LSI Industries Inc. — Fiscal 2020 Second-Quarter Form 10-Q
Reporting period: Quarterly and six-month periods ended December 31, 2019, compared with the corresponding periods ended December 31, 2018. The interim financial statements are unaudited. LSI operates through Lighting and Graphics segments and primarily serves petroleum/convenience, automotive, restaurant, retail, commercial and industrial markets.
Financial Performance and Position
| Metric | Three months ended Dec. 31, 2019 | Three months ended Dec. 31, 2018 | Six months ended Dec. 31, 2019 | Six months ended Dec. 31, 2018 |
|---|---|---|---|---|
| Net sales | $82.4 million | $89.5 million | $171.1 million | $174.5 million |
| Gross profit | $20.0 million | $19.7 million | $41.8 million | $40.9 million |
| Gross margin | 24.2% | 22.0% | 24.4% | 23.5% |
| Operating income (loss) | $1.8 million | $(20.3) million | $8.6 million | $(17.3) million |
| Operating margin | 2.1% | (22.6)% | 5.0% | (9.9)% |
| Net income (loss) | $1.7 million | $(15.8) million | $6.2 million | $(14.0) million |
| Diluted EPS | $0.07 | $(0.61) | $0.24 | $(0.54) |
- Second-quarter Lighting sales declined 16% to $53.4 million, while Graphics sales increased 12% to $28.9 million. For the first six months, Lighting sales decreased 7% to $116.6 million and Graphics sales increased 10% to $54.5 million.
- Second-quarter Lighting operating income was $3.2 million versus a $18.5 million loss; Graphics operating income rose to $1.4 million from $0.9 million. Six-month Lighting operating income was $12.3 million and Graphics operating income was $2.4 million.
- Management reported adjusted operating income of $2.1 million for the quarter versus $1.5 million in the prior-year quarter, and $4.3 million for the six months versus $5.1 million. Adjusted net income was $1.6 million for the quarter versus $0.9 million, and $2.6 million for the six months versus $3.1 million.
- Six-month net cash provided by operating activities was $20.9 million, compared with $7.6 million in the prior-year period. Capital expenditures were $1.1 million versus $1.6 million. Investing activities provided $11.2 million, primarily from the sale of the New Windsor facility.
- Cash was $1.2 million at December 31, 2019, compared with $1.0 million at June 30, 2019. Working capital was $51.6 million, and the current ratio was 2.24 to 1.
- Long-term debt was $10.4 million at December 31, 2019, versus $39.5 million at June 30, 2019. The company had $64.6 million available under its $75 million secured revolving credit facility and was in compliance with its covenants.
- Accounts receivable decreased to $44.5 million from $54.7 million; reported days sales outstanding improved to 54 days from 63 days. Inventory was approximately $43.3 million, broadly unchanged from June 30, 2019.
- The company paid $2.6 million in dividends during the first six months and subsequently declared a quarterly dividend of $0.05 per share, implying an annual rate of $0.20 per share.
Material Changes and Unusual Items
- The prior-year quarter included a $20.2 million goodwill impairment charge. The absence of that charge was the principal driver of the reported year-over-year improvement in operating income and net income.
- In the first quarter of fiscal 2020, LSI sold its New Windsor, New York facility for $12.3 million and recognized a $4.8 million pretax gain. Six-month restructuring and plant-closure results therefore included a net gain of approximately $4.3 million, while the second quarter included $276,000 of manufacturing realignment costs.
- Management stated that LSI is moving away from lower-margin commodity business toward higher-margin applications and solutions. This transition reduced near-term sales but improved Lighting margins.
- Graphics gross margin declined because of customer and product mix, competitive large projects, early-stage petroleum products, digital-transition costs and lower absorption.
- LSI adopted the lease standard on July 1, 2019, recognizing right-of-use assets of $10.4 million and lease liabilities of $10.8 million. The adoption had no material impact on reported earnings or cash flow.
- In December 2019, LSI agreed to sell its North Canton, Ohio graphics facility for approximately $8 million. Production is expected to move to a smaller leased facility during the second half of fiscal 2020, with closing expected by March 31, 2020. Management expects to record a gain.
Outlook, Risks and Contingencies
Formal quantitative earnings or revenue guidance is not provided in the filing. Management expects the strategic shift toward higher-value products to support margins, but acknowledges short-term sales pressure. The company states that operating cash flow and available revolving-credit capacity should be adequate for fiscal 2020 operating and capital needs.
- Key risks include continued weakness in selected vertical markets, execution of the product and manufacturing-footprint transition, competitive pricing and lower initial margins on large Graphics projects.
- Goodwill and indefinite-lived intangible assets are subject to impairment testing involving significant assumptions regarding forecasts, cash flows, discount rates, stock price and market conditions. Net goodwill was $10.4 million at December 31, 2019, after substantial historical impairment losses.
- The company is party to ordinary-course negotiations, customer bankruptcies and legal proceedings. Management believes these matters will not materially affect financial position, results, cash flows or liquidity.
- The company reported no standby letters of credit and no off-balance-sheet arrangements. Market-risk exposure was described as materially unchanged from June 30, 2019.
- Disclosure controls and procedures were considered effective as of December 31, 2019.
Investor Verification Checklist
- Verify whether the North Canton facility sale closed by March 31, 2020, the proceeds received and the gain recognized.
- Assess whether Lighting sales continue to decline as the company exits commodity business and whether improved margins offset lost volume.
- Track Graphics project mix, gross-margin recovery and the economics of the transition from print to digital signage.
- Reconcile reported results with management’s non-GAAP adjusted measures and confirm the treatment of restructuring, facility-sale and tax items.
- Monitor cash generation, debt repayment, revolver availability and compliance with leverage and fixed-charge covenants.
- Evaluate goodwill impairment sensitivity, particularly given the substantial prior-year impairment and dependence on forecasts and market assumptions.