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
March 31
|
|
|
Nine Months Ended
March 31
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting Segment
|
|
$
|
49,331
|
|
|
$
|
48,865
|
|
|
$
|
168,007
|
|
|
$
|
164,382
|
|
Graphics Segment
|
|
|
17,162
|
|
|
|
13,363
|
|
|
|
59,949
|
|
|
|
49,656
|
|
Technology Segment
|
|
|
4,247
|
|
|
|
6,375
|
|
|
|
13,396
|
|
|
|
17,705
|
|
All Other Category
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
41
|
|
|
|
$
|
70,740
|
|
|
$
|
68,603
|
|
|
$
|
241,352
|
|
|
$
|
231,784
|
|
Operating Income (Loss) by Business Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
March 31
|
|
|
Nine Months Ended
March 31
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting Segment
|
|
$
|
1,106
|
|
|
$
|
2,913
|
|
|
$
|
11,970
|
|
|
$
|
11,230
|
|
Graphics Segment
|
|
|
1,174
|
|
|
|
(320
|
)
|
|
|
5,370
|
|
|
|
798
|
|
Technology Segment
|
|
|
888
|
|
|
|
855
|
|
|
|
3,221
|
|
|
|
1,986
|
|
All Other Category
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(183
|
)
|
Corporate and Eliminations
|
|
|
(2,436
|
)
|
|
|
(2,866
|
)
|
|
|
(8,686
|
)
|
|
|
(8,491
|
)
|
|
|
$
|
732
|
|
|
$
|
582
|
|
|
$
|
11,875
|
|
|
$
|
5,340
|
|
Summary Comments
Fiscal 2016 third quarter net sales of $70,740,000 increased $2.1 million or 3.1% as compared to third quarter fiscal 2015 net sales of $68,603,000. Net sales were favorably influenced by increased net sales of the Lighting Segment (up $0.5 million or 1.0%) and increased net sales of the Graphics Segment (up $3.8 million or 28.4%). Net sales were unfavorably influenced by decreased net sales of the Technology Segment (down $2.1 million or 33.4%).
Fiscal 2016 nine month net sales of $241,352,000 increased $9.6 million or 4.1% as compared to the same period of fiscal 2015. Net sales were favorably influenced by increased net sales of the Lighting Segment (up $3.6 million or 2.2%) and increased net sales of the Graphics Segment (up $10.3 million or 20.7%). Net sales were unfavorably influenced by decreased net sales of the Technology Segment (down $4.3 million or 24.3%).
Fiscal 2016 third quarter operating income of $732,000 increased $150,000 or 25.8% from operating income of $582,000 in the same period the prior year. The $150,000 increase in operating income was the net result of increased net sales, an increase in gross profit, and a small increase in selling and administrative expenses.
Fiscal 2016 nine month operating income of $11,875,000 increased $6.5 million or 122% from operating income of $5,340,000 in the same period the prior year. The $6.5 million increase in operating income was the net result of increased net sales, an increase in gross profit and an increase in gross profit as a percentage of net sales from 23.9% in the first nine months of fiscal 2015 to 26.4% in the first nine months of fiscal 2016, an increase in selling and administrative expenses, and the net effect of the gain on the sale of a facility more than offset by the loss on the sale of a subsidiary in fiscal 2015 with no comparable events in fiscal 2016.
The Company’s total net sales of products related to solid-state LED technology in light fixtures, in certain elements of graphics products, and video screens have been recorded as indicated in the table below.
|
|
LED Net Sales
|
|
(In thousands)
|
|
FY 2016
|
|
|
FY 2015
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
38,911
|
|
|
$
|
30,898
|
|
|
|
25.9
|
%
|
Second Quarter
|
|
|
42,325
|
|
|
|
37,432
|
|
|
|
13.1
|
%
|
First Half
|
|
|
81,236
|
|
|
|
68,330
|
|
|
|
18.9
|
%
|
Third Quarter
|
|
|
33,755
|
|
|
|
30,878
|
|
|
|
9.3
|
%
|
Nine Months
|
|
|
114,991
|
|
|
|
99,208
|
|
|
|
15.9
|
%
|
Fourth Quarter
|
|
|
|
|
|
|
35,779
|
|
|
|
|
|
Full Year
|
|
|
|
|
|
$
|
134,987
|
|
|
|
|
|
Third quarter fiscal 2016 LED net sales of $33,755,000 were up $2.9 million or 9.3% from the same period of the prior year. The $33,755,000 total LED net sales and the $2.9 million increase are the net result of Lighting Segment LED net sales of $33.7 million (up $4.2 million or 14.1%), Graphics Segment LED net sales of less than $0.1 million (down $0.3 million or 90.1%), and Technology Segment LED net sales of LED video screens of $0.1 million (down $1.0 million or 95.1%). Fiscal 2016 first nine month total LED net sales of $114,991,000 were $15.8 million or 15.9% higher than the same period of the prior year. The $114,991,000 total LED net sales and the $15.8 million increase are primarily the net result of Lighting Segment LED net sales of $112,675,000 million (up $16.5 million or 17.2%), Graphics Segment LED net sales of $1.7 million (up $0.5 million or 47.9%), and Technology Segment LED net sales of $0.6 (down $1.3 million or 67.1%).
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 severance costs, the gain on the sale of the manufacturing facility, the loss on the sale of the subsidiary, and the income tax effect of the utilization of a long-term capital loss 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 2016
|
|
|
FY 2015
|
|
Reconciliation of operating income to
adjusted operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income as reported
|
|
$
|
732
|
|
|
$
|
582
|
|
|
|
|
|
|
|
|
|
|
Adjustment for severance costs
|
|
|
178
|
|
|
|
(295
|
)
|
|
|
|
|
|
|
|
|
|
Adjustment of self-insured death benefit expense
|
|
|
--
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income
|
|
$
|
910
|
|
|
$
|
1,287
|
|
(in thousands, except per share data; unaudited)
|
|
Third Quarter
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
Diluted
|
|
|
|
FY 2016
|
|
|
EPS
|
|
|
FY 2015
|
|
|
EPS
|
|
Reconciliation of net income to
adjusted net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income and earnings
per share as reported
|
|
$
|
522
|
|
|
$
|
0.02
|
|
|
$
|
393
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for severance costs,
inclusive of the income tax effect
|
|
|
117
|
(1)
|
|
|
--
|
|
|
|
(188
|
)
(2)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for self-insured death benefit expense,
Inclusive of the income tax effect
|
|
|
--
|
|
|
|
--
|
|
|
|
637
|
(3)
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income and earnings
per share
|
|
$
|
639
|
|
|
$
|
0.02
|
|
|
$
|
842
|
|
|
$
|
0.03
|
|
The income tax effects of the adjustments in the tables above are calculated using the estimated U.S. effective income tax rates for the periods indicated. The income tax effects were as follows (in thousands):
(1)
$61
(2)
$107
(3)
$(363)
(in thousands, unaudited)
|
|
Nine Months
|
|
|
|
FY 2016
|
|
|
FY 2015
|
|
Reconciliation of operating income to
adjusted operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income as reported
|
|
$
|
11,875
|
|
|
$
|
5,340
|
|
|
|
|
|
|
|
|
|
|
Adjustment for severance costs
|
|
|
401
|
|
|
|
662
|
|
|
|
|
|
|
|
|
|
|
Adjustment of self-insured death benefit expense
|
|
|
--
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
Adjustment for the gain on the
sale of a manufacturing facility
|
|
|
--
|
|
|
|
(343
|
)
|
|
|
|
|
|
|
|
|
|
Adjustment for the loss on sale of a
subsidiary
|
|
|
--
|
|
|
|
565
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income
|
|
$
|
12,276
|
|
|
$
|
7,224
|
|
(in thousands, except per share data; unaudited)
|
|
Nine Months
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
Diluted
|
|
|
|
FY 2016
|
|
|
EPS
|
|
|
FY 2015
|
|
|
EPS
|
|
Reconciliation of net income to
adjusted net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income and earnings
per share as reported
|
|
$
|
8,054
|
|
|
$
|
0.32
|
|
|
$
|
3,508
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for severance costs,
inclusive of the income tax effect
|
|
|
263
|
(1)
|
|
|
0.01
|
|
|
|
422
|
(2)
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for self-insured death benefit expense,
Inclusive of the income tax effect
|
|
|
--
|
|
|
|
--
|
|
|
|
637
|
(3)
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for the gain on the
sale of a manufacturing facility,
inclusive of the income tax effect
|
|
|
--
|
|
|
|
--
|
|
|
|
(224)
|
(4)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for the loss on sale of a
subsidiary
|
|
|
--
|
|
|
|
--
|
|
|
|
565
|
(5)
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax effect of utilization of a
long-term capital loss
|
|
|
--
|
|
|
|
--
|
|
|
|
(101)
|
(6)
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income and earnings
per share
|
|
$
|
8,317
|
|
|
$
|
0.33
|
|
|
$
|
4,807
|
|
|
$
|
0.20
|
|
The income tax effects of the adjustments in the tables above were calculated using the estimated U.S. effective income tax rates for the periods indicated. The income tax effects were as follows (in thousands):
(1)
$138
(2)
$(240)
(3)
$(363)
(4)
$119
(5)
0
(6)
0
Results of Operations
THREE MONTHS ENDED MARCH 31, 2016 COMPARED
TO THREE MONTHS ENDED MARCH 31,
2015
Lighting Segment
(In thousands)
Lighting Segment
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
March 31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
49,331
|
|
|
$
|
48,865
|
|
Gross Profit
|
|
$
|
10,563
|
|
|
$
|
11,930
|
|
Operating Income
|
|
$
|
1,106
|
|
|
$
|
2,913
|
|
Lighting Segment net sales of $49,331,000 in the third quarter of fiscal 2016 increased $0.5 million or 1% from fiscal 2015 same period net sales of $48,865,000. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $33.7 million in the third quarter of fiscal 2016, representing a $4.2 million or 14.1% increase from fiscal 2015 third quarter net sales of solid-state LED light fixtures of $29.5 million. Net sales of light fixtures having solid-state LED technology accounted for 68% of total Lighting Segment net sales. There was a reduction in the Company’s traditional lighting sales (metal halide and fluorescent light sources) from third quarter fiscal 2015 to third quarter fiscal 2016 as customers converted from traditional lighting to light fixtures having solid-state LED technology
.
Gross profit of $10,563,000 in the third quarter of fiscal 2016 decreased $1.4 million or 11.5% from the same period of fiscal 2015, and decreased from 24.2% to 21.1% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The $1.4 million decrease in the amount of gross profit is due to the net effect of competitive pricing pressures, improved manufacturing efficiencies as a result of the Company’s lean initiatives, increased supplies expense ($0.2 million), increased outside service expense ($0.1 million), increased repairs and maintenance expense ($0.1 million), increased rent expense ($0.1 million), increased sales concession expense ($0.3 million), and increased warranty expense ($0.7 million). The Company experienced a higher than normal level of warranty claims in the third quarter of fiscal 2016, primarily driven by older generation LED drivers.
Selling and administrative expenses of $9,457,000 in the third quarter of fiscal year 2016 increased $0.4 million or 4.9% from the same period of fiscal 2015 primarily as the net result of increased employee compensation and benefits expense ($0.3 million), increased sample expense ($0.1 million), decreased bad debt expense ($0.1 million), decreased commission expense ($0.1 million), increased travel costs ($0.1 million), decreased research and development expense ($0.1 million), and an increase in corporate shared service costs ($0.5 million).
The Lighting Segment third quarter fiscal 2016 operating income of $1,106,000 decreased $1.8 million or 62.0% from operating income of $2,913,000 in the same period of fiscal 2015. This decrease of $1.8 million was primarily the net result of an increase in net sales, a decrease in the gross profit mostly driven by an increase in warranty expense, and increased selling and administrative expenses.
Graphics Segment
(In thousands)
Graphics Segment
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
March 31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
17,162
|
|
|
$
|
13,363
|
|
Gross Profit
|
|
$
|
4,280
|
|
|
$
|
2,476
|
|
Operating Income (Loss)
|
|
$
|
1,174
|
|
|
$
|
(320
|
)
|
Graphics Segment net sales of $17,162,000 in the third quarter of fiscal 2016 increased $3.8 million or 28.4% from fiscal 2015 same period net sales of $13,363,000. The $3.8 million increase in Graphics Segment net sales is the net result of image conversion programs and sales to the petroleum / convenience store market ($3.1 million net increase), sales to the grocery retailer market ($0.5 million increase), sales to the national drug store retailer market ($0.3 million increase), sales to the commercial market ($0.2 million net increase), and changes in sales to other markets ($0.3 million net decrease)
. The Graphics Segment net sales of graphic identification products that contain solid-state LED light sources and LED lighting for signage totaled less than $0.1 million in the third quarter of fiscal 2016, representing a 90.1% decrease from fiscal 2015 net sales of $0.3 million.
Gross profit of $4,280,000 in the third quarter of fiscal 2016 increased $1.8 million or 72.9% from the same period of fiscal 2015. Gross profit as a percentage of Graphics Segment net sales (customer plus inter-segment net sales) increased from 18.3% in the third quarter of fiscal 2015 to 24.5% in the third quarter of fiscal 2016. The change in the amount of gross profit is due to the net effect of increased net sales, a slightly lower gross profit margin on installation net sales, an increase in gross profit on product net sales, similar freight costs on increased product sales, increased property tax expense ($0.2 million), an increase in corporate shared service costs ($0.1 million), and increased employee compensation and benefit expense ($0.1 million).
Selling and administrative expenses of $3,106,000 in the third quarter of fiscal 2016 increased $0.3 million or 11.1% from the same period of fiscal 2015 primarily as the result of increased travel expenses ($0.1 million) and increased convention and show expenses ($0.1 million).
The Graphics Segment third quarter fiscal 2016 operating profit of $1,174,000 increased $1.5 million from a third quarter fiscal 2015 operating loss of ($320,000). The $1.5 million increase in operating income was the net result of increased net sales, an increase in gross profit and an increase in gross profit as a percentage of net sales, and increased selling and administrative expenses.
Technology Segment
(In thousands)
Technology Segment
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
March 31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
4,247
|
|
|
$
|
6,375
|
|
Gross Profit
|
|
$
|
1,880
|
|
|
$
|
1,906
|
|
Operating Income
|
|
$
|
888
|
|
|
$
|
855
|
|
Technology Segment net sales of $4,247,000 in the third quarter of fiscal 2016 decreased $2.1 million or 33.4% from fiscal 2015 same period net sales of $6,375,000. The $2.1 million decrease in Technology Segment net sales is primarily the net result of a $0.4 million decrease in sales to the transportation market, a $0.1 million decrease in sales to the telecommunication market, a $0.3 million decrease in sales to the medical market, a $0.9 million decrease in sales to the sports market, a $0.8 million decrease in sales to original equipment manufacturers, and a $0.4 million increase in sales to various other markets. While net customer sales decreased, the Technology Segment inter-segment sales increased $2.1 million or 31.4%. The increase in inter-segment sales is the direct result of the Lighting Segment’s increase in net sales of light fixtures having solid-state LED technology along with light fixtures with integrated controls. The Technology Segment’s
intercompany support of electronic circuit boards and lighting control systems to the Lighting Segment is core to the strategic growth of the Company.
The Technology Segment’s net sales of LED video screens were less than $0.1 million in the third quarter of fiscal 2016 compared to $1.0 million net sales of video screens in the third quarter of fiscal 2015.
Gross profit of $1,880,000 in the third quarter of fiscal 2016 decreased slightly from the same period in fiscal 2015, and decreased from 14.5% to 14.3% as a percentage of net sales (customer plus inter-segment net sales). The small decrease in gross profit is due to the net effect of decreased customer net sales offset by increased inter-segment sales, decreased supplies expense ($0.1 million), increased depreciation expense ($0.1 million), and decreased repairs and maintenance expense ($0.1 million).
Selling and administrative expenses of $992,000 in the third quarter of fiscal 2016 decreased $59,000 or 5.6% from fiscal 2015 selling and administrative expenses of $1,051,000. The $59,000 decrease in selling and administrative expenses is the net result of several small changes in various expenses.
The Technology Segment third quarter fiscal 2016 operating income of $888,000 increased slightly from operating income of $855,000 in the same period of fiscal 2015. The small increase in operating income was primarily the net result of decreased customer net sales offset by increased inter-segment sales along with a small decrease in gross profit and a small decrease in selling and administrative expenses.
Corporate and Eliminations
(In thousands)
Corporate and Eliminations
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
$
|
(174
|
)
|
|
$
|
(7
|
)
|
Operating (Loss)
|
|
$
|
(2,436
|
)
|
|
$
|
(2,866
|
)
|
The gross profit (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $2,262,000 in the third quarter of fiscal 2016 decreased $0.6 million or 20.9% from the same period of the prior year. The $0.6 million decrease in expense is primarily the net result of decreased employee compensation and benefit expense ($0.9 million), increased outside service expense ($0.3 million), an increase in research and development costs ($0.6 million), and an increase in corporate shared services which are allocated to the reportable segments (favorable change of $0.7 million).
Consolidated Results
The Company reported net interest income of $19,000 in the third quarter of fiscal 2016 as compared to net interest expense of $3,000 in the same period of fiscal 2015. Commitment fees related to the unused portions of the Company’s lines of credit and interest income on invested cash are included in both fiscal years. The change from net interest expense in the third quarter of fiscal year 2015 to net interest income in the third quarter of fiscal 2016 is directly related to the increase in invested cash.
The $229,000 income tax expense in the third quarter of fiscal 2016 and the $186,000 income tax expense in the third quarter of fiscal 2015
represent a consolidated effective tax rate of 30.5% and 32.1%, respectively, both influenced by certain permanent book-tax differences and by tax benefits related to uncertain income tax positions.
The Company reported net income of $522,000 in the third quarter of fiscal 2016 as compared to net income of $393,000 in the same period of the prior year. The change in net income is primarily the net result of increased net sales, a small increase in gross profit, a small reduction in gross profit as a percentage of net sales, a small increase in selling and administrative expense, and a lower effective tax rate in fiscal 2016 compared to fiscal 2015. Diluted earnings per share of $0.02 were reported in the third quarter of fiscal 2016 as compared to diluted earnings per share of $0.02 in the same period of fiscal 2015. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the third quarter of fiscal 2016 were 25,700,000 shares as compared to 24,643,000 shares in the same period last year.
NINE MONTHS ENDED MARCH 31, 2016 COMPARED TO NINE MONTHS ENDED MARCH 31, 2015
Lighting Segment
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
168,007
|
|
|
$
|
164,382
|
|
Gross Profit
|
|
$
|
41,904
|
|
|
$
|
40,748
|
|
Operating Income
|
|
$
|
11,970
|
|
|
$
|
11,230
|
|
Lighting Segment net sales of $168,007,000 in the first nine months of fiscal 2016 increased $3.6 million or 2.2% from fiscal 2015 same period net sales of $164,382,000. The Lighting Segment’s net sales of light fixtures having solid-state LED technology totaled $112.7 million in the first nine months of fiscal 2016, representing an 17.2% increase from the first nine months of fiscal 2015 net sales of solid-state LED light fixtures of $96.2 million. Net sales of light fixtures having solid-state LED technology accounted for 67% of total Lighting Segment net sales. There was a reduction in the Company’s traditional lighting sales (metal halide and fluorescent light sources) from fiscal 2015 to fiscal 2016 as customers converted from traditional lighting to light fixtures having solid-state LED technology.
Gross profit of $41,904,000 in the first nine months of fiscal 2016 increased $1.2 million or 2.8% from the same period of fiscal 2015, and increased from 24.5% to 24.6% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The increase in gross profit is due primarily to the net effect of increased net sales, the improved procurement of material, competitive pricing pressures, and improved manufacturing efficiencies as a result of the Company’s lean initiatives. Also contributing to the change in gross profit is increased freight expense, increased employee compensation and benefits expense ($0.7 million), increased customer relations expense ($0.3 million), increased repairs and maintenance expense ($0.2 million), increased supplies expense ($0.2 million), increased travel expenses ($0.1 million), decreased utilities expense ($0.1 million), increased depreciation expense ($0.1 million), increased rent expense ($0.1 million), decreased outside service expense ($0.1 million), an increase in corporate shared services costs (0.5 million), and increased warranty costs ($1.5 million). The Company experienced a higher than normal level of warranty claims in the third quarter of fiscal 2016, primarily driven by older generation LED drivers.
Selling and administrative expenses of $29,934,000 in the first nine months of fiscal 2016 increased $0.4 million or 1.4% compared to selling and administrative expenses for the same period of fiscal 2015 primarily as the net result of increased employee compensation and benefit expense ($0.2 million), increased travel expense ($0.3 million), increased samples expense ($0.1 million), decreased literature expense ($0.1 million), decreased convention and trade show expense ($0.2 million), decreased depreciation expense ($0.1 million), decrease bad debt expense ($0.1 million), increased sales commission expense ($0.3 million), decreased rent expense ($0.1 million), decreased research and development expense ($1.1 million), decreased outside service expense ($0.2 million), and an increase in corporate shared service costs ($1.4 million).
The Lighting Segment nine month fiscal 2016 operating income of $11,970,000 increased $0.7 million or 6.6% from operating income of $11,230,000 in the same period of fiscal 2015. This increase of $0.7 million was the net result of increased net sales, an increase in gross profit, and an increase in the gross margin as a percentage of sales.
Graphics Segment
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
59,949
|
|
|
$
|
49,656
|
|
Gross Profit
|
|
$
|
15,836
|
|
|
$
|
9,232
|
|
Operating Income
|
|
$
|
5,370
|
|
|
$
|
798
|
|
Graphics Segment net sales of $59,949,000 in the first nine months of fiscal 2016 increased 20.7% from fiscal 2015 same period net sales of $49,656,000. The $10.3 million increase in Graphics Segment net sales is primarily the net result of image conversion programs and sales to the petroleum / convenience store market ($12.3 million net increase), sales to the grocery retailer market ($1.4 million increase), sales to the national drug retailer market ($0.2 million increase), sales to the quick-service restaurant market ($2.1 million net decrease), sales to the commercial market ($0.2 million net decrease), sales to the banking market ($0.3 million decrease), and changes in sales to other markets ($1.0 million net decrease). The Graphics Segment net sales of graphic identification products that contain solid-state LED light sources and LED lighting for signage totaled $1.7 million in the first nine months of fiscal 2016, representing a 47.9% increase from first nine months 2015 net sales of $1.1 million.
Gross profit of $15,836,000 in the first nine months of fiscal 2016 increased $6.6 million or 71.5% from the same period in fiscal 2015, and increased from 18.4% to 25.9% as a percentage of Graphics Segment net sales (customer plus inter-segment net sales). The increase in the amount of gross profit is due to the net effect of increased net sales, an overall improvement in gross profit as a percentage of net sales, lower margins on installation sales, increased freight expense, increased supplies expense ($0.1 million), increased outside service expense ($0.1 million), increased customer relations expense ($0.1 million), an increase in corporate shared service costs ($0.2 million), increased property tax expense ($0.2 million), and increased employee compensation and benefits expense ($0.7 million).
Selling and administrative expenses of $10,466,000 in the first nine months of fiscal 2016 increased $1.7 million or 19.2% from the same period of fiscal 2015 primarily as a result of increased employee compensation and benefits expense ($1.3 million), an increased travel expenses ($0.1 million), and several small increases in other expenses ($0.3 million). In fiscal 2015, the Graphics Segment recorded a gain on the sale of one of its facilities in Woonsocket, Rhode Island of $343,000, with no comparable event in fiscal 2016.
Graphics Segment nine month fiscal 2016 operating income of $5,370,000 increased $4.6 million or 573% from the same period of fiscal 2015 and is the net result of increased net sales, increased gross profit as a percentage of net sales, increased selling and administrative expenses, and a gain on the sale of a facility in fiscal 2015 with no corresponding event in fiscal 2016.
Technology Segment
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
13,396
|
|
|
$
|
17,705
|
|
Gross Profit
|
|
$
|
6,354
|
|
|
$
|
5,464
|
|
Operating Income
|
|
$
|
3,221
|
|
|
$
|
1,986
|
|
Technology Segment net sales of $13,396,000 in the first nine months of fiscal 2016 decreased $4.3 million or 24.3% from fiscal 2015 same period net sales of $17,705,000. The $4.3 million decrease in Technology Segment net sales is primarily the net result of a $0.8 million decrease in sales to the medical market, a $2.3 million decrease in sales to the transportation market, a $0.4 million decrease in sales to original equipment manufacturers, a $1.1 million decrease in sales to the sports market, and a $0.3 million increase in sales to various other markets.
While net customer sales decreased, Technology Segment inter-segment sales increased $5.5 million or 25.3%. The increase in inter-segment sales is the direct result of the Lighting Segment’s increase in net sales of light fixtures having solid-state LED technology and light fixtures with integrated controls. The Technology Segment’s
intercompany support of electronic circuit boards and lighting control systems to the Lighting Segment is core to the strategic growth of the Company.
The Technology Segment's net sales related to LED video screens totaled $0.6 million in the first nine months of fiscal 2016, representing a 67.1% decrease from fiscal 2015 same period net sales of $1.9 million.
Gross profit of $6,354,000 in the first nine months of fiscal 2016 increased $0.9 million or 16.3% from the same period of fiscal 2015, and increased from 13.9% to 15.6% as a percentage of Technology Segment net sales (customer plus inter-segment net sales). The $0.9 million increase in amount of gross profit is due to the net effect of decreased customer net sales more than offset by increased inter-segment sales, an improvement in operational efficiencies, decreased employee compensation and benefits expense ($0.4 million), increased outside service expense ($0.1 million), and increased depreciation expense ($0.1 million).
Selling and administrative expenses of $3,133,000 in the first nine months of fiscal 2016 decreased $0.3 million or 9.9% from the same period of fiscal 2015 as the net result of an increase in employee compensation and benefits expense ($0.2 million), a decrease in research and development expense ($0.4 million), and several small decreases in other expenses ($0.1 million).
Technology Segment nine month fiscal 2016 operating income of $3,221,000 increased $1.2 million or 62.2% from operating income of $1,986,000 in the same period of fiscal 2015. The increase of $1.2 million was the net result of decreased net customer sales more than offset by increased inter-segment sales, increased gross profit from the net increase in total net sales (customer and intersegment net sales), and decreased selling and administrative expenses.
All Other Category
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
--
|
|
|
$
|
41
|
|
Gross Profit
|
|
$
|
--
|
|
|
$
|
21
|
|
Operating (Loss)
|
|
$
|
--
|
|
|
$
|
(183
|
)
|
Due to the sale of LSI Saco on September 30, 2014, there is no longer comparable data for the All Other Category.
Corporate and Eliminations
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Nine Months Ended
|
|
|
|
March 31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
$
|
(270
|
)
|
|
$
|
3
|
|
Operating (Loss)
|
|
$
|
(8,686
|
)
|
|
$
|
(8,491
|
)
|
The gross profit (loss) relates to the change in the intercompany profit in inventory elimination.
Administrative expenses of $8,416,000 in the first nine months of fiscal 2016 increased $0.5 million or 6.1% from the same period of the prior year. The increase in expense is primarily the net result of increased employee compensation and benefits expense ($0.4 million), a decrease in legal fee expense ($0.2 million), increased outside service expense ($0.3 million), increased depreciation expense ($0.2 million), increased research and development expense ($1.4 million), an increase in travel expenses ($0.1 million), an increase in repair and maintenance expense ($0.1 million), an increase in corporate shared service costs allocated to the segments (favorable change of $2.0 million), and small increases in several other expenses ($0.2 million). The increase in research and development spending is the result of the creation of a corporate research and development department with its sole purpose to develop leading edge products utilizing: 1) the latest energy saving controls; 2) LED light source technology; 3) the “internet of things” connectivity; and 4) beacons and new display technology to enhance the retail experience.
In fiscal 2015, the Company recognized a $565,000 loss on the sale of its Montreal subsidiary, LSI Saco, with no corresponding event in fiscal 2016.
Consolidated Results
The Company reported net interest income of $27,000 in the first nine months of fiscal 2016 as compared to net interest expense of $17,000 in the same period of fiscal 2015. Commitment fees related to the unused portions of the Company’s lines of credit and interest income on invested cash are included in both fiscal years. The change from net interest expense in the first nine months of fiscal year 2015 to net interest income in the first nine months of fiscal 2016 is directly related to the increase in invested cash.
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, and by a tax benefit related to uncertain income tax positions. The $1,815,000 income tax expense in the first nine months of fiscal 2015 represents a consolidated effective tax rate of 34.1%. This is the net result of an income tax rate of 36.3% for the Company’s U.S. operations, influenced by certain permanent book-tax differences that were significant relative to the amount of taxable income, by certain U.S. federal tax credits, by a benefit related to uncertain income tax positions, by a full valuation reserve on the Company’s Canadian tax position and certain Canadian tax credits both occurring in the first quarter, and a $136,000 tax benefit related to the retroactive reinstatement of the R&D tax credit.
The Company reported net income of $8,054,000 in the first nine months of fiscal 2016 compared to net income of $3,508,000 in the same period of the prior year. The $4.5 million increase in net income is primarily the net result of increased net sales, increased gross profit, increased operating expenses, the gain on the sale of a facility more than offset by the loss on the sale of a subsidiary in fiscal 2015 with no comparable events in fiscal 2016,
and increased income tax expense. Diluted earnings per share of $0.32 were reported in the first nine months of fiscal 2016 as compared to diluted earnings per share of $0.14 in the same period of fiscal 2015. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first nine months of fiscal 2016 was 25,494,000 shares as compared to 24,550,000 shares in the same period last year.
Liquidity and Capital Resources
The Company considers its level of cash on hand, borrowing capacity, current ratio and working capital levels to be its most important measures of short-term liquidity. For long-term liquidity indicators, the Company believes its ratio of long-term debt to equity and its historical levels of net cash flows from operating activities to be the most important measures.
At March 31, 2016, the Company had working capital of $91.6 million, compared to $84.0 million at June 30, 2015. The ratio of current assets to current liabilities was 3.74 to 1 as compared to a ratio of 3.28 to 1 at June 30, 2015. The $7.7 million increase in working capital from June 30, 2015 to March 31, 2016 was primarily related to the net effect of increased cash and cash equivalents ($7.4 million), an increase in net inventory ($3.1 million), an increase in refundable income taxes ($0.5 million), and decreased accounts payable ($3.0 million), partially offset by an increase in accrued expenses ($0.4 million), a decrease in net accounts receivable ($5.8 million), and a decrease in other current assets ($1.0 million). 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 provided $15.2 million of cash from operating activities in the first nine months of fiscal 2016 as compared to a generation of cash of $21.8 million in the same period of the prior year. This $6.6 million decrease in net cash flows from operating activities is primarily the net result of an increase rather than a decrease in inventory (unfavorable change of $5.1 million), an increase rather than a decrease in refundable income tax (unfavorable change of $2.4 million), a smaller decrease in customer prepayments (favorable change of $0.3 million), a smaller increase in accrued expenses and other (unfavorable change of $3.5 million), a larger decrease in accounts payable (unfavorable change of $1.3), a smaller decrease in accounts receivable (unfavorable change of $1.1 million), an increase in net income (favorable change of $4.5 million), an increase in stock option expense (favorable change of $1.4 million), a loss on the sale of a subsidiary in fiscal 2015 with no comparable event in fiscal 2016 (unfavorable change of $0.6 million), a larger increase in the deferred compensation liability (favorable change of $0.3 million), a smaller increase in net deferred tax assets (favorable change of $0.5 million),
and a decrease in the gain recognized on the sale of fixed assets, which includes the sale of a facility (favorable change of $0.3 million)
.
Net accounts receivable were $37.9 million and $43.7 million at March 31, 2016 and June 30, 2015, respectively. DSO decreased to 45 days at March 31, 2016 from 49 days at June 30, 2015.
The Company believes that its receivables are ultimately collectable or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.
Net inventories of $46.2 million at March 31, 2015 increased $3.1 million from June 30, 2015 levels. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory increases occurred in the first nine months of fiscal 2016 in the Lighting Segment of approximately $2.1 million, in the Graphics Segment of approximately $1.1 million, and in the Technology Segment of approximately $0.2 million.
Cash generated from operations and borrowing capacity under the Company’s line of credit facility is the Company’s primary source of liquidity. The Company has an unsecured $30 million revolving line of credit with its bank, with all of the $30 million of the credit line available as of April 27, 2016. This line of credit is a $30 million three year committed credit facility expiring in the third quarter of fiscal 2019. The Company believes that its $30 million line of credit plus cash flows from operating activities are adequate for the Company’s fiscal 2016 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.
The Company used cash of $8.3 million related to investing activities in the first nine months of fiscal 2016 as compared to a use of cash of $1.0 million in the same period of the prior year, resulting in an unfavorable change of $7.3 million. Capital expenditures for the first nine months of fiscal 2016 increased $5.0 million to $8.4 million from the same period in fiscal 2015. The largest components of the first nine months of fiscal 2016 capital expenditures are tooling and equipment related to the Company’s Lighting, Graphics and Technology Segments. The Company recorded proceeds from the sale of one of its Woonsocket, Rhode Island facilities of $950,000 in the first nine months of fiscal 2015 with no proceeds from the sale of fixed assets in the first nine months of fiscal 2016. The Company also recorded net proceeds from the sale of its subsidiary in Montreal of $1.5 million in the first half of fiscal 2015 with no comparable transaction in the first half of fiscal 2016.
The Company generated $0.4 million of cash related to financing activities in the first nine months of fiscal 2016 compared to a use of cash of $1.8 million in the first nine months of fiscal 2015. The favorable change in cash flow was primarily the result of a $3.2 million increase in the exercise of stock options in the first nine months of fiscal 2016 compared to the exercise of stock options in first nine months of fiscal 2015. The Company increased its annual cash dividend from $2.1 million in fiscal 2015 to $3.0 million in fiscal 2016, which partially offset the favorable cash flow impact from the exercise of stock options.
The Company has, or could have, on its balance sheet financial instruments consisting primarily of cash and cash equivalents, short-term investments, revolving lines of credit, and long-term debt. The fair value of these financial instruments approximates carrying value because of their short-term maturity and/or variable, market-driven interest rates.
Off-Balance Sheet Arrangements
The Company has no financial instruments with off-balance sheet risk and has no off-balance sheet arrangements.
Cash Dividends
In April 2016, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable May 10, 2016 to shareholders of record as of May 2, 2016. The indicated annual cash dividend rate for fiscal 2016 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. Revenue is typically recognized 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. 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; 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. However, 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 each 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 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 examinations.
In September 2013, the Internal Revenue Service issued Treasury Decision 9636, which enacted final tax regulations regarding the capitalization and expensing of amounts paid to acquire, produce, or improve tangible property. The regulations also include guidance regarding the retirement of depreciable property. The regulations were effective in taxable years beginning on or after January 1, 2014, or the Company’s fiscal year 2015. The impact to the Company’s financial statements was immaterial.
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 reporting units with 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 reporting units and indefinite-lived intangible assets using a combination of a market approach and an income (discounted cash flow) approach that 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 historical trends.
Warranty Reserves
The Company maintains a warranty reserve which is reflective of its limited warranty policy. The warranty reserve covers the estimated future costs to repair or replace defective product or installation services, whether the product is returned, scrapped or repaired in the field. The warranty reserve is first determined based upon known claims or issues, and then by the application of a specific percentage of sales to cover general claims. The percentage applied to sales to calculate general claims is based upon historical claims as a percentage of sales. Management addresses the adequacy of its warranty reserves on a quarterly basis to ensure the reserve is accurate based upon the most current information.
Inventory Reserves
The Company maintains an inventory reserve for probable obsolescence of its 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. Significant judgment is used to establish obsolescence 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 over a point in time, provides new and more detailed guidance on specific revenue topics, and expands and improves disclosures about revenue. The amended guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2017, or the Company’s fiscal year 2019. The Company has not yet determined the impact the amended guidance will have on its financial statements.
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 has not yet determined the impact the amended guidance will have on its financial statements.
In December 2015, the Financial Accounting Standards Board issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.” The amended guidance eliminates the requirements for organizations to present deferred tax liabilities and assets as current and noncurrent. Instead, all deferred tax assets and liabilities will be classified as noncurrent. 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 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.