LSI Industries Inc. — Fiscal 2013 Form 10-K Summary
Business Context and Reporting Period
LSI Industries provides commercial lighting, graphics and visual-image solutions, LED video screens, lighting controls, electronic components and related professional services. Reportable operations comprise Lighting, Graphics, Electronic Components and an All Other category. The filing covers the fiscal year ended June 30, 2013; the request references 2012 Q4, but the filing is an annual FY2013 report and includes fourth-quarter comparative data.
- Lighting represented 73% of FY2013 sales, Graphics 17%, Electronic Components 7% and All Other 3%.
- Petroleum/convenience-store sales were $76.4 million, or 27.2% of total sales, compared with $71.2 million, or 26.5%, in FY2012.
- Backlog increased to $42.4 million at June 30, 2013 from $32.2 million, with orders generally expected to ship or be installed within twelve months.
Financial Performance and Key Metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $280.8 million | $268.4 million | +4.6% |
| Gross profit | $60.4 million | $60.3 million | +0.2% |
| Gross margin | 21.5% | 22.5% | Down approximately 1.0 percentage point |
| Operating income | $0.6 million | $6.3 million | Down $5.7 million |
| Operating margin | 0.2% | 2.4% | Down approximately 2.2 percentage points |
| Net income (loss) | $(0.1) million | $3.2 million | Declined $3.3 million |
| Diluted EPS | $(0.01) | $0.13 | Declined $0.14 |
| Cash flow from operations | $8.9 million | $24.4 million | Down $15.5 million |
| Capital expenditures | $7.6 million | $3.4 million | Up $4.1 million |
FY2013 quarterly net sales were $74.7 million, $71.1 million, $66.2 million and $68.8 million, respectively. Quarterly net income was $1.8 million, $(2.5) million, $(0.3) million and $0.8 million. Fourth-quarter FY2013 sales declined 3.3% from fourth-quarter FY2012, while fourth-quarter net income declined from $1.5 million to $0.8 million.
- Lighting sales increased 3.4% to $206.4 million, but operating income decreased 14.7% to $10.1 million. LED fixture sales were $71.4 million and LED video-screen sales were $6.0 million.
- Graphics sales increased 11.0% to $46.8 million, and the operating loss improved to $(1.3) million from $(1.9) million.
- Electronic Components sales increased 9.8% to $20.3 million, but the segment moved to a $(0.9) million operating loss from $3.6 million of operating income, primarily due to the Virticus lighting-controls business.
- All Other sales decreased 10.1% to $7.3 million and its operating loss increased to $(1.5) million.
- Total LED-related sales increased 8.5% to $79.6 million.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $7.9 million at June 30, 2013, down from $15.3 million.
- Working capital was $76.7 million versus $83.7 million; the current ratio was 3.93 versus 4.65.
- Net accounts receivable increased to $46.0 million, and days sales outstanding increased to 60 days from 55 days. A $4.7 million customer payment received in early July would have reduced reported DSO to 53 days if received before year-end.
- Inventory increased modestly to $42.1 million, while inventory-obsolescence reserves increased to $3.1 million.
- The company reported no outstanding long-term debt at year-end. It had a $30 million unsecured U.S. revolving facility and a $5 million Canadian facility, with substantially all capacity available as of August 30, 2013. The company was in compliance with loan covenants.
- Financing cash use was $8.6 million, primarily reflecting $8.6 million of dividends. The annual dividend rate was set at $0.24 per share for FY2014, or $0.06 per quarter.
Material Changes, Outlook and Unusual Items
- Operating performance weakened despite sales growth because of competitive pricing, higher employee and research-and-development costs, increased commissions, material costs and under-absorption at Virticus.
- LSI recorded a $2.4 million non-cash goodwill impairment charge in the Electronic Components Segment, fully impairing Virticus goodwill. No indefinite-lived intangible impairment was recorded.
- A $0.9 million contingent earn-out liability related to Virticus was reversed after revised sales forecasts reduced the remaining liability to zero. The filing states the maximum potential undiscounted earn-out could be $4 million if future sales forecasts were reestablished, but the likelihood was considered less than probable.
- All Other included a $1.2 million inventory reserve for technologically obsolete Canadian inventory; Lighting also recorded an approximately $0.8 million increase in obsolete-inventory reserves.
- Management provided no formal revenue or earnings guidance. It stated that available credit capacity and operating cash flow should be adequate for FY2014 operating and capital needs.
- Key risks include cyclical and seasonal demand, competition and pricing pressure, raw-material and electronic-component shortages, petroleum/convenience-store concentration, customer credit and proprietary-inventory exposure, acquisition integration, goodwill impairment, warranty costs, litigation and environmental compliance.
- Research and development spending increased to $6.5 million from $5.5 million. The company continued investing in LED lighting, video screens and lighting controls.
Investor Verification Checklist
- Verify the complete FY2013 cash-flow statement and the causes of the sharp decline in operating cash flow, particularly inventory, receivables and refundable taxes.
- Assess whether Virticus can reach profitability and whether additional goodwill, intangible-asset or inventory impairments may arise.
- Review the credit agreement, covenant calculations, borrowing availability and expiration dates of the $35 million credit facilities.
- Evaluate sustainability of the $0.24 annual dividend in light of the FY2013 net loss and reduced cash generation.
- Monitor petroleum/convenience-store concentration, customer-specific programs, backlog conversion and the effect of completed or delayed image-conversion programs.
- Review warranty reserves, obsolete-inventory reserves, the $1.2 million uncertain-tax-position liability and any developments in legal or customer-bankruptcy matters.
- Confirm that the FY2013 filing, rather than a standalone 2012 fourth-quarter filing, is the intended source period for analysis.