LSI Industries Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three months ended September 30, 2018, representing fiscal 2019 first quarter. LSI operates through Lighting and Graphics segments, serving petroleum/convenience, automotive, restaurant, retail, and other commercial markets. The filing presents results versus the three months ended September 30, 2017 and balance-sheet data versus June 30, 2018.
Key financial metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $85.0 million | $87.5 million | Down 2.9% |
| Gross profit | $21.3 million | $23.7 million | Down 10.3% |
| Gross margin | 25.0% | 27.1% | Down approximately 210 bps |
| Operating income (loss) | $2.9 million | $(24.8) million | Improved, largely due to prior-year goodwill impairment |
| Net income (loss) | $1.7 million | $(15.6) million | Returned to profitability |
| Diluted EPS | $0.07 | $(0.61) | Improved |
| Cash flow from operations | $2.2 million | $(2.7) million | Improved by $4.9 million |
Reported operating margin was approximately 3.5% and net margin approximately 2.1%. Adjusted operating income, excluding goodwill impairment and restructuring or plant-closure costs, was $3.5 million versus $3.2 million in the prior-year quarter. Adjusted net income was $2.2 million, or $0.08 per diluted share, versus $1.7 million, or $0.07 per diluted share.
- Lighting: Sales were $61.4 million, down 10.2%; operating income was $3.9 million versus a $22.9 million loss. LED products represented approximately 91% of Lighting product sales, while traditional lighting continued to decline.
- Graphics: Sales were $23.5 million, up 23.6%; operating income increased 61.7% to $2.4 million, driven mainly by growth in petroleum, quick-service restaurant, and digital technology business.
- Liquidity: September 30 cash was $4.2 million, working capital was $72.6 million, and the current ratio was 2.59 to 1.
- Debt: Long-term debt was $46.2 million under a $100 million secured revolving facility. Approximately $53.8 million was available at September 30, and the company was in compliance with all loan covenants. The facility expires in the third quarter of fiscal 2022.
- Capital allocation: Capital expenditures were $0.6 million, dividends paid were $1.3 million, and the November 2018 quarterly dividend was declared at $0.05 per share.
Material changes versus the prior comparable period
- Revenue declined modestly because a $7.0 million decline in Lighting more than offset a $4.5 million increase in Graphics.
- Prior-year results included a $28.0 million pre-tax goodwill impairment charge in the Lighting Segment; no comparable charge occurred in the current quarter.
- Current-quarter gross profit was pressured by lower Lighting volume, competitive pricing, commodity inflation, and $0.6 million of restructuring and plant-closure costs, partially offset by manufacturing efficiencies.
- Selling and administrative expenses decreased materially, including lower commissions and wage and benefit costs. A one-time $1.2 million favorable paid-time-off policy adjustment also benefited current-quarter earnings.
- The company adopted ASC Topic 606 using the modified retrospective method on July 1, 2018, increasing opening retained earnings by $0.6 million. The adoption increased opening accounts receivable by $4.9 million and reduced opening inventory by $4.2 million.
- Accounts receivable increased to $59.8 million from $50.6 million at June 30, while days sales outstanding increased to 59 days from 53 days. Inventory decreased to $49.6 million from $51.0 million.
Outlook, commentary, risks, and unusual items
Management stated that the company’s revolving credit capacity plus operating cash flow should be adequate for fiscal 2019 operating and capital expenditure needs. The filing does not provide formal revenue or earnings guidance.
On October 29, 2018, LSI announced the permanent closure of its New Windsor, New York manufacturing facility, which employs approximately 140 people. Production is expected to move to Erlanger, Kentucky and Blue Ash, Ohio, with completion expected by June 30, 2019. The action is intended to align the supply chain with changing lighting-market requirements and improve utilization of existing capacity.
Other notable items include the appointment of James A. Clark as CEO and President effective November 1, 2018, ongoing $1.6 million severance liability related to the former CEO, $0.2 million of severance payments during the quarter, and $0.2 million of restructuring liability at September 30. The company also recorded $0.8 million of inventory obsolescence expense.
Principal disclosed risks include competitive pressure, product demand and market acceptance, customer concentration and financial condition, cyclical and seasonal markets, collection and reserve estimates, litigation and regulatory costs, acquisition integration, employee retention, economic conditions, accounting and tax uncertainties, and potential goodwill or other asset impairment. The company reported no material off-balance-sheet arrangements other than operating leases and no standby letters of credit at September 30.
Important facts for investors to verify
- Whether Lighting revenue and adjusted operating income stabilize as traditional products continue to be replaced by LED products.
- The financial impact, timing, and execution risks associated with the New Windsor facility closure and production transfers.
- Whether the improvement in adjusted earnings persists after the one-time paid-time-off benefit and despite pricing, commodity, and wage pressures.
- Accounts receivable aging, the increase in DSO, inventory obsolescence reserves, and the sustainability of operating cash flow.
- Revolving-credit utilization, variable interest-rate exposure, covenant compliance, and capacity to fund dividends and restructuring costs.
- The effect of ASC Topic 606 adoption and the forthcoming lease-accounting standard on reported assets, liabilities, revenue, and earnings.