LSI Industries Inc. — Form 10-Q Summary
Business Context and Reporting Period
LSI Industries designs and manufactures commercial and industrial lighting, graphics and visual-image products, electronic components, and LED products and video screens. The filing covers the unaudited quarter and six months ended December 31, 2011, representing fiscal 2012 second quarter and first half. Reportable operations are Lighting, Graphics, Electronic Components, and All Other.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2011 | Three Months Ended Dec. 31, 2010 | Six Months Ended Dec. 31, 2011 | Six Months Ended Dec. 31, 2010 |
|---|---|---|---|---|
| Net sales | $68.8 million | $74.8 million | $134.3 million | $154.7 million |
| Gross profit | $14.9 million | $18.6 million | $30.4 million | $39.3 million |
| Gross margin | 21.7% | 24.9% | 22.6% | 25.4% |
| Operating income | $1.2 million | $4.6 million | $3.4 million | $11.3 million |
| Operating margin | 1.8% | 6.2% | 2.5% | 7.3% |
| Net income | $0.8 million | $2.9 million | $2.1 million | $7.2 million |
| Diluted EPS | $0.03 | $0.12 | $0.09 | $0.30 |
Six-month operating cash flow was $19.9 million, compared with $2.3 million in the prior-year period. Capital expenditures were $1.7 million, and financing cash uses were $2.8 million, including $2.6 million of dividends. Cash and cash equivalents increased to $19.5 million from $4.1 million at June 30, 2011.
At December 31, 2011, working capital was $85.6 million and the current ratio was 5.00 to 1. Accounts receivable were $41.1 million and inventories were $40.8 million. Total debt consisted primarily of a $1.1 million mortgage, all classified as current; the $30 million U.S. revolving facility and $5 million Canadian facility were fully available. The company stated that it was in compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined 8.1%; first-half sales declined 13.2%.
- Lighting was the principal positive contributor. Second-quarter Lighting sales increased 12.7% to $53.5 million, and operating income increased 29.1% to $2.8 million. First-half sales increased 7.0% to $102.7 million.
- Graphics was the primary negative contributor. Second-quarter sales fell 51.4% to $10.1 million and the segment recorded an $0.9 million operating loss versus $3.0 million of operating income. First-half sales fell 55.2% to $20.6 million and the segment recorded a $1.4 million operating loss versus $7.8 million of operating income.
- Electronic Components second-quarter sales declined 20.1% and operating income declined 61.8% to $0.7 million. First-half operating income declined 38.3% to $1.8 million.
- The decline in Graphics sales was primarily attributable to completion of the 7-Eleven image-conversion program. Management stated that this program reduced petroleum/convenience-store sales by $12.6 million in the second quarter and $28.2 million in the first half.
- LED sales increased 16.4% in the second quarter to $20.5 million and increased 6.0% in the first half to $36.3 million, driven primarily by Lighting.
- Goodwill associated with the Graphics Segment was fully impaired. A $258,000 impairment charge was recorded in the first quarter and finalized without change in the second quarter.
- Corporate and eliminations operating losses improved to $1.2 million in the second quarter and $2.7 million in the first half, partly because certain Montreal LED research and development costs were allocated to operating segments rather than corporate expense.
Guidance, Outlook, Risks and Unusual Items
Management did not provide explicit revenue or earnings guidance in the filing. It expected fiscal 2012 capital expenditures of approximately $5.0 million, excluding acquisitions, and stated that available cash flow and $35 million of credit facilities were adequate for fiscal 2012 operating and capital needs.
The Board established an indicated annual cash dividend rate of $0.24 per share, with a $0.06 quarterly dividend declared in January 2012. The stated dividend policy targets 50% to 70% of expected current-year net income, subject to Board discretion and capital requirements.
- Management highlighted the risk that large customer image-conversion programs may not be replaced immediately after completion.
- Important risks include competitive pricing, demand and market acceptance, customer concentration or financial difficulty, cyclical and seasonal conditions, collectibility of receivables, warranty and inventory reserves, impairment of goodwill and intangibles, litigation and regulatory compliance, acquisitions, and general economic conditions.
- Graphics goodwill impairment reflected recession-related market effects, lower discounted cash flows, and a decline in the company’s stock price. Further impairment could result if operating forecasts or market conditions deteriorate.
- The company reported no material off-balance-sheet arrangements and stated that legal proceedings and other contingencies were not expected to have a material adverse effect.
- Disclosure controls were assessed as effective, and no material changes in internal control over financial reporting were reported.
Most Important Facts for Investors to Verify
- Whether Lighting growth and higher LED demand can offset the completed 7-Eleven program and weakness in Graphics.
- Whether Graphics can return to profitability after the substantial reduction in program-related revenue and the full goodwill impairment.
- Whether the strong $19.9 million first-half operating cash flow is sustainable or primarily reflects working-capital reductions, particularly lower inventories and receivables.
- The assumptions and sensitivity underlying goodwill and intangible-asset impairment testing.
- The renewal of the Canadian credit facility and repayment or refinancing of the $1.1 million mortgage maturity.
- The adequacy of customer, warranty, inventory-obsolescence, and tax reserves in light of competitive pressure and customer financial risk.