LSI Industries Inc. — Fiscal 2019 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
LSI Industries designs, manufactures and markets lighting, graphics and technology solutions for indoor and outdoor applications. The filing covers the three and six months ended December 31, 2018, compared with the corresponding fiscal 2018 periods. The company operates through Lighting and Graphics segments, with operations solely in North America. The interim financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2018 | Three Months Ended Dec. 31, 2017 | Six Months Ended Dec. 31, 2018 | Six Months Ended Dec. 31, 2017 |
|---|---|---|---|---|
| Net sales | $89.5 million | $92.3 million | $174.5 million | $179.8 million |
| Gross profit | $19.7 million | $25.3 million | $40.9 million | $49.0 million |
| Gross margin | 22.0% | 27.4% | 23.4% | 27.3% |
| Operating income (loss) | $(20.3) million | $4.5 million | $(17.3) million | $(20.3) million |
| Net income (loss) | $(15.8) million | $(1.5) million | $(14.0) million | $(17.1) million |
| Diluted EPS | $(0.61) | $(0.06) | $(0.54) | $(0.66) |
| Cash flow from operations | Not separately provided | Not separately provided | $7.6 million | $(0.04) million |
The second-quarter operating loss includes a $20.2 million goodwill impairment charge. Excluding specified non-GAAP items, adjusted operating income was $1.5 million versus $4.6 million in the prior-year quarter, and adjusted net income was $0.9 million, or $0.03 per diluted share, versus $3.3 million, or $0.12 per share.
- Lighting revenue declined 8% in the quarter to $63.7 million and 9% for the first half to $125.1 million.
- Graphics revenue increased 12% in the quarter to $25.9 million and 17% for the first half to $49.4 million.
- Second-quarter segment operating income was $(18.5) million for Lighting and $0.9 million for Graphics. Corporate and eliminations were $(2.7) million.
- Cash and cash equivalents were $9.6 million at December 31, 2018, compared with $3.2 million at June 30, 2018.
- Working capital was $74.8 million, with a current ratio of 2.49 to 1.
- Accounts receivable were $56.4 million and inventories were $54.1 million at December 31, 2018.
- Capital expenditures were $1.6 million for the first six months. Cash dividends paid were $2.6 million.
- Long-term debt was $48.4 million. The company had $51.6 million of availability under its $100 million revolving credit facility at December 31, 2018 and stated that it was in compliance with all loan covenants.
Material Changes Versus the Prior Comparable Period
- Consolidated second-quarter sales declined 3%, primarily because of lower Lighting sales, continued market softness, competitive pricing and a shift in product mix.
- Gross margin decreased to 22.0% from 27.4%, reflecting lower volume, competitive pricing, commodity inflation and facility-closure costs, partially offset by manufacturing efficiencies.
- Reported operating results were adversely affected by the $20.2 million Lighting goodwill impairment. The impairment followed a sustained and significant decline in the company’s stock price and an interim impairment test.
- Graphics sales grew, particularly in petroleum and quick-service restaurant markets, but Graphics margins and operating income declined because of a mix shift toward large, initially lower-margin projects and higher outside-service and bad-debt expense.
- First-half operating cash flow improved to $7.6 million from a $43,000 use of cash, primarily due to favorable changes in accounts payable and accounts receivable, partly offset by higher inventory.
- The company adopted ASC Topic 606 on July 1, 2018 using the modified retrospective method, increasing opening retained earnings by $591,000. Prior-period results were not recast.
- Retained earnings declined from $15.1 million at June 30, 2018 to $(0.9) million at December 31, 2018, primarily reflecting the first-half net loss, partly offset by the revenue-recognition adoption adjustment.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal quantitative revenue or earnings guidance in the filing. Management expects the New Windsor, New York facility closure and production transfer to be completed by June 30, 2019, with expected annual savings of approximately $4.0 million. Estimated restructuring costs for that closure are $0.8 million to $1.5 million, mostly over the following two quarters and through the eventual facility sale.
- The company also closed a leased warehouse and light-assembly facility in Hawthorne, California and moved activity to Blue Ash, Ohio.
- Through December 31, 2018, restructuring costs totaled $556,000, with additional facility-closure inventory write-downs of $1.1 million for the first six months.
- Severance expense was $492,000 for the first six months, with a $1.7 million severance liability outstanding at December 31, 2018.
- Management cited cyclical demand, competitive products and pricing, customer and market acceptance, commodity inflation, inventory management, reliance on key customers, customer financial difficulties, debt covenant compliance, cyber threats, litigation, restructuring execution and goodwill impairment estimates as significant risks.
- The company’s stock price declined from a reported high of $8.69 in February 2018 to $3.17 on January 30, 2019. The filing added a risk factor that further declines could impair the company’s ability to raise capital.
- The company declared a quarterly dividend of $0.05 per share payable February 12, 2019, implying an indicated annual rate of $0.20 per share. Future dividends remain subject to board discretion and financial condition.
- The company stated that cash flow from operations and borrowing capacity are adequate for fiscal 2019 operating and capital-expenditure needs, but continued business cyclicality could adversely affect liquidity and results.
- The company had no material standby letters of credit and stated that pending legal proceedings were not expected to have a material adverse effect.
- Management concluded that disclosure controls were effective as of December 31, 2018. Additional controls were implemented for ASC Topic 606.
The filing contains an apparent inconsistency in the Lighting Segment discussion: the table reports second-quarter gross profit of $4.7 million, while the narrative states $14.7 million. The consolidated financial statements and segment operating results should be reviewed to resolve this discrepancy.
Most Important Facts for Investors to Verify
- Whether the $20.2 million goodwill impairment represents the final material impairment or whether additional impairment risk remains in the Lighting reporting units.
- Actual progress, costs, timing and realized savings from the New Windsor and Hawthorne facility closures.
- Whether Lighting demand, pricing pressure and gross-margin deterioration stabilize, and whether Graphics projects achieve expected margins over their life cycles.
- Compliance with the revolving-credit facility’s indebtedness-to-EBITDA and fixed-charge-coverage covenants as operating results evolve.
- Working-capital trends, particularly the increase in inventory and accounts receivable and their effect on operating cash flow.
- The impact of ASC Topic 606 and the forthcoming lease-accounting standard on reported assets, liabilities, revenue and earnings.
- The discrepancy between the reported Lighting gross-profit table and related MD&A narrative.