875,000 decreased $2.4 million from fiscal 2018 adjusted net income of $3,267,000. The change in adjusted net income is primarily the net result of decreased net sales, decreased gross profit, decreased selling and administrative expenses, increased interest expense, and a lower tax rate. Diluted loss per share of $(0.61) was reported in the second quarter of fiscal 2019 as compared to $(0.06) diluted loss per share in the same period of fiscal 2018. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the second quarter of fiscal 2019 were 26,083,000 shares as compared to 25,858,000 shares in the same period last year.
SIX MONTHS ENDED DECEMBER 31, 2018 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2017
Lighting Segment
(In thousands)
|
|
Six Months Ended
|
|
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
125,086
|
|
|
$
|
137,602
|
|
Gross Profit
|
|
$
|
30,217
|
|
|
$
|
37,932
|
|
Operating (Loss)
|
|
$
|
(14,602
|
)
|
|
$
|
(17,655
|
)
|
Lighting Segment net sales of $125,086,000 in the second half of fiscal 2019 decreased 9% from fiscal 2018 same period net sales of $137,602,000. The 9% drop in sales is attributed to continued softness and competitiveness in the Company’s project and stock and flow markets.
Gross profit of $30,217,000 in the first half of fiscal 2019 decreased $7.7 million or 20% from the same period of fiscal 2018 and decreased from 27.2% to 23.9% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The Company incurred restructuring and plant closure costs that were recorded in cost of sales related to the closure of its Hawthorne, California and New Windsor, New York facilities of $1,598,000 in fiscal 2019 with no comparable costs in fiscal 2018. The remaining decrease in amount of gross profit is due to the effect of reduced sales volume, competitive pricing pressures, and inflationary pressures of certain commodities, partially offset by manufacturing efficiencies as a result of the Company’s lean initiatives.
Selling and administrative expenses of $44,819,000
in the first half of fiscal year 2019 decreased $10.8 million from the same period of fiscal 2018 selling and administrative expenses of $55,587,000, primarily due to the $20.2 million and $28 million goodwill impairment charges in the first half of fiscal 2019 and fiscal 2018 respectively. When the goodwill impairment charges are removed from both fiscal year results, there was a $2.9 million or 12% reduction in selling and administrative expenses. The reduction in selling and administrative expenses is mostly driven by lower commission expense which is due to lower sales volume.
The Lighting Segment first half fiscal 2019 operating loss of $(14,602,000) increased $3.1 million from an operating loss of $(17,655,000) in the same period of fiscal 2018 primarily due to a $20.2 million pre-tax goodwill impairment charge in fiscal 2019 compared to a $28 million pre-tax goodwill impairment charge in fiscal 2018. When the goodwill impairment charges and the restructuring charges of $1,623,000 ($1,598,000 in cost of sales and $25,000 in selling and administrative expenses) are removed from both fiscal years, fiscal 2019 adjusted operating income of $7,369,000 was $3.0 million lower than fiscal 2018 adjusted operating income of $10,345,000. The reduction in sales volume and gross profit was partially offset by lower selling and administrative expenses.
Graphics Segment
(In thousands)
|
|
Six Months Ended
|
|
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
49,412
|
|
|
$
|
42,169
|
|
Gross Profit
|
|
$
|
10,709
|
|
|
$
|
11,109
|
|
Operating Income
|
|
$
|
3,248
|
|
|
$
|
3,731
|
|
Graphics Segment net sales of $49,412,000 in the first half of fiscal 2019 increased $7.2 million or 17% from fiscal 2018 same period net sales of $42,169,000. Most of the increase in sales is from growth in sales to the Petroleum and Quick Service Restaurant markets including digital technology.
Gross profit of $10,709,000 in the first half of fiscal 2019 decreased $0.4 million or 4% from the same period of fiscal 2018. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 25.7% in the second quarter of fiscal 2018 to 21.6% in the first half of fiscal 2019. The reduction in gross profit on higher sales is partially due to a mix shift to large customers in both the print and digital technology applications. These large projects, with lengthy life cycles, are competitive and initially generate lower margins. The business will work to improve the margins on these projects over its life cycle.
Selling and administrative expenses of $7,461,000 in the first half of fiscal 2019 increased $0.1 million or 1% from the same period of fiscal 2018. A reduction in wage and benefit was offset by an increase in bad debt expense and outside service expense.
The Graphics Segment first half fiscal 2019 operating income of $3,248,000 decreased $0.5 million or 13% from operating income of $3,731,000 in the same period of fiscal 2018. The decrease of $0.5 million was primarily the net result of a shift in customer mix on higher sales and a modest increase in selling and administrative expenses.
Corporate and Eliminations
(In thousands)
|
|
Six Months Ended
|
|
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
Gross (Loss)
|
|
$
|
(9
|
)
|
|
$
|
(31
|
)
|
Operating (Loss)
|
|
$
|
(5,983
|
)
|
|
$
|
(6,343
|
)
|
The gross (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $5,974,000 in the first half of fiscal 2019 decreased $0.3 million from the same period of the prior year. The change is primarily the result of a reduction in wage and benefit expense partially offset by an increase in legal and professional fees.
Consolidated Results
The Company reported $1,133,000 net interest expense in the first half of fiscal 2019 compared to $820,000 net interest expense in the first half of fiscal 2019. The change in interest expense from fiscal 2018 to fiscal 2019 is the result of higher interest rates on the Company’s line of credit and higher commitment fees on its unused portion of the line of credit.
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 first half FY 2018 effective tax rate of 18.9% and income tax benefit of $3,990,000 was most notably influenced by the first quarter goodwill impairment partially offset by a $4.7 million re-valuation of the Company’s deferred tax assets for the US tax rate change on the enactment date of the Tax Cut and Jobs Act.
The Company reported a net loss of $(14,033,000) in the first half of fiscal 2019 compared to net loss of $(17,097,000) in the same period of the prior year. The change from the net loss in fiscal 2018 to the net loss in the second half of fiscal 2019 is mostly driven by the $20.2 million and the $28 million goodwill impairment charges in the first of fiscal 2019 and fiscal 2018, respectively. Also contributing to the year-over-year change is a $4.7 million charge in the first half of fiscal 2018 related to the re-valuation of the Company’s deferred tax assets with no comparable charge in fiscal 2019. To a lesser degree, there were other non-GAAP charges in both fiscal years besides the goodwill impairment and the re-valuation of the deferred tax assets impacting the comparable year-over-year results. (Refer to the non-GAAP tables above.) When the impact of all non-GAAP charges is removed from both fiscal years, the fiscal 2019 adjusted net income of $3,078,000 decreased $1.9 million from fiscal 2018 adjusted net income of $5,001,000. The change in adjusted net income is primarily the net result of decreased net sales, decreased gross profit, decreased selling and administrative expenses, increased interest expense, and a larger tax benefit. Diluted loss per share of $(0.54) was reported in the first half of fiscal 2019 as compared to $(0.66) diluted loss per share in the same period of fiscal 2018. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first half of fiscal 2019 were 26,058,000 shares as compared to 25,824,000 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, 2018, the Company had working capital of $74.8 million, compared to $67.9 million at June 30, 2018. The ratio of current assets to current liabilities was 2.49 to 1 as compared to a ratio of 2.61 to 1 at June 30, 2018. The $6.9 million increase in working capital from June 30, 2018 to December 31, 2018 was primarily related to the net effect of increased cash and cash equivalents ($6.4 million), increased net accounts receivable ($5.8 million), increased net inventory ($3.1 million), an increase in accrued expenses ($0.7 million), a decrease in refundable income taxes ($0.8 million), and an increase in accounts payable ($8.8 million). Of the $5.8 million increase in accounts receivable, $5.3 million is attributed to the adoption of the new revenue guidance. The Company proactively manages its working capital, including reduction of the accounts receivable days sales outstanding (DSO) and reduction of inventory levels, without reducing service to its customers.
The Company generated $7.6 million of cash from operating activities in the first half of fiscal 2019 as compared to a use of cash of $43,000 in the same period of the prior year. This $7.7 million increase in net cash flows from operating activities is primarily the net result of an increase rather than a decrease in accounts payable (favorable change of $11.3 million), a smaller increase in net accounts receivable (favorable change of $9.8 million), an increase rather than a decrease in net inventory (unfavorable change of $9.6 million), a greater decrease in accrued expenses and other (unfavorable change of $1.2 million), and an improvement in net loss from fiscal 2018 to fiscal 2019 more than offset by several non-cash add-backs to the net loss in both fiscal years (unfavorable change of $3.3 million).
Net accounts receivable were $56.4 million and $50.6 million at December 31, 2018 and June 30, 2018, respectively. DSO was 53 days at December 31, 2018 and June 30, 2018. The Company believes that its receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.
Net inventories of $54.1 million at December 31, 2018 increased $3.1 million from $51.0 million at June 30, 2018. The increase of $3.1 million is the result of an increase in gross inventory of $3.8 million and an increase in obsolescence reserves of $0.7 million. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory increased 4.8 million in the first half of fiscal 2019 in the Graphics Segment which was partially offset by a decrease in net inventory in the Lighting Segment of $1.7 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 $48.4 million of the credit line available as of January 28, 2019. 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 2019 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.
The Company used cash of $1.6 million related to investing activities in the first half of fiscal 2019 as compared to a source of $0.3 million in the same period of the prior year, resulting in an unfavorable change of $1.9 million. Capital expenditures for the first half of fiscal 2019 increased $0.4 million to $1.6 million from the same period in fiscal 2018. The Company sold its Woonsocket manufacturing facility for $1.5 million in the first half of fiscal 2018 which contributed to the change in cash flow from investing activities from fiscal 2018 to fiscal 2019.
The Company had a $0.3 million source of cash related to financing activities in the first half of fiscal 2019 compared to a use of cash of $0.2 million in the first half of fiscal 2018. The $0.5 million favorable change in cash flow was primarily the net result of borrowings in excess of payments of long-term debt.
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 January 2019, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable February 12, 2019 to shareholders of record as of February 4, 2019. The indicated annual cash dividend rate for fiscal 2019 is $0.20 per share. The Board of Directors has adopted a policy regarding dividends which indicates that dividends will be determined by the Board of Directors in its discretion based upon its evaluation of earnings, cash flow requirements, financial condition, debt levels, stock repurchases, future business developments and opportunities, and other factors deemed relevant.
Critical Accounting Policies and Estimates
A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2018 Annual Report on Form 10-K.
New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases.” The amended guidance requires an entity to recognize assets and liabilities that arise from leases. The amended guidance is effective for financial statements issued for fiscal and interim periods within those years, beginning after December 15, 2018, or the Company’s fiscal 2020, with early adoption permitted. The Company has an implementation team tasked with reviewing our lease obligations and determining the impact of the new standard to its financial statements. The implementation team has completed a qualitative assessment of the Company’s active leases and is compiling related data in a central repository. The Company will continue to evaluate the new standard’s impact on its financial statements.