LSI Industries Inc. 2019 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2019. The filing also reports fourth-quarter fiscal 2019 results; the requested “2018 Q4” period does not match the filing’s reporting period.
Business Context
LSI designs, manufactures and markets commercial and industrial lighting, LED lighting and controls, digital signage, graphics, visual-image solutions, installation and project-management services. The Lighting segment represented 72% of fiscal 2019 sales, while Graphics represented 28%. Approximately 32% of sales came from the petroleum/convenience-store market.
Financial Results and Key Metrics
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $328.9 million | $342.0 million | Down 3.9% |
| Gross profit | $73.7 million | $89.2 million | Down 17.4% |
| Gross margin | 22.4% | 26.1% | Down 370 bps |
| Operating loss | $(19.9) million | $(21.7) million | Improved $1.8 million |
| Net loss | $(16.3) million | $(19.5) million | Improved $3.2 million |
| Diluted loss per share | $(0.63) | $(0.76) | Improved $0.13 |
| Cash flow from operations | $11.5 million | $11.5 million | Approximately flat |
| Free cash flow | $8.9 million | $8.1 million | Up 9.6% |
| Adjusted operating income | $4.0 million | $9.6 million | Down 58.1% |
| Adjusted EBITDA | $14.2 million | $19.8 million | Down 28.2% |
Reported results included a $20.2 million Lighting goodwill impairment charge in fiscal 2019 versus $28.0 million in fiscal 2018. Excluding specified unusual items, adjusted operating margin was approximately 1.2% versus 2.8% in the prior year. The filing does not provide a clear consolidated gross-margin guidance figure for fiscal 2020.
Segment Performance
- Lighting: Sales declined 9.8% to $235.1 million. Gross profit declined 20.4% to $55.1 million, and gross margin fell to 23.4% from 26.6%. Adjusted operating income declined to $11.2 million from $15.2 million.
- Graphics: Sales increased 15.1% to $93.7 million, primarily from petroleum, quick-service restaurant and digital-technology projects. Gross profit declined 7.1% to $18.6 million, and operating income declined 44.6% to $3.1 million as larger projects initially generated lower margins.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $1.0 million at June 30, 2019, down from $3.2 million.
- Working capital was $71.1 million, compared with $67.9 million; the current ratio was 2.78 to 1, or 2.59 to 1 excluding the $7.5 million asset held for sale.
- Net accounts receivable increased to $54.7 million from $50.6 million; reported DSO increased to 55 days from 53 days.
- Net inventory declined to $43.5 million from $51.0 million.
- Long-term debt was $39.5 million, all associated with the secured revolving credit facility. The facility was reduced from $100 million to $75 million and expires in the third quarter of fiscal 2022. Availability was $35.5 million at June 30, 2019 and $41.5 million as of August 15, 2019.
- The company stated that it was in compliance with all debt covenants and believed operating cash flow plus borrowing capacity would fund fiscal 2020 operations and capital expenditures.
- The company paid $5.2 million in dividends during fiscal 2019 and maintained an indicated annual dividend rate of $0.20 per share.
Material Changes and Unusual Items
- Management cited competitive pricing, lower sales volume, product mix, commodity inflation, tariffs and organizational disruption as factors reducing margins and adjusted earnings.
- The company closed its New Windsor, New York lighting facility and moved production to other facilities. It incurred $1.8 million of restructuring costs, including $1.1 million of inventory write-downs reported separately, and expects annual savings of approximately $4.0 million.
- The New Windsor facility was classified as held for sale at $7.5 million. The company expected a sale for approximately $12 million in the first quarter of fiscal 2020, potentially generating a book gain.
- The company recorded $560,000 of severance costs and a favorable $1.2 million benefit-policy adjustment.
- Fiscal 2019 included a $5.9 million income-tax benefit, including a $928,000 benefit related to the anticipated New Windsor sale.
- The company adopted revenue-recognition guidance under ASC 606 using the modified retrospective method, increasing opening retained earnings by $591,000.
- The company expected adoption of the new lease standard on July 1, 2019 to add approximately $9.5 million to $12.5 million of right-of-use assets and corresponding lease liabilities, without a material income-statement or cash-flow effect.
Outlook and Principal Risks
Management did not provide specific fiscal 2020 revenue or earnings guidance in the supplied filing. Management expects facility consolidation to improve utilization and generate approximately $4.0 million of annual savings, and expects proceeds from the New Windsor sale to support liquidity.
- Demand is cyclical and seasonal and depends significantly on commercial, industrial, retail, petroleum and convenience-store activity.
- Raw materials and components represented approximately 62% of cost of sales in fiscal 2019. Steel, aluminum, LEDs, electronics and other input costs remain exposed to inflation, shortages and tariffs.
- Approximately 32% of sales came from the petroleum/convenience-store market, creating exposure to oil prices, industry investment cycles and customer spending decisions.
- Competition, customer pricing pressure, project mix and execution of large image-conversion programs could further affect margins.
- Potential risks include inventory obsolescence, customer credit losses, product warranty and recall costs, cybersecurity and privacy compliance, litigation, intellectual-property protection, key-personnel turnover and LIBOR replacement risk.
- The company’s goodwill balance declined to $10.4 million after the fiscal 2019 impairment. Future adverse operating results or valuation changes could result in additional impairment.
Investor Verification Checklist
- Verify whether the New Windsor facility sale closed in fiscal 2020 and whether the anticipated proceeds and book gain were realized.
- Assess whether the projected $4.0 million annual savings from facility consolidation were achieved and whether restructuring costs are complete.
- Monitor Lighting sales, pricing, gross margin and goodwill impairment risk.
- Evaluate whether Graphics growth converts into improved margins as large projects mature.
- Reconcile reported earnings with adjusted operating income, EBITDA and free cash flow, particularly the effect of goodwill, restructuring, severance and tax items.
- Review debt utilization, covenant compliance, interest rates and liquidity after the reduction of the revolving facility to $75 million.
- Assess the sustainability of the $0.20-per-share annual dividend given recurring net losses and debt levels.
- Confirm the balance-sheet effects of ASC 842 lease adoption and the accounting effects of ASC 606 revenue recognition.