LSI Industries Inc. Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended March 31, 2016. The request metadata identifies “2015 Q3,” but the filing is for the third quarter of fiscal 2016. Financial statements are unaudited and presented under U.S. GAAP.
Business Context
LSI operates through Lighting, Graphics, and Technology segments. Lighting provides traditional and LED lighting products; Graphics provides visual image, signage, menu-board, installation, and digital-signage services; and Technology provides electronic controls, circuit boards, and LED video screens. The company is focused primarily on U.S. operations and no longer has Canadian operations following the 2014 sale of LSI Saco Technologies.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2016 | Three Months Ended March 31, 2015 | Nine Months Ended March 31, 2016 | Nine Months Ended March 31, 2015 |
|---|---|---|---|---|
| Net sales | $70.7 million | $68.6 million | $241.4 million | $231.8 million |
| Gross profit | $16.5 million | $16.3 million | $63.8 million | $55.5 million |
| Gross margin | 23.4% | 23.8% | 26.4% | 23.9% |
| Operating income | $0.7 million | $0.6 million | $11.9 million | $5.3 million |
| Operating margin | 1.0% | 0.8% | 4.9% | 2.3% |
| Net income | $0.5 million | $0.4 million | $8.1 million | $3.5 million |
| Diluted EPS | $0.02 | $0.02 | $0.32 | $0.14 |
For the third quarter, net sales increased 3.1%, operating income increased 25.8%, and net income increased 32.8%. For the nine-month period, net sales increased 4.1%, operating income increased 122%, and net income increased 129.6%.
Segment Performance
- Lighting: Third-quarter sales increased 1.0% to $49.3 million, but operating income declined 62.0% to $1.1 million. Higher warranty costs, competitive pricing pressure, and increased operating expenses reduced profitability. LED lighting represented approximately 68% of segment sales in the quarter.
- Graphics: Third-quarter sales increased 28.4% to $17.2 million, and the segment moved from a $0.3 million operating loss to $1.2 million of operating income. Nine-month operating income increased to $5.4 million from $0.8 million.
- Technology: Third-quarter customer sales declined 33.4% to $4.2 million, primarily due to lower transportation, medical, sports, OEM, and LED video-screen sales. Operating income was broadly stable at $0.9 million, supported by higher intersegment sales to Lighting.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash provided by operating activities was $15.2 million for the first nine months of fiscal 2016, compared with $21.8 million in the prior-year period.
- Capital expenditures were $8.4 million, compared with $3.4 million in the prior-year period. Investing activities used $8.3 million, versus $1.0 million previously.
- Cash and cash equivalents increased to $33.8 million at March 31, 2016 from $26.4 million at June 30, 2015.
- Working capital was $91.6 million, with a current ratio of 3.74 to 1, compared with $84.0 million and 3.28 to 1 at June 30, 2015.
- Accounts receivable declined to $37.9 million and reported DSO improved to 45 days from 49 days. Inventory increased to $46.2 million from $43.1 million.
- The company renewed a $30 million unsecured revolving credit facility expiring in the third quarter of fiscal 2019. There were no borrowings outstanding at March 31, 2016, and the full facility was available as of April 27, 2016. The company was in compliance with its covenants.
- Financing activities provided $0.4 million, including $3.0 million of dividends paid and $3.6 million from stock-option exercises.
Material Changes Versus the Prior Comparable Period
- Graphics growth and improved margins were the principal drivers of improved consolidated profitability.
- Lighting sales shifted toward LED products, but the segment experienced unusually high warranty claims, primarily involving older-generation LED drivers. Accrued warranty liability increased to $4.8 million from $3.4 million at June 30, 2015.
- Technology external sales and LED video-screen sales declined substantially, although intersegment sales to Lighting increased.
- Nine-month results benefited from the absence of the prior-year $565,000 loss on the sale of LSI Saco and the prior-year $343,000 gain on the sale of a facility. Fiscal 2016 also included $401,000 of severance costs.
- Stock-option expense increased to $2.5 million for the first nine months from $1.2 million, contributing to higher reported operating expenses.
- LED-related sales increased 15.9% for the first nine months to $115.0 million, while third-quarter LED sales increased 9.3% to $33.8 million.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that cash flow from operations and the available $30 million credit facility are adequate for fiscal 2016 operating and capital-expenditure needs. No formal revenue or earnings guidance was provided.
- Management is investing in research and development focused on energy-saving controls, LED technology, Internet-of-Things connectivity, beacons, and display technology.
- Goodwill and indefinite-lived intangible impairment testing was preliminarily passed as of March 1, 2016, but final testing was expected in the fourth quarter. The company stated it did not expect the final results to change.
- A contingent earn-out related to the 2012 Virticus acquisition has a maximum potential undiscounted liability of $2 million through fiscal 2017, although management considers achievement unlikely.
- The company had a $0.4 million irrevocable letter of credit issued to a foreign inventory supplier. Management reported no material adverse effect from pending negotiations, customer bankruptcies, or legal proceedings.
- Principal risks include competitive pricing, product demand and acceptance, customer credit and concentration risk, seasonality and cyclicality, warranty claims, inventory obsolescence, impairment of goodwill and intangible assets, litigation, tax estimates, and integration or retention issues relating to acquisitions.
- The company declared a quarterly dividend of $0.05 per share in April 2016, implying an indicated annual rate of $0.20 per share.
- Disclosure controls were assessed as effective as of March 31, 2016, with no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether elevated LED-driver warranty claims and the $4.8 million warranty reserve will normalize or require additional charges.
- Whether Graphics Segment growth and improved margins are sustainable after the strong year-over-year improvement.
- Whether declining Technology customer sales and LED video-screen sales persist, and the extent to which intersegment demand offsets the decline.
- The final fiscal 2016 goodwill and indefinite-lived intangible impairment testing results.
- The effect of increased capital expenditures, inventory growth, and lower operating cash flow on future liquidity.
- The recurring versus nonrecurring components of reported and adjusted earnings, including severance, stock compensation, and prior-period asset-sale items.
- The impact of adopting new revenue-recognition, inventory, lease, deferred-tax, and share-based-payment accounting standards; the filing states that the effects had not yet been determined.