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
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting Segment
|
|
$
|
60,169
|
|
|
$
|
59,601
|
|
|
$
|
120,539
|
|
|
$
|
118,676
|
|
Graphics Segment
|
|
|
20,582
|
|
|
|
21,206
|
|
|
|
39,476
|
|
|
|
43,536
|
|
Technology Segment
|
|
|
4,907
|
|
|
|
3,880
|
|
|
|
9,802
|
|
|
|
8,400
|
|
|
|
$
|
85,658
|
|
|
$
|
84,687
|
|
|
$
|
169,817
|
|
|
$
|
170,612
|
|
Operating Income (Loss) by Business Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting Segment
|
|
$
|
2,738
|
|
|
$
|
5,182
|
|
|
$
|
5,529
|
|
|
$
|
10,864
|
|
Graphics Segment
|
|
|
1,174
|
|
|
|
1,959
|
|
|
|
2,191
|
|
|
|
4,193
|
|
Technology Segment
|
|
|
924
|
|
|
|
1,069
|
|
|
|
1,652
|
|
|
|
2,336
|
|
Corporate and Eliminations
|
|
|
(2,018
|
)
|
|
|
(2,830
|
)
|
|
|
(5,488
|
)
|
|
|
(6,250
|
)
|
|
|
$
|
2,818
|
|
|
$
|
5,380
|
|
|
$
|
3,884
|
|
|
$
|
11,143
|
|
Summary Comments
Fiscal 2017 second quarter net sales of $85,658,000 increased slightly as compared to second quarter fiscal 2016 net sales of $84,687,000. Net sales were favorably influenced by increased net sales of the Lighting Segment (up $0.6 million or 1.0%) and increased net sales of the Technology Segment (up $1.0 million or 26.5%). Net sales were unfavorably influenced by decreased net sales of the Graphics Segment (down $0.6 million or 2.9%).
Fiscal 2017 first half net sales of $169,817,000 decreased $0.8 million or 0.5% as compared to the same period of fiscal 2016. Net sales were favorably influenced by increased net sales of the Lighting Segment (up $1.9 million or 1.6%) and increased net sales of the Technology Segment (up $1.4 million or 16.7%). Net sales were unfavorably influenced by decreased net sales of the Graphics Segment (down $4.1 million or 9.3%).
Fiscal 2017 second quarter operating income of $2,818,000 decreased $2.6 million or 48% from operating income of $5,380,000 in the same period of fiscal 2016. The $2.6 million decrease in operating income was the net result of a decrease in gross profit on slightly higher sales year-over-year, similar selling and administrative expenses, and restructuring and plant closure costs of $697,000 in the second quarter of fiscal 2017 with no comparable costs in fiscal 2016. Fiscal 2017 second quarter operating income was favorably impacted by significant adjustments to the Company’s incentive compensation and stock compensation accruals. The adjustments affected fluctuations in employee compensation and benefits expense described below in the discussion of each segment’s results.
Fiscal 2017 first half operating income of $3,884,000 decreased $7.3 million or 65% from operating income of $11,143,000 in the same period of fiscal 2016. The $7.3 million decrease in operating income was the net result of decreased net sales, decreased gross profit, an increase in selling and administrative expenses, and restructuring, plant closure costs, and related inventory write-downs of $1,753,000 with no comparable costs in fiscal 2016.
Fiscal 2017 first half operating income was favorably impacted by significant adjustments to the Company’s incentive compensation and stock compensation accruals. The adjustments affected fluctuations in employee compensation and benefits expense described below in the discussion of each segment’s results.
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 restructuring and plant closure costs, along with severance costs, are non-GAAP financial measures. We believe that these adjusted supplemental measures are useful in assessing the operating performance of our business. These supplemental measures are used by our management, including our chief operating decision maker, to evaluate business results. We exclude these items because they are not representative of the ongoing results of operations of our business. Below is a reconciliation of these non-GAAP measures to operating income, net income, and earnings per share for the periods indicated.
(in thousands, unaudited)
|
|
Second Quarter
|
|
|
|
FY 2017
|
|
|
FY 2016
|
|
Reconciliation of operating income to adjusted operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income as reported
|
|
$
|
2,818
|
|
|
$
|
5,380
|
|
|
|
|
|
|
|
|
|
|
Adjustment for restructuring and plant closure costs
|
|
|
697
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Adjustment for other severance costs
|
|
|
28
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income
|
|
$
|
3,543
|
|
|
$
|
5,603
|
|
(in thousands, except per share data; unaudited)
|
|
Second Quarter
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
Diluted
|
|
|
|
FY 2017
|
|
|
EPS
|
|
|
FY 2016
|
|
|
EPS
|
|
Reconciliation of net income to adjusted net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income and earnings per share as reported
|
|
$
|
2,006
|
|
|
$
|
0.08
|
|
|
$
|
3,782
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for restructuring and plant closure costs, inclusive of the income tax effect
|
|
|
448
|
(1)
|
|
|
0.02
|
|
|
|
--
|
|
|
|
--
|
|
Adjustment for severance costs, inclusive of the income tax effect
|
|
|
23
|
(2)
|
|
|
--
|
|
|
|
146
|
(3)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income and earnings per share
|
|
$
|
2,477
|
|
|
$
|
0.10
|
|
|
$
|
3,928
|
|
|
$
|
0.15
|
|
The income tax effects of the adjustments in the tables above were calculated using the estimated U.S. effective income tax rates re-computed after considering non-GAAP adjustments for the periods indicated. The income tax effects were as follows (in thousands):
(1)
249
(2)
5
(3)
77
(in thousands, unaudited)
|
|
First Half
|
|
|
|
FY 2017
|
|
|
FY 2016
|
|
Reconciliation of operating income to adjusted operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income as reported
|
|
$
|
3,884
|
|
|
$
|
11,143
|
|
|
|
|
|
|
|
|
|
|
Adjustment for restructuring, plant closure costs, and related inventory write-downs
|
|
|
1,753
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Adjustment for other severance costs
|
|
|
173
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income
|
|
$
|
5,810
|
|
|
$
|
11,366
|
|
(in thousands, except per share data; unaudited)
|
|
First Half
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
Diluted
|
|
|
|
FY 2017
|
|
|
EPS
|
|
|
FY 2016
|
|
|
EPS
|
|
Reconciliation of net income to adjusted net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income and earnings per share as reported
|
|
$
|
2,835
|
|
|
$
|
0.11
|
|
|
$
|
7,532
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for restructuring, plant closure costs, and related inventory write-downs inclusive of the income tax effect
|
|
|
1,143
|
(1)
|
|
|
0.04
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for other severance costs, Inclusive of the income tax effect
|
|
|
120
|
(2)
|
|
|
--
|
|
|
|
146
|
(3)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income and earnings per share
|
|
$
|
4,098
|
|
|
$
|
0.16
|
|
|
$
|
7,678
|
|
|
$
|
0.30
|
|
The income tax effects of the adjustments in the tables above were calculated using the estimated U.S. effective income tax rates re-computed after considering non-GAAP adjustments for the periods indicated. The income tax effects were as follows (in thousands):
(1)
610
(2)
53
(3)
77
Results of Operations
THREE MONTHS ENDED DECEMBER 31, 2016 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2015
Lighting Segment
(In thousands)
|
|
Three Months Ended
|
|
|
|
December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
60,169
|
|
|
$
|
59,601
|
|
Gross Profit
|
|
$
|
14,570
|
|
|
$
|
15,669
|
|
Operating Income
|
|
$
|
2,738
|
|
|
$
|
5,182
|
|
Lighting Segment net sales of $60,169,000 in the second quarter of fiscal 2017 increased 1.0% from fiscal 2016 same period net sales of $59,601,000. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $46.1 million in the second quarter of fiscal 2017, representing a $4.5 million or 10.9% increase from fiscal 2016 second quarter net sales of solid-state LED light fixtures of $41.6 million. Net sales of light fixtures having solid-state LED technology accounted for 76.7% of total Lighting Segment net sales in the second quarter of fiscal 2017 compared to 69.8% of total Lighting Segment net sales in the second quarter of fiscal 2016. There was a reduction in the Company’s traditional lighting sales (metal halide and fluorescent light sources) from second quarter fiscal 2016 to second quarter fiscal 2017 as customers converted from traditional lighting to light fixtures having solid-state LED technology
.
Lighting Segment total net sales of solid-state LED technology in light fixtures have been recorded as indicated in the table below.
|
|
|
LED Net Sales
|
|
(In thousands)
|
|
FY 2017
|
|
|
FY 2016
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
43,146
|
|
|
$
|
37,393
|
|
|
|
15.4
|
%
|
|
Second Quarter
|
|
|
46,137
|
|
|
|
41,612
|
|
|
|
10.9
|
%
|
|
First Half
|
|
$
|
89,283
|
|
|
|
79,005
|
|
|
|
13.0
|
%
|
|
Third Quarter
|
|
|
|
|
|
|
33,670
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
112,675
|
|
|
|
|
|
|
Fourth Quarter
|
|
|
|
|
|
|
42,810
|
|
|
|
|
|
|
Full Year
|
|
|
|
|
|
$
|
155,485
|
|
|
|
|
|
Gross profit of $14,570,000 in the second quarter of fiscal 2017 decreased $1.1 million or 7.0% from the same period of fiscal 2016, and decreased from 25.9% 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 the Kansas City, Kansas manufacturing facility of $432,000 in the second quarter of fiscal 2017 with no comparable costs in the second quarter of fiscal 2016. The remaining $0.7 million decrease in the amount of gross profit is due to the net effect of increased product sales, improved manufacturing efficiencies as a result of the Company’s lean initiatives, competitive pricing pressures, product mix, and inflationary pressures including the rising cost of steel, aluminum, copper, and other commodities. Also contributing to the change in gross profit is decreased employee compensation and benefits expense ($0.4 million), decreased warranty expense ($0.2 million), increased rent expense ($0.1 million increase), increased depreciation expense ($0.1 million increase), and increased customer relations expense ($0.1 million).
Selling and administrative expenses of $11,832,000 in the second quarter of fiscal 2017 increased $1.3 million or 12.8% from the same period of fiscal 2016. The increase is primarily the net result of increased sales commission expense ($1.3 million increase), decreased research and development expense ($0.1 million), increased bad debt expense ($0.1 million), a loss on the sale of fixed assets ($0.1 million), small net decreases in expense in other categories, and restructuring expenses of $47,000 in the second quarter of fiscal 2017 with no comparable expenses in fiscal 2016.
The Lighting Segment second quarter fiscal 2017 operating income of $2,738,000 decreased $2.4 million or 47% from operating income of $5,182,000 in the same period of fiscal 2016. This decrease of $2.4 million was primarily the net result of increased net sales, a reduction in gross profit, increased selling and administrative expenses, and restructuring and plant closure costs of $479,000 with no comparable costs in fiscal 2016.
On September 22, 2016, the Company announced plans to close its lighting facility in Kansas City, Kansas. The decision was based upon the market shift away from fluorescent and other technologies and the rapid movement to LED lighting which is produced at other LSI facilities. All operations at the Kansas City facility ceased prior to December 31, 2016. The Company expects closure of this facility to result in annual net operating profit improvement and cost savings of approximately $1.4 million before consideration of the restructuring, inventory write-down costs, and expected gain on the sale of the facility. Realization of such savings is expected to start in the third quarter of fiscal 2017.
Graphics Segment
(In thousands)
|
|
Three Months Ended
|
|
|
|
|
December 31
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
20,582
|
|
|
$
|
21,206
|
|
|
Gross Profit
|
|
$
|
4,918
|
|
|
$
|
6,298
|
|
|
Operating Income
|
|
$
|
1,174
|
|
|
$
|
1,959
|
|
Graphics Segment net sales of $20,582,000 in the second quarter of fiscal 2017 decreased $0.6 million or 2.9% from fiscal 2016 same period net sales of $21,206,000. The $0.6 million decrease in Graphics Segment net sales is the net result of sales to the petroleum / convenience store market ($0.3 million net decrease), sales to the retail grocery market ($0.5 million net decrease), sales to the national retail drug store market ($0.5 million decrease), sales to the quick serve restaurant market ($0.3 million net increase), and changes in volume or completion of several other graphics programs ($0.4 million net increase)
.
Gross profit of $4,918,000 in the second quarter of fiscal 2017 decreased $1.4 million or 21.9% from the same period of fiscal 2016. Gross profit as a percentage of Graphics Segment net sales (customer plus inter-segment net sales) decreased from 28.9% in the second quarter of fiscal 2016 to 23.1% in the second quarter of fiscal 2017. The Company incurred restructuring and plant closure costs of $211,000 in the second quarter of fiscal 2017 with no comparable costs in the prior year. The remaining change in the amount of gross profit is due to the net effect of decreased net product sales (customer plus inter-segment net product sales were down $0.9 million or 5.5%), a slight increase in installation sales (customer plus inter-segment installation sales were up $0.1 million or 2.1%) and a slight increase in the gross profit margin on installation sales, increased shipping and handling costs as a percentage of shipping and handling sales, decreased employee and compensation expense ($0.4 million), increased depreciation expense ($0.1 million), and increased supplies expense ($0.1 million).
Selling and administrative expenses of $3,744,000 in the second quarter of fiscal 2017 decreased $0.6 million or 13.7% from the same period of fiscal 2016 primarily as the net result of decreased employee compensation and benefits expense ($0.8 million), increased convention and shows expense ($0.1 million), and small increases in expense in other categories.
The Graphics Segment second quarter fiscal 2017 operating profit of $1,174,000 decreased $0.8 million or 40% from the same period of fiscal 2016. The $0.8 million decrease from fiscal 2016 was the net result of decreased net sales, decreased gross profit and decreased gross margin as a percentage of sales, decreased selling and administrative expenses, and restructuring and plant closure costs of $221,000 with no comparable costs in fiscal 2016.
In November 2016, the Company announced the consolidation of the Woonsocket, Rhode Island manufacturing operation into its North Canton, Ohio operation. The manufacturing operations in Woonsocket ceased prior to December 31, 2016. The Company expects closure of this facility to result in annual net operating profit improvement and cost savings of approximately $680,000, before consideration of the restructuring costs.
Technology Segment
(In thousands)
|
|
Three Months Ended
|
|
|
|
|
December 31
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
4,907
|
|
|
$
|
3,880
|
|
|
Gross Profit
|
|
$
|
1,824
|
|
|
$
|
1,997
|
|
|
Operating Income
|
|
$
|
924
|
|
|
$
|
1,069
|
|
Technology Segment net sales of $4,907,000 in the second quarter of fiscal 2017 increased $1.0 million or 26.5% from fiscal 2016 same period net sales of $3,880,000. The $1.0 million increase in Technology Segment net sales is primarily the net result of a $0.9 million increase in sales to the transportation market, a $0.1 million increase in sales to the medical market, a $0.1 million decrease in sales to the original equipment manufacturing market, and a $0.1 million increase in sales to various other markets. Technology Segment inter-segment sales decreased $0.6 million or 6.6%. While the Technology Segment’s
intercompany sales decreased, the support of electronic circuit boards and lighting control systems to the Lighting Segment continues to be core to the strategic growth of the Company.
Gross profit of $1,824,000 in the second quarter of fiscal 2017 decreased $0.2 million or 8.7% from the same period in fiscal 2016, and decreased from 15.6% to 13.8% as a percentage of net sales (customer plus inter-segment net sales). The $0.2 million decrease in gross profit is due to the net effect of increased customer net sales partially offset by decreased inter-segment sales, increased supplies expense ($0.1 million), increased warranty expense ($0.2 million), and decreased outside services expense ($0.1 million).
Selling and administrative expenses of $900,000 in the second quarter of fiscal 2017 decreased 3.0% from fiscal 2016 selling and administrative expenses of $928,000. A decrease in research and development expense of $0.1 million was offset by an increase in outside services expense of $0.1 million.
The Technology Segment second quarter fiscal 2017 operating income of $924,000 decreased $0.1 million or 13.6% from operating income of $1,069,000 in the same period of fiscal 2016. The $0.1 million decrease in operating income was primarily the net result of increased customer net sales more than offset by decreased inter-segment sales, and decreased gross profit.
In September 2016, the Company announced the consolidation of the Beaverton, Oregon facility into other LSI facilities. The light assembly of products in the Beaverton facility was moved to the Company’s Columbus, Ohio facility, and administration and engineering functions were moved to the Company’s Cincinnati, Ohio facility. This consolidation was completed September 30, 2016. The consolidation of this facility and net reduction of employment is expected to result in annual cost savings of approximately $450,000. Realization of such savings started in the second quarter of fiscal 2017.
Corporate and Eliminations
(In thousands)
|
|
Three Months Ended
|
|
|
|
|
December 31
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
$
|
95
|
|
|
$
|
(38
|
)
|
|
Operating (Loss)
|
|
$
|
(2,018
|
)
|
|
$
|
(2,830
|
)
|
The gross profit (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $2,113,000 in the second quarter of fiscal 2017 decreased $0.7 million or 24.3% from the same period of the prior year. The $0.7 million decrease in expense is primarily the result of decreased employee compensation and benefit expense ($1.2 million), an increase in legal fee expense ($0.1 million), increased outside service expense ($0.2 million), and an increase in research and development costs ($0.2 million).
Consolidated Results
The Company reported net interest income of $20,000 in the second quarter of fiscal 2017 as compared to net interest income of $8,000 in the same period of fiscal 2016. Commitment fees related to the unused portions of the Company’s lines of credit and interest income on invested cash are included in both fiscal years. The increase in net interest income is directly related to the increase in invested cash and an increase in the interest rate earned on invested cash.
The $832,000 income tax expense in the second quarter of fiscal 2017 represents a consolidated effective tax rate of 29.3%. This is the net result of an income tax rate of 30.8% influenced by certain permanent book-tax differences and by a benefit related to uncertain income tax positions.
The $1,606,000 income tax expense in the second quarter of fiscal 2016 represents a consolidated effective tax rate of 29.8%. This is the net result of an income tax rate of 34.5% influenced by certain permanent book-tax differences, an $111,000 tax benefit related to the retroactive reinstatement of the R&D tax credit, and a benefit related to uncertain income tax positions.
The Company reported net income of $2,006,000 in the second quarter of fiscal 2017 as compared to net income of $3,782,000 in the same period of the prior year. The change in net income is primarily the net result of decreased gross profit on slightly higher sales, similar selling and administrative expenses, and a slightly lower effective tax rate in fiscal 2017 compared to fiscal 2016. Also contributing to the lower net income are pre-tax restructuring costs of $697,000 recorded in the second quarter of fiscal 2017 with no comparable costs in fiscal 2016. Diluted earnings per share of $0.08 were reported in the second quarter of fiscal 2017 as compared to diluted earnings per share of $0.15 in the same period of fiscal 2016. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the second quarter of fiscal 2017 were 25,803,000 shares as compared to 25,624,000 shares in the same period last year.
SIX MONTHS ENDED DECEMBER 31, 2016 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2015
Lighting Segment
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Six Months Ended
|
|
|
|
|
December 31
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
120,539
|
|
|
$
|
118,676
|
|
|
Gross Profit
|
|
$
|
29,161
|
|
|
$
|
31,341
|
|
|
Operating Income
|
|
$
|
5,529
|
|
|
$
|
10,864
|
|
Lighting Segment net sales of $120,539,000 in the first half of fiscal 2017 increased 1.6% from fiscal 2016 same period net sales of $118,676,000. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $89.3 million in the first half of fiscal 2017, representing a 13.0% increase from first half fiscal 2016 net sales of solid-state LED light fixtures of $79.0 million. Net sales of light fixtures having solid-state LED technology accounted for 74.1% of total Lighting Segment net sales. (See the LED net sales table on page 28.) There was a reduction in the Company’s traditional lighting sales (metal halide and fluorescent light sources) from fiscal 2016 to fiscal 2017 as customers converted from traditional lighting to light fixtures having solid-state LED technology.
Gross profit of $29,161,000 in the first half of fiscal 2017 decreased $2.2 million or 7.0% from the same period of fiscal 2016, and decreased from 26.1% 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, including the write-down of inventory, that were recorded in cost of sales related to the closure of the Kansas City, Kansas manufacturing facility of $1,114,000 in fiscal 2017 with no comparable costs in fiscal 2016. The remaining $1.1 million decrease in gross profit is due to the net effect of increased net product sales, improved manufacturing efficiencies as a result of the Company’s lean initiatives, competitive pricing pressures, product mix, inflationary pressures including the rising cost of steel, aluminum, copper, and other commodities, and slightly lower freight costs as a percentage of net sales primarily due to initiatives to lower freight tariffs. Also contributing to the net change in gross profit is decreased employee compensation and benefits expense ($0.7 million), decreased warranty costs ($0.1 million), increased customer relations expense ($0.3 million), increased repairs and maintenance expense ($0.1 million), increased depreciation expense ($0.2 million), increased rent expense ($0.2 million), and increased outside service expense ($0.2 million).
Selling and administrative expenses of $23,632,000 in the first half of fiscal 2017 increased $3.2 million or 15.4% from the same period of fiscal 2016. The $3.2 million increase is primarily the result of increased employee compensation and benefit expense ($0.5 million), increased samples expense ($0.1 million), increased outside service expense ($0.1 million), increased sales commission expense ($1.9 million), increased bad debt expense ($0.1 million), decreased literature expense ($0.1 million), a loss on the sale of fixed assets ($0.1 million), use tax recorded on current and prior year purchases as a result of a use tax audit conducted at the Company’s Blue Ash, Ohio facility ($0.2 million), and small net increases in several other categories. Also contributing to the increase in selling and administrative expenses are restructuring and plant closure costs of $56,000 related to the closure of the Kansas City, Kansas manufacturing facility that were recorded in fiscal 2017 with no comparable costs in fiscal 2016.
Lighting Segment first half fiscal 2017 operating income of $5,529,000 decreased $5.3 million or 49.1% from operating income of $10,864,000 in the same period of fiscal 2016. This decrease of $5.3 million was the net result of increased net sales, a decrease in gross profit, increased selling and administrative expenses, and restructuring, plant closure costs, and related inventory write-downs of $1.2 million with no comparable costs in fiscal 2016.
On September 22, 2016, the Company announced plans to close its lighting facility in Kansas City, Kansas. The decision was based upon the market shift away from fluorescent and other technologies and the rapid movement to LED lighting which is produced at other LSI facilities. All operations at the Kansas City facility ceased prior to December 31, 2016. The Company expects closure of this facility to result in annual net operating profit improvement and cost savings of approximately $1.4 million before consideration of the restructuring, inventory write-down costs, and expected gain on the sale of the facility. Realization of such savings is expected to start in the third quarter of fiscal 2017.
Graphics Segment
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Six Months Ended
|
|
|
|
|
December 31
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
39,476
|
|
|
$
|
43,536
|
|
|
Gross Profit
|
|
$
|
9,358
|
|
|
$
|
11,853
|
|
|
Operating Income
|
|
$
|
2,191
|
|
|
$
|
4,193
|
|
Graphics Segment net sales of $39,476,000 in the first half of fiscal 2017 decreased 9.3% from fiscal 2016 same period net sales of $43,536,000. The $4.1 million decrease in Graphics Segment net sales is primarily the net result of sales to the petroleum / convenience store market ($2.2 million net decrease), sales to the retail grocery market ($0.9 million net decrease), sales to the national retailer drug store market ($1.9 million decrease), sales to the quick-service restaurant market ($0.6 million net increase), sales to the retail market ($0.4 million increase), and changes in volume or completion of several other graphics programs ($0.1 million net decrease)
.
Gross profit of $9,358,000 in the first half of fiscal 2017 decreased $2.5 million or 21.0% from the same period in fiscal 2016, and decreased from 26.6% to 23.2% as a percentage of Graphics Segment net sales (customer plus inter-segment net sales). The Company incurred restructuring and plant closure costs that were recorded in cost of sales related to the closure of the Woonsocket, Rhode Island manufacturing facility of $211,000. The remaining $2.3 million decrease in the amount of gross profit is due to the net effect of decreased net product sales (customer plus inter-segment net product sales were down $3.0 million or 8.7%), a drop in installation sales (customer plus inter-segment installation sales were down $1.7 million or 24.6%) partially offset by higher margins on installation sales, decreased freight expense as a percentage of shipping and handling revenue, increased depreciation expense ($0.3 million), increased real estate taxes ($0.1 million), and decreased compensation and benefit expense ($0.4 million).
Selling and administrative expenses of $7,167,000 in the first half of fiscal 2017 decreased $0.5 million or 6.4% from the same period of fiscal 2016 primarily as a result of decreased compensation and benefit expense ($1.0 million), increased outside services expense ($0.2 million), increased convention and shows expense ($0.1 million), increased travel expense ($0.1 million), and increased supplies expense ($0.1 million).
Graphics Segment first half fiscal 2017 operating income of $2,191,000 decreased $2.0 million or 48% from the same period of fiscal 2016 and is the net result of decreased net sales, decreased gross profit and decreased gross profit as a percentage of net sales, decreased selling and administrative expenses, and restructuring and plant closure costs of $221,000 with no comparable costs in fiscal 2016.
In November 2016, the Company announced the consolidation of the Woonsocket, Rhode Island manufacturing operation into its North Canton, Ohio operation. The manufacturing operations in Woonsocket ceased prior to December 31, 2016. The Company expects closure of this facility to result in annual net operating profit improvement and cost savings of approximately $680,000, before consideration of the restructuring costs.
Technology Segment
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Six Months Ended
|
|
|
|
|
December 31
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
9,802
|
|
|
$
|
8,400
|
|
|
Gross Profit
|
|
$
|
3,551
|
|
|
$
|
4,177
|
|
|
Operating Income
|
|
$
|
1,652
|
|
|
$
|
2,336
|
|
Technology Segment net sales of $9,802,000 in the first half of fiscal 2017 increased $1.4 million or 16.7% from fiscal 2016 same period net sales of $8,400,000. The $1.4 million increase in Technology Segment net sales is primarily the net result of a $0.1 million increase in sales to the medical market, a $1.6 million increase in sales to the transportation market, a $0.1 million decrease in sales to original equipment manufacturers, a $0.1 million decrease in sales to the telecommunication market, and a $0.1 million decrease in sales to various other markets.
Technology Segment inter-segment sales decreased $1.2 million or 6.5%. While the Technology Segment’s intercompany sales decreased, the support of electronic circuit boards and lighting control systems to the Lighting Segment continues to be core to the strategic growth of the Company.
Gross profit of $3,551,000 in the first half of fiscal 2017 decreased $0.6 million or 15.0% from the same period of fiscal 2016, and decreased from 15.6% to 13.2% as a percentage of Technology Segment net sales (customer plus inter-segment net sales). The Company incurred restructuring charges of $0.2 million related to the consolidation of its Beaverton, Oregon facility into other LSI facilities, with no comparable costs in fiscal 2016. The remaining $0.4 million decrease in amount of gross profit is due to the net effect of increased customer net sales, partially offset by decreased inter-segment sales, increased employee compensation and benefits expense ($0.3 million), increased supplies expense ($0.3 million), increased warranty expense ($0.1 million), and decreased outside services expense ($0.2 million).
Selling and administrative expenses of $1,899,000 in the first half of fiscal 2017 increased $58,000 or 3.2% from the same period of fiscal 2016. The increase in selling and administrative expenses is the net result of an increase in employee compensation and benefit expense ($0.1 million), an increase in outside services expense ($0.1 million), and a decrease in research and development expense ($0.2 million). Also contributing to the increase in selling and administrative expenses are $33,000 in restructuring costs recorded in the first half of fiscal 2017 related to the consolidation of its Beaverton, Oregon facility into other LSI facilities with no comparable costs in fiscal 2016.
Technology Segment first half fiscal 2017 operating income of $1,652,000 decreased $0.7 million or 29% from operating income of $2,336,000 in the same period of fiscal 2016. The decrease of $0.7 million was the net result of increased net customer sales, decreased inter-segment sales, restructuring costs in fiscal 2017 with no comparable costs in fiscal 2016, and decreased gross profit.
In September 2016, the Company announced the consolidation of the Beaverton, Oregon facility into other LSI facilities. The light assembly of products in the Beaverton facility was moved to the Company’s Columbus, Ohio facility, and administration and engineering functions were moved to the Company’s Cincinnati, Ohio facility. This consolidation was completed September 30, 2016. The consolidation of this facility and net reduction of employment is expected to result in annual cost savings of approximately $450,000. Realization of such savings started in the second quarter of fiscal 2017.
Corporate and Eliminations
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Six Months Ended
|
|
|
|
|
December 31
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
$
|
172
|
|
|
$
|
(96
|
)
|
|
Operating (Loss)
|
|
$
|
(5,488
|
)
|
|
$
|
(6,250
|
)
|
The gross profit (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $5,660,000 in the first half of fiscal 2017 decreased $0.5 million or 8.0% from the same period of the prior year. The $0.5 million change in administrative expenses is primarily the net result of decreased employee compensation and benefit expense ($1.3 million), an increase in legal expense ($0.2 million), decreased depreciation expense ($0.1 million), increased research and development expense ($0.3 million), increased telephone expense ($0.1 million), and several small net increases in various other expenses ($0.2 million). Also contributing to the increased administrative expenses are restructuring costs of $0.1 million recorded in fiscal 2017 related to the consolidation of its Beaverton, Oregon facility into other LSI facilities, with no comparable costs in fiscal 2016. These restructuring expenses were primarily for severance costs for employees located in the Beaverton, Oregon facility that were previously included in corporate research and development expenses.
Consolidated Results
The Company reported net interest income of $34,000 in the first half of fiscal 2017 as compared to net interest income of $8,000 in the same period of fiscal 2016. Commitment fees related to the unused portions of the Company’s lines of credit and interest income on invested cash are included in both fiscal years. The increase in net interest income is directly related to the increase in invested cash and an increase in the interest rate earned on invested cash.
The $1,083,000 income tax expense in the first half of fiscal 2017 represents a consolidated effective tax rate of 27.6%. This is the net result of an income tax rate of 30.8% influenced by certain permanent book-tax differences, by a benefit related to uncertain income tax positions, and by a favorable adjustment to a deferred tax asset. The $3,619,000 income tax expense in the first half of fiscal 2016 represents a consolidated effective tax rate of 32.5%. This is the net result of an income tax rate of 34.5% influenced by certain permanent book-tax differences, an $111,000 tax benefit related to the retroactive reinstatement of the R&D tax credit, and by a benefit related to uncertain income tax positions.
The Company reported net income of $2,835,000 in the first half of fiscal 2017 compared to net income of $7,532,000 in the same period of the prior year. The $4.7 million decrease in net income is primarily the net result of decreased net sales, decreased gross profit, increased operating expenses, restructuring and plant closure costs in fiscal 2017 with no comparable costs in fiscal 2016, and lower income tax expense in fiscal 2017 compared to fiscal 2016. Diluted earnings per share of $0.11 was reported in the first half of fiscal 2017 as compared to diluted earnings per share of $0.30 in the same period of fiscal 2016. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first half of fiscal 2017 was 25,859,000 shares as compared to 25,405,000 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, 2016, the Company had working capital of $94.2 million, compared to $88.5 million at June 30, 2016. The ratio of current assets to current liabilities was 3.55 to 1 as compared to a ratio of 3.26 to 1 at June 30, 2016. The $5.7 million increase in working capital from June 30, 2016 to December 31, 2016 was primarily related to the net effect of decreased cash and cash equivalents ($0.8 million), increased net accounts receivable ($2.6 million), decreased net inventory ($1.7 million), a decrease in accrued expenses ($2.4 million), an increase in other current assets ($0.2 million), and assets held for sale of $3.2 million at December 31, 2016. The Company has a strategy of aggressively managing working capital, including reduction of the accounts receivable days sales outstanding (DSO) and reduction of inventory levels, without reducing service to its customers.
The Company generated $4.6 million of cash from operating activities in the first half of fiscal 2017 as compared to $5.5 million in the same period of the prior year. This $0.9 million decrease in net cash flows from operating activities is primarily the net result of an increase rather than a decrease in net accounts receivable (unfavorable change of $3.1 million), a smaller decrease in accounts payable (favorable change of $5.8 million), a smaller increase in customer prepayments (unfavorable change of $0.2 million), a decrease rather than an increase in inventory (favorable change of $4.5 million), a decrease rather than an increase in accrued expenses and other (unfavorable change of $3.6 million), an increase in refundable income taxes in fiscal 2016 (favorable change of $0.5 million), a greater increase in net deferred tax assets (unfavorable change of $0.5 million), a decrease in stock compensation expense (unfavorable change of $0.3 million), a decrease in the deferred compensation liability (unfavorable change of $0.1 million), an increase in depreciation and amortization expense (favorable change of $0.4 million), fixed asset impairment and accelerated depreciation with no comparable events in the prior year (favorable change of $0.4 million), an increase in the loss on the sale of fixed assets ($0.1 million), and a decrease in net income (unfavorable change of $4.7 million).
Net accounts receivable were $49.5 million and $47.0 million at December 31, 2016 and June 30, 2016, respectively. DSO increased to 53 days at December 31, 2016 compared to 47 days at June 30, 2016. 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 $42.4 million at December 31, 2016 decreased $1.7 million from $44.1 million at June 30, 2016. The decrease of $1.7 million is the result of a decrease in gross inventory of $1.7 million and similar obsolescence reserves. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory increases occurred in the first half of fiscal 2017 in the Graphics Segment of approximately $0.6 million and in the Technology Segment of approximately $0.9 million. There was a decrease in net inventory in the Lighting Segment of $3.3 million.
Cash generated from operations and borrowing capacity under the Company’s line of credit facility is the Company’s primary source of liquidity. The Company has an unsecured $30 million revolving line of credit with its bank, with all of the $30 million of the credit line available as of January 27, 2017. This line of credit is a $30 million three year committed credit facility expiring in the third quarter of fiscal 2019. The Company believes that its $30 million line of credit plus cash flows from operating activities are adequate for the Company’s fiscal 2017 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.
The Company used cash of $2.7 million related to investing activities in the first half of fiscal 2017 as compared to a use of $3.4 million in the same period of the prior year, resulting in a favorable change of $0.6 million. Capital expenditures in the first half of fiscal 2017 decreased $0.6 million to $2.7 million from the same period in fiscal 2016. The largest components of the fiscal 2017 capital expenditures are equipment and building improvements related to the Company’s Lighting and Graphics Segments and computer hardware and software related to Corporate Administration.
The Company used $2.7 million of cash related to financing activities in the first half of fiscal 2017 compared to a source of cash of $0.2 million in the first half of fiscal 2016. The $2.9 million unfavorable change in cash flow was the net result of an increase in dividends paid to shareholders (unfavorable change of $0.8 million), a decrease in the exercise of stock options in the first half of fiscal 2017 (unfavorable change of $2.0 million), and an increase in the purchase of treasury shares (unfavorable change of $0.1 million).
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.
Cash Dividends
In January 2017, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable February 14, 2017 to shareholders of record as of February 6, 2017. The indicated annual cash dividend rate for fiscal 2017 is $0.20 per share. The Board of Directors has adopted a policy regarding dividends which indicates that dividends will be determined by the Board of Directors in its discretion based upon its evaluation of earnings, cash flow requirements, financial condition, debt levels, stock repurchases, future business developments and opportunities, and other factors deemed relevant.
Critical Accounting Policies and Estimates
The Company is required to make estimates and judgments in the preparation of its financial statements that affect the reported amounts of assets, liabilities, revenues and expenses, and related footnote disclosures. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The Company continually reviews these estimates and their underlying assumptions to ensure they remain appropriate. The Company believes the items discussed below are among its most significant accounting policies because they utilize estimates about the effect of matters that are inherently uncertain and therefore are based on management’s judgment. Significant changes in the estimates or assumptions related to any of the following critical accounting policies could possibly have a material impact on the financial statements.
Revenue Recognition
Revenue is recognized when title to goods and risk of loss have passed to the customer, there is persuasive evidence of a purchase arrangement, delivery has occurred or services have been rendered, and collectability is reasonably assured. Sales are recorded net of estimated returns, rebates and discounts. Amounts received from customers prior to the recognition of revenue are accounted for as customer pre-payments and are included in accrued expenses.
The Company has five sources of revenue: revenue from product sales; revenue from installation of products; service revenue generated from providing integrated design, project and construction management, site engineering and site permitting, and commissioning of lighting controls; revenue from the management of media content and digital hardware related to active digital signage; and revenue from shipping and handling.
Product revenue is recognized on product-only orders upon passing of title and risk of loss, generally at time of shipment. In certain arrangements with customers, as is the case with the sale of some of our solid-state LED video screens, revenue is recognized upon customer acceptance of the video screen at the job site. Product revenue related to orders where the customer requires the Company to install the product is recognized when the product is installed. The company provides product warranties and certain post-shipment service, support and maintenance of certain solid state LED video screens and billboards.
Installation revenue is recognized when the products have been fully installed. The Company is not always responsible for installation of products it sells and has no post-installation responsibilities, other than normal warranties.
Service revenue from integrated design, project and construction management, and site permitting is recognized when all products at a customer site have been installed.
Revenue from the management of media content and digital hardware related to active digital signage is recognized evenly over the service period with the customer. Media content service periods with most customers range from 1 month to 1 year.
Shipping and handling revenue coincides with the recognition of revenue from the sale of the product.
In situations where the Company is responsible for re-imaging programs with multiple sites, each site is viewed as a separate unit of accounting and has stand-alone value to the customer. Revenue is recognized upon the Company’s complete performance at the location, which may include a site survey, graphics products, lighting products, and installation of products. The selling price assigned to each site is based upon an agreed upon price between the Company and its customer and reflects the estimated selling price for that site relative to the selling price for sites with similar image requirements.
The Company also evaluates the appropriateness of revenue recognition in accordance with the accounting standard on software revenue recognition. Our solid-state LED video screens, billboards and active digital signage contain software elements which the Company has determined are incidental.
Income Taxes
The Company accounts for income taxes in accordance with the accounting guidance for income taxes. Accordingly, deferred income taxes are provided on items that are reported as either income or expense in different time periods for financial reporting purposes than they are for income tax purposes. Deferred income tax assets and liabilities are reported on the Company’s balance sheet. Significant management judgment is required in developing the Company’s income tax provision, including the estimation of taxable income and the effective income tax rates in the multiple taxing jurisdictions in which the Company operates, the estimation of the liability for uncertain income tax positions, the determination of deferred tax assets and liabilities, and any valuation allowances that might be required against deferred tax assets. The Company has adopted ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.” As a result of early adoption of this accounting guidance, prior periods have been re-classified, which only affected the financial statement presentation and not the measurement of deferred tax liabilities and assets.
The Company operates in multiple taxing jurisdictions and is subject to audit in these jurisdictions. The Internal Revenue Service and other tax authorities routinely review the Company’s tax returns. These audits can involve complex issues which may require an extended period of time to resolve. In management’s opinion, adequate provision has been made for potential adjustments arising from these audits.
The Company is recording estimated interest and penalties related to potential underpayment of income taxes as a component of tax expense in the Condensed Consolidated Statements of Operations. The reserve for uncertain tax positions is not expected to change significantly in the next twelve months.
Asset Impairment
Carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment in accordance with the accounting standard on goodwill and intangible assets. The Company may first assess qualitative factors in order to determine if goodwill is impaired. If through the qualitative assessment it is determined that it is more likely than not that goodwill is not impaired, no further testing is required. If it is determined that it is more likely than not that goodwill is impaired, or if the Company elects not to first assess qualitative factors, the Company’s impairment testing continues with the estimation of the fair value of goodwill and indefinite-lived intangible assets using a combination of a market approach and an income (discounted cash flow) approach, at the reporting unit level. The estimation of the fair value of goodwill and indefinite-lived intangible assets requires significant management judgment with respect to revenue and expense growth rates, changes in working capital and the selection and use of an appropriate discount rate. The estimates of fair value of reporting units are based on the best information available as of the date of the assessment. The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease an impairment charge. Company management uses its judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as adverse business conditions, economic factors and technological change or competitive activities may signal that an asset has become impaired.
Carrying values for long-lived tangible assets and definite-lived intangible assets, excluding goodwill and indefinite-lived intangible assets, are reviewed for possible impairment as circumstances warrant. Impairment reviews are conducted at the judgment of Company management when it believes that a change in circumstances in the business or external factors warrants a review. Circumstances such as the discontinuation of a product or product line, a sudden or consistent decline in the forecast for a product, changes in technology or in the way an asset is being used, a history of negative operating cash flow, or an adverse change in legal factors or in the business climate, among others, may trigger an impairment review. The Company’s initial impairment review to determine if a potential impairment charge is required is based on an undiscounted cash flow analysis at the lowest level for which identifiable cash flows exist. The analysis requires judgment with respect to changes in technology, the continued success of product lines and future volume, revenue and expense growth rates, and discount rates.
Credit and Collections
The Company maintains allowances for doubtful accounts receivable for probable estimated losses resulting from either customer disputes or the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against income. The Company determines its allowance for doubtful accounts by first considering all known collectability problems of customers’ accounts, and then applying certain percentages against the various aging categories based on the due date of the remaining receivables. The resulting allowance for doubtful accounts receivable is an estimate based upon the Company’s knowledge of its business and customer base, and historical trends. The amount ultimately not collected may differ from the reserve established, particularly in the case where percentages are applied against aging categories. In all cases, it is management’s goal to carry a reserve against the Company’s accounts receivable which is adequate based upon the information available at that time so that net accounts receivable is properly stated. The Company also establishes allowances, at the time revenue is recognized, for returns and allowances, discounts, pricing and other possible customer deductions. These allowances are based upon contractual terms and historical trends.
Warranty Reserves
The Company offers a limited warranty that its products are free from defects in workmanship and materials. The specific terms and conditions vary somewhat by product line, but generally cover defective products returned within one to five years, with some exceptions where the terms extend to 10 years, from the date of shipment. The Company records warranty liabilities to cover the estimated future costs for repair or replacement of defective returned products as well as products that need to be repaired or replaced in the field after installation. The Company calculates its liability for warranty claims by applying estimates based upon historical claims as a percentage of sales to cover unknown claims, as well as estimating the total amount to be incurred for known warranty issues. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Inventory Reserves
The Company maintains an inventory reserve for probable obsolete and excess inventory. The Company first determines its obsolete inventory reserve by considering specific known obsolete items, and then by applying certain percentages to specific inventory categories based upon inventory turns. The Company uses various tools, in addition to inventory turns, to identify which inventory items have the potential to become obsolete. Judgment is used to establish excess and obsolete inventory reserves and management adjusts these reserves as more information becomes available about the ultimate disposition of the inventory item. Management values inventory at lower of cost or market.
New Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board issued ASU 2014-09, “Revenue from Contracts with Customers.” This amended guidance supersedes and replaces all existing U.S. GAAP revenue recognition guidance. The guidance established a new revenue recognition model, changes the basis for deciding when revenue is recognized, provides new and more detailed guidance on specific revenue topics, and expands and improves disclosures about revenue. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing.” In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers: Narrow Scope Improvements and Practical Expedients.” In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” These three standards clarify or improve guidance from ASU 2014-09 and are effective for fiscal years and interim periods within those years, beginning after December 15, 2017, or the Company’s fiscal year 2019. The Company will adopt these standards no later than July 1, 2018. While the Company is currently assessing the impact of the new standard, the Company’s revenue is primarily generated from the sale of finished products to customers. Those sales predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risks, and rewards transfer. These are largely unaffected by the new standard. However, certain product sales require installation and revenue is currently not recognized until the installation is complete. The Company does not expect this new guidance to have a material impact on the amount of overall sales recognized, however, the timing of sales on certain projects may be affected. The Company has not yet quantified this potential impact.
In July 2015, the Financial Accounting Standards Board issued ASU 2015-11, “Simplifying the Measurement of Inventory.” The amended guidance requires an entity to measure in scope inventory at lower of cost and net realizable value. The amended guidance is effective for fiscal years beginning after December 15, 2016, or the Company’s fiscal year 2018, with early adoption permitted. The Company is evaluating the impact the amended guidance will have on its financial statements.
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which eliminates the current requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts in the statement of financial position. This update requires that deferred tax liabilities and assets be classified as noncurrent. This update is effective for financial statements issued for fiscal years beginning April 1, 2017. This update may be applied either prospectively or retrospectively. However, early adoption is permitted and the Company has chosen to adopt the standard retrospectively as of June 30, 2016. As a result, prior periods have been adjusted to reflect this change. This update affected the presentation, but not the measurement of deferred tax liabilities and assets.
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 years and interim periods within those years, beginning after December 15, 2018, or the Company’s fiscal year 2020, with early adoption permitted. The Company has not yet determined the impact the amended guidance will have on its financial statements.
In March 2016, the Financial Accounting Standards Board issued ASU 2016-08, “Principal versus Agent Considerations.” The amendment is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The amended guidance is effective for financial statements issued for fiscal years and interim periods within those years, beginning after December 15, 2017, or the Company’s fiscal year 2019, with early adoption permitted in fiscal years beginning after December 15, 2016. The Company has not yet determined the impact the amended guidance will have on its financial statements.
In March 2016, the Financial Accounting Standards Board issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This amended guidance simplifies several aspects of the accounting for share-based payment award transactions. The amended guidance is effective for financial statements issued for fiscal years and interim periods within those years, beginning after December 15, 2016, or the Company’s fiscal year 2018, with early adoption permitted. The Company has not yet determined the impact the amended guidance will have on its financial statements.
In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” This amendment provides additional guidance on the measurement of expected credit losses for financial assets based on historical experience, current conditions, and supportable forecasts. The amended guidance is effective for financial statements issued for fiscal years and interim periods within those years, beginning after December 15, 2019, or the Company’s fiscal year 2021. The Company is evaluating the impact of the amended guidance and the anticipated impact to the financial statements is not material.
In August 2016, the Financial Accounting Standards Board issued ASU 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments,” which provides cash flow classification guidance for certain cash receipts and cash payments. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, or the Company’s fiscal year 2019. The Company is evaluating the impact the amended guidance will have on its financial statements.