LSI Industries Inc. 10-Q Summary
Business context and reporting period
LSI Industries designs and manufactures lighting, graphics, electronic components and related installation, project-management and service offerings, with increasing exposure to solid-state LED products. This unaudited Form 10-Q covers the three and six months ended December 31, 2013, the second quarter and first half of fiscal 2014, compared with the corresponding fiscal 2013 periods.
Financial performance and liquidity
| Metric | Q2 FY2014 | Q2 FY2013 | H1 FY2014 | H1 FY2013 |
|---|---|---|---|---|
| Net sales | $76.1 million | $71.1 million | $156.6 million | $145.8 million |
| Gross profit | $16.8 million | $13.9 million | $35.9 million | $31.8 million |
| Gross margin | 22.0% | 19.5% | 22.9% | 21.8% |
| Operating income (loss) | $1.5 million | $(2.7) million | $4.4 million | $0.3 million |
| Operating margin | 2.0% | (3.8)% | 2.8% | 0.2% |
| Net income (loss) | $0.9 million | $(2.5) million | $2.7 million | $(0.6) million |
| Diluted EPS | $0.04 | $(0.10) | $0.11 | $(0.03) |
- Six-month operating cash flow was $8.5 million, down from $9.7 million; capital expenditures were $2.7 million.
- Cash increased to $10.9 million at December 31, 2013 from $7.9 million at June 30, 2013. Financing cash use was $2.9 million, including $2.9 million of dividends.
- Working capital was $77.4 million, with a 3.73-to-1 current ratio. Accounts receivable declined to $41.1 million, while inventory increased to $47.2 million.
- No borrowings were outstanding under the $30 million U.S. revolving facility or the $5 million Canadian facility. The Company reported compliance with all loan covenants.
- Shareholders’ equity was $142.5 million; total assets were $172.0 million. The filing does not report outstanding funded debt at December 31, 2013.
Material changes versus the prior comparable period
- Quarterly sales increased 7.1%; first-half sales increased 7.4%. Lighting sales increased 6.8% in the quarter and 6.7% year to date, while Graphics sales increased 23.0% and 26.7%, respectively.
- Electronic Components sales declined 17.9% in the quarter and 14.6% year to date, although increased intersegment demand for LED circuit-board assemblies improved segment profitability.
- LED sales increased 46.7% in the quarter to $27.5 million and 24.0% year to date to $52.8 million. LED lighting growth was partly offset by declining traditional lighting sales.
- Profitability benefited from the absence of prior-year unusual charges, including a $2.1 million goodwill impairment and a $1.2 million obsolete-inventory reserve. The prior year also included a contingent earn-out liability reduction; the filing indicates no comparable reduction in fiscal 2014.
- Lighting operating income declined despite higher sales because of competitive pricing, manufacturing inefficiencies associated with new LED fixtures, expedited freight, higher compensation, warranty and research-and-development costs.
- Graphics reduced its quarterly operating loss to $0.3 million from $1.1 million and nearly reached break-even for the first half. Electronic Components and All Other returned to operating profit.
Outlook, commentary, risks and unusual items
- Management reported a significant increase in past-due Lighting backlog caused by strong LED demand and production bottlenecks. Operational improvements were underway, with expected benefits in the second half of fiscal 2014. No formal earnings or sales guidance is provided.
- The Board declared a regular quarterly dividend of $0.06 per share, implying a fiscal 2014 annual rate of $0.24 per share. Management states that its dividend policy generally targets 50% to 70% of expected current-year net income, subject to Board discretion.
- The maximum potential undiscounted Virticus earn-out liability was $4.0 million through fiscal 2017, but the recorded liability was zero and management considered achievement unlikely.
- Warranty liabilities increased to $1.4 million from $1.2 million at December 31, 2012. Inventory and warranty estimates, customer collectability, revenue recognition, taxes and impairment testing remain significant judgment areas.
- Management identified risks from competition, demand and market acceptance, customer concentration and credit quality, seasonality and cyclicality, litigation and regulatory compliance, acquisitions, economic conditions, technology changes and potential asset impairments.
- The Company stated that no potential goodwill impairment conditions were identified during the first six months of fiscal 2014. Prior-year goodwill associated with Virticus was fully impaired.
- Disclosure controls were deemed effective, and no material changes to internal control over financial reporting were reported.
Important facts for investors to verify
- Whether LED demand can be converted into sustainable margin improvement after pricing pressure, production inefficiencies, expedited freight and higher warranty costs.
- Whether the past-due backlog is reduced as projected and whether inventory growth can be converted into shipments and cash without additional obsolescence reserves.
- The sustainability of operating cash flow given higher inventories and the Company’s dividend policy.
- The performance and customer demand of the declining Electronic Components business and the still-unprofitable Graphics segment.
- Future impairment risk for the remaining $10.5 million of net goodwill and $8.4 million of other intangible assets.
- The effect of tax valuation allowances, uncertain tax positions and new tangible-property tax regulations on future tax expense and cash taxes.
- The filing’s unaudited status and the absence of formal full-year financial guidance.