LSI Industries Inc. Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended March 31, 2018, compared with the corresponding periods ended March 31, 2017. The filing is unaudited. LSI operates through Lighting and Graphics segments; the former Technology segment was merged into Lighting during fiscal 2018.
Financial performance and position
| Metric | Q3 FY2018 | Q3 FY2017 | 9M FY2018 | 9M FY2017 |
|---|---|---|---|---|
| Net sales | $78.8 million | $78.2 million | $258.6 million | $248.0 million |
| Gross profit | $19.9 million | $18.4 million | $68.9 million | $60.6 million |
| Gross margin | 25.3% | 23.5% | 26.7% | 24.5% |
| Operating income (loss) | $0.7 million | $(0.8) million | $(19.5) million | $3.1 million |
| Net income (loss) | $0.2 million | $(0.5) million | $(16.9) million | $2.3 million |
| Diluted EPS | $0.01 | $(0.02) | $(0.65) | $0.09 |
| Operating cash flow | Not separately provided | Not separately provided | $6.9 million | $12.9 million |
Q3 operating margin was approximately 0.9%, compared with negative 1.0% in the prior-year quarter. Nine-month operating margin was approximately negative 7.6%, compared with 1.3% in the prior-year period. Reported nine-month results include a $28.0 million goodwill impairment charge and a $4.7 million deferred-tax revaluation charge related to the Tax Cuts and Jobs Act.
- Lighting: Q3 sales were $61.6 million, essentially flat year over year, while operating income declined to $3.0 million from $4.1 million. Nine-month sales increased 3.7% to $199.2 million, but the segment reported a $14.7 million operating loss primarily because of the goodwill impairment.
- Graphics: Q3 sales increased 5.0% to $17.3 million and operating income improved to $0.4 million from a $0.5 million loss. Nine-month sales increased 6.3% to $59.5 million and operating income increased 142% to $4.1 million.
- Solid-state LED lighting sales increased 14.0% in Q3 and 20.6% for the first nine months; LED products represented 92.2% and 89.5% of Lighting product sales, respectively.
- Management-reported adjusted operating income was $0.8 million in Q3 and $8.6 million for nine months, excluding specified impairment, restructuring, severance, acquisition and inventory-related items. Adjusted net income was $0.2 million in Q3 and $5.2 million for nine months.
Liquidity, debt and cash flow
- Cash and cash equivalents were $2.1 million at March 31, 2018, compared with $3.0 million at June 30, 2017.
- Working capital was $67.1 million, up from $61.7 million at June 30, 2017; the current ratio improved to 2.69 from 2.36.
- Accounts receivable were $49.5 million and inventory was $51.7 million. Days sales outstanding increased to 55 days from 51 days at fiscal year-end.
- Long-term debt was $45.3 million. The secured revolving credit facility has $100 million of capacity, expires in the third quarter of fiscal 2022, and had $54.7 million available at March 31, 2018. Management reported compliance with all covenants.
- Nine-month investing cash use was $0.7 million, including $2.2 million of capital expenditures and $1.5 million of proceeds from the sale of the Woonsocket facility.
- Nine-month financing cash use was $7.2 million, including $77.8 million of debt repayments, $73.4 million of new borrowings and $3.8 million of dividends.
- The board declared a quarterly dividend of $0.05 per share, implying an indicated annual rate of $0.20 per share.
Material changes and unusual items
- The company recorded a $28.0 million goodwill impairment in the Lighting segment after a sustained decline in its stock price. Net goodwill fell to $30.5 million from $58.5 million at June 30, 2017.
- The company recorded a one-time $4.7 million deferred-tax expense in the second quarter to revalue deferred tax balances following the reduction in the U.S. corporate tax rate.
- Fiscal 2017 included acquisition deal costs, restructuring costs, facility-sale gains and an intangible impairment that did not recur in Q3 FY2018.
- Atlas Lighting was acquired in February 2017. Reported year-over-year sales benefited from a full nine months of Atlas sales in FY2018; excluding Atlas, nine-month sales declined 8.2%.
- The company expects to adopt the new revenue standard in fiscal 2019 using the modified retrospective method. Most Lighting revenue is expected to remain point-in-time, but some Graphics arrangements may shift to over-time recognition and accelerate revenue from shipment to production.
Outlook, management commentary and risks
- Management stated that cash from operations and borrowing capacity should be adequate for fiscal 2018 operating and capital expenditure needs.
- Management expects no additional restructuring charges for fiscal 2018 because previously announced facility consolidations were completed in fiscal 2017.
- On April 23, 2018, Dennis W. Wells departed as president and chief executive officer. Ronald D. Brown was appointed interim CEO and Crawford C. Lipsey interim president and COO. The company expects to record a severance charge in Q4 FY2018 and has begun searching for a permanent CEO.
- The company disclosed that its stock price declined approximately 20% to 25% following the CEO departure. A sustained decline could trigger an additional impairment review, although management had not determined that a triggering event had occurred as of the filing.
- Key risks include competitive pressure, demand and market acceptance, customer credit and concentration risks, cyclical and seasonal conditions, commodity and operating-cost inflation, litigation and regulatory matters, integration of acquired businesses, goodwill and intangible impairment, tax uncertainty, warranty obligations and inventory obsolescence.
- The company reported no material change in market-risk exposure, no standby letters of credit and no material off-balance-sheet arrangements other than operating leases.
Investor verification checklist
- Verify the sustainability of improved gross margins and the extent to which LED mix growth offsets declining traditional-lighting demand.
- Reconcile reported results with management’s non-GAAP adjustments, particularly the $28.0 million goodwill impairment and $4.7 million tax charge.
- Monitor Lighting segment profitability, cash conversion, inventory levels and receivables aging, including the increase in DSO to 55 days.
- Review debt covenant headroom, variable-rate borrowing costs and the company’s ability to continue dividends while operating cash flow remains pressured.
- Assess the impact of the CEO transition, expected severance charge and potential future impairment testing.
- Confirm the eventual impact of the new revenue-recognition standard on Graphics contracts and reported revenue timing.