LSI Industries Inc. — Fiscal 2020 First-Quarter Form 10-Q Summary
Business context and reporting period
LSI Industries Inc. filed its unaudited Form 10-Q for the three months ended September 30, 2019, the first quarter of fiscal 2020. The company operates through Lighting and Graphics segments serving petroleum and convenience stores, automotive dealerships, restaurants, retail, grocery, pharmacy, and other commercial markets.
Financial performance and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $88.7 million | $85.0 million | +4.4% |
| Gross profit | $21.9 million | $21.3 million | +2.8% |
| Gross margin | 24.6% | 25.0% | Down approximately 40 basis points |
| Operating income | $6.8 million | $2.9 million | +133% |
| Operating margin | 7.7% | 3.5% | Improved |
| Net income | $4.5 million | $1.7 million | +156% |
| Diluted EPS | $0.17 | $0.07 | +$0.10 |
| Operating cash flow | $6.4 million | $2.2 million | +190% |
Lighting sales increased 2.9% to $63.2 million, while Graphics sales increased 8.4% to $25.5 million. Lighting operating income rose to $9.2 million from $3.9 million; Graphics operating income declined to $1.0 million from $2.4 million.
Cash and cash equivalents were $1.6 million at September 30, 2019, compared with $1.0 million at June 30, 2019. Working capital was $62.4 million, and the current ratio was 2.38 to 1. Accounts receivable were $58.4 million, inventories were $43.1 million, and days sales outstanding improved to 57 days from 63 days at June 30, 2019.
The company had $23.2 million outstanding under its $75 million revolving credit facility and $51.8 million available at September 30, 2019. Management stated that approximately $53.0 million was available as of October 21, 2019. The facility expires in the third quarter of fiscal 2022, and the company was in compliance with all debt covenants.
Investing activities provided $12.0 million, primarily from $12.3 million of proceeds from the sale of the New Windsor, New York facility. Financing activities used $17.7 million, reflecting $51.6 million of debt repayments, $35.3 million of borrowings, and $1.3 million of dividends. Capital expenditures were $0.4 million.
Material changes versus the prior comparable period
- Reported operating income and net income benefited substantially from a $4.8 million pretax gain on the sale of the New Windsor facility.
- Reported results in the prior-year quarter benefited from a $1.2 million favorable, one-time adjustment related to the paid-time-off policy; there was no comparable adjustment in the current quarter.
- After excluding restructuring and plant-closure items, adjusted operating income decreased to $2.3 million from $3.5 million, and adjusted net income decreased to $1.0 million from $2.2 million. Management characterized underlying consolidated operating performance as relatively flat after these unusual items.
- Lighting gross margin improved to 27.2% from 25.2%, supported by favorable price and product mix and initial cost savings from the New Windsor closure.
- Graphics gross margin declined to 18.1% from 24.6%, primarily due to customer program mix, early-stage petroleum projects, lower absorption, manufacturing-resource realignment during the transition from print to digital, and related operating inefficiencies.
- Debt declined from $39.5 million at June 30, 2019 to $23.2 million at September 30, 2019.
Guidance, outlook, commentary, risks, and unusual items
Management stated that the revolving credit facility and operating cash flows were adequate for fiscal 2020 operating and capital expenditure requirements. No specific revenue, earnings, or margin guidance was provided in the filing.
The company cited inconsistent market conditions but continued to focus on growth in Automotive, Petroleum, QSR, and retail parking-lot markets. Graphics performance remains exposed to the transition from traditional print products to digital signage, customer-program mix, project ramp-up costs, and manufacturing absorption.
Fiscal 2020 adopted the new lease standard, resulting in recognition of approximately $10.4 million of right-of-use assets and $10.8 million of lease liabilities at July 1, 2019. At September 30, 2019, operating lease liabilities totaled $10.7 million. Management stated that adoption had no material impact on earnings or cash flow.
The company reported $82,000 of foreign-currency transaction losses and a 29.3% effective tax rate, compared with 27.6% in the prior-year quarter. The company also recorded $233,000 of additional closure-related costs, while total restructuring activity included a net $4.6 million benefit from the facility sale.
Legal proceedings, customer bankruptcies, and other ordinary-course matters were described as unlikely to have a material adverse effect. No standby letters of credit were outstanding. Market-risk exposure was not materially changed from June 30, 2019, and disclosure controls were deemed effective.
Important facts for investors to verify
- Reconcile reported earnings with adjusted earnings and confirm the after-tax impact of the $4.8 million facility-sale gain and other restructuring items.
- Assess whether Graphics gross-margin pressure and the print-to-digital transition persist in subsequent quarters.
- Monitor Lighting price/mix benefits and whether New Windsor closure savings offset higher selling and administrative expenses.
- Track accounts receivable, inventory, working-capital requirements, and continued improvement in cash conversion.
- Review revolving-credit covenants, variable-rate exposure, debt repayments, and remaining borrowing capacity.
- Consider the effect of recognized operating lease liabilities and future lease payments on leverage and liquidity.
- Verify the continuation of the $0.05 quarterly dividend and the board’s discretion to change dividends based on earnings, cash flow, debt, and investment needs.