LSI Industries Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the quarter ended September 30, 2011, LSI Industries’ first quarter of fiscal 2012, compared with the quarter ended September 30, 2010. The company operates through Lighting, Graphics, Electronic Components, and All Other business categories, serving commercial, industrial, retail, petroleum/convenience-store, graphics, and LED markets.
Financial performance and liquidity
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $65.5 million | $79.9 million | Down 18.0% |
| Gross profit | $15.5 million | $20.6 million | Down 25.0% |
| Gross margin | 23.6% | 25.8% | Down 2.2 percentage points |
| Operating income | $2.2 million | $6.6 million | Down 67.1% |
| Operating margin | 3.3% | 8.3% | Down 5.0 percentage points |
| Net income | $1.3 million | $4.3 million | Down 69.0% |
| Diluted EPS | $0.05 | $0.18 | Down $0.13 |
| Operating cash flow | $9.1 million | $(2.5) million | Improved $11.6 million |
- Segment sales were $49.2 million for Lighting, $10.5 million for Graphics, $4.4 million for Electronic Components, and $1.4 million for All Other.
- Lighting operating income was $3.3 million, Electronic Components operating income was $1.1 million, All Other reported a $0.1 million operating loss, and Graphics reported a $0.6 million operating loss.
- Cash and cash equivalents increased to $11.0 million from $4.1 million at June 30, 2011. Working capital was $85.1 million, and the current ratio was 5.17 to 1.
- Accounts receivable decreased to $41.5 million and inventories decreased to $47.3 million from $45.0 million and $50.3 million, respectively, at June 30, 2011.
- The company had $1.1 million of mortgage debt classified as current at September 30, 2011. Its $30 million U.S. revolving facility and $5 million Canadian facility were fully available, and the company reported compliance with all debt covenants.
- Capital expenditures were $0.8 million. Management expected fiscal 2012 capital expenditures of approximately $5.0 million, excluding acquisitions.
- Cash dividends paid were $1.2 million. A quarterly dividend of $0.06 per share, approximately $1.4 million, was declared for payment in November 2011.
Material changes versus the prior comparable period
- Revenue declined primarily because the Graphics Segment fell 58.2%, reflecting completion of the 7-Eleven image-conversion program. Graphics operating results shifted from $4.8 million of income to a $0.6 million loss.
- Petroleum/convenience-store sales decreased 45% to $18.3 million, or 28% of consolidated sales, from $33.8 million, or 42%, in the prior-year quarter.
- Lighting sales increased 1.5% to $49.2 million, although Lighting operating income decreased 3.4% to $3.3 million. Lighting sales of LED fixtures increased 16% to $14.7 million.
- Consolidated selling and administrative expenses decreased to $13.3 million from $14.0 million, while corporate administrative expenses declined 42.3%.
- Graphics gross margin declined to 17.5% from 27.9%, primarily due to lower volume and reduced overhead absorption.
- Goodwill associated with the Graphics Segment was determined to be fully impaired. The company recorded a preliminary $258,000 impairment charge; the impairment test was not complete and adjustments could be recorded by the end of the second quarter.
- Operating cash flow improved substantially because of reductions in receivables and inventories, despite lower earnings. Days sales outstanding increased to 55 days from 53 days at June 30, 2011.
Outlook, commentary, risks, contingencies, and unusual items
- Management described near-term conditions as challenging, citing recessionary effects, weak industrial production, high unemployment, commodity-price volatility, tight credit markets, weak housing conditions, and reduced demand across many markets.
- Management is pursuing expense and capital-expenditure controls, headcount reductions, and tighter management of receivables and inventories. It expects the economy to improve, but the timing is uncertain, and stated that difficult conditions could continue for several quarters.
- Management believes cash flows and the $35 million of available credit facilities are adequate for fiscal 2012 operating and capital-expenditure requirements.
- Key risks include customer concentration and financial difficulty, cyclical and seasonal demand, competitive pressure, collectibility of receivables, warranty and inventory reserves, litigation and regulatory matters, tax uncertainties, and impairment of goodwill and other intangible assets.
- The company reported no material off-balance-sheet arrangements or market-risk changes. Routine negotiations, customer bankruptcies, and legal proceedings were not expected by management to have a material adverse effect.
- Forward-looking statements are subject to substantial risks and are not being updated by the company.
Important facts for investors to verify
- Complete the Graphics Segment goodwill impairment test and determine whether the preliminary $258,000 charge requires adjustment.
- Assess whether replacement sales can offset the completed 7-Eleven program and the resulting decline in petroleum/convenience-store revenue.
- Monitor Graphics Segment margins, backlog, customer programs, and the company’s ability to restore profitability.
- Verify cash conversion, receivables aging, the increase in DSO, and inventory reductions as fiscal 2012 progresses.
- Confirm that the company remains within debt covenants and that the mortgage balance is repaid or refinanced as scheduled through August 2012.
- Evaluate whether the $0.06 quarterly dividend remains supported by earnings and cash flow given the decline in profitability.