What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-05-05 compared with 2020-02-06 · 168 added, 138 removed, 116 unchanged (73% of the section changed)

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MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended June 30, 2019, and our financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

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.

Our condensed consolidated financial statements, accompanying notes and the “Safe Harbor” Statement, each as appearing earlier in this report, should be referred to in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Recent Developments

LSI Industries is a leading producer of high-performance, American-made lighting solutions.

The Company’s strength in outdoor lighting applications creates opportunities for it to introduce additional solutions to its valued customers.

LSI’s indoor and outdoor products and services, including its digital and print graphics capabilities, are valued by architects, engineers, distributors and contractors for their quality, reliability and innovation.

The Company’s products are used extensively in automotive dealerships, petroleum stations, quick service restaurants, grocery stores and pharmacies, retail establishments, sports complexes, parking lots and garages, and commercial and industrial buildings.

Our strength in outdoor lighting applications creates opportunities for us to introduce additional solutions to our valued customers.

LSI’s indoor and outdoor products and services, including our digital and print graphics capabilities, are valued by architects, engineers, distributors and contractors for their quality, reliability and innovation.

Our products are used extensively in automotive dealerships, petroleum stations, quick service restaurants, grocery stores and pharmacies, retail establishments, sports complexes, parking lots and garages, and commercial and industrial buildings.

Although we are aggressively managing our response to the recent COVID-19 pandemic primarily through our focus on employee safety, customer service and support and cost-effective business continuity, the pandemic’s impact on our full year fiscal 2020 results and beyond is uncertain.

We believe that the most significant elements of uncertainty relate to the intensity and duration of the impact on construction, renovation, and consumer spending as well as the ability of our sales channels, supply chains, manufacturing, and distribution to continue to operate with minimal disruption for the remainder of fiscal 2020 and beyond, all of which could negatively impact our financial position, results of operations, cash flows, and outlook.

While we remain fully operational at all manufacturing facilities and practice safe engagement with our customers, agents and suppliers, we are attempting to mitigate the possible impacts of the COVID-19 pandemic on our business by taking certain expense management actions.

Also, even though we have not recently experienced any issues with our supply chains, we have taken steps to diversify our supply chains so that we are not dependent on a sole supplier for certain raw materials.

Because the duration and resulting economic disruption of the COVID-19 pandemic are unknown and impossible to determine at this time, we are uncertain regarding the extent to which the COVID-19 pandemic could have a material adverse effect on our ability to operate, results of operations, financial condition, liquidity and capital investments.

Net Sales by Business Segment

Three Months Ended

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(In thousands)

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Three Months Ended

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Summary Comments

Fiscal 2020 second quarter net sales of $82,377,000 decreased $7.2 million or 8% as compared to second quarter fiscal 2019 net sales of $89,541,000.

As we mentioned in the prior two quarters, we are transitioning from low margin commodity business to focus on higher margin applications and solutions, resulting in lower sales in the short term and improved margins.

Net sales of $71.0 million for the three months ended March 31, 2020 decreased $1.8 million or 3% as compared to net sales of $72.8 million for the three months ended March 31, 2019.

Net sales were favorably influenced by increased net sales of the Graphics Segment (an increase of $1.9 million or 10%) more than offset by decreased net sales of the Lighting Segment (a decrease of $3.8 million or 7%).

Fiscal 2020 first half net sales of $171,078,000 decreased $3.4 million or 2% as compared to first half fiscal 2019 net sales of $174,498,000.

Net sales of $242.1 million for the nine months ended March 31, 2020 decreased $5.2 million or 2% as compared to net sales of $247.3 million for the nine months ended March 31, 2019.

Net sales were favorably influenced by increased net sales of the Graphics Segment (an increase of $7.0 million or 10%) more than offset by decreased net sales of the Lighting Segment (a decrease of $12.2 million or 7%).

Fiscal 2020 second quarter operating income of $1.8 million represents a $22.1 million improvement from operating loss of $(20.3) million in the second quarter of fiscal 2019.

The $22.1 million improvement from operating loss in fiscal 2019 was primarily the result of a pre-tax $20.2 million goodwill impairment charge in the Lighting Segment in the second quarter of fiscal 2019.

When the impact of the goodwill impairment charge along with other restructuring and plant closure costs are removed from operating results, adjusted operating income, a non-GAAP financial measure, was $2.1 million in the second quarter of fiscal 2020 compared to $1.5 million in the second quarter of fiscal 2019.

Operating income of $2.6 million for the three months ended March 31, 2020 represents a $4.9 million improvement from operating loss of ($2.3) million in the three months ended March 31, 2019.

The $4.9 million improvement from operating loss in fiscal 2019 was impacted by the sale of the North Canton, Ohio facility in the third quarter of fiscal 2020 which favorably resulted in a pre-tax gain of $3.7 million.

When the impact of the sale of the North Canton facility, other restructuring and other plant closure costs and severance are removed from the operating results, adjusted operating loss, a Non-GAAP measure, was ($0.4) million in the three months ended March 31, 2020 compared to ($1.9) million in the three months ended March 31, 2019.

Refer to “Non-GAAP Financial Measures” below.

The increase in adjusted operating income was the result of a decrease in selling and administrative expenses coupled with an improved margin on lower net sales.

The Company is transitioning from low margin commodity business to focus on higher margin applications and solutions, resulting in lower sales in the short term and improved margins.

Fiscal 2020 first half operating income of $8.6 million represents a $25.9 million improvement from an operating loss of $(17.3) million in the first half of fiscal 2019.

The $25.9 million improvement from operating loss in fiscal 2019 was impacted by the sale of the Company’s New Windsor, New York facility in the first quarter of fiscal 2020 which favorably resulted in a pre-tax gain of $4.8 million and a pre-tax $20.2 million goodwill impairment charge in the second quarter of fiscal 2019.

Also contributing to the period-over-period improvement in operating income is a one-time adjustment to a Company benefit plan in fiscal 2019 which resulted in a favorable pre-tax adjustment to earnings of $1.2 million.

When the impact of the sale of the New Windsor facility, the goodwill impairment charge and other restructuring and plant closure costs are removed from the operating results, adjusted operating income, a non-GAAP measure, was $4.3 million in the first half of fiscal 2020 compared to $5.1 million in the first half of fiscal 2019.

The improvement in adjusted operating loss was the net result of higher value sales mix, lower selling and administrative expenses and cost savings from the closure of the New Windsor, New York facility.

Operating income of $11.2 million for the nine months ended March 31, 2020 represents a $30.8 million improvement from an operating loss of ($19.6) million in the nine months ended March 31, 2019.

The $30.8 million improvement from operating loss in fiscal 2019 was impacted by the sale of the New Windsor, New York facility in the first quarter of fiscal 2020 which favorably resulted in a pre-tax gain of $4.8 million, the sale of the North Canton, Ohio facility in the third quarter of fiscal 2020 which favorably resulted in a pre-tax gain of $3.7 million, and a pre-tax $20.2 million goodwill impairment charge in the second quarter of fiscal 2019 with no comparable event in fiscal 2020.

The period-over-period improvement in operating income was partially offset by a one-time adjustment to a Company benefit plan in fiscal 2019 which resulted in a favorable pre-tax adjustment to earnings of $1.2 million.

When the impact of the sales of the New Windsor and North Canton facilities, the goodwill impairment charge and other restructuring and plant closure costs are removed from the operating results, adjusted operating income, a Non-GAAP measure, was $3.9 million in the nine months ended March 31, 2020 compared to $3.2 million in the nine months ended March 31, 2019.

Refer to “Non-GAAP Financial Measures” below.

The decrease in adjusted operating income was the net result of decreased net sales, improved margins on lower sales and a decrease in selling and administrative expenses.

As we mention above, the Company is transitioning from low margin commodity business to focus on higher margin applications and solutions, resulting in lower sales in the short term and improved margins.

The increase in adjusted operating income was the net result of higher value sales mix, lower selling and administrative expenses and cost savings from the closure of the New Windsor, New York facility.

Non-GAAP Financial Measures

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Adjusted operating income, net income and earnings per share, which exclude the impact of goodwill impairment, severance costs, transition and re-alignment costs, and restructuring and plant closure costs, are Non-GAAP financial measures.

Also included below are Non-GAAP financial measures including Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA and Adjusted EBITDA), Free Cash Flow and Net Debt.

We believe that these adjusted supplemental measures are useful in assessing the operating performance of our business.

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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.

Reconciliation of operating income (loss) to adjusted operating income:

Below is a reconciliation of these Non-GAAP measures to operating income, net income, and earnings per share for the periods indicated along with the calculation of EBIDTA and Adjusted EBITDA, Free Cash Flow and Net Debt.

Reconciliation of operating income (loss) to adjusted operating income (loss):

Three Months Ended

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Operating Income (Loss) as reported

Restructuring and plant closure costs

Restructuring, plant closure (gain) costs and related inventory write-downs

Severance costs

Goodwill impairment

Transition and re-alignment costs

Adjusted Operating Income

Reconciliation of net income (loss) to adjusted net income

Adjusted Operating Loss

Reconciliation of net income (loss) to adjusted net income (loss)

Three Months Ended

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Net Income (Loss) as reported

Restructuring and plant closure costs

Restructuring, plant closure (gain) costs and related inventory write-downs

Severance costs

Goodwill impairment

Transition and re-alignment costs

Tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes

Net Income adjusted

Net Loss adjusted

The income tax effects of the adjustments in the tables above were calculated using the estimated U.S.

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Reconciliation of operating income (loss) to adjusted operating income:

Six Months Ended

Nine Months Ended

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Operating Income (Loss) as reported

Restructuring and plant closure (gain) costs

Restructuring, plant closure (gain) costs and related inventory write-downs

Severance costs

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Reconciliation of net income (loss) to adjusted net income

Six Months Ended

Nine Months Ended

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Net Income (Loss) as reported

Restructuring and plant closure (gain) costs

Restructuring, plant closure (gain) costs and related inventory write-downs

Severance costs

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The income tax effects were as follows (in thousands):

Reconciliation of operating income (loss) to EBITDA and Adjusted EBITDA

Three Months Ended

Nine Months Ended

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Operating Income (Loss) as reported

Depreciation and Amortization

Restructuring, plant closure (gain) costs and related inventory write-downs

Severance costs

Goodwill impairment

Transition and re-alignment costs

Adjusted EBITDA

Reconciliation of cash flow from operations to free cash flow

Three Months Ended

Nine Months Ended

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Cash Flow from Operations

Proceeds from sale of facilities

Capital expenditures

Free Cash Flow

Reconciliation of Net Debt

(In thousands)

Long-Term Debt as reported

Cash and cash equivalents as reported

Results of Operations

THREE MONTHS ENDED DECEMBER 31, 201 9 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 201 8

THREE MONTHS ENDED MARCH 31, 2020 COMPARED TO THREE MONTHS ENDED MARCH 31, 2019

Lighting Segment

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Operating Income (Loss)

Lighting Segment net sales of $53,436,000 in the second quarter of fiscal 2020 decreased 16% from fiscal 2019 same period net sales of $63,654,000.

The 16% drop in sales is attributed to the continued transition toward a less commoditized, higher-value sales mix and the softness in select vertical markets.

Gross profit of $15,501,000 in the second quarter of fiscal 2020 increased $0.8 million or 5% from the same period of fiscal 2019, and increased from 22.8% to 28.5% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales).

The Company incurred restructuring and plant closure costs that were recorded in cost of sales related to the closure of its New Windsor, New York facility of $1,008,000 in fiscal 2019 with no comparable costs in fiscal 2020.

The increase in gross profit is also due to product mix and moving away from low-margin commodity business to higher value opportunities which contributed to the improvement in gross profit margin.

Selling and administrative expenses of $12,351,000 in the second quarter of fiscal year 2020 decreased $20.8 million from the same period of fiscal 2019 selling and administrative expenses of $33,194,000, primarily due to the $20.2 million pre-tax goodwill impairment charge in the second quarter of fiscal 2019.

When the goodwill impairment charge is removed from fiscal 2019 results, there was a $0.7 million or 5% reduction in selling and administrative expenses.

The reduction in selling and administrative expenses is mostly driven by lower commission expense due to lower sales volume.

Lighting Segment second quarter fiscal 2020 operating income of $3,150,000 increased $21.6 million from operating loss of $(18,452,000) in the same period of fiscal 2019 primarily due to a $20.2 million pre-tax goodwill impairment charge in the second quarter of fiscal 2019.

When all non-GAAP charges are removed from both fiscal years, fiscal 2020 adjusted operating income, a non-GAAP financial measure, was $3,166,000 compared to $2,929,000 in fiscal 2019 (refer to the non-GAAP table below for a reconciliation of Lighting Segment operating income (loss) to adjusted operating income).

The reduction in sales volume was partially offset by higher gross profit margin and lower selling and administrative expenses.

Reconciliation of Lighting Segment operating income (loss) to adjusted operating income:

Lighting Segment net sales of $49.0 million in the three months ended March 31, 2020 decreased 7% from net sales of $52.8 million in the same period in fiscal 2019.

The 7% drop in sales is attributed to the continued transition toward a less commoditized, higher-value sales mix.

Gross profit of $12.6 million in the three months ended March 31, 2020 increased $0.3 million or 3% from the same period of fiscal 2019 and increased from 23.2% to 25.4% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales).

The Lighting Segment incurred restructuring and plant closure costs that were recorded in cost of sales related to the closure of the New Windsor, New York facility $0.3 million in fiscal 2019.

The increase in gross profit is also due to product mix and moving away from low-margin commodity business to higher margin market applications.

Also contributing to the period-over-period improvement in gross profit are the cost savings from the closure of the New Windsor facility

Selling and administrative expenses of $11.5 million in the three months ended March 31, 2020 remained relatively flat from the same period of fiscal 2019.

Lighting Segment operating income of $1.1 million for the three months ended March 31, 2020 increased $0.4 million from operating income of $0.7 million in the same period of fiscal 2019 primarily due to restructuring and plant closure costs and severance related to the closure of its New Windsor facility in fiscal 2019.

Graphics Segment

Three Months Ended

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Operating Income (Loss)

Restructuring and plant closure costs

Goodwill impairment

Adjusted operating income

Graphics Segment

Graphics Segment net sales of $22.0 million in the three months ended March 31, 2020 increased $1.9 million or 10% from net sales of $20.0 million in the same period in fiscal 2019.

The increase in sales is from growth in sales to the Petroleum market vertical.

Gross profit of $3.3 million in the three months ended March 31, 2020 increased $0.3 million or 9% from the same period of fiscal 2019.

Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) for the three months ended March 31, 2020 remained relatively flat from the same period of fiscal 2019.

Selling and administrative expenses, which showed a gain of ($0.7) million in the three months ended March 31, 2020, improved $4.6 million from $3.9 million in the same period of fiscal 2019.

The $4.6 million improvement was primarily as a result of the $3.7 million pre-tax gain on the sale of the North Canton, Ohio facility in the third quarter of fiscal 2020.

When the $3.7 million gain is removed from the third quarter of fiscal 2020 results, there was a $0.9 million or 23% decrease in selling and administrative expenses.

The decrease in selling and administrative expenses was due to decreased wages and benefit expense due to lower headcount and a reduction in bad debt expense.

Graphics Segment operating income of $4.0 million in the three months ended March 31, 2020 increased $4.9 million from operating loss of ($0.9) million in the same period of fiscal 2019.

The increase of $4.9 million was primarily the net result of the $3.7 million pre-tax gain on the sale of the North Canton, Ohio facility in the three months ended March 31, 2020.

When all Non-GAAP items are removed from both fiscal years, Non-GAAP adjusted operating income for the three months ended March 31, 2020 was $1.0 million, or $1.9 million higher than Non-GAAP adjusted operating loss of ($0.9) million for the three months ended March 31, 2019 (refer to the Non-GAAP table below for a reconciliation of Graphics Segment operating income (loss) to adjusted operating income).

The increase is due to the increase in sales and a decrease in selling and administrative expenses.

Reconciliation of Graphics Segment operating income (loss) to adjusted operating income (loss):

Three Months Ended

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Operating Income (Loss)

Graphics Segment net sales of $28,941,000 in the second quarter of fiscal 2020 increased $3.0 million or 12% from fiscal 2019 same period net sales of $25,887,000.

Most of the increase in sales is from growth in sales to the Petroleum market.

Gross profit of $4,465,000 in the second quarter of fiscal 2020 decreased $0.5 million or 9% from the same period of fiscal 2019.

Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 19.0% in the second quarter of fiscal 2019 to 15.4% in the second quarter of fiscal 2020.

As reported in the previous quarter, the reduction in gross profit on higher sales is partially due to a mix shift to large customers in both the print and digital technology applications.

These large projects, with lengthy life cycles, are competitive and initially generate lower margins.

The business will work to improve the margins on these projects over its life cycle.

Selling and administrative expenses of $3,103,000 in the second quarter of fiscal 2020 decreased $1.0 million or 24% from the same period of fiscal 2019 as a result of decreased wages and benefit expense due to lower headcount and a reduction in bad debt expense.

Graphics Segment second quarter fiscal 2020 operating income of $1,362,000 increased $0.5 million or 58% from operating income of $861,000 in the same period of fiscal 2019.

The increase of $0.5 million was primarily the net result of an increase in sales and a decrease in selling and administrative expenses partially offset by decreased gross profit and decreased gross profit margin as a percentage of sales.

Restructuring, plant closure (gain) costs and related inventory write-downs

Adjusted operating income (loss)

Corporate and Eliminations

Three Months Ended

(In thousands)

Gross Profit (Loss)

Operating (Loss)

The gross (loss) relates to the change in the intercompany profit in inventory elimination.

Administrative expenses of $2,750,000 in the second quarter of fiscal 2020 increased $0.1 million or 3% from the same period of the prior year.

The increase is primarily the result of several increases and decreases across several cost categories.

The gross profit (loss) relates to the change in the intercompany profit in inventory elimination.

Administrative expenses of $2.5 million in the three months ended March 31, 2020 increased $0.4 million or 22% from the same period of fiscal 2019.

The increase is primarily the result of filling key vacancies in selling and administration.

Consolidated Results

The Company reported $233,000 net interest expense in the second quarter of fiscal 2020 compared to $615,000 net interest expense in the second quarter of fiscal 2019.

The decrease in interest expense from fiscal 2019 to fiscal 2020 is the result of lower levels of debt outstanding on the Company’s line of credit.

The Company also recorded $91,000 of other income related to net foreign exchange currency transaction gains from transactions with its customers and suppliers through its Mexican subsidiary.

The $125,000 income tax benefit in the second quarter of fiscal 2020 was driven by a lower estimated annualized income tax rate at the end of the second quarter compared to the income tax rate at the end of the first quarter.

The lower estimated annualized income tax rate is due to the utilization of a capital loss carryforward related to the anticipated capital gain on the sale of the North Canton, Ohio facility.

The $5,104,000 income tax benefit in the second quarter of fiscal 2019 represented a consolidated effective tax rate of 24.4%, which is slightly higher than the expected annual rate of 23% due to the fiscal 2019 second quarter goodwill impairment.

The Company reported net income of $1,743,000 in the second quarter of fiscal 2020 compared to net loss of $(15,782,000) in the same period of the prior year.

The improvement in the net loss in the second quarter of fiscal 2019 to net income in the second quarter of fiscal 2020 is mostly driven by the $20.2 million pre-tax goodwill impairment charge in the second quarter of fiscal 2019 with no comparable charge in the second quarter of fiscal 2020.

To a lesser degree, there were other non-GAAP charges in both fiscal years besides the goodwill impairment impacting the comparable quarter-over-quarter results (refer to the non-GAAP tables above.) When the impact of all non-GAAP charges is removed from both fiscal years, the fiscal 2020 adjusted net income, a non-GAAP financial measure, of $1,575,000 increased $0.7 million from fiscal 2019 adjusted net income of $875,000.

The increase in adjusted net income is primarily the net result of lower net sales, improved gross margin percentage on lower net sales, decreased interest expense, decreased selling and administrative expenses, and a lower tax rate.

Diluted earnings per share of $0.07 was reported in the second quarter of fiscal 2020 as compared to $(0.61) diluted loss per share in the same period of fiscal 2019.

The weighted average common shares outstanding for purposes of computing diluted earnings (loss) per share in the second quarter of fiscal 2020 were 26,534,000 shares as compared to 26,083,000 shares in the same period last year.

SIX MONTHS ENDED DECEMBER 31, 201 9 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 201 8

We reported $0.1 million net interest expense in the three months ended March 31, 2020 compared to $0.6 million net interest expense in the three months ended March 31, 2019.

The decrease in interest expense from fiscal 2019 to fiscal 2020 is the result of lower levels of debt outstanding on our line of credit.

We also recorded other expense of $0.6 million in the three months ended March 31, 2020 compared to $0.2 million in the three months ended March 31, 2019, both of which are related to net foreign exchange currency transaction losses through our Mexican subsidiary.

The increase in other expense for the three months ended March 31, 2020 was due to the devaluation of the Mexican Peso as a result of market conditions surrounding the COVID-19 pandemic.

We recorded less than $1,000 of income tax expense in the three months ended March 31, 2020 which was driven by a favorable deferred tax asset adjustment related to a Net Operating Loss (NOL) carryback from the CARES Act.

The $0.1 million income tax expense in the three months ended March 31, 2019 was the result of a cumulative change to our estimated annual tax rate driven by the expected gain on the sale of the New Windsor, New York facility.

We reported net income of $1.9 million in the three months ended March 31, 2020 compared to net loss of ($3.2) million in the same period of fiscal 2019.

The improvement in the net loss in the three months ended March 31, 2019 to net income in the three months ended March 31, 2020 is mostly driven by the pre-tax gain of $3.7 million on the sale of the North Canton, Ohio facility.

When the impact of all Non-GAAP items is removed from both fiscal years, Non-GAAP adjusted net loss was ($1.1) million for the three months ended March 31, 2020 compared to adjusted net loss of ($2.2) million for the three months ended March 31, 2019 (Refer to the Non-GAAP tables above).

The increase in Non-GAAP adjusted net income is primarily the net result of an improved gross profit margin, decreased interest expense, and a lower effective tax rate, partially offset by decreased net sales and higher foreign exchange currency transaction losses.

Diluted earnings per share of $0.07 was reported in the three months ended March 31, 2020 as compared to ($0.12) diluted loss per share in the same period of fiscal 2019.

The weighted average common shares outstanding for purposes of computing diluted earnings (loss) per share in the three months ended March 31, 2020 were 26,301,000 shares as compared to 26,132,000 shares in the same period last year.

NINE MONTHS ENDED MARCH 31, 2020 COMPARED TO NINE MONTHS ENDED MARCH 31, 2019

Lighting Segment

Six Months Ended

Nine Months Ended

(In thousands)

Operating Income (Loss)

Lighting Segment net sales of $116,627,000 in the first half of fiscal 2020 decreased 7% from fiscal 2019 same period net sales of $125,086,000.

Lighting Segment net sales of $165.6 million in the nine months ended March 31, 2020 decreased 7% from net sales of $177.9 million in the same period in fiscal 2019.

The reduction in sales is attributed to the continued transition toward a less commoditized, higher-value sales mix and the softness in select vertical markets.

Gross profit of $32,720,000 in the first half of fiscal 2020 increased $2.5 million or 8% from the same period of fiscal 2019 and increased from 23.9% to 27.7% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales).

Gross profit of $45.4 million in the nine months ended March 31, 2020 increased $2.8 million or 7% from the same period of fiscal 2019 and increased from 23.7% to 27.0% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales).

The growth in gross profit and gross profit as a percentage of sales is due to continued favorable price/mix.

Also contributing to the period-over-period improvement in gross profit is the initial cost savings from the closure of the Company’s New Windsor, New York facility.

Selling and administrative expenses of $20,411,000 in the first half of fiscal 2020 decreased $24.4 million from the same period of fiscal 2019 selling and administrative expenses of $44,819,000, primarily due to the $4.8 million pre-tax gain on the sale of the New Windsor, New York facility in the first half of fiscal 2020 and the $20.2 million pre-tax goodwill impairment charge in the first half of fiscal 2019.

When the $4.8 million gain is removed from fiscal 2020 results and the goodwill impairment charge was removed from fiscal 2019 results, there was a $0.6 million or 2% increase in selling and administrative expenses.

The increase in selling and administrative expenses is mostly driven by a one-time adjustment to a Company benefit plan in fiscal 2019 with no comparable event in fiscal 2020 partially offset by lower commission expense which is the result of decreased sales volume.

Lighting Segment first half fiscal 2020 operating income of $12,309,000 increased $26.9 million from an operating loss of $(14,602,000) in the same period of fiscal 2019 primarily due to the $4.8 million pre-tax gain on the sale of the New Windsor, New York facility in the first half of fiscal 2020 and a $20.2 million pre-tax goodwill impairment charge in the first half of fiscal 2019.

When all non-GAAP charges are removed from both fiscal years, fiscal 2020 Non-GAAP adjusted operating income of $7,676,000 was $0.3 million higher than fiscal 2019 Non-GAAP adjusted operating income of $7,369,000 (refer to the non-GAAP table below for a reconciliation of Lighting Segment operating income (loss) to adjusted operating income).

Also contributing to the period-over-period improvement in gross profit are the cost savings from the closure of the New Windsor facility.

Selling and administrative expenses of $31.9 million in the nine months ended March 31, 2020 decreased $24.5 million from selling and administrative expenses of $56.5 million in the same period in fiscal 2019, primarily due to the $4.8 million pre-tax gain on the sale of the New Windsor, New York facility in fiscal 2020 and the $20.2 million pre-tax goodwill impairment charge in fiscal 2019.

When the $4.8 million gain is removed from fiscal 2020 results and the goodwill impairment charge is removed from fiscal 2019 results, there was a $0.5 million or 1% increase in selling and administrative expenses.

Lighting Segment operating income of $13.4 million in the nine months ended March 31, 2020 increased $27.3 million from an operating loss of ($13.9) million in the same period of fiscal 2019 primarily due to the $4.8 million pre-tax gain on the sale of the New Windsor, New York facility in fiscal 2020 and a $20.2 million pre-tax goodwill impairment charge in fiscal 2019.

When all Non-GAAP items are removed from both fiscal years, fiscal 2020 Non-GAAP adjusted operating income of $8.8 million was $0.3 million higher than fiscal 2019 Non-GAAP adjusted operating income of $8.5 million (refer to the Non-GAAP table below for a reconciliation of Lighting Segment operating income (loss) to adjusted operating income).

The increase in Non-GAAP adjusted operating income is due to higher gross profit and improved gross profit as a percentage of sales partially offset by a decrease in sales volume and higher selling and administrative expenses.

Reconciliation of Lighting Segment operating income (loss) to adjusted operating income:

Six Months Ended

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Operating Income (Loss)

Restructuring and plant closure costs

Restructuring and plant closure (gain) costs

Goodwill impairment

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Graphics Segment

Six Months Ended

Nine Months Ended

(In thousands)

Operating Income

Graphics Segment net sales of $54,451,000 in the first half of fiscal 2020 increased $5.0 million or 10% from fiscal 2019 same period net sales of $49,412,000.

Graphics Segment net sales of $76.4 million in the nine months ended March 31, 2020 increased $7.0 million or 10% net sales of $69.5 million in the same period of fiscal 2019.

Growth was realized across the petroleum and digital signage product applications.

Gross profit of $9,091,000 in the first half of fiscal 2020 decreased $1.6 million or 15% from the same period of fiscal 2019.

Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 21.6% in the first half of fiscal 2019 to 16.7% in the first half of fiscal 2020.

Gross profit of $12.4 million in the nine months ended March 31, 2020 decreased $1.3 million or 10% from the same period of fiscal 2019.

Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 19.7% in the nine months ended March 31, 2019 to 16.1% in the nine months ended March 31, 2020.

The decrease in amount of gross profit is due to the net effect of increased net sales (customer plus inter-segment net sales) offset by a change in customer program mix.

Graphics gross margin was unfavorably impacted by several factors including:

new and early stage petroleum products and start-up costs associated therewith, improved inventory levels and impact of lower absorption, alignment of manufacturing resources required to support the transition from print to digital in certain market applications, and a one-time adjustment to a Company benefit plan in fiscal 2019 with no comparable event in fiscal 2020.

Selling and administrative expenses of $6,712,000 in the first half of fiscal 2020 decreased $0.7 million or 10% from the same period of fiscal 2019 primarily as a result of decreased wages and benefit expense due to lower headcount and a reduction in bad debt expense.

Graphics Segment first half fiscal 2020 operating income of $2,379,000 decreased $0.9 million or 27% from operating income of $3,248,000 in the same period of fiscal 2019.

The decrease of $0.9 million was primarily the net result of increased net sales and lower selling and administrative costs more than offset by decreased gross profit and decreased gross profit margin as a percentage of sales.

new and early stage petroleum products and start-up costs associated therewith, alignment of manufacturing resources required to support the transition from print to digital in certain market applications, and a one-time adjustment to a Company benefit plan in fiscal 2019 with no comparable event in fiscal 2020.

Selling and administrative expenses of $6.0 million in the nine months ended March 31, 2020 decreased $5.4 million or 47% from the same period of fiscal 2019 primarily as a result of the $3.7 million pre-tax gain on the sale of the North Canton, Ohio facility in the third quarter of fiscal 2020.

When the $3.7 million gain is removed from the third quarter of fiscal 2020 results, there was a $1.6 million or 14% decrease in selling and administrative expenses.

The decrease in selling and administrative expenses was due to decreased wages and benefit expense due to lower headcount and a reduction in bad debt expense.

Graphics Segment operating income of $6.4 million in the nine months ended March 31, 2020 increased $4.0 million from operating income of $2.4 million in the same period of fiscal 2019.

The increase of $4.0 million was primarily the result of the $3.7 million pre-tax gain on the sale of the North Canton, Ohio facility.

Corporate and Eliminations

Six Months Ended

Nine Months Ended

(In thousands)

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The gross profit (loss) relates to the change in the intercompany profit in inventory elimination.

Administrative expenses of $6,097,000 in the first half of fiscal 2020 increased $0.1 million from the same period of the prior year.

The increase is primarily the result of several increases and decreases across several cost categories.

Administrative expenses of $8.6 million in the nine months ended March 31, 2020 increased $0.6 million from the same period of fiscal 2019.

The increase is primarily the result of filling key vacancies in selling and administration.

Consolidated Results

The Company reported $664,000 net interest expense in the first half of fiscal 2020 compared to $1,133,000 net interest expense in the first half of fiscal 2019.

The decrease in interest expense from fiscal 2019 to fiscal 2020 is primarily the result of reduced borrowings against the Company’s line of credit.

The Company also recorded $9,000 of other income related to net foreign exchange currency transaction gains from transactions with its customers and suppliers through its Mexican subsidiary.

The $1,726,000 income tax expense in the first half of fiscal 2020 represents a consolidated effective tax rate of 21.7% influenced mostly by a discrete item related to stock-based compensation expense and the utilization of a capital loss carryforward related to the anticipated capital gain on the sale of the North Canton, Ohio facility.

The $4,437,000 income tax benefit in the first half of fiscal 2019 represents a consolidated effective tax rate of 24.0%, which is slightly higher than the expected annual rate of 23% due to the goodwill impairment.

The Company reported a net income of $6,218,000 in the first half of fiscal 2020 compared to net loss of $(14,033,000) in the same period of the prior year.

The improvement from the net loss in the first half of fiscal 2019 to the net income in the first half of fiscal 2020 is driven by the $4.8 million pre-tax gain on the sale of the Company’s New Windsor, New York facility in the first half of fiscal 2020 and the $20.2 million pre-tax goodwill impairment charge in the first half of fiscal 2019.

To a lesser degree, there were other non-GAAP charges in both fiscal years besides the gain on the New Windsor, New York facility and goodwill impairment charge (Refer to the Non-GAAP tables above.) When the impact of all non-GAAP charges is removed from both fiscal years, the fiscal 2020 Non-GAAP adjusted net income of $2,601,000 decreased $0.5 million from fiscal 2019 adjusted net income of $3,078,000.

The decrease in Non-GAAP adjusted net income is primarily the net result of decreased net sales partially offset by an improved gross profit margin, decreased selling and administrative expenses, decreased interest expense, and a lower effective tax rate.

Diluted earnings per share of $0.24 was reported in the first half of fiscal 2020 as compared to $(0.54) diluted loss per share in the same period of fiscal 2019.

The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first half of fiscal 2020 were 26,364,000 shares as compared to 26,058,000 shares in the same period last year.

We reported $0.8 million net interest expense in the nine months ended March 31, 2020 compared to $1.7 million net interest expense in the nine months ended March 31, 2019.

The decrease in interest expense from fiscal 2019 to fiscal 2020 is primarily the result of reduced borrowings against our line of credit.

We also recorded other expense of $0.6 million in the nine months ended March 31, 2020 compared $0.2 million in the nine months ended March 31, 2019, both of which are related to net foreign exchange currency transaction losses through our Mexican subsidiary.

The increase in other expense for the three months ended March 31, 2020 was due to the devaluation of the Mexican Peso as a result of market conditions surrounding the COVID-19 pandemic.

The $1.7 million income tax expense in the nine months ended March 31, 2020 represents a consolidated effective tax rate of 17.6%.

The effective tax rate is mostly driven by the following:

1) a discrete item related to stock-based compensation expense;

2) a deferred tax asset adjustment related to a NOL carryback from the CARES Act, and;

3) the utilization of a capital loss carryforward related to the capital gain on the sale of the North Canton, Ohio facility.

The $4.3 million income tax benefit in the nine months ended March 31, 2019 represents a consolidated effective tax rate of 20.0%, which is inclusive of a cumulative change to the estimated annual tax rate mostly due to the tax treated related to the fourth quarter of fiscal 2019 sale of the New Windsor, New York facility.

Also impacting the consolidated tax benefit in the first nine months of fiscal 2019 is the second quarter goodwill impairment charge.

We reported net income of $8.1 million in the nine months ended March 31, 2020 compared to net loss of ($17.2) million in the same period of fiscal 2019.

The change from the net loss in the nine months ended March 31, 2019 to the net income in the nine months ended March 31, 2020 is driven by the $3.7 million pre-tax gain on the sale of the North Canton, Ohio facility and the $4.8 million pre-tax gain on the sale of the New Windsor, New York facility in fiscal 2020 and the $20.2 million pre-tax goodwill impairment charge in fiscal 2019.

When the impact of all Non-GAAP items is removed from both fiscal years, the fiscal 2020 Non-GAAP adjusted net income of $1.5 million increased $0.6 million from fiscal 2019 adjusted net income of $0.9 million (Refer to the Non-GAAP tables above).

Diluted earnings per share of $0.31 was reported in the nine months ended March 31, 2020 as compared to ($0.66) diluted loss per share in the same period of fiscal 2019.

The weighted average common shares outstanding for purposes of computing diluted earnings per share in the nine months ended March 31, 2020 were 26,423,000 shares as compared to 26,083,000 shares in the same period of fiscal 2019.

Liquidity and Capital Resources

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, 2019, the Company had working capital of $51.6 million, compared to $71.1 million at June 30, 2019.

We consider our level of cash on hand, borrowing capacity, current ratio and working capital levels to be our most important measures of short-term liquidity.

For long-term liquidity indicators, we believe our ratio of long-term debt to equity and our historical levels of net cash flows from operating activities to be the most important measures.

At March 31, 2020, we had working capital of $56.4 million, compared to $71.1 million at June 30, 2019.

The ratio of current assets to current liabilities was 2.45 to 1 as compared to a ratio of 2.78 to 1 at June 30, 2019.

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When June 30, 2019 current assets are revised to exclude the asset held for sale, adjusted working capital, a Non-GAAP financial measure, and the ratio of current assets to current liability are $63.6 million and 2.59 to 1, respectively, as of June 30, 2019.

The $12.0 million decrease in working capital from June 30, 2019 to December 31, 2019 (as adjusted and excludes held for sale assets) is primarily driven by a $10.2 million decrease in accounts receivable and an increase in accounts payable of $1.9 million.

The Company generated $20.9 million of cash from operating activities in the first half of fiscal 2020 as compared to $7.6 million in the same period of the prior year.

This $13.3 million increase in net cash flows from operating activities is the result of the Company’s ongoing strategy to aggressively manage its working capital which includes the reduction of accounts receivable days sales outstanding (DSO), increasing inventory turns while simultaneously reducing inventory levels, and effectively managing the Company’s supply chain which includes partnering with its suppliers to find the appropriate service level while effectively managing payment terms.

Net accounts receivable were $44.5 million and $54.7 million at December 31, 2019 and June 30, 2019, respectively.

DSO decreased to 54 days at December 31, 2019 from 63 days at June 30, 2019.

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 $43.3 million at December 31, 2019 decreased $0.2 million from $43.5 million at June 30, 2019.

The $7.2 million decrease in working capital from June 30, 2019 to March 31, 2020 (as adjusted and excludes held for sale assets) is primarily driven by an $8.8 million decrease in accounts receivable, a $1.1 million decrease in accrued expense and a $0.9 million increase in refundable income taxes.

We generated $17.1 million of cash from operating activities in the nine months ended March 31, 2020 as compared to $6.4 million in the same period of fiscal 2019.

This $10.7 million increase in net cash flows from operating activities is the result of our improved earnings as well as our ongoing strategy to aggressively manage our working capital which includes the reduction of accounts receivable days sales outstanding (DSO), increasing inventory turns while simultaneously reducing inventory levels, and effectively managing our supply chain which includes partnering with our suppliers to find the appropriate service level while effectively managing payment terms.

Net accounts receivable were $46.0 million and $54.7 million at March 31, 2020 and June 30, 2019, respectively.

DSO decreased to 59 days at March 31, 2020 from 63 days at June 30, 2019.

We believe that our receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.

Net inventories of $43.6 million at March 31, 2020 increased $0.1 million from $43.5 million at June 30, 2019.

The decrease of $0.1 million is the result of a decrease in gross inventory of $0.9 million and a decrease in obsolescence reserves of $1.0 million.

Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory decreased $1.4 million in the first half of fiscal 2020 in the Graphics Segment which was partially offset by an increase in net inventory in the Lighting Segment of $1.2 million.

Cash generated from operations and borrowing capacity under the Company’s line of credit is the Company’s primary source of liquidity.

The Company has a secured $75 million revolving line of credit with its bank, with $66.6 million of the credit line available as of January 16, 2020.

Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory increased $1.7 million in the first nine months of fiscal 2020 in the Lighting Segment which was partially offset by a decrease in net inventory in the Graphics Segment of $1.6 million.

We increased inventory in the Lighting Segment in anticipation for higher demand during the coming summer months.

Cash generated from operations and borrowing capacity under our line of credit is our primary source of liquidity.

We have a secured $75 million revolving line of credit with our bank, with $63.7 million of the credit line available as of April 17, 2020.

This line of credit is a $75 million five-year credit line expiring in the third quarter of fiscal 2022.

The Company believes that its $75 million line of credit plus cash flows from operating activities are adequate for the Company’s fiscal 2020 operational and capital expenditure needs.

The Company is in compliance with all of its loan covenants.

The Company had a source of cash of $11.2 million related to investing activities in the first half of fiscal 2020 as compared to a use of $1.6 million in the same period of the prior year, resulting in a favorable change of $12.8 million.

Capital expenditures for the first half of fiscal 2020 decreased from $1.6 million in fiscal 2019 to $1.1 million in fiscal 2020.

The Company sold its New Windsor, New York manufacturing facility for $12.3 million in the first quarter of fiscal 2020 which was the primary contributing factor to the increase in cash flow from investing activities from fiscal 2019 to fiscal 2020.

The Company used $31.8 million of cash related to financing activities in the first half of fiscal 2020 compared to a source of cash of $0.3 million in the first half of fiscal 2019.

The $32.1 million unfavorable change in cash flow was primarily the net result of payments of long-term debt in excess of borrowings which was primarily driven by cash flow from operations.

The Company has on its balance sheet financial instruments consisting primarily of cash and cash equivalents, short-term investments, revolving lines of credit, and long-term debt.

We are in compliance with all of our loan covenants.

We believe that our $75 million line of credit plus cash flows from operating activities are adequate for calendar year 2020 operational and capital expenditure needs.

However, as the impact of COVID-19 on the economy and our operations evolves, we will continue to assess our liquidity needs.

We had a source of cash of $18.5 million related to investing activities in the nine months ended March 31, 2020 as compared to a use of $2.3 million in the same period of fiscal 2019, resulting in a favorable change of $20.8 million.

Capital expenditures decreased from $2.3 million in the nine months ended March 31, 2019 to $1.5 million in the nine months ended March 31, 2020.

We sold our New Windsor, New York manufacturing facility for $12.3 million in the first quarter of fiscal 2020 and our North Canton, Ohio facility for $7.7 million in the third quarter of fiscal 2020, which were the primary contributing factors to the increase in cash flow from investing activities from fiscal 2019 to fiscal 2020.

We used $35.5 million of cash related to financing activities in the nine months ended March 31, 2020 compared to $5.5 million in the nine months ended March 31, 2019.

The $30.0 million change in cash flow was primarily the net result of payments of long-term debt in excess of borrowings which was primarily driven by cash flow from operations.

We have on our balance sheet financial instruments consisting primarily of cash and cash equivalents, short-term investments, revolving lines of credit, and long-term debt.

The fair value of these financial instruments approximates carrying value because of their short-term maturity and/or variable, market-driven interest rates.

Off-Balance Sheet Arrangements

The Company has no financial instruments with off-balance sheet risk and has no off-balance sheet arrangements.

We have no financial instruments with off-balance sheet risk and have no off-balance sheet arrangements.

Cash Dividends

In February 2020, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable February 26, 2020 to shareholders of record as of February 18, 2020.

In April 2020, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable May 12, 2020 to shareholders of record as of May 4, 2020.

The indicated annual cash dividend rate for fiscal 2020 is $0.20 per share.

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Critical Accounting Policies and Estimates

A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2019 Annual Report on Form 10-K.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the Company’s exposure to market risk since June 30, 2019.

Additional information can be found in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, which appears on page 13 of the Annual Report on Form 10-K for the fiscal year ended June 30, 2019.

A summary of our significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2019 Annual Report on Form 10-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis