ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company’s condensed consolidated financial statements, accompanying notes and the “Safe Harbor” Statement, each as appearing earlier in this report, should be referred to in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Net Sales by Business Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
March 31
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting Segment
|
|
$
|
52,785
|
|
|
$
|
61,554
|
|
|
$
|
177,871
|
|
|
$
|
199,156
|
|
Graphics Segment
|
|
|
20,047
|
|
|
|
17,289
|
|
|
|
69,459
|
|
|
|
59,458
|
|
|
|
$
|
72,832
|
|
|
$
|
78,843
|
|
|
$
|
247,330
|
|
|
$
|
258,614
|
|
Operating Income (Loss) by Business Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
March 31
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting Segment
|
|
$
|
691
|
|
|
$
|
2,982
|
|
|
$
|
(13,911
|
)
|
|
$
|
(14,673
|
)
|
Graphics Segment
|
|
|
(898
|
)
|
|
|
415
|
|
|
|
2,350
|
|
|
|
4,146
|
|
Corporate and Eliminations
|
|
|
(2,066
|
)
|
|
|
(2,654
|
)
|
|
|
(8,049
|
)
|
|
|
(8,997
|
)
|
|
|
$
|
(2,273
|
)
|
|
$
|
743
|
|
|
$
|
(19,610
|
)
|
|
$
|
(19,524
|
)
|
Summary Comments
We are in the business of designing, manufacturing and marketing lighting, graphics and technology solutions for both indoor and outdoor applications. Historically, sales of our products have been subject to cyclical variations caused by competitive pressures that affect selling prices, changes in general economic conditions, and other factors. Our operating results in the fiscal 2019 third quarter reflect the continued competitiveness in both our project and stock and flow markets, a shift in focus to pursue higher value-add customer opportunities, a mix of new larger customers, a shift in project mix, and pricing below prior year levels for the quarter driven by select price moves in key vertical markets. This combination of factors resulted in lower gross margins and operating earnings compared to prior year. The cyclical nature of our business could continue to adversely affect our liquidity and financial results.
Fiscal 2019 third quarter net sales of $72,832,000 decreased $6.0 million or 8% as compared to third quarter fiscal 2018 net sales of $78,843,000. Net sales were favorably influenced by increased net sales of the Graphics Segment (up $2.8 million or 16%) more than offset by decreased net sales of the Lighting Segment (down $8.8 million or 14%).
Fiscal 2019 first nine months net sales of $247,330,000 decreased $11.3 million or 4% as compared to first nine months fiscal 2018 net sales of $258,614,000. Net sales were favorably influenced by increased net sales of the Graphics Segment (up $10.0 million or 17%) more than offset by decreased net sales of the Lighting Segment (down $21.3 million or 11%).
Fiscal 2019 third quarter operating loss of $(2,273,000) represents a $3.0 million change from operating income of $0.7 million in the third quarter of fiscal 2018. The $3.0 million change from operating income in fiscal 2018 to an operating loss in fiscal 2019 was primarily the result of decreased net sales and decreased gross profit offset by a decrease in selling and administrative expenses.
Fiscal 2019 first nine months operating loss of $(19,610,000) represents a $0.1 million increase in operating loss from an operating loss of $(19,524,000) in the nine months of fiscal 2018. Both fiscal years recorded goodwill impairment charges in the Lighting Segment. There was a $20.2 million goodwill impairment charge in fiscal 2019 and a $28.0 million goodwill impairment charge in fiscal 2018. Adjusted operating income for the first nine months of fiscal 2019 of $3.2 million decreased $5.4 million from adjusted fiscal 2018 operating income of $8.6 million. Refer to “Non-GAAP Financial Measures” below. The decrease in adjusted operating income was the result of decreased net sales and decreased gross profit offset by a decrease in selling and administrative expenses. Also contributing to the period-over-period results is a one-time adjustment to the Company’s paid-time-off policy in fiscal 2019 which resulted in a favorable pre-tax adjustment to earnings of $1.2 million.
Non-GAAP Financial Measures
The Company believes it is appropriate to evaluate its performance after making adjustments to the as-reported U.S. GAAP operating income, net income, and earnings per share. Adjusted operating income, net income and earnings per share, which exclude the impact of goodwill impairment, severance costs, the tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes, transition and re-alignment costs, and restructuring and plant closure costs, are non-GAAP financial measures. We believe that these adjusted supplemental measures are useful in assessing the operating performance of our business. These supplemental measures are used by our management, including our chief operating decision maker, to evaluate business results. We exclude these items because they are not representative of the ongoing results of operations of our business. Below is a reconciliation of these non-GAAP measures to operating income, net income, and earnings per share for the periods indicated.
(in thousands, unaudited)
|
|
Third Quarter
|
|
|
|
FY 2019
|
|
|
FY 2018
|
|
Reconciliation of operating (loss) income to adjusted operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income as reported
|
|
$
|
(2,273
|
)
|
|
$
|
743
|
|
|
|
|
|
|
|
|
|
|
Adjustment for severance cost
|
|
|
42
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Adjustment for restructuring, plant closure costs, and related inventory write-downs
|
|
|
368
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating (loss) income
|
|
$
|
(1,863
|
)
|
|
$
|
751
|
|
(in thousands, except per share data; unaudited)
|
|
Third Quarter
|
|
|
|
FY 2019
|
|
|
Diluted
EPS
|
|
|
FY 2018
|
|
|
Diluted
EPS
|
|
Reconciliation of net loss to adjusted net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income and (loss) income per share as reported
|
|
$
|
(3,168
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
220
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for severance costs, inclusive of the income tax effect
|
|
|
(14
|
)
(1
)
|
|
|
--
|
|
|
|
6
|
(
4
)
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes
|
|
|
897
|
(2
)
|
|
|
0.03
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax impact from the reduction of the deferred tax assets
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for restructuring, plant closure costs, and related inventory write-downs inclusive of the income tax effect
|
|
|
115
|
(3
)
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net (loss) income and (loss) earnings per share
|
|
$
|
(2,170
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
226
|
|
|
$
|
0.01
|
|
The reconciliation of reported earnings per share to adjusted earnings per share may not produce identical amounts due to rounding differences and due to the difference between basic and dilutive weighted average shares outstanding in the computation of earnings per share.
The income tax effects of the adjustments in the tables above were calculated using the estimated U.S. effective income tax rates for the periods indicated. The income tax effects were as follows (in thousands):
(1)
56
(2)
0
(3)
253
(4)
2
(in thousands, unaudited)
|
|
Nine Months
|
|
|
|
FY 2019
|
|
|
FY 2018
|
|
Reconciliation of operating (loss) to adjusted operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) as reported
|
|
$
|
(19,610
|
)
|
|
$
|
(19,524
|
)
|
|
|
|
|
|
|
|
|
|
Adjustment for goodwill impairment
|
|
|
20,165
|
|
|
|
28,000
|
|
|
|
|
|
|
|
|
|
|
Adjustment for severance costs
|
|
|
534
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
Adjustment for transition and re-alignment costs
|
|
|
120
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Adjustment for restructuring, plant closure costs, and related inventory write-downs
|
|
|
1,991
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income
|
|
$
|
3,200
|
|
|
$
|
8,567
|
|
(in thousands, except per share data; unaudited)
|
|
Nine Months
|
|
|
|
FY 2019
|
|
|
Diluted
EPS
|
|
|
FY 2018
|
|
|
Diluted
EPS
|
|
Reconciliation of net loss to adjusted net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss per share as reported
|
|
$
|
(17,201
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
(16,877
|
)
|
|
$
|
(0.65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for goodwill impairment, inclusive of the income tax effect
|
|
|
15,361
|
(1)
|
|
|
0.59
|
|
|
|
17,361
|
(6
)
|
|
|
0.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for severance costs, inclusive of the income tax effect
|
|
|
372
|
(2)
|
|
|
0.01
|
|
|
|
67
|
(7
)
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for transition and re-alignment costs, inclusive of the income tax effect
|
|
|
94
|
(3)
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes
|
|
|
897
|
(4)
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax impact from the reduction of the deferred tax assets
|
|
|
--
|
|
|
|
--
|
|
|
|
4,676
|
(8)
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for restructuring, plant closure costs, and related inventory write-downs inclusive of the income tax effect
|
|
|
1,386
|
(5
)
|
|
|
0.05
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income and earnings per share
|
|
$
|
908
|
|
|
$
|
0.03
|
|
|
$
|
5,227
|
|
|
$
|
0.20
|
|
The reconciliation of reported earnings per share to adjusted earnings per share may not produce identical amounts due to rounding differences and due to the difference between basic and dilutive weighted average shares outstanding in the computation of earnings per share.
The income tax effects of the adjustments in the tables above were calculated using the estimated U.S. effective income tax rates for the periods indicated. The income tax effects were as follows (in thousands):
(1)
4,804
(2)
162
(3)
26
(4)
0
(5)
605
(6
)
10,639
(7
)
24
(8)
0
Results of Operations
THREE MONTHS ENDED
MARCH 31, 2019
COMPARED TO THREE MONTHS ENDED
MARCH
31, 201
8
Lighting Segment
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
52,785
|
|
|
$
|
61,554
|
|
Gross Profit
|
|
$
|
12,331
|
|
|
$
|
15,944
|
|
Operating Income
|
|
$
|
691
|
|
|
$
|
2,982
|
|
Lighting Segment net sales of $52,785,000 in the third quarter of fiscal 2019 decreased $8.8 million or 14% from fiscal 2018 same period net sales of $61,554,000. The 14% drop in sales is attributed to continued competitiveness in the Company’s project and stock and flow markets. The Company also elected not to run any quarter-end promotional programs in the third quarter of fiscal 2019 as compared to several promotional programs which were conducted at the end of the third quarter of fiscal 2018. In addition, the Company’s realignment of its sales organization and focus on market priorities were disruptive and contributed to the decline in third quarter sales.
Gross profit of $12,331,000 in the third quarter of fiscal 2019 decreased $3.6 million or 23% from the same period of fiscal 2018 and decreased from 25.7% to 23.2% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The Company incurred restructuring and plant closure costs that were recorded in cost of sales related to the closure of its New Windsor, New York facility of $261,000 in fiscal 2019 with no comparable costs in fiscal 2018. The remaining decrease in amount of gross profit is due to the effect of reduced sales volume, competitive pricing pressures, and inflationary pressures of certain commodities, partially offset by manufacturing efficiencies as a result of the Company’s lean initiatives.
Selling and administrative expenses of $11,640,000
in the third quarter of fiscal year 2019 decreased $1.3 million or 10% from the same period of fiscal 2018 selling and administrative expenses of $12,962,000. The reduction in selling and administrative expenses is driven by lower commission expense due to lower sales volume along with a reduction in spending to match lower sales.
The Lighting Segment third quarter fiscal 2019 operating income of $691,000 decreased $2.3 million from operating income of $2,982,000 in the same period of fiscal 2018 mostly due to the reduction in sales volume and gross profit partially offset by lower selling and administrative expenses.
Graphics Segment
Graphics Segment
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
20,047
|
|
|
$
|
17,289
|
|
Gross Profit
|
|
$
|
3,018
|
|
|
$
|
3,977
|
|
Operating (Loss) Income
|
|
$
|
(898
|
)
|
|
$
|
415
|
|
Graphics Segment net sales of $20,047,000 in the third quarter of fiscal 2019 increased $2.7 million or 16% from fiscal 2018 same period net sales of $17,289,000. Most of the increase in sales is from growth in sales to the petroleum market.
Gross profit of $3,018,000 in the third quarter of fiscal 2019 decreased $1.0 million or 24% from the same period of fiscal 2018. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 22.8% in the third quarter of fiscal 2018 to 15.0% in the third quarter of fiscal 2019. The reduction in gross profit on higher sales is partially due to a mix shift to large customers in both the print and digital technology applications. These large projects including hundreds and potentially thousands of individual locations, with lengthy project life cycles, are competitive and initially generate lower margins. The business will work to improve the margins on these projects over their life cycle.
Selling and administrative expenses of $3,916,000 in the third quarter of fiscal 2019 increased $0.4 million or 10% from the same period of fiscal 2018 primarily as a result of an increase in outside service expense and bad debt expense.
The Graphics Segment third quarter fiscal 2019 operating loss of $(898,000) decreased $1.3 million from operating income of $415,000 in the same period of fiscal 2018. The decrease of $1.3 million was primarily the net result of a shift in customer mix on higher sales and an increase in selling and administrative expenses.
Corporate and Eliminations
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Gross (Loss)
|
|
$
|
(12
|
)
|
|
$
|
(3
|
)
|
Operating (Loss)
|
|
$
|
(2,066
|
)
|
|
$
|
(2,654
|
)
|
The gross (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $2,054,000 in the third quarter of fiscal 2019 decreased $0.6 million or 23% from the same period of the prior year. The change is primarily the result of a reduction in both outside service expense and research and development expense.
Consolidated Results
The Company reported $579,000 net interest expense in the third quarter of fiscal 2019 compared to $400,000 net interest expense in the third quarter of fiscal 2018. The change in interest expense from fiscal 2018 to fiscal 2019 is the result of higher interest rates on the Company’s line of credit. The Company also recorded other expense of $183,000 in the third quarter related to net foreign currency transaction losses from transactions with its customers and suppliers through its Mexican subsidiary.
The $133,000 income tax expense in the third quarter of fiscal 2019 compared to a pre-tax loss is the result of a cumulative change to the Company’s estimated annual tax rate. The Company has announced that it has entered into a definitive agreement to sell its New Windsor, New York facility. The closing of the sale is expected in the fourth quarter and is expected to generate a gain resulting from the sale. This gain will be offset by a capital loss carryforward resulting in a tax benefit. This event was part of the calculation of the estimated annual income tax rate. The $123,000 income tax expense in the third quarter of fiscal 2018 represents a consolidated effective tax rate of 35.9%. This is the net result of adjusting the Company’s year-to-date tax expense to an overall income tax rate of 28.9% influenced by the first quarter goodwill impairment and by certain permanent book-tax differences and adjustments related to uncertain income tax positions.
The Company reported a net loss of $(3,168,000) in the third quarter of fiscal 2019 compared to net income of $220,000 in the same period of the prior year. The change from net income in fiscal 2018 to a net loss in the third quarter of fiscal 2019 is the net result of decreased net sales, decreased gross profit, decreased selling and administrative expenses, and increased interest expense. Also impacting the period-over-period comparison is $368,000 of restructuring charges and $183,000 of net foreign currency transactions losses of which there were no comparable events in fiscal 2018. Diluted loss per share of $(0.12) was reported in the third quarter of fiscal 2019 as compared to $ 0.01 diluted earnings per share in the same period of fiscal 2018. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the third quarter of fiscal 2019 were 26,132,000 shares as compared to 26,437,000 shares in the same period last year.
N
INE
MONTHS ENDED
MARCH
31, 201
9
COMPARED TO
NINE
MONTHS ENDED
MARCH
31, 201
8
Lighting Segment
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
177,871
|
|
|
$
|
199,156
|
|
Gross Profit
|
|
$
|
42,548
|
|
|
$
|
53,876
|
|
Operating (Loss)
|
|
$
|
(13,911
|
)
|
|
$
|
(14,673
|
)
|
Lighting Segment net sales of $177,871,000 in the first nine months of fiscal 2019 decreased 11% from fiscal 2018 same period net sales of $199,156,000. The 11% drop in sales is attributed to continued competitiveness in the Company’s project and stock and flow markets. In addition, the Company’s realignment of its sales organization and is focus on market priorities were disruptive and contributed to the decline in year-over-year sales.
Gross profit of $42,548,000 in the first nine months of fiscal 2019 decreased $11.3 million or 21% from the same period of fiscal 2018 and decreased from 26.8% to 23.7% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The Company incurred restructuring and plant closure costs that were recorded in cost of sales related to the closure of its Hawthorne, California and New Windsor, New York facilities of $1,859,000 in fiscal 2019 with no comparable costs in fiscal 2018. The remaining decrease in amount of gross profit is due to the effect of reduced sales volume, competitive pricing pressures, and inflationary pressures of certain commodities, partially offset by manufacturing efficiencies as a result of the Company’s lean initiatives.
Selling and administrative expenses of $56,459,000
in the first nine months of fiscal year 2019 decreased $12.1 million or 21% from the same period of fiscal 2018 selling and administrative expenses of $68,549,000, primarily due to the $20.2 million and $28.0 million goodwill impairment charges in the first nine months of fiscal 2019 and fiscal 2018 respectively. When the goodwill impairment charges are removed from both fiscal year results, there was a $4.3 million or 12% reduction in selling and administrative expenses. The reduction in selling and administrative expenses is mostly driven by lower commission expense which is due to lower sales volume along with a reduction in spending to match lower sales.
The Lighting Segment first nine month fiscal 2019 operating loss of $(13,911,000) decreased $0.8 million from an operating loss of $(14,673,000) in the same period of fiscal 2018 primarily due to a $20.2 million pre-tax goodwill impairment charge in fiscal 2019 compared to a $28.0 million pre-tax goodwill impairment charge in fiscal 2018. When the goodwill impairment charges are removed from both fiscal years along with the restructuring charges of $1,991,000 ($1,859,000 in cost of sales and $132,000 in selling and administrative expenses) and severance expense ($77,000 in cost of sales and $160,000 in selling and administrative expense) from the current fiscal year, fiscal 2019 adjusted operating income of $8,482,000 was $4.9 million lower than fiscal 2018 adjusted operating income of $13,335,000. The reduction in sales volume and gross profit was partially offset by lower selling and administrative expenses.
Graphics Segment
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|
|
|
|
|
|
|
|
(In thousands)
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
69,459
|
|
|
$
|
59,458
|
|
Gross Profit
|
|
$
|
13,727
|
|
|
$
|
15,086
|
|
Operating Income
|
|
$
|
2,350
|
|
|
$
|
4,146
|
|
Graphics Segment net sales of $69,459,000 in the first nine months of fiscal 2019 increased $10.0 million or 17% from fiscal 2018 same period net sales of $59,458,000. Most of the increase in sales is from growth in sales to the Petroleum and Quick Service Restaurant markets including digital technology.
Gross profit of $13,727,000 in the first nine months of fiscal 2019 decreased $1.4 million or 9% from the same period of fiscal 2018. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 24.9% in the first nine months of fiscal 2018 to 19.7% in the first nine of fiscal 2019. The reduction in gross profit on higher sales is partially due to a mix shift to large customers in both the print and digital technology applications. These large projects, with lengthy life cycles, are competitive and initially generate lower margins. The business will work to improve the margins on these projects over its life cycle.
Selling and administrative expenses of $11,377,000 in the first nine months of fiscal 2019 increased $0.4 million or 4% from the same period of fiscal 2018. A reduction in wage and benefit was more than offset by an increase in bad debt expense and outside service expense.
The Graphics Segment first nine months fiscal 2019 operating income of $2,350,000 decreased $1.8 million or 43% from operating income of $4,146,000 in the same period of fiscal 2018. The decrease of $1.8 million was primarily the net result of lower gross margin on higher sales and an increase in selling and administrative expenses.
Corporate and Eliminations
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|
|
|
|
|
|
|
|
(In thousands)
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|
Nine Months Ended
|
|
|
|
March 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Gross (Loss)
|
|
$
|
(21
|
)
|
|
$
|
(34
|
)
|
Operating (Loss)
|
|
$
|
(8,049
|
)
|
|
$
|
(8,997
|
)
|
The gross (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $8,028,000 in the first nine months of fiscal 2019 decreased $0.9 million from the same period of the prior year. The change is primarily the result of a reduction in wage and benefit expense and research and development cost partially offset by an increase in legal and professional fees.
Consolidated Results
The Company reported $1,712,000 net interest expense in the first nine months of fiscal 2019 compared to $1,220,000 net interest expense in the first nine months of fiscal 2019. The change in interest expense from fiscal 2018 to fiscal 2019 is the result of higher interest rates on the Company’s line of credit. The Company also recorded other expense of $183,000 in the third quarter related to net foreign currency transaction losses from transactions with its customers and suppliers through its Mexican subsidiary.
The $4,304,000 income tax benefit in the first nine months of fiscal 2019 represents a consolidated effective tax rate of 20.0%, which is inclusive of a cumulative change to the estimated annual tax rate mostly due to the tax treatment related to the fourth quarter sale of its New Windsor, New York facility. The Company has announced that it has entered into a definitive agreement to sell its New Windsor, New York facility. The closing of the sale is expected in the fourth quarter and is expected to generate a gain resulting from the sale. This gain will be offset by a capital loss carryforward resulting in a tax benefit. Also impacting the consolidated tax benefit is the second quarter goodwill impairment charge and a 30% tax rate on taxable income from pre-tax profits recognized by the Company’s Mexican subsidiary. The $3,867,000 tax benefit in the first nine months of fiscal 2018 represents a consolidated effective rate of 18.6%. This is the net result of an overall income tax rate of 28.9% influenced by the first quarter goodwill impairment, by the second quarter $4.7 million tax adjustment related to the revaluation of the Company’s deferred tax assets, and by certain permanent book-tax differences and adjustments related to uncertain income tax positions.
The Company reported a net loss of $(17,201,000) in the first nine months of fiscal 2019 compared to net loss of $(16,877,000) in the same period of the prior year. The increase in the net loss from fiscal 2018 to the net loss in the first nine months of fiscal 2019 is mostly driven by decreased net sales, decreased gross profit, decreased selling and administrative expenses, increased interest expense, and a larger tax benefit. Diluted loss per share of $(0.66) was reported in the first nine months of fiscal 2019 as compared to $(0.65) diluted loss per share in the same period of fiscal 2018. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first nine months of fiscal 2019 were 26,083,000 shares as compared to 25,835,000 shares in the same period last year.
Liquidity and Capital Resources
The Company considers its level of cash on hand, borrowing capacity, current ratio and working capital levels to be its most important measures of short-term liquidity. For long-term liquidity indicators, the Company believes its ratio of long-term debt to equity and its historical levels of net cash flows from operating activities to be the most important measures.
At March 31, 2019 the Company had working capital of $68.3 million, compared to $67.9 million at June 30, 2018. The ratio of current assets to current liabilities was 2.59 to 1 as compared to a ratio of 2.61 to 1 at June 30, 2018. The $0.4 million increase in working capital from June 30, 2018 to March 31, 2019 was primarily related to the net effect of decreased cash and cash equivalents ($1.5 million), increased net accounts receivable ($1.5 million), increased net inventory ($0.6 million), a decrease in accrued expenses ($2.1 million), a decrease in refundable income taxes ($0.3 million), an increase on other current assets ($0.6 million), and an increase in accounts payable ($2.7 million). Of the $1.5 million increase in accounts receivable, $4.6 million of the total increase is attributed to the adoption of the new revenue guidance. The Company proactively manages its working capital, including reduction of the accounts receivable days sales outstanding (DSO) and reduction of inventory levels, without reducing service to its customers.
The Company generated $6.4 million of cash from operating activities in the first nine months of fiscal 2019 as compared to a source of cash of $7.9 million in the same period of the prior year. This $1.5 million decrease in net cash flows from operating activities is primarily the net result of an increase rather than a decrease in accounts payable (favorable change of $5.8 million), a decrease rather than an increase in net accounts receivable (favorable change of $3.7 million), a greater increase in net inventory (unfavorable change of $4.0 million), a greater decrease in accrued expenses and other (unfavorable change of $1.3 million), and an increase in net loss from fiscal 2018 to fiscal 2019 along with unfavorable change of non-cash add-backs to the change in net loss (unfavorable change of $6.1 million).
Net accounts receivable were $52.1 million and $50.6 million at March 31, 2019 and June 30, 2018, respectively. DSO was 60 days at March 31, 2019 compared to DSO of 53 days at June 30, 2018. The Company believes that its receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.
Net inventories of $51.6 million at March 31, 2019 increased $0.6 million from $51.0 million at June 30, 2018. The increase of $0.6 million is the result of an increase in gross inventory of $1.5 million and an increase in obsolescence reserves of $0.9 million. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory increased $3.7 million in the first nine months of fiscal 2019 in the Graphics Segment which was partially offset by a decrease in net inventory in the Lighting Segment of $3.0 million.
Cash generated from operations and borrowing capacity under the Company’s line of credit is the Company’s primary source of liquidity. The Company has a secured $75 million revolving line of credit with its bank, with $30.6 million of the credit line available as of April 14, 2019. (The Company amended its revolving line of credit in the third quarter of fiscal 2019 and reduced its available line of credit from $100 million to $75 million in order to better match its financing needs with an appropriate borrowing capacity.) This line of credit is a $75 million five-year credit line expiring in the third quarter of fiscal 2022. The Company believes that its $75 million line of credit plus cash flows from operating activities are adequate for the Company’s fiscal 2019 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.
The Company used cash of $2.3 million related to investing activities in the first nine months of fiscal 2019 as compared to a use of $0.7 million in the same period of the prior year, resulting in an unfavorable change of $1.6 million. Capital expenditures for the first nine months of fiscal 2019 increased $0.1 million to $2.3 million from the same period in fiscal 2018. The Company sold its Woonsocket manufacturing facility for $1.5 million in fiscal 2018 which contributed to the change in cash flow from investing activities from fiscal 2018 to fiscal 2019.
In April 2019, the Company announced that it entered into a definitive agreement to sell its manufacturing facility in New Windsor, New York. Under the terms of the agreement, the Company will receive approximately $12 million of gross proceeds related to the sale. The transaction is expected to close on or before June 30, 2019 subject to the final approval from the New Windsor town officials.
The Company had a $5.5 million use of cash related to financing activities in the nine months of fiscal 2019 compared to a use of cash of $8.2 million in the first nine months of fiscal 2018. The $2.7 million favorable change in cash flow was primarily the net result of a reduction in net payments against the Company’s revolving line of credit.
The Company has, or could have, on its balance sheet financial instruments consisting primarily of cash and cash equivalents, short-term investments, revolving lines of credit, and long-term debt. The fair value of these financial instruments approximates carrying value because of their short-term maturity and/or variable, market-driven interest rates.
Off-Balance Sheet Arrangements
The Company has no financial instruments with off-balance sheet risk and has no off-balance sheet arrangements, except for various operating leases. However, none of these operating leases, individually or in the aggregate have or are reasonably likely to have a current effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material.
Cash Dividends
In April 2019, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable May 14, 2019 to shareholders of record as of May 6, 2019. The indicated annual cash dividend rate for fiscal 2019 is $0.20 per share. The Board of Directors has adopted a policy regarding dividends which indicates that dividends will be determined by the Board of Directors in its discretion based upon its evaluation of earnings, cash flow requirements, financial condition, debt levels, stock repurchases, future business developments and opportunities, and other factors deemed relevant.
Critical Accounting Policies and Estimates
A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2018 Annual Report on Form 10-K.
New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases.” The amended guidance requires an entity to recognize assets and liabilities that arise from leases. The amended guidance is effective for financial statements issued for fiscal and interim periods within those years, beginning after December 15, 2018, or the Company’s fiscal 2020, with early adoption permitted. The Company has an implementation team tasked with reviewing our lease obligations and determining the impact of the new standard to its financial statements. The Company will continue to evaluate the new standard’s impact on its financial statements.