LSI Industries Inc. Fiscal 2014 Form 10-K Summary
Business context and reporting period
LSI Industries is an Ohio-based provider of commercial visual-image solutions, including LED and traditional lighting, lighting controls, graphics, digital signage, LED video screens, electronic components and related installation and project-management services. The filing covers the fiscal year ended June 30, 2014. The requested “2013 Q4” period is not the filing period; fourth-quarter fiscal 2014 results are separately presented for the quarter ended June 30, 2014.
- Lighting represented 76% of fiscal 2014 sales, Graphics 15%, Electronic Components 7%, and All Other 2%.
- Approximately 30% of fiscal 2014 sales were concentrated in the petroleum/convenience-store market.
- Approximately 6.5% of total sales were generated outside the United States.
Financial performance and liquidity
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $299.5 million | $280.8 million | +6.7% |
| Gross profit | $65.3 million | $60.4 million | +8.1% |
| Gross margin | 21.8% | 21.5% | +0.3 points |
| Operating income | $2.3 million | $0.6 million | +268% |
| Operating margin | 0.8% | 0.2% | Improved |
| Net income (loss) | $0.9 million | $(0.1) million | Returned to profit |
| Diluted EPS | $0.04 | $(0.01) | Improved |
| Cash flow from operations | $11.6 million | $8.9 million | +$2.7 million |
- LED-related sales increased 36.2% to $108.4 million, including $99.9 million of LED lighting-fixture sales and $5.0 million of LED video-screen sales.
- Fiscal 2014 interest expense was $68,000 and net interest expense was $51,000. There were no borrowings under the revolving credit facilities at June 30, 2014.
- Cash and cash equivalents were $9.0 million, compared with $7.9 million at June 30, 2013.
- Working capital was $76.8 million; the current ratio was 3.62 to 1.
- Accounts receivable declined to $42.8 million and reported DSO improved to 50 days from 60 days.
- Inventory increased to $45.4 million from $42.1 million.
- Capital expenditures were $5.2 million, and cash dividends paid were $5.8 million, or $0.24 per share.
- The company had $35 million of total revolving credit capacity: $30 million for U.S. operations and $5 million for Canada. Both facilities mature in the third quarter of fiscal 2017, and the company was in compliance with its covenants.
Material changes versus the prior comparable period
- Lighting sales rose 10.3% to $227.6 million, driven primarily by LED adoption. Lighting operating income declined 3.0% to $9.8 million because of pricing pressure, manufacturing inefficiencies, higher research and development, commissions, warranty costs and other expenses.
- Graphics sales declined 1.3% to $46.2 million, while its operating loss widened to $2.8 million from $1.3 million. Management cited soft customer spending, lower margins and higher selling and administrative expenses.
- Electronic Components sales declined 4.1% to $19.5 million, but the segment moved to $2.4 million of operating income from a $0.9 million operating loss. The comparison benefited from higher intersegment demand and the absence of the $2.4 million goodwill impairment recorded in fiscal 2013.
- All Other sales declined 15.6% to $6.2 million, but the operating loss narrowed to $0.1 million from $1.5 million, primarily because fiscal 2013 included a $1.2 million obsolete-inventory reserve.
- Gross margin improved modestly to 21.8%, but selling and administrative expenses rose to $62.2 million from $57.4 million.
- Fiscal 2014 included an $805,000 non-cash impairment of two definite-lived intangible assets in the Electronic Components Segment. Fiscal 2013 included a $2.4 million goodwill impairment charge.
- Backlog declined to $34.0 million at June 30, 2014 from $42.4 million. Management stated that the orders were believed to be firm and generally shippable or installable within twelve months.
Guidance, outlook, risks and unusual items
- Management did not provide quantified fiscal 2015 revenue or earnings guidance in the filing. The company stated that cash flows from operations and $35 million of credit capacity were adequate for fiscal 2015 operating and capital-expenditure needs.
- The company implemented a 3% to 5% Lighting Segment price increase effective February 2014 to offset material-cost inflation.
- On August 22, 2014, LSI signed a non-binding letter of intent to sell LSI Saco Technologies in Canada. Management expected completion in the first or second quarter of fiscal 2015 and estimated a loss of $0.5 million to $1.0 million. The Canadian $5 million credit facility is expected to terminate upon completion.
- A Graphics Segment building was classified as held for sale and was expected to be sold in the first quarter of fiscal 2015 at a price above carrying value.
- The fourth quarter of fiscal 2014 generated a net loss of $0.8 million on sales of $73.9 million, compared with net income of $0.8 million on sales of $68.8 million in the fourth quarter of fiscal 2013.
- Key risks include competitive pricing, economic cyclicality and seasonality, raw-material and electronic-component shortages, customer concentration, customer-specific inventory obsolescence, technology changes, acquisition integration, impairment of goodwill and intangible assets, warranty claims, key-personnel retention, litigation and tax matters.
- Materials represented approximately 61% of cost of sales in fiscal 2014. The company does not actively hedge raw-material price risk.
- The warranty liability increased to $2.7 million from $1.4 million, while the inventory-obsolescence reserve decreased to $2.3 million from $3.1 million.
- Contractual obligations totaled $35.9 million, including $31.1 million of purchase obligations and $4.8 million of operating leases. The filing reported no off-balance-sheet arrangements and no standby letters of credit at June 30, 2014.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of June 30, 2014.
Most important facts for an investor to verify
- Whether the strong growth in LED sales can offset declining traditional-lighting demand and support sustainable margins.
- Whether Graphics Segment losses can be reduced and whether the Electronic Components Segment’s improvement is repeatable without impairment-related benefits.
- The status, final consideration and realized loss from the proposed LSI Saco Technologies sale.
- The effect of the $34.0 million backlog, customer reimaging programs and petroleum/convenience-store exposure on fiscal 2015 revenue.
- Future warranty costs, inventory obsolescence and raw-material pricing, particularly as LED production and inventory expand.
- The company’s ability to maintain the $0.06 quarterly dividend while net income remains modest and the annual fiscal 2015 dividend rate remains under evaluation.
- Potential future impairment charges, given that one Lighting reporting unit’s estimated business value exceeded carrying value by only approximately 3% at the March 1, 2014 test date.