LSI Industries Inc. — Form 10-Q Summary
Business context and reporting period
LSI Industries Inc. filed an unaudited Form 10-Q for the quarter and nine months ended March 31, 2013, covering the third quarter of fiscal 2013. The company operates through Lighting, Graphics, Electronic Components, and All Other business categories, with products and services focused on commercial lighting, graphics and image programs, LED technology, electronic controls, and related installation and project-management services.
Financial performance and key metrics
| Metric | Three months ended March 31 | Change | Nine months ended March 31 | Change |
|---|---|---|---|---|
| Net sales | $66.2 million | Up 5.1% | $212.0 million | Up 7.5% |
| Gross profit | $13.9 million | Up 4.5% | $45.7 million | Up 4.5% |
| Gross margin | 21.0% | Down from 21.2% | 21.5% | Down from 22.2% |
| Operating income (loss) | $(0.5) million | Down from $0.1 million | $(0.2) million | Down from $3.5 million |
| Net income (loss) | $(0.3) million | Improved from $(0.4) million | $(0.9) million | Down from $1.7 million |
| Diluted EPS | $(0.01) | Improved from $(0.02) | $(0.04) | Down from $0.07 |
| Cash flow from operations | Not provided for quarter | — | $11.5 million | Down from $25.3 million |
Third-quarter segment sales were $47.4 million in Lighting, $13.1 million in Graphics, $4.4 million in Electronic Components, and $1.3 million in All Other. Graphics sales increased 46.6% and reached approximately breakeven operating results, while Lighting sales increased 1.4% but operating income declined 35.4% to $1.7 million. Electronic Components sales declined 4.6% and the segment recorded a $0.4 million operating loss, primarily reflecting weakness in the Virticus lighting-controls business. All Other sales declined 52.3%, although its operating loss narrowed to $0.2 million.
LED-related sales increased 8.7% to $18.8 million in the third quarter and increased 14.4% to $61.3 million for the first nine months. Petroleum and convenience-store market sales were $17.4 million in the quarter and $59.0 million for the nine-month period.
At March 31, 2013, cash and cash equivalents were $13.9 million, down from $15.3 million at June 30, 2012. Working capital was $77.7 million, compared with $83.7 million at fiscal year-end, and the current ratio was 4.20 to 1. Net accounts receivable declined to $38.7 million from $44.4 million, while inventories were broadly unchanged at $41.4 million.
The company had no outstanding borrowings under its $30 million U.S. revolving credit facility, other than $0.3 million supporting a standby letter of credit, and no borrowings under its $5 million Canadian facility. The company reported compliance with all loan covenants. Shareholders’ equity was $142.0 million versus $149.4 million at June 30, 2012.
Material changes versus the prior comparable period
- Revenue increased, driven principally by Graphics programs and higher LED sales, but consolidated operating performance deteriorated because of higher selling and administrative expenses, weaker Lighting margins, and the underperformance of Virticus.
- Electronic Components operating results declined from $2.8 million of income to a $1.1 million loss for the nine-month period. The decline included a $2.4 million goodwill impairment charge associated with LSI Virticus and higher research and development and operating costs.
- The company recorded $2.4 million of goodwill impairment during the first nine months, including a $0.3 million charge in the third quarter. Virticus goodwill was fully impaired. Goodwill remained subject to finalization of the fourth-quarter impairment analysis.
- Nine-month operating cash flow fell $13.8 million year over year, primarily because of less favorable working-capital changes, including inventory, refundable income taxes, accounts payable, and receivables.
- Capital expenditures increased to $5.7 million from $2.5 million, primarily due to an enterprise resource planning system upgrade. The company expected fiscal 2013 capital expenditures of approximately $8.0 million, excluding acquisitions.
- Cash dividends paid increased to $7.2 million from $4.1 million. The board declared a regular quarterly dividend of $0.06 per share payable in May 2013, implying an indicated annual rate of $0.24 per share.
- A contingent earn-out liability related to the Virticus acquisition was reduced from $877,000 to $218,000 in December 2012 based on revised sales forecasts. The liability, including accrued interest, was $241,000 at March 31, 2013.
Outlook, risks, contingencies, and unusual items
Management stated that available cash, operating cash flow, and the combined $35 million of revolving credit capacity were adequate for fiscal 2013 operating and capital-expenditure requirements. No formal earnings or revenue guidance was provided in the filing.
Management highlighted the cyclical and seasonal nature of the business, customer concentration and financial condition, delays or cancellations of customer image and brand programs, competitive pricing, product demand and market acceptance, warranty obligations, inventory obsolescence, doubtful accounts, tax matters, litigation, acquisition integration, and goodwill and intangible-asset impairment risks.
Ahold U.S.A. represented 12.5% of net accounts receivable at March 31, 2013; no customer concentration in consolidated sales was reported. Warranty liabilities increased to $1.4 million from $1.1 million at June 30, 2012. The company recorded a $1.8 million inventory obsolescence reserve during the first nine months, principally related to the Canadian operation.
The company reported no material off-balance-sheet arrangements and stated that pending negotiations, customer bankruptcies, and legal proceedings were not expected to have a material adverse effect. Disclosure controls were evaluated as effective, with no material changes in internal control over financial reporting.
Management also presented non-GAAP adjusted results excluding goodwill impairment and the earn-out reduction. Adjusted net loss was approximately $21,000, or approximately $0.00 per diluted share, for the third quarter, and adjusted net income was $0.4 million, or $0.02 per diluted share, for the first nine months.
Important facts for investors to verify
- Whether Virticus can achieve sufficient sales and profitability after the full goodwill impairment and continued investment in lighting controls.
- The final fourth-quarter fiscal 2013 goodwill impairment analysis and any additional impairment charges.
- Whether Graphics growth reflects sustainable customer programs or temporary image-conversion projects.
- Progress in restoring consolidated operating profitability and improving Lighting and Electronic Components margins.
- Cash generation relative to dividends, capital expenditures, and the company’s stated dividend policy.
- Inventory obsolescence, warranty claims, customer collectability, and the concentration of receivables with Ahold U.S.A.
- Compliance with credit-facility covenants and continued availability of the company’s revolving borrowing capacity.