LSI Industries Inc. Form 10-Q Summary
Business Context and Reporting Period
This unaudited Form 10-Q covers the three and nine months ended March 31, 2017, LSI Industries’ fiscal 2017 third quarter and year-to-date period. The company operates through Lighting, Graphics, and Technology segments, with operations located in the United States. The filing includes the February 21, 2017 acquisition of Atlas Lighting Products, a manufacturer of LED lighting products.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2017 | Three Months Ended March 31, 2016 | Nine Months Ended March 31, 2017 | Nine Months Ended March 31, 2016 |
|---|---|---|---|---|
| Net sales | $78.2 million | $70.7 million | $248.0 million | $241.4 million |
| Gross profit | $18.4 million | $16.5 million | $60.6 million | $63.8 million |
| Operating income | $(0.8) million | $0.7 million | $3.1 million | $11.9 million |
| Net income | $(0.5) million | $0.5 million | $2.3 million | $8.1 million |
| Diluted EPS | $(0.02) | $0.02 | $0.09 | $0.32 |
- Consolidated gross margin was approximately 23.5% in the quarter and 24.5% for the nine months, based on reported net sales and gross profit.
- Quarterly adjusted operating income was $0.4 million versus $0.9 million in the prior-year quarter. Nine-month adjusted operating income was $6.2 million versus $12.3 million.
- Quarterly adjusted net income was $0.4 million, or $0.01 per diluted share, versus $0.6 million, or $0.02 per share, in the prior-year quarter. Nine-month adjusted net income was $4.5 million, or $0.17 per share, versus $8.3 million, or $0.33 per share.
- Operating cash flow for the first nine months was $12.9 million, down from $15.2 million in the prior-year period.
- Capital expenditures were $3.5 million, compared with $8.4 million in the prior-year period. Acquisition spending was $95.1 million.
- Cash and cash equivalents were $4.4 million at March 31, 2017, compared with $33.8 million at June 30, 2016.
- Working capital was $67.0 million, compared with $88.5 million at June 30, 2016. The current ratio declined to 2.68 from 3.26.
- Long-term debt was $55.0 million at March 31, 2017, compared with no long-term debt at June 30, 2016. The company had $45.0 million available under its secured $100 million revolving credit facility at March 31, 2017 and reported compliance with all covenants.
- The company declared a quarterly dividend of $0.05 per share, implying an indicated annual rate of $0.20 per share.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 10.5%, while nine-month sales increased 2.7%. Management reported third-quarter organic sales growth of 1.1% and essentially flat nine-month organic sales.
- Lighting sales increased 13.6% in the quarter and 5.1% year to date, substantially reflecting the Atlas acquisition and continued LED growth. LED lighting represented 81.8% of Lighting sales in the quarter and 76.5% year to date.
- Graphics sales declined 4.5% in the quarter and 8.0% year to date; Graphics operating income fell to a $0.5 million loss in the quarter and declined 67.5% year to date.
- Technology sales increased 35.5% in the quarter and 22.9% year to date, although year-to-date operating income declined 8.5% because of lower gross profit and restructuring costs.
- Operating performance was reduced by higher selling and administrative expenses, $1.5 million of acquisition deal costs, a $0.5 million intangible-asset impairment, restructuring and plant-closure costs, and related inventory write-downs. These items were partly offset by a $1.4 million gain on the sale of the Kansas City facility.
- The effective tax rate was 43.3% in the quarter and 22.7% year to date, compared with 30.5% and 32.3%, respectively, in the prior-year periods.
Guidance, Outlook, Risks, and Unusual Items
- Management expects the Kansas City facility closure to provide approximately $1.4 million of annual net operating profit improvement and cost savings, the Woonsocket consolidation approximately $0.7 million, and the Beaverton consolidation approximately $0.5 million. The filing states that realization of these savings had begun, but does not provide formal earnings guidance.
- The Atlas acquisition had preliminary purchase accounting. The $97.5 million purchase price included $96.9 million of cash and $0.6 million of warrants; preliminary goodwill was $47.9 million and identified intangible assets were $34.3 million. The valuation was expected to be completed in the fourth quarter of fiscal 2017.
- The company recorded a $0.5 million impairment of a Graphics customer-relationship intangible asset. Preliminary annual goodwill and indefinite-lived intangible-asset tests indicated no impairment, but testing was not yet finalized.
- Woonsocket property was classified as held for sale at $1.5 million. Management expected a gain on sale but had not recognized that gain as of March 31, 2017.
- Reported risks include competitive products, demand and market acceptance, customer concentration and credit risk, cyclical and seasonal demand, litigation and regulatory costs, acquisition integration, retention of acquired employees, unfavorable economic conditions, impairment assessments, and the adequacy of reserves for receivables, inventory, and warranties.
- The company expects to adopt the new revenue-recognition standard no later than July 1, 2018. It does not expect a material change in total sales but has not quantified possible timing effects for installation-related projects. Lease-accounting and other accounting-standard impacts remained under evaluation.
- Management stated that there were no material changes in market-risk exposure, no standby letters of credit, and no material adverse effect expected from disclosed legal proceedings and contingencies.
Important Facts for Investors to Verify
- Confirm final Atlas purchase-price allocations, goodwill and intangible valuations, and the acquisition’s ongoing contribution to sales, margins, cash flow, and leverage.
- Monitor cash generation, debt utilization, interest costs, covenant headroom, and the company’s ability to fund operations and dividends with only $4.4 million of cash at quarter-end.
- Assess whether the expected savings from Kansas City, Woonsocket, and Beaverton closures offset lost capacity, restructuring costs, and potential execution risks.
- Evaluate Graphics Segment demand, margins, customer-program timing, and the significance of the $0.5 million intangible impairment.
- Reconcile reported GAAP results with management’s adjusted measures and consider whether excluded restructuring, acquisition, impairment, severance, and inventory items may recur.
- Review the final goodwill impairment testing, the pending Woonsocket sale, warranty reserves, receivables allowances, inventory reserves, and the impact of future accounting-standard adoption.