LSI Industries Inc. Fiscal 2021 Third-Quarter Form 10-Q Summary
Reporting period: Three and nine months ended March 31, 2021, compared with the corresponding periods ended March 31, 2020. The filing is the fiscal 2021 third-quarter report, although the request metadata identifies “2020 Q3.” Operations consist of Lighting and Graphics segments and are located solely in North America.
Financial Performance and Position
| Metric | Three months ended March 31 | Year-over-year change | Nine months ended March 31 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $72.2 million | Up 2% | $218.6 million | Down 10% |
| Gross profit | $18.1 million | Up 13% | $56.1 million | Down 3% |
| Gross margin | 25.1% | Up from 22.4% | 25.6% | Up from 23.9% |
| Operating income | $2.1 million | Down from $2.6 million | $7.0 million | Down from $11.2 million |
| Net income | $1.5 million | Down from $1.9 million | $5.7 million | Down from $8.1 million |
| Diluted EPS | $0.05 | Down from $0.07 | $0.21 | Down from $0.31 |
Quarterly operating margin was approximately 2.9%, compared with 3.7% in the prior-year quarter. Nine-month operating margin was approximately 3.2%, compared with 4.6% in the prior-year period. The reported comparisons were affected by prior-year gains on facility sales and other restructuring items.
- Lighting: Third-quarter sales were $45.7 million, down 7%; operating income was $3.8 million, up from $1.1 million. Gross margin increased to 31.0% from 25.8%. Nine-month sales declined 18% to $136.3 million, while adjusted operating income increased to $9.7 million from $8.8 million.
- Graphics: Third-quarter sales increased 20% to $26.5 million, driven primarily by quick-service restaurant growth. Operating income was $1.2 million versus $4.0 million, with the prior-year period benefiting from a $3.7 million facility-sale gain. Nine-month sales rose 8% to $82.3 million, and adjusted operating income increased to $6.3 million from $3.7 million.
- Cash flow: Nine-month operating cash flow was $24.6 million, compared with $17.1 million. Third-quarter operating cash flow was $11.2 million, compared with an outflow of $3.8 million. Nine-month capital expenditures were $1.5 million, and free cash flow was $23.1 million.
- Liquidity: Cash increased to $23.5 million from $3.5 million at June 30, 2020. Working capital was $61.1 million, and the current ratio was 2.10 to 1. Accounts receivable were $45.0 million and inventories were $40.4 million.
- Debt: The company reported no long-term debt and no borrowings under its revolving facility. In March 2021, the secured credit facility was increased from $75 million to $100 million, expiring in the third quarter of fiscal 2026. The full $100 million was available at March 31, 2021, and the company was in compliance with its covenants.
- Dividends: The company paid approximately $4.0 million in dividends during the nine-month period. In April 2021, the board declared a quarterly dividend of $0.05 per share.
Material Changes and Unusual Items
- COVID-19 disruptions continued to affect construction markets and supply chains, particularly Lighting sales, although management stated that the year-over-year sales gap narrowed each quarter.
- Prior-year results included pre-tax gains of approximately $4.8 million from the New Windsor facility sale and $3.7 million from the North Canton facility sale. These gains materially reduced prior-year operating expenses and increased reported operating income.
- Excluding restructuring and plant-closure items, stock compensation, and severance, adjusted operating income was $2.5 million for the quarter versus an adjusted operating loss of $0.5 million in the prior-year quarter. Nine-month adjusted operating income was $8.3 million versus $4.4 million.
- Adjusted net income was $1.8 million for the quarter versus an adjusted net loss of $1.1 million in the prior-year quarter. Nine-month adjusted net income was $6.4 million versus $2.3 million.
- The company’s preliminary March 2021 goodwill and indefinite-lived intangible asset impairment tests passed. The definitive tests were expected in the fourth quarter of fiscal 2021, with management anticipating no change.
- The company adopted the current expected credit loss standard on July 1, 2020 without a material impact on its financial statements.
Outlook, Risks, and Contingencies
- Management stated that cash flows from operations and the $100 million credit facility were adequate for fiscal 2021 operating and capital expenditure needs, while noting that liquidity needs would continue to be assessed as COVID-19 developments evolve.
- Key risks include continuing COVID-19 effects, workforce and supply-chain disruptions, construction-market weakness, customer demand volatility, foreign-exchange exposure through the Mexican subsidiary, and potential changes in interest rates or LIBOR replacement provisions.
- Goodwill impairment testing depends on estimates of revenue growth, operating performance, cash flows, enterprise values, and discount rates. The Lighting reporting unit passed its preliminary test by 26% and the Graphics reporting unit by 2,065% above carrying value.
- The company reported ordinary-course negotiations, customer bankruptcies, and legal proceedings, but management believed these matters would not have a material adverse effect. No standby letters of credit were outstanding at March 31, 2021, and no off-balance-sheet arrangements were reported.
- Disclosure controls and procedures were deemed effective as of March 31, 2021, with no material changes in internal control over financial reporting.
Investor Verification Checklist
- Verify whether the recovery in Lighting sales and construction-related demand continued after March 31, 2021.
- Reconcile GAAP results with management’s adjusted operating income, adjusted net income, EBITDA, and free-cash-flow measures.
- Review the definitive fiscal 2021 goodwill and indefinite-lived intangible impairment tests and any subsequent impairment charges.
- Assess working-capital trends, particularly accounts receivable, inventory reserves, customer prepayments, and accrued liabilities.
- Confirm continued availability of the $100 million revolving facility, covenant compliance, interest-rate terms, and any LIBOR transition effects.
- Evaluate the sustainability of gross-margin improvements, cost reductions, and the $0.05-per-share quarterly dividend.