LSI Industries Inc. — Form 10-Q Summary
Business context and reporting period
LSI Industries designs and manufactures lighting, digital signage, graphics, electronic assemblies and related installation and program-management services. Its two operating segments are Lighting and Graphics, with operations solely in North America. This filing covers the quarter and six months ended December 31, 2020, the second quarter and first half of fiscal 2021, compared with the corresponding fiscal 2020 periods.
Financial performance and position
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $76.4 million | $82.4 million | $146.4 million | $171.1 million |
| Operating income | $2.7 million | $1.8 million | $4.9 million | $8.6 million |
| Net income | $2.2 million | $1.7 million | $4.2 million | $6.2 million |
| Diluted EPS | $0.08 | $0.07 | $0.15 | $0.24 |
| Cash flow from operations | Not separately provided | Not separately provided | $13.4 million | $20.9 million |
| Free cash flow | Not separately provided | Not separately provided | $12.5 million | $32.1 million |
- Q2 consolidated gross profit was $19.7 million, compared with $20.0 million. The consolidated gross margin was approximately 25.8%, compared with 24.2%.
- Q2 Lighting sales declined 16% to $45.1 million; operating income declined to $2.1 million from $3.2 million. Lighting gross margin improved to 30.4% from 29.0%.
- Q2 Graphics sales increased 8% to $31.3 million; operating income increased to $3.1 million from $1.4 million. Graphics gross margin improved to 19.2% from 15.4%.
- For the six months, Lighting sales declined 22% to $90.5 million, while Graphics sales increased 3% to $55.9 million.
- Q2 adjusted operating income increased to $3.1 million from $2.3 million. Six-month adjusted operating income increased to $5.8 million from $4.9 million. These non-GAAP measures exclude specified stock compensation, severance and restructuring or plant-closure items.
- Q2 adjusted net income was $2.5 million, or $0.09 per diluted share, compared with $1.7 million, or $0.07. Six-month adjusted net income was $4.6 million, or $0.17 per diluted share, compared with $3.3 million, or $0.13.
- Cash and cash equivalents were $13.6 million at December 31, 2020, compared with $3.5 million at June 30, 2020. Working capital was $58.2 million and the current ratio was 2.41 to 1.
- There was no long-term debt and no borrowing under the $75 million secured revolving credit facility; the full facility was available at December 31, 2020. The company was in compliance with its loan covenants.
- Operating lease liabilities totaled $8.4 million and finance lease liabilities totaled $1.9 million at December 31, 2020.
- Capital expenditures were $0.9 million for the six months. Cash dividends paid were $2.6 million, and the company declared a subsequent quarterly dividend of $0.05 per share.
Material changes versus the prior comparable period
- Revenue declined primarily because COVID-19-related disruption continued to affect Lighting construction markets. Graphics benefited from growth in Grocery and Quick-Service Restaurant verticals.
- Profitability improved in Q2 despite lower sales because of higher-value product mix, cost management, lower selling and administrative expenses, and improved Graphics margins.
- Six-month reported operating income and net income were lower than the prior year largely because the prior-year period included a $4.8 million pretax gain from the sale of the New Windsor, New York facility.
- Six-month operating cash flow decreased $7.5 million, principally because the prior-year period benefited from a larger reduction in accounts receivable. Inventory declined to $34.8 million from $38.8 million at June 30, 2020.
- The company adopted the current expected credit loss standard on July 1, 2020, with no material impact. Goodwill and intangible assets related to a dissolved entity were written off on a gross basis with no net financial statement impact.
Outlook, commentary, risks and unusual items
- Management stated that cash, operating cash flow and the available revolving facility are adequate for anticipated fiscal 2021 operating and capital expenditure needs, while noting that liquidity needs will continue to be assessed as COVID-19 conditions evolve.
- COVID-19 remains the principal identified operating risk, particularly through effects on construction activity, customer demand, supply chains and the broader economy. The duration and future impact remain uncertain.
- Management expects the regular annualized cash dividend rate for fiscal 2021 to be $0.20 per share, subject to board discretion and factors including earnings, cash flow, financial condition and future opportunities.
- Six-month results include $3 thousand of restructuring costs, compared with a $4.3 million net restructuring gain in the prior-year period, including the New Windsor facility sale gain and related costs.
- The company disclosed routine negotiations, customer bankruptcies and legal proceedings. Management believes these matters will not materially adversely affect financial position, results, cash flows or liquidity; no material loss range was disclosed.
- Effective January 26, 2021, the company entered into change-in-control and supplemental benefits agreements with its CEO, CFO and senior vice president of human resources and general counsel. The agreements provide specified severance, benefit continuation and equity-vesting protections upon qualifying events.
- Management concluded that disclosure controls and procedures were effective as of December 31, 2020, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether Lighting demand and construction-market activity recover from COVID-19 effects and whether Graphics growth in Grocery and Quick-Service Restaurants continues.
- Whether improved gross margins and cost reductions are sustainable if revenue remains below prior-year levels.
- The comparability of reported year-to-date earnings and cash flow, given the prior-year $4.8 million facility-sale gain and $12.3 million of sale proceeds.
- Availability, covenant compliance and expiration timing of the $75 million revolving credit facility, which expires in the third quarter of fiscal 2022.
- Future inventory obsolescence reserves, receivable collectibility and working-capital requirements as market conditions change.
- The impact of COVID-19, foreign exchange movements, lease obligations and executive change-in-control arrangements on future cash flows and liquidity.