LSI Industries Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended March 31, 2012, compared with the corresponding periods ended March 31, 2011. The request identifies “2011 Q3,” but the filing is for fiscal 2012 third quarter.
Business Context and Financial Position
LSI operates through Lighting, Graphics, Electronic Components, and All Other businesses. Products and services include commercial and niche-market lighting, LED lighting and video screens, graphics and signage, electronic components, and installation and project-management services.
- Total assets were $173.3 million at March 31, 2012, compared with $176.0 million at June 30, 2011.
- Cash and cash equivalents increased to $18.5 million from $4.1 million.
- Working capital was $82.1 million, with a current ratio of 4.87 to 1.
- The Company had no outstanding borrowings under its $30 million U.S. revolving facility or $5 million Canadian line of credit. The former expires in fiscal 2015 and the latter is expected to be renewed in fiscal 2013.
- The $1.1 million mortgage balance outstanding at June 30, 2011 was paid in full in February 2012.
- Management stated that all loan covenants were satisfied and that available credit and operating cash flow were adequate for fiscal 2012 operating and capital needs.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2012 | Three Months Ended March 31, 2011 | Nine Months Ended March 31, 2012 | Nine Months Ended March 31, 2011 |
|---|---|---|---|---|
| Net sales | $62.9 million | $64.6 million | $197.2 million | $219.3 million |
| Gross profit | $13.3 million | $16.3 million | $43.7 million | $55.6 million |
| Gross margin | 21.2% | 25.3% | 22.2% | 25.3% |
| Operating income | $0.1 million | $2.5 million | $3.5 million | $13.8 million |
| Operating margin | 0.1% | 3.8% | 1.8% | 6.3% |
| Net income (loss) | $(0.4) million | $2.1 million | $1.7 million | $9.3 million |
| Diluted EPS | $(0.02) | $0.09 | $0.07 | $0.38 |
| Operating cash flow | Not separately provided | Not separately provided | $25.3 million | $(0.2) million |
Operating cash flow improved primarily because of reductions in accounts receivable and inventory. Capital expenditures were $2.5 million for the nine-month period, and investing cash use totaled $5.5 million, including the Virticus acquisition. Financing cash use was $5.3 million, including $4.1 million of dividends and $1.1 million of debt repayment.
Material Changes Versus Prior Comparable Period
- Third-quarter sales declined 2.6%; nine-month sales declined 10.1%.
- The Lighting Segment remained comparatively strong: nine-month sales increased 4.7% and operating income increased 21.6%.
- Graphics was the largest weakness. Nine-month sales fell 47.7%, and the segment moved from $8.4 million of operating income to a $2.2 million operating loss. The decline primarily reflected completion of the 7-Eleven program and lower petroleum/convenience-store activity.
- Electronic Components nine-month sales declined 17.6% and operating income declined 52.9%, reflecting reduced recurring-customer and intersegment sales, higher warranty expense, and higher compensation costs.
- LED-related sales increased 13.6% to $53.6 million for the first nine months and increased 33.5% in the third quarter, driven primarily by Lighting.
- Gross margin pressure reflected lower Graphics and Electronic Components volumes, competitive pricing, warranty costs, customer returns, concessions, and lower overhead absorption.
- Income tax expense was $1.7 million for the nine months, representing a 49.2% effective rate, compared with 31.8% in the prior year. The quarter included $0.4 million of tax expense despite pretax income of only $0.1 million.
- Goodwill associated with the Graphics Segment was fully impaired in the first quarter of fiscal 2012. The Company recorded a $0.3 million goodwill impairment charge. The March 1, 2012 annual impairment testing was not complete at the filing date, although management believed no additional impairment existed.
Guidance, Outlook, Risks, and Unusual Items
- Management expected fiscal 2012 capital expenditures of approximately $4.0 million, excluding acquisitions.
- The Board declared a $0.06 per-share quarterly dividend, establishing an indicated annual rate of $0.24 per share. The stated policy targets annual dividends of 50% to 70% of expected current-year net income, subject to Board discretion.
- On March 19, 2012, LSI acquired Virticus Corporation for $3.15 million in cash plus a potential five-year contingent earn-out of up to $5.0 million. The preliminary allocation included $3.1 million of goodwill and an $857,000 contingent earn-out liability. Virticus contributed no sales and a $0.2 million operating loss in the reported quarter, including $0.15 million of acquisition-related expenses.
- Management presented adjusted net income of approximately $2.1 million for the nine months, or $0.09 diluted EPS, excluding after-tax acquisition costs of $0.4 million. This is a non-GAAP measure.
- Warranty expense increased with the growth of newer LED products. Management stated that design weaknesses had been addressed and expected warranty expense to decline in future quarters.
- Principal risks include cyclical and seasonal demand, competitive pricing, dependence on key customers and market programs, customer credit risk, product acceptance, warranty claims, litigation and regulatory matters, acquisition integration, employee retention, tax uncertainties, and potential goodwill or intangible-asset impairments.
- The Company reported various ordinary-course negotiations, customer bankruptcies, and legal proceedings, but management did not expect them to have a material adverse effect.
- No material changes in market-risk exposure were reported. The Company reported no off-balance-sheet arrangements and concluded that disclosure controls were effective as of March 31, 2012.
Investor Verification Checklist
- Verify whether the pending fiscal 2012 goodwill and indefinite-lived intangible-asset impairment tests resulted in additional charges.
- Assess whether Graphics sales and profitability can recover after the completion of the 7-Eleven program and whether customer concentration or program-driven revenue remains elevated.
- Monitor LED product warranty claims, reserves, and margin performance as LED sales expand.
- Review the final purchase-price allocation, contingent earn-out liability, compensation expense, and operating contribution from Virticus.
- Evaluate the sustainability of the $0.24 annual dividend against earnings, cash flow, acquisition needs, and the stated 50%–70% payout policy.
- Reconcile reported net income with adjusted net income and understand the treatment of acquisition-related costs and future earn-out compensation.