LSI Industries Inc. — Form 10-Q Summary
Business context and reporting period
LSI Industries designs and manufactures commercial lighting, graphics, electronic components, LED products and related installation and project-management services. Reportable segments are Lighting, Graphics and Electronic Components, with an All Other category. This unaudited Form 10-Q covers the three and six months ended December 31, 2012, representing the second quarter and first half of fiscal 2013, compared with the corresponding fiscal 2012 periods.
Financial performance and liquidity
| Metric | Q2 FY2013 | Q2 FY2012 | First half FY2013 | First half FY2012 |
|---|---|---|---|---|
| Net sales | $71.1 million | $68.8 million | $145.8 million | $134.3 million |
| Gross profit | $13.9 million | $14.9 million | $31.8 million | $30.4 million |
| Gross margin | 19.5% | 21.7% | 21.8% | 22.6% |
| Operating income (loss) | $(2.7) million | $1.2 million | $0.3 million | $3.4 million |
| Operating margin | (3.8)% | 1.8% | 0.2% | 2.5% |
| Net income (loss) | $(2.5) million | $0.8 million | $(0.6) million | $2.1 million |
| Diluted EPS | $(0.10) | $0.03 | $(0.03) | $0.09 |
| Operating cash flow | Not separately provided | Not separately provided | $9.7 million | $19.9 million |
- Second-quarter sales increased 3.4%; first-half sales increased 8.6%.
- Lighting generated the majority of sales and remained profitable, with first-half operating income of $7.0 million versus $6.1 million in the prior year. Graphics remained loss-making, while Electronic Components shifted from $1.8 million of first-half operating income to a $0.8 million loss.
- Cash and equivalents were $14.5 million at December 31, 2012, compared with $15.3 million at June 30, 2012. Working capital was $78.6 million, and the current ratio was 4.36 to 1.
- The company had no borrowings under its $30 million U.S. revolving facility, apart from a $0.3 million standby letter of credit, and no borrowings under its $5 million Canadian facility. Management reported compliance with all loan covenants.
- First-half capital expenditures were $3.1 million. Dividends paid were $7.2 million, including an accelerated $0.06-per-share quarterly dividend and an additional $0.12-per-share dividend. The indicated fiscal 2013 annual dividend rate was $0.24 per share.
Material changes versus the prior comparable period
- Profitability declined despite higher sales. Second-quarter gross profit fell $1.0 million and operating income declined $3.9 million, primarily because of inventory reserves, higher operating expenses and a $2.1 million goodwill impairment charge.
- The Electronic Components reporting unit, LSI Virticus, recorded a $2.1 million goodwill impairment after reduced sales forecasts. Net goodwill declined to $10.8 million from $12.9 million at June 30, 2012.
- The All Other category recorded a $1.2 million reserve for technologically obsolete inventory at the Canadian operation, contributing to a second-quarter gross loss of $0.8 million.
- The Virticus contingent earn-out liability was reduced from $0.877 million to $0.218 million, with a related $0.659 million reduction recorded in selling and administrative expenses and a $0.046 million reversal of accrued interest. The remaining liability, including interest, was $0.233 million.
- Second-quarter LED sales decreased 8.5% to $18.7 million, although first-half LED sales increased 17.1% to $42.5 million. First-half growth included a large LED sports video screen sale.
- Research and development expense increased to $3.2 million in the first half from $2.6 million. Stock-option expense increased to $0.6 million from $0.2 million.
Outlook, commentary, risks and unusual items
Management stated that operating cash flow and available borrowing capacity were adequate for fiscal 2013 operating and capital needs. Fiscal 2013 capital expenditures were expected to be approximately $10.0 million, excluding acquisitions. The filing does not provide formal revenue or earnings guidance.
- Management identified continuing customer caution regarding large image and brand programs, economic conditions, cyclical and seasonal demand, competition, product acceptance and reliance on key markets and customers as risks.
- Petroleum and convenience-store customers represented approximately 31% of second-quarter consolidated sales and 28% of first-half sales, making this an important market concentration by business focus, although the company reported no formal customer concentration in consolidated sales or receivables.
- Goodwill and intangible-asset valuations depend on forecasts, discounted cash flows, discount rates and other significant judgments. The Virticus goodwill was scheduled for retesting in the annual impairment test as of March 1, 2013.
- Additional risks include inventory obsolescence, customer collectability, warranty claims, tax valuation allowances, litigation and the integration and performance of acquired businesses.
- Management reported that legal matters and customer bankruptcies were not expected to have a material adverse effect, and no material subsequent events requiring adjustment or disclosure were identified.
- Disclosure controls and procedures were deemed effective as of December 31, 2012, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the Electronic Components and All Other categories improve after the Virticus impairment and Canadian obsolete-inventory reserve.
- Whether gross margins recover from the second-quarter decline and whether inventory levels and reserves normalize.
- The results of the March 1, 2013 goodwill testing and any additional impairment charges.
- Actual fiscal 2013 capital expenditures versus the approximately $10 million expectation and the effect on cash balances.
- The sustainability of the dividend policy given the first-half net loss, $7.2 million of dividends paid and management’s stated earnings-based payout policy.
- Future LED demand, the timing of large image programs and continued dependence on the petroleum/convenience-store market.