LSI Industries Inc. Fiscal 2018 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2018. The request metadata references “2017 Q4,” but the supplied filing is the company’s fiscal 2018 annual report, not a quarterly filing.
Business Context
LSI provides integrated lighting, graphics, digital signage, controls and related installation and project-management services, primarily to commercial, industrial, petroleum/convenience-store, restaurant, automotive and retail customers. Lighting represented 76% of fiscal 2018 sales and Graphics represented 24%. The company operates primarily in the United States and had approximately 1,223 full-time and 123 agency employees at June 30, 2018.
Financial Performance and Position
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $342.0 million | $331.4 million | Up 3.2% |
| Gross profit | $89.2 million | $81.9 million | Up 9.0% |
| Gross margin | 26.1% | 24.7% | Up 140 basis points |
| Operating income (loss) | $(21.7) million | $3.6 million | Declined $25.3 million |
| Net income (loss) | $(19.5) million | $3.0 million | Declined $22.5 million |
| Diluted EPS | $(0.76) | $0.12 | Declined $0.88 |
| Cash flow from operations | $11.5 million | $21.3 million | Down $9.8 million |
- Lighting sales were $260.6 million, up 0.6%; Graphics sales were $81.4 million, up 12.5%.
- Lighting operating results declined to a $12.8 million loss from $14.1 million of income, primarily because of a $28.0 million goodwill impairment charge. Graphics operating income increased 130% to $5.6 million.
- LED fixture sales increased 16.1% to $203.5 million and represented 92.9% of lighting product sales, compared with 81.1% in fiscal 2017.
- Reported operating margin was approximately negative 6.3%, compared with 1.1% in fiscal 2017. Excluding identified special items, adjusted operating income was $9.6 million, or approximately 2.8% of sales, versus $7.3 million in fiscal 2017.
- Cash and cash equivalents were $3.2 million. Working capital was $67.9 million, with a current ratio of 2.61 to 1.
- Long-term debt was $45.4 million at June 30, 2018, drawn under a secured $100 million revolving credit facility; $54.6 million was available as of August 19, 2018. The facility expires in the third quarter of fiscal 2022, and the company reported compliance with its covenants.
- Capital expenditures were $3.4 million. Cash dividends paid were $5.2 million, and the indicated annual dividend rate was $0.20 per share.
Material Changes Versus the Prior Comparable Period
- Sales increased modestly, but reported profitability reversed sharply because of the $28.0 million Lighting goodwill impairment, $3.1 million of transition and realignment costs, higher interest expense and a $3.3 million deferred-tax charge related to the Tax Cuts and Jobs Act.
- The company’s comparable fiscal 2018 sales excluding Atlas decreased $19.4 million, or 6.2%, from fiscal 2017. Atlas Lighting, acquired February 21, 2017, contributed a full year of sales in fiscal 2018 versus slightly more than four months in fiscal 2017.
- Graphics improved substantially, supported by digital signage and petroleum/convenience-store sales, while Lighting margins benefited from product mix and manufacturing efficiencies but remained burdened by competitive pricing and commodity inflation.
- Operating cash flow declined because accounts receivable, inventory and accounts payable movements were less favorable. Days sales outstanding increased to 53 days from 51 days.
- Goodwill declined from $58.5 million to $30.5 million after the impairment. Total shareholders’ equity declined from $160.1 million to $139.3 million.
Outlook, Commentary, Risks and Unusual Items
- Management stated that the credit facility plus operating cash flow should be adequate for fiscal 2019 operating and capital-expenditure needs.
- Backlog was $28.8 million at June 30, 2018, compared with $30.2 million at June 30, 2017; orders were expected to ship or be installed within twelve months.
- Management is emphasizing integrated lighting, graphics, digital signage, controls and IoT capabilities, product innovation and lean manufacturing. In August 2018, the company announced a reorganization around key markets and customers and consolidated separate lighting, Atlas and graphics leadership structures into one LSI organization.
- Raw materials represented approximately 61% of cost of sales. Steel, aluminum, LEDs, electronic components and other commodity costs, tariffs and supply shortages may pressure margins; fiscal 2018 price increases did not fully offset commodity inflation.
- Approximately 30% of fiscal 2018 sales were concentrated in the petroleum/convenience-store market. Customer image-conversion programs can create significant growth but may also produce difficult comparisons when programs are completed.
- The business is cyclical and seasonal, with demand affected by construction activity, weather, customer budget cycles and economic conditions. Other risks include competition, customer creditworthiness, inventory obsolescence, product warranties and recalls, intellectual-property protection, cybersecurity, litigation, key personnel retention and acquisition integration.
- The company recorded $1.9 million of severance expense in fiscal 2018, including costs related to the departure of its CEO. The accrued severance liability was $1.8 million at June 30, 2018.
- Internal control over financial reporting and disclosure controls were assessed as effective, and Grant Thornton issued unqualified opinions on the financial statements and internal controls.
Important Facts for Investors to Verify
- Whether Lighting revenue and profitability improve after the goodwill impairment and organizational realignment.
- Whether LED growth and Graphics/digital-signage growth offset weakness in traditional lighting and petroleum/convenience-store demand.
- Debt repayment progress, borrowing-base availability, interest costs and compliance with revolving-credit covenants.
- Cash conversion, including accounts-receivable collection, inventory levels and working-capital requirements.
- The sustainability of the $0.20 annual dividend in light of the fiscal 2018 net loss and reduced operating cash flow.
- Potential further goodwill or intangible-asset impairments, particularly if the share price or Lighting operating outlook deteriorates.
- The effect of tariffs and commodity prices, and the company’s ability to pass cost increases through to customers.
- The fiscal 2019 impact of adopting the new revenue-recognition standard, including the expected $0.6 million to $1.0 million credit adjustment to opening retained earnings.