LSI Industries Inc. Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended March 31, 2020, compared with March 31, 2019. Although the request identifies “2019 Q3,” this filing covers LSI’s fiscal 2020 third quarter. The financial statements are unaudited.
Business context
LSI manufactures lighting, digital signage, graphics, electronic circuit boards and related installation and program-management services. Its two reportable segments are Lighting and Graphics, serving markets including petroleum and convenience stores, automotive dealerships, quick-service restaurants, grocery, retail, commercial and industrial customers. Management continued transitioning away from lower-margin commodity business toward higher-value applications and solutions.
Key financial metrics
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Nine months ended March 31, 2020 | Nine months ended March 31, 2019 |
|---|---|---|---|---|
| Net sales | $71.0 million | $72.8 million | $242.1 million | $247.3 million |
| Gross profit | $15.9 million | $15.3 million | $57.8 million | $56.3 million |
| Gross margin | 22.5% | 21.1% | 23.9% | 22.7% |
| Operating income (loss) | $2.6 million | $(2.3) million | $11.2 million | $(19.6) million |
| Operating margin | 3.7% | (3.1)% | 4.6% | (7.9)% |
| Net income (loss) | $1.9 million | $(3.2) million | $8.1 million | $(17.2) million |
| Diluted EPS | $0.07 | $(0.12) | $0.31 | $(0.66) |
| Cash flow from operations | $(3.8) million | $(1.2) million | $17.1 million | $6.4 million |
- Segment sales: Lighting sales declined 7% to $49.0 million in the quarter and 7% to $165.6 million year to date. Graphics sales increased 10% to $22.0 million in the quarter and 10% to $76.4 million year to date.
- Adjusted performance: Excluding restructuring, facility-sale gains, severance and other unusual items, adjusted operating loss was $0.4 million in the quarter versus $1.9 million in the prior-year quarter. Adjusted operating income was $3.9 million year to date versus $3.2 million.
- Adjusted EBITDA: $1.7 million for the quarter and $10.6 million year to date, compared with $0.7 million and $11.0 million, respectively, in the comparable periods.
- Cash flow and capital spending: Year-to-date operating cash flow was $17.1 million, investing cash flow was $18.5 million, and capital expenditures were $1.5 million. Year-to-date free cash flow, including facility-sale proceeds, was $35.6 million.
- Liquidity: Cash was $0.8 million at March 31, 2020. Working capital was $56.4 million and the current ratio was 2.45 to 1.
- Debt: Long-term debt was $7.9 million, down from $39.5 million at June 30, 2019. The company had $67.1 million available under its $75 million revolving credit facility at March 31 and $63.7 million available on April 17, 2020. LSI was in compliance with all loan covenants.
- Balance sheet: Total assets were $182.2 million and shareholders’ equity was $124.7 million at March 31, 2020. Accounts receivable declined to $46.0 million from $54.7 million at June 30, 2019, while inventory was broadly stable at $43.6 million.
Material changes versus the prior comparable periods
- Quarterly sales decreased 3%, primarily because of the Lighting segment’s continued shift away from commodity products. Graphics growth partially offset the Lighting decline.
- Gross margin improved by approximately 140 basis points in the quarter, reflecting product mix, higher-value applications and cost savings from facility closures.
- Reported operating results benefited from a $3.7 million gain on the sale of the North Canton, Ohio facility. Year-to-date results also benefited from a $4.8 million gain on the sale of the New Windsor, New York facility.
- The prior-year nine-month period included a $20.2 million goodwill impairment charge; no comparable charge was recorded in fiscal 2020.
- Year-to-date Graphics gross profit declined 10% to $12.4 million and its margin declined from 19.7% to 16.1%, despite 10% sales growth, due to customer and product mix, start-up costs and manufacturing-resource realignment.
- Interest expense declined to $0.1 million in the quarter and $0.8 million year to date, reflecting lower borrowings.
- Foreign-exchange losses increased, partly because of Mexican peso devaluation during COVID-19-related market disruption.
- LSI adopted the lease standard on July 1, 2019, recognizing right-of-use assets of $10.4 million and lease liabilities of $10.8 million at adoption, with no material effect on reported operating results or cash flow.
Guidance, outlook, risks and unusual items
- The company did not provide specific numerical fiscal 2020 earnings or revenue guidance in the filing. Management stated that the COVID-19 pandemic made the outlook uncertain.
- As of the filing, LSI’s manufacturing locations and primary suppliers remained operational. Management was focused on employee safety, customer support, expense management and supply-chain diversification.
- COVID-19 could reduce construction, renovation and consumer spending, disrupt customers and suppliers, constrain manufacturing or distribution, and materially affect revenue, earnings, liquidity and capital investments. The duration and financial impact could not be reliably estimated.
- The company completed an interim March 31 goodwill impairment test after its stock-price decline and concluded that goodwill was not impaired. The definitive annual goodwill and indefinite-lived intangible-asset tests were expected in the fourth quarter.
- The North Canton facility was sold in the quarter, and production was scheduled to move to a smaller leased facility in Akron during the fourth quarter. The company recorded $0.5 million of inventory write-down expense related to the relocation.
- The CARES Act produced a favorable deferred-tax impact of approximately $0.3 million in the quarter. The nine-month effective tax rate was 17.6%.
- The board declared a quarterly dividend of $0.05 per share payable May 12, 2020, implying an indicated annual rate of $0.20 per share.
- Management stated that normal-course legal proceedings, customer bankruptcies and negotiations were not expected to have a material adverse effect. No standby letters of credit were outstanding at March 31, 2020.
Most important facts for investors to verify
- Whether COVID-19 caused subsequent order declines, supply-chain interruptions, facility restrictions or covenant/liquidity pressure after March 31, 2020.
- The sustainability of reported margin improvement after removing facility-sale gains, restructuring benefits and other nonrecurring items.
- Progress and costs associated with the North Canton relocation and other manufacturing-footprint changes.
- Graphics segment profitability, including whether the nine-month gross-margin decline reverses as new petroleum and digital-signage programs mature.
- Results of the definitive fiscal 2020 goodwill and indefinite-lived intangible-asset impairment tests.
- Future operating cash flow, dividend coverage and availability under the revolving credit facility.
- The extent to which the Lighting sales decline reflects intentional portfolio repositioning versus weakening end-market demand.