LSI Industries Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended March 31, 2014, compared with the corresponding periods ended March 31, 2013. The filing is unaudited. The source metadata refers to “2013 Q3,” but the filing clearly reports fiscal 2014 third-quarter results.
Business Context
LSI operates through Lighting, Graphics, Electronic Components, and an All Other category. Its products and services include traditional and LED lighting, LED video screens, graphics and signage, electronic assemblies, lighting controls, installation, and project-management services.
- LED sales were $25.5 million in the third quarter, up 35.4%, and $78.2 million for the first nine months, up 27.5%.
- Lighting remained the largest segment and benefited from demand for LED fixtures.
- Management reported that operational improvements reduced a past-due backlog that had increased during the second quarter because of LED demand and production bottlenecks.
Key Financial Metrics
| Metric | Three Months Ended March 31 | Nine Months Ended March 31 |
|---|---|---|
| Net sales | $69.0 million, up 4.3% | $225.6 million, up 6.4% |
| Gross profit | $13.7 million | $49.6 million |
| Gross margin | 19.9%, versus 21.0% | 22.0%, versus 21.5% |
| Operating income (loss) | $(0.9) million, versus $(0.5) million | $3.4 million, versus $(0.2) million |
| Net income (loss) | $(1.0) million, versus $(0.3) million | $1.7 million, versus $(0.9) million |
| Diluted EPS | $(0.04), versus $(0.01) | $0.07, versus $(0.04) |
| Net cash from operating activities | Not separately provided | $10.8 million, versus $11.5 million |
Segment Results
| Segment | Q3 Sales | Q3 Operating Income (Loss) | Nine-Month Sales | Nine-Month Operating Income (Loss) |
|---|---|---|---|---|
| Lighting | $53.0 million, up 11.9% | $1.8 million, up 10.8% | $169.9 million, up 8.3% | $7.8 million, down 9.8% |
| Graphics | $9.9 million, down 24.5% | $(1.7) million, versus $0.0 million | $36.9 million, up 7.2% | $(1.8) million, versus $(1.5) million |
| Electronic Components | $5.1 million, up 15.1% | $0.5 million, versus $(0.4) million | $14.2 million, down 5.9% | $2.5 million, versus $(1.1) million |
| All Other | $1.0 million, down 19.3% | $(0.2) million | $4.7 million, down 15.9% | $(0.0) million, versus $(1.6) million |
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $10.4 million at March 31, 2014, versus $7.9 million at June 30, 2013.
- Working capital was $75.7 million, versus $76.7 million; the current ratio was 3.90 to 1, versus 3.93 to 1.
- Accounts receivable declined to $37.5 million from $46.0 million, and reported days sales outstanding improved to 51 days from 60 days.
- Inventories increased to $46.6 million from $42.1 million, primarily in the Lighting and Electronic Components segments.
- The company had no borrowings under its $30 million U.S. revolving facility or $5 million Canadian facility and was in compliance with all loan covenants.
- In April 2014, the facilities were renewed under one bank, with expiration extended to the third quarter of fiscal 2017.
- Capital expenditures were $4.5 million for the first nine months, versus $5.7 million. Financing cash use was $4.1 million, including $4.3 million of dividends.
- The board declared a quarterly dividend of $0.06 per share, implying an indicated annual rate of $0.24 per share.
Material Changes Versus Prior Comparable Period
- Sales increased, led by Lighting and LED products, but third-quarter profitability deteriorated because gross margin declined, selling and administrative expenses increased, and Graphics results weakened materially.
- The third-quarter Graphics operating result fell to a $1.7 million loss from approximately breakeven, primarily due to lower sales and gross profit associated with completion of a major grocery-retailer program.
- Electronic Components improved to operating income in both the quarter and year-to-date period, aided by increased intercompany demand for LED circuit boards and lighting controls and the absence of prior-year goodwill impairment charges.
- Nine-month operating income improved by $3.6 million, reflecting higher sales, the absence of $2.4 million of prior-year goodwill impairment, the absence of a $1.2 million prior-year obsolete-inventory provision, and the absence of a prior-year $0.7 million earn-out liability reduction.
- Third-quarter gross margin fell to 19.9% from 21.0%, while nine-month gross margin improved to 22.0% from 21.5%.
- Research and development expense increased to $6.1 million for the first nine months from $4.9 million.
Guidance, Outlook, Risks, and Unusual Items
- No specific revenue or earnings guidance is provided in the filing. Management stated that cash, operating cash flow, and available credit were adequate for fiscal 2014 operating and capital needs.
- Management identified competitive pricing, product mix, manufacturing inefficiencies, freight, warranty costs, customer demand, and the ability to meet delivery schedules as important operating factors.
- The March 1, 2014 goodwill test showed limited excess value in the Lighting reporting unit: approximately $2.5 million, or 3%, above carrying value. The fiscal 2014 test was expected to be completed in the fourth quarter, and management anticipated no change.
- A building at the Woonsocket, Rhode Island graphics operation was placed on the market following consolidation into the remaining facility. It was classified as held for sale at $0.6 million, with no loss recognized because estimated selling price exceeded net book value.
- The Virticus acquisition earn-out liability was zero at March 31, 2014, but the maximum potential undiscounted future liability was $4.0 million through fiscal 2017; management did not consider payment probable.
- The company reported a $0.4 million third-quarter tax expense despite a pretax loss, including a $0.36 million increase in the valuation reserve for New York State tax credits following a tax-code change.
- Warranty liabilities increased to $1.9 million from $1.4 million at June 30, 2013. The company also recorded a $0.2 million graphics inventory write-down during the first nine months.
- Management disclosed normal-course litigation, customer bankruptcies, and negotiations but stated that material adverse outcomes were not expected. No standby letters of credit were outstanding.
- Forward-looking results remain subject to competition, customer concentration and financial condition, cyclical and seasonal demand, litigation and regulatory costs, acquisitions, impairment testing, tax matters, and economic conditions.
Most Important Facts for Investors to Verify
- Whether the Lighting segment can sustain LED growth while recovering gross-margin pressure, warranty costs, and production inefficiencies.
- Whether Graphics can restore profitability after the completion of the major grocery-retailer program.
- The final fourth-quarter goodwill impairment test, particularly the narrow valuation cushion in the Lighting reporting unit.
- Inventory levels, obsolescence reserves, warranty reserves, and the conversion of operating cash flow into sustainable free cash flow.
- The impact of the April 2014 refinancing, covenant requirements, and continued availability of the $35 million combined credit facilities.
- The sustainability of the $0.24 annualized dividend relative to earnings, cash flow, capital expenditures, and the stated 50%–70% payout policy.