ORION ENERGY SYSTEMS, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited Condensed Consolidated Financial Statements and related notes included in this Form 10-Q, as well as our audited Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 .
Cautionary Note Regarding Forward-Looking Statements
Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, prospects, financial condition, assumptions or future events or performance are not historical facts and are "forward-looking statements" as that term is defined under the federal securities laws. These statements are often, but not always, made through the use of words or phrases such as "believe", "anticipate", "should", "intend", "plan", "will", "expects", "estimates", "projects", "positioned", "strategy", "outlook" and similar words. You should read the statements that contain these types of words carefully. Such forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from what is expressed or implied in such forward-looking statements. There may be events in the future that we are not able to predict accurately or over which we have no control. Potential risks and uncertainties include, but are not limited to, those discussed in "Part I, Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 . We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or uncertainties after the date hereof or to reflect the occurrence of unanticipated events.
Overview
We provide state-of-the-art LED lighting, wireless Internet of Things ("IoT")
enabled control solutions, and energy project management. We research, design,
develop, manufacture, market, sell, install, and implement energy management
systems consisting primarily of high-performance, energy-efficient commercial
and industrial interior and exterior lighting systems and related services. Our
products are targeted for applications in three primary market segments:
commercial office and retail, area lighting, and industrial applications,
although we do sell and install products into other markets. Virtually all of
our sales occur within North America .
Our lighting products consist primarily of light emitting diode ("LED") lighting
fixtures, many of which include IoT enabled control systems. Our principal
customers include large national account end-users, federal and state government
facilities, large regional account end-users, electrical distributors,
electrical contractors and energy service companies ("ESCOs"). Currently,
substantially all of our products are manufactured at our leased production
facility located in Manitowoc, Wisconsin , although as the LED and related IoT
market continues to evolve, we are increasingly sourcing products and components
from third parties in order to provide versatility in our product development.
We have experienced recent success offering our comprehensive project management
services to national account customers to retrofit their multiple locations. Our
comprehensive services include initial site surveys and audits, utility
incentive and government subsidy management, engineering design, and project
management from delivery through to installation and controls integration.
We believe the market for LED lighting products and related controls continues
to grow. Due to their size and flexibility in application, we also believe that
LED lighting systems can address opportunities for retrofit applications that
cannot be satisfied by other lighting technologies. Our LED lighting
technologies have become the primary component of our revenue as we continue to
strive to be a leader in the LED market.
In fiscal 2020, we began to successfully capitalize on our capability of being a
full service, turn-key provider of LED lighting and controls systems with
design, build, installation and project management services, including being
awarded a very large project for a major national account. As a result of this
success, we have begun to evolve our business strategy to focus on further
expanding the nature and scope of our products and services offered to our
customers. This further expansion of our products and services includes pursuing
projects to develop recurring revenue streams, including providing lighting and
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electrical maintenance services and utilizing control sensor technology to
collect data and assisting customers in the digitization of this data, along
with other potential services. We also plan to pursue the expansion of our IoT,
"smart-building" and "connected ceiling" and other related technology, software
and controls products and services that we offer to our customers. We currently
plan on investing significant time, resources and capital into expanding our
offerings in these areas with no expectation that they will result in us
realizing material revenue in the near term and without any assurance they will
succeed or be profitable. In fact, it is likely that these efforts will reduce
our profitability, at least in the near term, as we invest resources and incur
expenses to develop these offerings. While we intend to pursue these expansion
strategies organically, we also are actively exploring potential business
acquisitions which would more quickly add these types of expanded and different
capabilities to our product and services offerings. It is possible that one or
more of such potential acquisitions, if successfully completed, could
significantly change, and potentially transform, the nature and extent of our
business.
We generally do not have long-term contracts with our customers that provide us
with recurring revenue from period to period and we typically generate
substantially all of our revenue from sales of lighting and control systems and
related services to governmental, commercial and industrial customers on a
project-by-project basis. We also perform work under master services or product
purchasing agreements with major customers with sales completed on an individual
purchase order basis. In addition, in order to provide quality and timely
service under our multi-location master retrofit agreements, we are required to
make substantial working capital expenditures and advance inventory purchases
that we may not be able to recoup if the agreements or a substantial volume of
purchase orders under the agreements are delayed or terminated. For example,
while we received a master retrofit agreement in January 2020 for approximately
$18-20 million in revenue from our largest customer, due to the closure of its
facilities to external activities because of the COVID-19 pandemic, this
customer deferred retrofit installations related to the project during March
2020 , thereby resulting in the deferral of our realization of expected revenue
during our fiscal 2020 fourth quarter. The loss of, or substantial reduction in
sales to, any of our significant customers, or our current single largest
customer, or the termination or delay of a significant volume of purchase orders
by one or more key customers, could have a material adverse effect on our
results of operations in any given future period.
We typically sell our lighting systems in replacement of our customers' existing
fixtures. We call this replacement process a "retrofit". We frequently engage
our customer's existing electrical contractor to provide installation and
project management services. We also sell our lighting systems on a wholesale
basis, principally to electrical distributors and ESCOs to sell to their own
customer bases.
The gross profits of our products can vary significantly depending upon the types of products we sell, with margins typically ranging from 10% to 50%. As a result, a change in the total mix of our sales among higher or lower margin products can cause our profitability to fluctuate from period to period.
Our fiscal year ends onMarch 31 . We refer to our just completed fiscal year, which ended onMarch 31, 2020 , as "fiscal 2020", and our prior fiscal year which ended onMarch 31, 2019 as "fiscal 2019". Our fiscal first quarter of each fiscal year ends onJune 30 , our fiscal second quarter ends onSeptember 30 , our fiscal third quarter ends onDecember 31 and our fiscal fourth quarter ends onMarch 31 . Reportable segments are components of an entity that have separate financial data that the entity's chief operating decision maker ("CODM") regularly reviews when allocating resources and assessing performance. Our CODM is our chief executive officer. Orion has three reportable segments: Orion Engineered Systems Division ("OES"), andOrion Distribution Services Division ("ODS"), and OrionU.S. Markets Division ("USM").
Major Developments in First Half of Fiscal 2021
During fiscal first half of fiscal 2021, we executed a contract extension for a major national account customer with our state-of-the-art LED lighting systems and wireless IoT enabled control solutions at locations nationwide. This one national account customer represented 74.1% of our total revenue in fiscal 2020 and was the primary driver for our growth over the prior year period. DuringMarch 2020 , this customer suspended our installations at a significant number of locations that were scheduled for installation during our fiscal 2020 fourth quarter and our fiscal 2021 first quarter. These installations resumed during the second quarter of fiscal 2021. 26 -------------------------------------------------------------------------------- We also completed several initial facilities for a new national customer, a major global logistics company, and several more projects are in process. This customer is expected to be a significant source of revenue as we move forward. Orion expects to work with the customer on a project-by-project basis, versus larger-scale multi-site commitments, which limits visibility on the timing of future revenue contributions, Additionally, we added a new large specialty retail customer and are providing turnkey LED lighting retrofit solutions for its nationwide chain of stores. The initial phase of the project is expected to generate product and service revenue of at least$8 million during the second half fiscal 2021. Orion expects to retrofit the customer's remaining stores in late fiscal 2021 and fiscal 2022.
Impact of COVID-19 and Fiscal 2021 Outlook
The COVID-19 pandemic has disrupted business, trade, commerce, financial and credit markets, in theU.S. and globally. Our business has been adversely impacted by measures taken by government entities and others to control the spread of the virus beginning inMarch 2020 . As a deemed essential business, we provide products and services to ensure energy and lighting infrastructure and we therefore continue to operate throughout the pandemic. We have implemented a number of safety protocols, including limiting travel, restricting access to our facilities along with monitoring processes, physical distancing, physical barriers, enhanced cleaning procedures, and requiring face coverings. Nonetheless, we did experience a curtailment of activity beginning in the last few weeks of our 2020 fiscal year and continuing into fiscal 2021. As part of our recent response to the impacts of the COVID-19 pandemic, during the fourth quarter of fiscal 2020 we implemented a number of cost reduction and cash conservation measures, including reducing headcount. While certain restrictions began to initially lessen in certain jurisdictions during the first half of our fiscal 2021, stay-at-home, face mask or lockdown orders remain in effect in others, with employees asked to work remotely if possible. Certain areas of the country have seen a spike of COVID-19 cases (including in and around our headquarters inManitowoc, Wisconsin ), which could result in renewed restrictions and lockdown orders. Some customers and projects are in areas where travel restrictions have been imposed, certain customers have either closed or reduced on-site activities, and timelines for the completion of several projects have been delayed, extended or terminated. These modifications to our business practices, including any future actions we take, may cause us to experience reductions in productivity and disruptions to our business routines. In addition, we are required to make substantial working capital expenditures and advance inventory purchases that we may not be able to recoup if the agreements or a substantial volume of purchase orders under the agreements are delayed or terminated as a result of COVID-19. At this time, it is not possible to predict the overall impact the COVID-19 pandemic will have on Orion's business, liquidity, capital resources or financial results, although the economic and regulatory impacts of COVID-19 significantly reduced our revenue and profitability in the first half of fiscal 2021. If the COVID-19 pandemic becomes more pronounced in our markets or experiences a resurgence in markets recovering from the spread of COVID-19, or if another significant natural disaster or pandemic were to occur in the future, our operations in areas impacted by such events could experience further adverse financial impacts due to market changes and other resulting events and circumstances. The impact of COVID-19 has caused significant uncertainty and volatility in the credit markets. We rely on the credit markets to provide us with liquidity to operate and grow our businesses beyond the liquidity that operating cash flows provide. If our access to capital were to become significantly constrained or if costs of capital increased significantly due the impact of COVID-19, including volatility in the capital markets, a reduction in our credit ratings or other factors, then our financial condition, results of operations and cash flows could be adversely affected. In addition to the managing the adverse financial impact of the COVID-19 pandemic, our ability to achieve our desired revenue growth and profitability goals depends on our ability to effectively execute on the following key strategic initiatives. We may identify strategic acquisition candidates that would help support these initiatives. Focus on executing and marketing our turnkey LED retrofit capabilities to large national account customers. We believe one of our competitive advantages is our ability to deliver full turnkey LED lighting project capabilities. These turnkey services were the principal reason we achieved significant revenue growth in fiscal 2020 as we executed on our commitment to retrofit multiple locations for a major national account customer. Our success in the national account market segment centers on our turnkey design, engineering, manufacturing and project management capabilities, which represent a very clear competitive advantage for us among large enterprises seeking to benefit from the illumination benefits and energy savings of 27
-------------------------------------------------------------------------------- LED lighting across locations nationwide. Few LED lighting providers are organized to serve every step of a custom retrofit project in a comprehensive, non-disruptive and timely fashion, from custom fixture design and initial site surveys to final installations. Incrementally, we are also able to help customers deploy state-of-the-art control systems that provide even greater long-term value from their lighting system investments. Looking forward, we are focused on continuing to successfully execute on existing national account opportunities while also actively pursuing new national account opportunities that leverage our customized, comprehensive turnkey project solutions, and expanding our addressable market with high-quality, basic lighting systems to meet the needs of value-oriented customer segments served by our other market channels. Given our unique value proposition, capabilities and focus on customer service, we are optimistic about our business prospects and working to build sales momentum with existing and new customers. Continued Product Innovation. We continue to innovate, developing lighting fixtures and features that address specific customer requirements, while also working to maintain a leadership position in energy efficiency, smart product design and installation benefits. For interior building applications, we have recently launched an antimicrobial troffer fixture which supports the suppression of bacteria, mold, fungi, and mildew, and are currently developing an air circulation troffer to support improved air circulation. We also continue to deepen our capabilities in the integration of smart lighting controls. Our goal is to provide state-of-the-art lighting products with modular plug-and-play designs to enable lighting system customization from basic controls to advanced IoT capabilities. Leverage of Orion's Smart Lighting Systems to Support Internet of Things Applications. We believe we are ideally positioned to help customers to efficiently deploy new IoT controls and applications by leveraging the "Smart Ceiling" capabilities of their Orion solid state lighting system. IoT capabilities can include the management and tracking of facilities, personnel, resources and customer behavior, driving both sales and lowering costs. As a result, these added capabilities provide customers an even greater return on investment from their lighting system and make us an even more attractive partner. We plan to pursue the expansion of our IoT, "smart-building" and "connected ceiling" and other related technology, software and controls products and services that we offer to our customers. While we intend to pursue these expansion strategies organically, we also are actively exploring potential business acquisitions which would more quickly add these types of expanded and different capabilities to our product and services offerings. Develop Maintenance Service Offerings. We believe we can leverage our construction management process expertise to develop a high-quality, quick-response, multi-location maintenance service offering. Our experience with large national customers and our large installed base of fixtures position us well to extend a maintenance offering to historical customers, as well as to new customers. Development of this recurring revenue stream is in the preliminary stage, but we believe there is significant market opportunity. Support success of our ESCO and agent-driven distribution sales channels. We continue to focus on building our relationships and product and sales support for our ESCO and agent driven distribution channels. These efforts include an array of product and sales training efforts as well as the development of new products to cater to the unique needs of these sales channels.
Managing Impacts of Tariffs and Trade Policies
The United States government has been implementing various monetary, regulatory, and trade importation restraints, penalties, and tariffs. Certain sourced finished products and certain of the components used in our products have been impacted by imposed tariffs onChina imports. Our efforts to mitigate the impact of added costs resulting from these government actions include a variety of activities, such as sourcing from non-tariff impacted countries and raising prices. If we are unable to successfully mitigate the impacts of these tariffs and other trade policies, our results of operations may be adversely affected. We believe that these mitigation activities will assist to offset added costs, and we currently believe that such tariffs will have a limited adverse financial effect on our results of operations. Any future policy changes that may be implemented could have a positive or negative consequence on our financial performance depending on how the changes would influence many factors, including business and consumer sentiment. 28 --------------------------------------------------------------------------------
Results of Operations - Three Months Ended
The following table sets forth the line items of our Condensed Consolidated
Statements of Operations and as a relative percentage of our total revenue for
each applicable period, together with the relative percentage change in such
line item between applicable comparable periods (dollars in thousands, except
percentages):
Three Months Ended September 30,
2020 2019 2020 2019
% % of % of
Amount Amount Change Revenue Revenue
Product revenue $ 20,260 $ 35,572 (43.0 )% 77.1 % 73.6 %
Service revenue 6,021 12,750 (52.8 )% 22.9 % 26.4 %
Total revenue 26,281 48,322 (45.6 )% 100.0 % 100.0 %
Cost of product revenue 14,402 25,878 (44.3 )% 54.8 % 53.6 %
Cost of service revenue 4,616 9,653 (52.2 )% 17.6 % 20.0 %
Total cost of revenue 19,018 35,531 (46.5 )% 72.4 % 73.5 %
Gross profit 7,263 12,791 (43.2 )% 27.6 % 26.5 %
General and administrative expenses 2,638 2,605 1.3 % 10.0 % 5.4 %
Sales and marketing expenses 2,332 2,918 (20.1 )% 8.9 % 6.0 %
Research and development expenses 424 390 8.7 % 1.6 % 0.8 %
Income from operations 1,869 6,878 (72.8 )% 7.1 % 14.2 %
Other income 35 8 337.5 % 0.1 % 0.0 %
Interest expense (1 ) (87 ) (98.9 )% (0.0 )% (0.2 )%
Amortization of debt issue costs (61 ) (60 ) 1.7 % (0.2 )% (0.1 )%
Interest income - 1 (100.0 )% 0.0 % 0.0 %
Income before income tax 1,842 6,740 (72.7 )% 7.0 % 13.9 %
Income tax expense (72 ) 19 NM (0.3 )% 0.0 %
Net income $ 1,914 $ 6,721 (71.5 )% 7.3 % 13.9 %
* NM - Not Meaningful
Revenue. Product revenue decreased 43.0%, or $15.3 million , for the second
quarter of fiscal 2021 versus the second quarter of fiscal 2020. Service revenue
decreased 52.8%, or $6.7 million , for the second quarter of fiscal 2021 versus
the second quarter of fiscal 2020. The decrease in product and service revenue
was primarily due to the relative sales to one large national account customer,
as the installations for this one customer had been on-hold due to COVID-19, and
resumed during the quarter. Sales to this one customer accounted for 60.7% of
total revenue in the second quarter of fiscal 2021, and 81.1% in the second
quarter of fiscal 2020. Total revenue decreased by 45.6%, or $22.0 million , due
to the items discussed above. Compared to the first quarter fiscal 2021, total
revenue increased 143.1% or $15.5 million , due to the resumption of customer
installations for this one customer and others as businesses reopened during the
second quarter.
Cost of Revenue and Gross Profit. Cost of product revenue decreased 44.3%, or
$11.5 million , in the second quarter of fiscal 2021 versus the second quarter of
fiscal 2020 due to the significant decrease in our sales. Cost of service
revenue decreased 52.2% or $5.0 million , in the second quarter of fiscal 2021
versus the second quarter of fiscal 2020 due to the decrease in sales. Gross
profit percentage increased from 26.5% of revenue in the second quarter of
fiscal 2020 to 27.6% in the second quarter of fiscal 2021, due primarily to the
change in customer sales mix. Gross profit percentage in the second quarter of
fiscal 2021 also increased compared to 24.4% in the first quarter of fiscal
2021, due primarily to increased revenue covering fixed costs.
Operating Expenses
General and Administrative. General and administrative expenses in the second quarter of fiscal 2021 remained relatively flat compared to the second quarter of fiscal 2020, as slightly lower headcounts costs were offset by slightly higher legal costs.
Sales and Marketing. Sales and marketing expenses decreased 20.1%, or
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Research and Development. Research and development expenses increased 8.7%, or
$34 thousand , in the second quarter of fiscal 2021 compared to the second
quarter of fiscal 2020. This comparative increase was primarily due to timing of
testing costs.
Other Income. Other income in the second quarter of fiscal 2021 primarily represented product royalties received from licensing agreements for our patents.
Interest Expense. Interest expense in the second quarter of fiscal 2021 decreased by 98.9%, or$0.1 million , from the second quarter of fiscal 2020. The decrease in interest expense was primarily due to lower borrowing on our revolving credit facility in the second quarter of fiscal 2021 compared to the second quarter of fiscal 2020. Amortization of debt issue costs. Amortization of debt issue costs in the second quarter of fiscal 2021 remained flat compared to the second quarter of fiscal 2020. Interest Income. Interest income in the second quarter of fiscal 2021 remained relatively flat compared to the second quarter of fiscal 2020. Interest income relates to interest earned on sweep bank accounts. Income Taxes. Income tax expense decreased$0.1 million , in the second quarter of fiscal 2021 compared to the second quarter of fiscal 2020. Our income tax expense is due primarily to minimum state tax liabilities.
Orion Engineered Systems Division
Our OES segment develops and sells lighting products and provides construction
and engineering services for our commercial lighting and energy management
systems. OES provides engineering, design, lighting products and in many cases
turnkey solutions for large national accounts, governments, municipalities,
schools and other customers.
The following table summarizes our OES segment operating results (dollars in
thousands):
Three Months Ended September 30,
%
2020 2019 Change
Revenues $ 18,470 $ 42,306 (56.3 )%
Operating income $ 1,764 $ 7,831 (77.5 )%
Operating margin 9.6 % 18.5 %
OES segment revenue in the second quarter of fiscal 2021 was $18.5 million , a
decrease of $23.8 million from the second quarter of fiscal 2020, due primarily
to the timing of installations to one large national account customer. The
installations for this customer had been put on-hold as a result of COVID-19
during March 2020 , and resumed during the second quarter. Due to the resumed
installations with the one large national account customer, we expect OES
segment revenue in the second half of fiscal 2021 to increase.
OES segment operating income in the second quarter of fiscal 2021 was $1.8
million , a decrease of $6.1 million from the second quarter of fiscal 2020. The
decrease in the segment's operating income was the result of significantly lower
sales in this segment.
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Our ODS segment focuses on selling lighting products through manufacturer representative agencies and a network of North American broadline and electrical distributors and contractors.
The following table summarizes our ODS segment operating results (dollars in
thousands):
Three Months Ended September 30,
%
2020 2019 Change
Revenues $ 5,500 $ 3,853 42.7 %
Operating income (loss) $ 926 $ (148 ) NM
Operating margin 16.8 % (3.8 )%
* NM - Not Meaningful
ODS segment revenue in the second quarter of fiscal 2021 was $5.5 million , an
increase of 42.7%, or $1.6 million , compared to the second quarter of fiscal
2020, primarily due to sales to one customer who represented 7.5% of second
quarter fiscal 2021 total revenue.
ODS segment operating income in the second quarter of fiscal 2021 was
OrionU.S. Markets Division
Our USM segment sells commercial lighting systems and energy management systems to the wholesale contractor markets. USM customers include ESCOs and contractors.
The following table summarizes our USM segment operating results (dollars in
thousands):
Three Months Ended September 30,
%
2020 2019 Change
Revenues $ 2,311 $ 2,163 6.8 %
Operating income $ 304 $ 271 12.2 %
Operating margin 13.2 % 12.5 %
USM segment revenue in the second quarter of fiscal 2021 was
USM segment operating income in the second quarter of fiscal 2021 was
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Results of Operations - Six Months Ended
The following table sets forth the line items of our Condensed Consolidated
Statements of Operations and as a relative percentage of our total revenue for
each applicable period, together with the relative percentage change in such
line item between applicable comparable periods (dollars in thousands, except
percentages):
Six Months Ended September 30,
2020 2019 2020 2019
% % of % of
Amount Amount Change Revenue Revenue
Product revenue $ 29,961 $ 67,911 (55.9 )% 80.8 % 74.9 %
Service revenue 7,131 22,789 (68.7 )% 19.2 % 25.1 %
Total revenue 37,092 90,700 (59.1 )% 100.0 % 100.0 %
Cost of product revenue 21,631 49,703 (56.5 )% 58.3 % 54.8 %
Cost of service revenue 5,563 17,923 (69.0 )% 15.0 % 19.8 %
Total cost of revenue 27,194 67,626 (59.8 )% 73.3 % 74.6 %
Gross profit 9,898 23,074 (57.1 )% 26.7 % 25.4 %
General and administrative expenses 5,049 5,612 (10.0 )% 13.6 % 6.2 %
Sales and marketing expenses 4,186 5,624 (25.6 )% 11.3 % 6.2 %
Research and development expenses 839 801 4.7 % 2.3 % 0.9 %
Income (loss) from operations (176 ) 11,037 NM (0.5 )% 12.2 %
Other income 44 20 120.0 % 0.1 % 0.0 %
Interest expense (50 ) (223 ) 77.6 % (0.1 )% (0.2 )%
Amortization of debt issue costs (122 ) (121 ) 0.8 % (0.3 )% (0.1 )%
Interest income - 3 (100.0 )% 0.0 % 0.0 %
Income (loss) before income tax (304 ) 10,716 NM (0.8 )% 11.8 %
Income tax expense 1 27 (96.3 )% 0.0 % 0.0 %
Net Income (loss) $ (305 ) $ 10,689 NM (0.8 )% 11.8 %
* NM - Not Meaningful
Revenue. Product revenue decreased 55.9%, or $38.0 million , for the first six
months of fiscal 2021 versus the first six months of fiscal 2020. Service
revenue decreased 68.7%, or $15.7 million for the first six months of fiscal
2021 versus the first six months of fiscal 2020. The decrease in product and
service revenue was primarily due to multiple projects put on hold as a result
of COVID-19, including the projects for one large national account customer
which represented 79.2% of revenue in the first six months of fiscal 2020, but
only 44.4% of revenue in the first six months of fiscal 2021. The project
installations for this large national account customer resumed during the second
quarter. Sales to one other customer accounted for 14.9% of total revenue in the
first six months of fiscal 2021. Total revenue decreased by 59.1%, or $53.6
million , due to the items discussed above.
Cost of Revenue and Gross Profit. Cost of product revenue decreased 56.5%, or
$28.1 million , in the first six months of fiscal 2021 versus the first six
months of fiscal 2020 due to the significant decrease in our sales. Cost of
service revenue decreased 69.0% or $12.4 million , in the first six months of
fiscal 2021 versus the first six months of fiscal 2020 due to the decrease in
sales. Gross profit percentage increased from 22.1% of revenue in the first six
months of fiscal 2020 to 26.7% in fiscal 2021, due primarily to proactive
sourcing and cost management and a change in customer sales mix.
Operating Expenses
General and Administrative. General and administrative expenses decreased 10.0%, or$0.6 million in the first six months of fiscal 2021 compared to the first six months of fiscal 2020, primarily due to lower employment costs. Sales and Marketing. Sales and marketing expenses decreased 25.6%, or$1.4 million , in the first six months of fiscal 2021 compared to the first six months of fiscal 2020. This comparative decrease was primarily due to a decrease in commission expense on lower sales and lower employment costs. Research and Development. Research and development expenses in the first six months of fiscal 2021 remained relatively flat compared to the first quarter of fiscal 2020. 32
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Other Income. Other income in the first six months of fiscal 2021 primarily represented product royalties received from licensing agreements for our patents.
Interest Expense. Interest expense in the first six months of fiscal 2021 decreased by 77.6%, or$0.2 million , from the first six months of fiscal 2020. The decrease in interest expense was primarily due to lower borrowing on our revolving credit facility in the first six months of fiscal 2021 compared to the first six months of fiscal 2020.
Amortization of debt issue costs. Amortization of debt issue costs in the first six months of fiscal 2021 remained flat compared to the first six months of fiscal 2020.
Interest Income. Interest income in the first six months of fiscal 2021 remained relatively flat compared to the first six months of fiscal 2020. Interest income relates to interest earned on sweep bank accounts. Income Taxes. Income tax expense decreased$26 thousand , in the first six months of fiscal 2021 compared to the first six months of fiscal 2020. Our income tax expense is due primarily to minimum state tax liabilities.
Orion Engineered Systems Division
Our OES segment develops and sells lighting products and provides construction
and engineering services for our commercial lighting and energy management
systems. OES provides engineering, design, lighting products and in many cases
turnkey solutions for large national accounts, governments, municipalities,
schools and other customers.
The following table summarizes our OES segment operating results (dollars in
thousands):
Six Months Ended September 30,
%
2020 2019 Change
Revenues $ 20,726 $ 77,094 (73.1 )%
Operating income (loss) $ (86 ) $ 12,687 NM
Operating margin (0.4 )% 16.5 %
* NM - Not Meaningful
OES segment revenue in the first six months of fiscal 2021 was $20.7 million , a
decrease of $56.4 million from the first six months of fiscal 2020, due to
multiple projects put on hold as a result of COVID-19, including the projects to
one large national account customer that represented 79.2% of total revenue in
the first six months fiscal 2020, but only 44.4% of revenue in the first six
months of fiscal 2021. The project installations for this customer resumed
during the second quarter.
OES segment operating loss in the first six months of fiscal 2021 was $0.1
million , a decrease of $12.8 million from operating income of $12.7 million in
the first six months of fiscal 2020. The decrease in the segment's operating
income was the result of significantly lower sales in this segment, resulting in
unfavorable operating leverage.
Our ODS segment focuses on selling lighting products through manufacturer representative agencies and a network of North American broadline and electrical distributors and contractors.
The following table summarizes our ODS segment operating results (dollars in
thousands):
Six Months Ended September 30,
%
2020 2019 Change
Revenues $ 12,129 $ 7,557 60.5 %
Operating income (loss) 1,678 (485 ) NM
Operating margin 13.8 % (6.4 )%
* NM - Not Meaningful
ODS segment revenue in the first six months of fiscal 2021 was $12.1 million , an
increase of 60.5%, or $4.6 million , compared to the first six months of fiscal
2020, primarily due to sales to one customer who represented 14.9% of first six
months fiscal 2021 total revenue.
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ODS segment operating income in the first six months of fiscal 2021 was $1.7
million , an increase of $2.2 million , from an operating loss in the first six
months of fiscal 2020, primarily due to higher revenues resulting in improved
operating leverage.
Orion U.S. Markets Division
Our USM segment sells commercial lighting systems and energy management systems to the wholesale contractor markets. USM customers include ESCOs and contractors.
The following table summarizes our USM segment operating results (dollars in
thousands):
Six Months Ended September 30,
%
2020 2019 Change
Revenues $ 4,237 $ 6,049 (30.0 )%
Operating income $ 385 $ 1,172 (67.2 )%
Operating margin 9.1 % 19.4 %
USM segment revenue in the first six months of fiscal 2021 was $4.2 million , a
decrease of 30.0%, or $1.8 million , from the first six months of fiscal 2020,
primarily due to the impact of COVID-19.
USM segment operating income in the first six months of fiscal 2021 was $0.4
million , a decrease of 67.2%, or $0.8 million , from the first six months of
fiscal 2020. The decrease in the segment's operating income was the result of
significantly lower sales in this segment, resulting in lower operating
leverage.
Liquidity and Capital Resources
Overview
We had approximately$12.1 million in cash and cash equivalents as ofSeptember 30, 2020 , compared to$28.8 million atMarch 31, 2020 . Our cash position decreased primarily as a result of the use of cash from operating activities of$14.3 million and net payments of$2.1 million to reduce the principal balance of our Credit Facility. Our future liquidity needs and forecasted cash flows are dependent upon many factors, including our relative revenue, gross profits, cash management practices, cost reduction initiatives, working capital management, capital expenditures, pending or future litigation results and cost containment measures. In addition, we tend to experience higher working capital costs when we increase sales from existing levels.
Cash Flows
The following table summarizes our cash flows for the six months ended
Six Months Ended September 30,
2020 2019
Operating activities $ (14,138 ) $ 8,449
Investing activities (427 ) (534 )
Financing activities (2,062 ) (5,546 )
(Decrease) increase in cash and cash equivalents
$ 2,369 Cash Flows Related to Operating Activities. Cash (used in) provided by operating activities primarily consists of net (loss) income adjusted for certain non-cash items, including depreciation, amortization of intangible assets, stock-based compensation, amortization of debt issue costs, provisions for reserves, and the effect of changes in working capital and other activities. Cash used in operating activities for the first six months of fiscal 2021 was$14.1 million and consisted of our net loss adjusted for non-cash expense items of$1.0 million and net cash used in changes in operating assets and liabilities of$15.2 million . Cash used by operating assets and liabilities consisted primarily of a decrease in Accounts payable of$6.3 million and 34 --------------------------------------------------------------------------------
an increase in Accounts receivable of
Cash provided by operating activities for the first six months of fiscal 2020 was$8.5 million and consisted of our net income adjusted for non-cash expense items of$12.1 million and net cash used by changes in operating assets and liabilities of$3.6 million . Cash used by changes in operating assets and liabilities consisted primarily of an increase of$12.2 million in Accounts receivable due to higher sales and the timing of collections, and an increase in Inventory of$4.4 million on anticipated third quarter sales. Cash provided by changes in operating assets and liabilities consisted primarily of an increase of$12.7 million in Accounts payable and$0.8 million in Accrued expenses other based on timing of payments.
Cash Flows Related to Investing Activities. Cash used in investing activities of
Cash used in investing activities of
Cash Flows Related to Financing Activities. Cash used in financing activities of$2.1 million in the first six months of fiscal 2021 consisted primarily of net repayments of$(2.1) million on our Credit Facility.
Cash used in financing activities was
Working Capital
Our net working capital as ofSeptember 30, 2020 was$27.4 million , consisting of$51.2 million in current assets and$23.8 million in current liabilities. Our net working capital as ofMarch 31, 2020 was$27.8 million , consisting of$55.0 million in current assets and$27.2 in current liabilities. Our current Accounts receivable, net balance increased by$6.6 million from the fiscal 2020 year-end primarily due to timing of collections on second quarter sales. Our Inventories, net increased from the fiscal 2020 year-end by$2.6 million due primarily to anticipated third quarter sales as the project installations for a large national account customer resumed during the second quarter. Our Accounts payable decreased$6.5 million from our fiscal 2020 year-end due to the timing of purchases and payments during the quarter. Our Accrued expenses increased from our fiscal 2020 year-end by$3.0 million due primarily to an increase in accrued project costs. We expect an increase in our current liabilities, and therefore a decrease in our working capital, as ofDecember 31, 2020 when our borrowings under the Credit Agreement are recorded as a current liability. We generally attempt to maintain at least a three-month supply of on-hand inventory of purchased components and raw materials to meet anticipated demand, as well as to reduce our risk of unexpected raw material or component shortages or supply interruptions. Our Accounts receivable, Inventory and payables may increase to the extent our revenue and order levels increase.
Indebtedness
Revolving Credit Agreement
OnOctober 26, 2018 , we entered into a secured revolving Business Financing Agreement withWestern Alliance Bank , as lender (the "Credit Agreement"). OnJune 3, 2019 , we and certain of our subsidiaries entered into an amendment to the Credit Agreement, which increased the maximum borrowing base credit available for certain of the customer receivables included in our borrowing base and provided for a borrowing base credit of up to$3.0 million based on inventory, in each case, subject to certain conditions. OnAugust 2, 2019 , we and certain of our subsidiaries entered into a second amendment to the Credit Agreement, which established a rent reserve in an amount equal to three months' rent payable at any leased location where we maintain inventory included in our borrowing base and provided for a reduction of the borrowing base credit that we may receive for inventory if we default under the lease for any such location. As of the date of the Second Amendment, this rent reserve equaled$0.1 million . OnNovember 21, 2019 , we entered into a third amendment to the Credit Agreement, which extended the maturity date fromOctober 26, 2020 toOctober 26, 2021 ; increased the sublimit under the Credit Agreement for 35 -------------------------------------------------------------------------------- advances under business credit cards from$1.5 million to$3 million ; created a new$2 million sublimit permitting entry into foreign currency forward contracts with the lender; expanded our ability to make capital expenditures and incur other debt from time to time; and permitted the lender to amend the financial covenant included in the Credit Agreement (which requires the maintenance of a certain amount of unrestricted cash on deposit with the lender at the end of each month) upon receipt of the our annual projections. The Credit Agreement, as amended, provides for a revolving credit facility (the "Credit Facility") maturing onOctober 26, 2021 . Borrowings under the Credit Facility are limited to$20.15 million subject to a borrowing base requirement based on eligible receivables and inventory. The Credit Agreement, as amended, includes a$2.0 million sublimit for the issuance of letters of credit. As ofSeptember 30, 2020 , our borrowing base was$16.4 million , and we had$7.9 borrowings outstanding. As ofSeptember 30, 2020 , we had no outstanding letters of credit leaving total additional borrowing availability of$8.5 million . While our borrowings under the Credit Agreement are currently recorded as a long-term liability on our balance sheet, we expect this characterization to change to a current liability during the third quarter as the Credit Agreement will then mature in less than 12 months.
The Credit Agreement is secured by a security interest in substantially all of our and our subsidiaries' personal property.
Borrowings under the Credit Agreement generally bear interest at floating rates based upon the prime rate (but not less than 5.00% per year) plus an applicable margin determined by reference to our quick ratio (defined as the aggregate amount of unrestricted cash, unrestricted marketable securities and, with certain adjustments, receivables convertible into cash divided by the total current liabilities, including the obligations under the Credit Agreement). As ofSeptember 30, 2020 , the applicable interest rate was 5.25%. Among other fees, we are required to pay an annual facility fee equal to 0.45% of the credit limit under the Credit Agreement due annuallyOctober 26 . The Credit Agreement requires us to maintain nine months' of "RML" as of the end of each month. For purposes of the Credit Agreement, RML is defined as, as of the applicable determination date, unrestricted cash on deposit with the lender plus availability under the Credit Agreement divided by an amount equal to, for the applicable trailing three-month period, consolidated net profit before tax, plus depreciation expense, amortization expense and stock-based compensation, minus capital lease principal payments, tested as of the end of each month. As ofSeptember 30, 2020 , we were in compliance with this RML requirement. The Credit Agreement also contains customary events of default and other covenants, including certain restrictions on our ability to incur additional indebtedness, consolidate or merge, enter into acquisitions, pay any dividend or distribution on our stock, redeem, retire or purchase shares of our stock, make investments or pledge or transfer assets. If an event of default under the Credit Agreement occurs and is continuing, then the lender may cease making advances under the Credit Agreement and declare any outstanding obligations under the Credit Agreement to be immediately due and payable. In addition, if we become the subject of voluntary or involuntary proceedings under any bankruptcy or similar law, then any outstanding obligations under the Credit Agreement will automatically become immediately due and payable.
Capital Spending
Our capital expenditures are primarily for general corporate purposes for our corporate headquarters and technology center, production equipment and tooling and for information technology systems. Our capital expenditures totaled$0.4 million and$0.5 million for the six month periods endedSeptember 30, 2020 , and 2019, respectively. Due to the uncertainty of the COVID-19 impact on our business, we are not currently providing capital expenditure external guidance for fiscal 2021; however, we expect to finance current year capital expenditures primarily through our existing cash, equipment-secured loans and leases, to the extent needed, long-term debt financing, or by using our available capacity under our Credit Agreement. 36 --------------------------------------------------------------------------------
Backlog
Backlog represents the amount of revenue that we expect to realize in the future as a result of firm, committed purchase orders. Backlog totaled$12.9 million and$18.6 million as ofSeptember 30, 2020 andMarch 31, 2020 , respectively. We generally expect our backlog to be recognized as revenue within one year, although the COVID-19 pandemic may extend this time period.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Inflation
Our results from operations have not been, and we do not expect them to be, materially affected by inflation.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of our consolidated financial statements requires us to make certain estimates and judgments that affect our reported assets, liabilities, revenue and expenses, and our related disclosure of contingent assets and liabilities. We re-evaluate our estimates on an ongoing basis, including those related to revenue recognition, inventory valuation, collectability of receivables, stock-based compensation, warranty reserves and income taxes. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. A summary of our critical accounting policies is set forth in the "Critical Accounting Policies and Estimates" section of our Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year endedMarch 31, 2020 . For the three months endedSeptember 30, 2020 , there were no material changes in our accounting policies.
Recent Accounting Pronouncements
For a complete discussion of recent accounting pronouncements, refer to Note 3
in the Condensed Consolidated Financial Statements included elsewhere in this
report.
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