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
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting Segment
|
|
$
|
56,039
|
|
|
$
|
49,331
|
|
|
$
|
176,578
|
|
|
$
|
168,007
|
|
Graphics Segment
|
|
|
16,463
|
|
|
|
17,236
|
|
|
|
55,939
|
|
|
|
60,772
|
|
Technology Segment
|
|
|
5,654
|
|
|
|
4,173
|
|
|
|
15,456
|
|
|
|
12,573
|
|
|
|
$
|
78,156
|
|
|
$
|
70,740
|
|
|
$
|
247,973
|
|
|
$
|
241,352
|
|
Operating Income (Loss) by Business Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
March 31
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting Segment
|
|
$
|
2,759
|
|
|
$
|
1,106
|
|
|
$
|
8,288
|
|
|
$
|
11,970
|
|
Graphics Segment
|
|
|
(480
|
)
|
|
|
1,078
|
|
|
|
1,711
|
|
|
|
5,271
|
|
Technology Segment
|
|
|
1,386
|
|
|
|
984
|
|
|
|
3,038
|
|
|
|
3,320
|
|
Corporate and Eliminations
|
|
|
(4,439
|
)
|
|
|
(2,436
|
)
|
|
|
(9,927
|
)
|
|
|
(8,686
|
)
|
|
|
$
|
(774
|
)
|
|
$
|
732
|
|
|
$
|
3,110
|
|
|
$
|
11,875
|
|
Summary Comments
The Company acquired Atlas Lighting Products, Inc. on February 21, 2017. Atlas is a manufacturer of high-quality LED lighting products sold in the electrical distribution market. The operating results of Atlas beginning February 21, 2017 have been included in the Company’s consolidated operating results and in the Lighting Segment results.
Fiscal 2017 third quarter net sales of $78,156,000 increased as compared to third quarter fiscal 2016 net sales of $70,740,000. Net sales were favorably influenced by increased net sales of the Lighting Segment (up $6.7 million or 13.6%) and increased net sales of the Technology Segment (up $1.5 million or 35.5%). Net sales were unfavorably influenced by decreased net sales of the Graphics Segment (down $0.8 million or 4.5%). Fiscal 2017 third quarter organic sales of $71,495,000 increased $0.7 million or 1.1% as compared to $70,740,000 in the same period of fiscal 2016.
Fiscal 2017 nine month net sales of $247,973,000 increased $6.6 million or 2.7% as compared to the same period of fiscal 2016. Net sales were favorably influenced by increased net sales of the Lighting Segment (up $8.6 million or 5.1%) and increased net sales of the Technology Segment (up $2.9 million or 22.9%). Net sales were unfavorably influenced by decreased net sales of the Graphics Segment (down $4.8 million or 8.0%). Fiscal 2017 nine month organic sales of $241,312,000 remained fairly constant as compared to fiscal 2016 nine month organic sales of $241,352,000.
Fiscal 2017 third quarter operating income (loss) of $(774,000) decreased $1.5 million from operating income of $732,000 in the same period of fiscal 2016. The $1.5 million decrease in operating income was the net result of an increase in gross profit on higher sales year-over-year, higher selling and administrative expenses, acquisition costs of $1,480,000 in the third quarter of fiscal 2017 with no comparable costs in 2016, and the gain on the sale of a facility of $1,361,000 with no comparable gain in the same period of fiscal 2016. Also, contributing to the lower operating income in the third quarter of fiscal 2017 was an impairment expense of $479,000 related to a customer relationship intangible asset that was determined to be fully impaired with no comparable expense in the same period of fiscal 2016.
Fiscal 2017 nine month operating income of $3,110,000 decreased $8.8 million or 74% from operating income of $11,875,000 in the same period of fiscal 2016. The $8.8 million decrease in operating income was the net result of increased net sales, decreased gross profit, an increase in selling and administrative expenses, acquisition costs of $1,480,000 in fiscal 2017 with no comparable costs in fiscal 2016, restructuring, plant closure costs, related inventory write-downs of $2,157,000 with no comparable costs in fiscal 2016, and a gain on the sale of a facility of $1,361,000 in fiscal 2017 with no comparable gain in fiscal 2016.
Also, contributing to the lower operating income in fiscal 2017 was an impairment expense of $479,000 related to a customer relationship intangible asset that was determined to be fully impaired with no comparable expense in the same period of fiscal 2016. Fiscal 2017 nine month 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, intangible asset impairment expense, acquisition deal costs, and fair market value inventory adjustments, 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 2017
|
|
|
FY 2016
|
|
Reconciliation of operating income (loss) to
adjusted operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) as reported
|
|
$
|
(774
|
)
|
|
$
|
732
|
|
|
|
|
|
|
|
|
|
|
Impairment of intangible asset
|
|
|
479
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Adjustment for restructuring and plant closure costs
(gain), and related inventory write-downs
|
|
|
(957
|
)
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Adjustment for other severance costs
|
|
|
49
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
Adjustment for acquisition deal costs
|
|
|
1,480
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Fair market value inventory write-up
|
|
|
155
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income
|
|
$
|
432
|
|
|
$
|
910
|
|
(in thousands, except per share data; unaudited)
|
|
Third Quarter
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
Diluted
|
|
|
|
FY 2017
|
|
|
EPS
|
|
|
FY 2016
|
|
|
EPS
|
|
Reconciliation of net income (loss) to
adjusted net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) and earnings
(loss) per share as reported
|
|
$
|
(531
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
522
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of intangible asset, inclusive of the
income tax effect
|
|
|
335
|
(1)
|
|
|
0.01
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for restructuring and plant closure
costs (gain), inclusive of the income tax effect
|
|
|
(629
|
)
(2)
|
|
|
(0.02
|
)
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for severance costs,
inclusive of the income tax effect
|
|
|
44
|
(3)
|
|
|
--
|
|
|
|
117
|
(6)
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for acquisition deal costs,
inclusive of the income tax effect
|
|
|
1,030
|
(4)
|
|
|
0.04
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair market value inventory write-up,
inclusive of the income tax effect
|
|
|
108
|
(5)
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income and earnings per share
|
|
$
|
357
|
|
|
$
|
0.01
|
|
|
$
|
639
|
|
|
$
|
0.02
|
|
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)
$144
(2)
$(328)
(3)
$5
(4)
$450
(5)
$47
(6)
$61
(in thousands, unaudited)
|
|
Nine Months
|
|
|
|
FY 2017
|
|
|
FY 2016
|
|
Reconciliation of operating income to
adjusted operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income as reported
|
|
$
|
3,110
|
|
|
$
|
11,875
|
|
|
|
|
|
|
|
|
|
|
Impairment of intangible asset
|
|
|
479
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Adjustment for restructuring,
plant closure costs, and related
inventory write-downs
|
|
|
796
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Adjustment for other severance costs
|
|
|
222
|
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
Adjustment for acquisition deal costs
|
|
|
1,480
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Fair market value inventory write-up
|
|
|
155
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income
|
|
$
|
6,242
|
|
|
$
|
12,276
|
|
(in thousands, except per share data; unaudited)
|
|
Nine Months
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
Diluted
|
|
|
|
FY 2017
|
|
|
EPS
|
|
|
FY 2016
|
|
|
EPS
|
|
Reconciliation of net income to
adjusted net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income and earnings
per share as reported
|
|
$
|
2,304
|
|
|
$
|
0.09
|
|
|
$
|
8,054
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of intangible asset, inclusive
of the income tax effect
|
|
|
335
|
(1)
|
|
|
0.01
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for restructuring, plant closure
costs, and related inventory write-downs
inclusive of the income tax effect
|
|
|
514
|
(2)
|
|
|
0.02
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for other severance costs,
inclusive of the income tax effect
|
|
|
164
|
(3)
|
|
|
0.01
|
|
|
|
263
|
(6)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for acquisition deal costs
|
|
|
1,030
|
(4)
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair market value inventory write-up
|
|
|
108
|
(5)
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income and earnings
per share
|
|
$
|
4,455
|
|
|
$
|
0.17
|
|
|
$
|
8,317
|
|
|
$
|
0.33
|
|
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)
$144
(2)
$282
(3)
$58
(4)
$450
(5)
$47
(6)
$138
These non-GAAP measures may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations, in that they do not reflect all amounts associated with our results as determined in accordance with U.S. GAAP. Therefore, these measures should only be used to evaluate our results in conjunction with corresponding GAAP measures.
Results of Operations
THREE MONTHS ENDED MARCH 31, 2017 COMPARED TO THREE MONTHS ENDED MARCH 31, 2016
Lighting Segment
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
56,039
|
|
|
$
|
49,331
|
|
Gross Profit
|
|
$
|
12,767
|
|
|
$
|
10,563
|
|
Operating Income
|
|
$
|
2,759
|
|
|
$
|
1,106
|
|
The Company acquired Atlas Lighting Products, Inc. on February 21, 2017. Atlas is a manufacturer of high-quality LED lighting products sold in the electrical distribution market. The operating results of Atlas beginning February 21, 2017 have been included in the Company’s consolidated operating results and in the Lighting Segment results. Atlas contributed $6.7 million to net sales during the third quarter of fiscal 2017 since the date of acquisition.
Lighting Segment net sales of $56,039,000 in the third quarter of fiscal 2017 increased 13.7% from fiscal 2016 same period net sales of $49,331,000. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $45.8 million in the third quarter of fiscal 2017, representing a $12.1 million or 36.1% increase from fiscal 2016 third quarter net sales of solid-state LED light fixtures of $33.7 million. Net sales of light fixtures having solid-state LED technology accounted for 81.8% of total Lighting Segment net sales in the third quarter of fiscal 2017 compared to 68.3% of total Lighting Segment net sales in the third quarter of fiscal 2016. There was a reduction in the Company’s traditional lighting sales (metal halide and fluorescent light sources) from third quarter fiscal 2016 to third 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
|
|
|
45,815
|
|
|
|
33,670
|
|
|
|
36.1%
|
|
Nine Months
|
|
$
|
135,098
|
|
|
|
112,675
|
|
|
|
19.9%
|
|
Fourth Quarter
|
|
|
|
|
|
$
|
42,810
|
|
|
|
|
|
Full Year
|
|
|
|
|
|
$
|
155,485
|
|
|
|
|
|
Gross profit of $12,767,000 in the third quarter of fiscal 2017 increased $2.2 million or 20.9% from the same period of fiscal 2016, and increased from 21.1% to 22.6% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The Company incurred restructuring, plant closure and related inventory write-down costs that were recorded in cost of sales related to the closure of the Kansas City, Kansas manufacturing facility of $158,000 in the third quarter of fiscal 2017 with no comparable costs in the third quarter of fiscal 2016. The remaining change 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 warranty expense ($0.3 million), decreased supplies expense ($0.1 million), decreased utilities expense ($0.1 million) increased rent expense ($0.1 million), increased depreciation expense ($0.1 million), decreased outside services expense ($0.1 million), and increased customer relations expense ($0.1 million).
Selling and administrative expenses of $10,008,000 in the third quarter of fiscal 2017 increased $0.6 million or 5.8% from the same period of fiscal 2016. The increase is primarily the net result of increased sales commission expense ($1.1 million), a gain on the sale of a facility ($1.4 million), increased wage and benefits expense ($0.4 million), increased bad debt expense ($0.1 million), increased travel expense ($0.1 million), and increased intangible asset amortization expense ($0.2 million).
The Lighting Segment third quarter fiscal 2017 operating income of $2,759,000 increased $1.7 million or 150% from operating income of $1,106,000 in the same period of fiscal 2016. This increase of $1.7 million was primarily the net result of increased net sales, increased gross profit, increased selling and administrative expenses, a gain on the sale of a facility of $1,361,000 and restructuring, plant closure, and related inventory write-down costs of $206,000 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 gain on the sale of the facility. Realization of such savings started in the third quarter of fiscal 2017.
Graphics Segment
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
16,463
|
|
|
$
|
17,236
|
|
Gross Profit
|
|
$
|
3,506
|
|
|
$
|
4,308
|
|
Operating Income (Loss)
|
|
$
|
(480
|
)
|
|
$
|
1,078
|
|
Graphics Segment net sales of $16,463,000 in the third quarter of fiscal 2017 decreased $0.8 million or 4.5% from fiscal 2016 same period net sales of $17,236,000. The $0.8 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 ($0.1 million net decrease), sales to the national retail drug store market ($0.7 million decrease), sales to the quick serve restaurant market ($0.1 million net decrease), sales to the retail market ($0.3 million increase), and changes in volume or completion of several other graphics programs ($0.1 million net increase)
.
Gross profit of $3,506,000 in the third quarter of fiscal 2017 decreased $0.8 million or 18.6% 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 24.6% in the third quarter of fiscal 2016 to 21.0% in the third quarter of fiscal 2017. The Company incurred restructuring and plant closure costs of $185,000 in the third 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 $0.5 million or 3.7%), a decrease in installation sales (customer plus inter-segment installation sales were down $0.5 million or 21.4%) an increase in the gross profit margin on installation sales, increased shipping and handling costs as a percentage of shipping and handling sales, decreased employee compensation and benefits expense ($0.1 million), decreased supplies expense ($0.1 million), decreased property taxes ($0.2 million), and decreased outside services expense ($0.1 million).
Selling and administrative expenses of $3,986,000 in the third quarter of fiscal 2017 increased $0.8 million or 23.4% from the same period of fiscal 2016 primarily as the net result of increased employee compensation and benefits expense, ($0.4 million), increased outside services expense ($0.1 million), and small net decreases in expense in other categories. Also contributing to the higher selling and administrative expense in the third quarter of fiscal 2017 was an intangible asset impairment expense of $479,000 related to a customer relationship intangible asset that was determined to be fully impaired with no comparable expense in the prior period of fiscal 2016.
The Graphics Segment third quarter fiscal 2017 operating loss of $(480,000) decreased $1.6 million from operating income of $1,078,000 in the same period of fiscal 2016. The $1.6 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, increased selling and administrative expenses, restructuring and plant closure costs of $183,000 with no comparable costs in fiscal 2016, and intangible asset impairment expense of $479,000 with no comparable costs in the same period of 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
|
|
|
|
March 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
5,654
|
|
|
$
|
4,173
|
|
Gross Profit
|
|
$
|
2,153
|
|
|
$
|
1,852
|
|
Operating Income
|
|
$
|
1,386
|
|
|
$
|
984
|
|
Technology Segment net sales of $5,654,000 in the third quarter of fiscal 2017 increased $1.5 million or 35.5% from fiscal 2016 same period net sales of $4,173,000. The $1.5 million increase in Technology Segment net sales is primarily the net result of a $0.6 million increase in sales to the transportation market, a $0.7 million increase in sales to the original equipment manufacturing market, and a $0.2 million increase in sales to various other markets. Technology Segment inter-segment sales decreased $0.2 million or 2.3%. While the Technology Segment’s
intercompany sales decreased slightly, 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 $2,153,000 in the third quarter of fiscal 2017 increased $0.3 million or 16.3% from the same period in fiscal 2016, and increased from 14.1% to 15.0% as a percentage of net sales (customer plus inter-segment net sales). The $0.3 million increase 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 ($0.1 million), and other small net increases in expense in other categories.
Selling and administrative expenses of $767,000 in the third quarter of fiscal 2017 decreased $0.1 million or 11.6% from fiscal 2016 selling and administrative expenses of $868,000 primarily as a result of a decrease in research and development expense ($0.1 million), a gain on the sale of assets in fiscal 2016 with no similar costs in fiscal 2017 ($0.1 million increase), and other small net decreases in expense in other categories.
The Technology Segment third quarter fiscal 2017 operating income of $1,386,000 increased $0.4 million or 40.9% from operating income of $984,000 in the same period of fiscal 2016. The $0.4 million increase in operating income was primarily the net result of increased customer net sales, decreased inter-segment sales, increased gross profit, and decreased selling and administrative expenses.
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
|
|
|
|
March 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
$
|
(27
|
)
|
|
$
|
(174
|
)
|
Operating (Loss)
|
|
$
|
(4,439
|
)
|
|
$
|
(2,436
|
)
|
The gross profit (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $4,412,000 in the third quarter of fiscal 2017 increased $2.2 million or 95% from the same period of the prior year. The $2.2 million increase in expense is primarily the result of increased employee compensation and benefits expense, ($0.2 million), increased outside service expense ($0.2 million), acquisition costs of $1,480,000 million with no similar expenses in the prior period, and other small net increases in expense in other categories.
Consolidated Results
The Company reported net interest expense of $163,000 in the third quarter of fiscal 2017 as compared to net interest income of $19,000 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. Interest expense related to outstanding debt is included in fiscal 2017. The Company was in a positive cash position and was debt free during the three months ended March 31, 2016 and generated interest income on invested cash. The Company was in a borrowing position beginning on February 21, 2017 primarily as a result of the Atlas Lighting Products, Inc. acquisition.
The $(406,000) income tax benefit in the third quarter of fiscal 2017 represents a consolidated effective tax rate of 43.3%. This is the net result of an income tax rate of 30.4% influenced by certain permanent book-tax differences, a tax benefit related to disqualifying dispositions, and by a benefit related to uncertain income tax positions.
The $229,000 income tax expense in the third quarter of fiscal 2016 represents a consolidated effective tax rate of 30.5%. This is the net result of an income tax rate of 34.5% influenced by certain permanent book-tax differences, a tax benefit related to disqualifying dispositions, and a benefit related to uncertain income tax positions.
The Company reported a net loss of $(531,000) in the third quarter of fiscal 2017 as compared to net income of $522,000 in the same period of the prior year. The change in net income is primarily the net result of increased gross profit on higher sales, increased selling and administrative expenses, and an income tax benefit in fiscal 2017 compared to expense in fiscal 2016. Also contributing to the lower net income are pre-tax restructuring, plant closure, and related inventory write-down costs of $404,000 recorded in the third quarter of fiscal 2017 with no comparable costs in fiscal 2016, a gain on the sale of the Kansas City facility of $1,361,000 recorded in the third quarter of fiscal 2017 with no comparable gain in fiscal 2016, acquisition costs of $1,480,000 recorded in the third quarter of fiscal 2017 with no comparable costs in fiscal 2016, and intangible asset impairment expense of $479,000 with no comparable cost in fiscal 2016. Diluted loss per share of $(0.02) was reported in the third quarter of fiscal 2017 as compared to diluted earnings per share of $0.02 in the same period of fiscal 2016. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the third quarter of fiscal 2017 were 25,452,000 shares as compared to 25,700,000 shares in the same period last year.
NINE MONTHS ENDED MARCH 31, 2017 COMPARED TO NINE MONTHS ENDED MARCH 31, 2016
Lighting Segment
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
176,578
|
|
|
$
|
168,007
|
|
Gross Profit
|
|
$
|
41,928
|
|
|
$
|
41,904
|
|
Operating Income
|
|
$
|
8,288
|
|
|
$
|
11,970
|
|
The Company acquired Atlas Lighting Products, Inc. on February 21, 2017. Atlas is a manufacturer of high-quality LED lighting products sold in the electrical distribution market. The operating results of Atlas beginning February 21, 2017 have been included in the Company’s consolidated operating results and in the Lighting Segment results. Atlas contributed $6.7 million to net sales during the first nine months of fiscal 2017 since the date of acquistion.
Lighting Segment net sales of $176,578,000 in the first nine months of fiscal 2017 increased 5.1% from fiscal 2016 same period net sales of $168,007,000. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $135.1 million in the first nine months of fiscal 2017, representing a 19.9% increase from first nine months of fiscal 2016 net sales of solid-state LED light fixtures of $112.7 million. Net sales of light fixtures having solid-state LED technology accounted for 76.5% of total Lighting Segment net sales. (See the LED net sales table on page 31.) 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 $41,928,000 in the first nine months of fiscal 2017 increased $0.02 million or 0.1% compared to the same period of fiscal 2016, and decreased from 24.6% to 23.5% 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 $1,272,000 in fiscal 2017 with no comparable costs in fiscal 2016. The Lighting Segment’s gross profit was also favorably influenced by the net effect of increased product net 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 net change in gross profit is decreased employee compensation and benefits expense ($0.7 million), decreased warranty costs ($0.5 million), increased customer relations expense ($0.4 million), increased repairs and maintenance expense ($0.1 million), increased depreciation expense ($0.4 million), increased rent expense ($0.3 million), decreased supplies expense ($0.1 million), and increased outside service expense ($0.1 million).
Selling and administrative expenses of $33,640,000 in the first nine months of fiscal 2017 increased $3.7 million or 12.4% from the same period of fiscal 2016. The $3.7 million increase is primarily the result of increased employee compensation and benefits expense ($0.9 million), increased intangible asset amortization expense ($0.2 million), increased samples expense ($0.1 million), increased outside service expense ($0.1 million), increased sales commission expense ($3.0 million), increased bad debt expense ($0.1 million), increased travel 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 ($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 $104,000 related to the closure of the Kansas City, Kansas manufacturing facility that were recorded in fiscal 2017 with no comparable costs in fiscal 2016, and a gain on the sale of the Kansas City facility of $1,361,000 with no comparable gain in fiscal 2016.
Lighting Segment nine month fiscal 2017 operating income of $8,288,000 decreased $3.7 million or 30.8% from operating income of $11,970,000 in the same period of fiscal 2016. This decrease of $3.7 million was the net result of increased net sales, a slight increase in gross profit, increased selling and administrative expenses, restructuring and plant closure costs, and related inventory write-downs of $1.4 million with no comparable costs in fiscal 2016, and a gain on the sale of the Kansas City facility of $1.4 million with no comparable gain 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 gain on the sale of the facility. Realization of such savings started in the third quarter of fiscal 2017.
Graphics Segment
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
55,939
|
|
|
$
|
60,772
|
|
Gross Profit
|
|
$
|
12,864
|
|
|
$
|
16,161
|
|
Operating Income
|
|
$
|
1,711
|
|
|
$
|
5,271
|
|
Graphics Segment net sales of $55,939,000 in the first nine months of fiscal 2017 decreased 8.0% from fiscal 2016 same period net sales of $60,772,000. The $4.8 million decrease in Graphics Segment net sales is primarily the net result of sales to the petroleum / convenience store market ($2.7 million net decrease), sales to the retail grocery market ($0.9 million net decrease), sales to the national retailer drug store market ($2.6 million decrease), sales to the quick-service restaurant market ($0.5 million net increase), sales to the retail market ($0.7 million increase), and changes in volume or completion of several other graphics programs ($0.2 million net increase)
.
Gross profit of $12,864,000 in the first nine months of fiscal 2017 decreased $3.3 million or 20.4% from the same period in fiscal 2016, and decreased from 26.0% to 22.6% 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 $396,000. The remaining $2.9 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 $3.5 million or 7.3%), a drop in installation sales (customer plus inter-segment installation sales were down $2.3 million or 23.7%) partially offset by higher margins on installation sales, slightly decreased freight expense as a percentage of shipping and handling revenue, increased depreciation expense ($0.3 million), decreased real estate taxes ($0.1 million), decreased supplies expense ($0.1 million), decreased repair and maintenance expense ($0.1 million), decreased outside services ($0.1 million), and decreased compensation and benefits expense ($0.5 million).
Selling and administrative expenses of $11,153,000 in the first nine months of fiscal 2017 increased $0.3 million or 2.4% from the same period of fiscal 2016 primarily as a result of decreased compensation and benefits expense ($0.5 million), increased outside services expense ($0.3 million), increased convention and shows expense ($0.1 million), increased travel expense ($0.1 million), increased supplies expense ($0.1 million), decreased commissions expense ($0.1 million), and other small net decreases in other categories. Also contributing to the higher selling and administrative expense in fiscal 2017 was intangible asset impairment expense of $479,000 related to a customer relationship intangible asset that was determined to be fully impaired with no comparable expenses in the prior period of fiscal 2016.
Graphics Segment first nine month fiscal 2017 operating income of $1,711,000 decreased $3.6 million or 67.5% 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, restructuring and plant closure costs of $404,000 with no comparable costs in fiscal 2016, and intangible asset impairment expense of $479,000 with no comparable cost in fiscal 2016, and a decrease in other selling and administrative expenses.
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)
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
15,456
|
|
|
$
|
12,573
|
|
Gross Profit
|
|
$
|
5,704
|
|
|
$
|
6,029
|
|
Operating Income
|
|
$
|
3,038
|
|
|
$
|
3,320
|
|
Technology Segment net sales of $15,456,000 in the first nine months of fiscal 2017 increased $2.9 million or 22.9% from fiscal 2016 same period net sales of $12,573,000. The $2.9 million increase in Technology Segment net sales is primarily the net result of a $0.2 million increase in sales to the medical market, a $2.2 million increase in sales to the transportation market, a $0.6 million increase in sales to original equipment manufacturers, and a $0.1 million decrease in sales to the telecommunication market.
Technology Segment inter-segment sales decreased $1.4 million or 5.1%. 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 $5,704,000 in the first nine months of fiscal 2017 decreased $0.3 million or 5.4% from the same period of fiscal 2016, and decreased from 15.1% to 13.8% 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 $0.1 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 ($0.4 million), increased warranty expense ($0.3 million), decreased rent expense ($0.1 million), and decreased outside services expense ($0.2 million).
Selling and administrative expenses of $2,666,000 in the first nine months of fiscal 2017 decreased $43,000 or 1.6% from the same period of fiscal 2016. The decrease in selling and administrative expenses is the net result of an increase in employee compensation and benefits expense ($0.1 million), an increase in outside services expense ($0.1 million), a decrease in research and development expense ($0.3 million), and a gain on the sale of assets in fiscal 2016 with no comparable gain in fiscal 2017 ($0.1 million increase).
Technology Segment nine month fiscal 2017 operating income of $3,038,000 decreased $0.3 million or 8.5% from operating income of $3,320,000 in the same period of fiscal 2016. The decrease of $0.3 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)
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
$
|
145
|
|
|
$
|
(270
|
)
|
Operating (Loss)
|
|
$
|
(9,927
|
)
|
|
$
|
(8,686
|
)
|
The gross profit (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $10,072,000 in the first nine months of fiscal 2017 increased $1.7 million or 19.7% from the same period of the prior year. The $1.7 million change in administrative expenses is primarily the net result of decreased employee compensation and benefits expense ($1.1 million), an increase in legal expense ($0.1 million), decreased depreciation expense ($0.1 million), increased research and development expense ($0.3 million), increased telephone expense ($0.1 million), increased outside services expense ($0.2 million), increased director’s fees ($0.2 million), a change in the allocation of corporate expense to the operating units ($0.2 million increase), and several small net increases in various other expenses. Also contributing to the increased administrative expenses are acquisition costs of $1,480,000 recorded in fiscal 2017 and 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 expense of $129,000 in the first nine months of fiscal 2017 as compared to net interest income of $27,000 in the same period of fiscal 2016. Commitment fees related to the unused portion of the Company’s line of credit and interest income on invested cash are included in both fiscal years. The Company was in a positive cash position and was debt free for the nine months ended March 31, 2016 and generated interest income on invested cash. The Company was in a borrowing position beginning on February 21, 2017 primarily as a result of the Atlas Lighting Products acquisition.
The $677,000 income tax expense in the first nine months of fiscal 2017 represents a consolidated effective tax rate of 22.7%. This is the net result of an income tax rate of 30.4% influenced by certain permanent book-tax differences, by a benefit related to uncertain income tax positions, a tax benefit related to disqualifying dispositions, and by a favorable adjustment to a deferred tax asset. The $3,848,000 income tax expense in the first nine months of fiscal 2016 represents a consolidated effective tax rate of 32.3%. 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, a tax benefit related to disqualifying dispositions, and by a benefit related to uncertain income tax positions.
The Company reported net income of $2,304,000 in the first nine months of fiscal 2017 compared to net income of $8,054,000 in the same period of the prior year. The $5.8 million decrease in net income is primarily the net result of increased net sales, decreased gross profit, increased operating expenses, restructuring and plant closure costs in fiscal 2017 with no comparable costs in fiscal 2016, intangible asset impairment expense in fiscal 2017 with no comparable cost in fiscal 2016, and lower income tax expense in fiscal 2017 compared to fiscal 2016. Diluted earnings per share of $0.09 was reported in the first nine months of fiscal 2017 as compared to diluted earnings per share of $0.32 in the same period of fiscal 2016. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first nine months of fiscal 2017 was 25,909,000 shares as compared to 25,494,000 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.
The March 31, 2017 balance sheet includes the acquisition Atlas Lighting Products, whereas Atlas was not included in the June 30, 2016 balance sheet. With respect to the Consolidated Statement of Cash flows, fiscal 2017 amounts include Atlas’ changes in its balance sheet from the February 21, 2017 acquisition date to March 31, 2017.
At March 31, 2017, the Company had working capital of $67.0 million, compared to $88.5 million at June 30, 2016. The ratio of current assets to current liabilities was 2.68 to 1 as compared to a ratio of 3.26 to 1 at June 30, 2016. The $21.5 million decrease in working capital from June 30, 2016 to March 31, 2017 was primarily related to the net effect of decreased cash and cash equivalents ($29.5 million), increased net accounts receivable ($1.8 million), increased net inventory ($4.3 million), a decrease in accrued expenses ($1.5 million), an increase in other current assets ($0.9 million), an increase in refundable income taxes ($0.1 million), an increase in accounts payable ($2.1 million), and assets held for sale of $1.5 million at March 31, 2017. 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 $12.9 million of cash from operating activities in the first nine months of fiscal 2017 as compared to $15.2 million in the same period of the prior year. This $2.3 million decrease in net cash flows from operating activities is primarily the net result of a smaller decrease in net accounts receivable (unfavorable change of $0.3 million), a smaller decrease in accounts payable (favorable change of $2.2 million), an increase rather than a decrease in customer prepayments (favorable change of $0.5 million), a decrease rather than an increase in net inventory (favorable change of $7.3 million), an decrease rather than an increase in accrued expenses and other (unfavorable change of $5.9 million), a smaller increase in refundable income taxes (favorable change of $0.4 million), a greater increase in net deferred tax assets (unfavorable change of $0.8 million), a decrease in stock compensation expense (unfavorable change of $0.1 million), a decrease in the deferred compensation liability (unfavorable change of $0.1 million), an increase in depreciation and amortization expense (favorable change of $0.8 million), fixed asset impairment and accelerated depreciation with no comparable events in the prior year (favorable change of $0.4 million), intangible asset impairment with no comparable events in the prior year (favorable change of $0.5 million), a gain on the sale of a building in fiscal 2017 with no comparable event in fiscal 2016 (unfavorable change of $1.4 million), a loss compared to a gain on the sale of fixed assets (favorable change of $0.1 million), and a decrease in net income (unfavorable change of $5.8 million).
Net accounts receivable were $48.8 million and $47.0 million at March 31, 2017 and June 30, 2016, respectively. DSO increased to 52 days at March 31, 2017 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 $48.5 million at March 31, 2017 increased $4.3 million from $44.1 million at June 30, 2016. The increase of $4.3 million is the result of an increase in gross inventory of $4.1 million and an increase of obsolescence reserves of $0.2 million. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, a net inventory decrease occurred in the first nine months of fiscal 2017 in the Lighting Segment of approximately $4.0 million, which was offset by the added inventory from the acquisition of Atlas Lighting Products. Graphics Segment net inventory decreased approximately $0.1 million. Technology Segment inventory remained constant.
Cash generated from operations and borrowing capacity under the Company’s line of credit is the Company’s primary source of liquidity. The Company has a secured $100 million revolving line of credit with its bank, with $44.2 million of the credit line available as of April 27, 2017. This line of credit is a $100 million five year credit line expiring in the third quarter of fiscal 2022. The Company believes that its $100 million line of credit plus cash flows from operating activities are adequate for the Company’s fiscal 2017 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.
The Company used cash of $95.5 million related to investing activities in the first nine months of fiscal 2017 as compared to a use of $8.3 million in the same period of the prior year, resulting in an unfavorable change of $87.2 million. Capital expenditures in the first nine months of fiscal 2017 decreased $4.9 million to $3.5 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 acquired Atlas Lighting Products in the third quarter of fiscal 2017, which used cash of $95.1 million.
The Company provided $53.1 million of cash related to financing activities in the first nine months of fiscal 2017 compared to a source of cash of $0.4 million in the first nine months of fiscal 2016. The $52.7 million favorable change in cash flow was the net result of borrowings in excess of payments of long term debt of $54.8 million, an increase in dividends paid to shareholders (unfavorable change of $0.8 million), and a decrease in the exercise of stock options in the first nine months of fiscal 2017 (unfavorable change of $1.2 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, except for various operating leases.
Cash Dividends
In April 2017, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable May 16, 2017 to shareholders of record as of May 8, 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. The recognition of revenue from most product sales is largely unaffected by the new standard. However, with respect to certain product sales requiring installation, revenue is currently not recognized until the installation is complete. While the Company does not expect this new guidance to have a material impact on the amount of overall sales recognized, the timing of recognition of revenues from 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.
In January 2017, the Financial Accounting Standards Board issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment, which simplifies the testing for goodwill impairment by eliminating a previously required step. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2019, or the Company’s fiscal year 2021. The Company is evaluating the impact the amended guidance will have on its financial statements.