LSI Industries Inc. — Fiscal 2017 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended December 31, 2016; comparative periods ended December 31, 2015. The interim financial statements are unaudited. LSI operates through Lighting, Graphics, and Technology segments, with operations solely in the United States.
Financial Results and Position
| Metric | Q2 FY2017 | Q2 FY2016 | Six Months FY2017 | Six Months FY2016 |
|---|---|---|---|---|
| Net sales | $85.7 million | $84.7 million | $169.8 million | $170.6 million |
| Gross profit | $21.4 million | $23.9 million | $42.2 million | $47.3 million |
| Gross margin | 25.0% | 28.2% | 24.9% | 27.7% |
| Operating income | $2.8 million | $5.4 million | $3.9 million | $11.1 million |
| Operating margin | 3.3% | 6.4% | 2.3% | 6.5% |
| Net income | $2.0 million | $3.8 million | $2.8 million | $7.5 million |
| Diluted EPS | $0.08 | $0.15 | $0.11 | $0.30 |
- Cash flow: Six-month operating cash flow was $4.6 million versus $5.5 million in the prior-year period. Capital expenditures were $2.7 million versus $3.4 million. Financing activities used $2.7 million, including $2.5 million of dividends.
- Liquidity: Cash and cash equivalents were $33.0 million at December 31, 2016, compared with $33.8 million at June 30, 2016. Working capital was $94.2 million, and the current ratio was 3.55:1.
- Debt: No borrowings were outstanding under the unsecured $30 million revolving credit facility. The facility expires in the third quarter of fiscal 2019, and the company was in compliance with its covenants.
- Balance sheet: Total assets were $195.8 million and shareholders’ equity was $157.8 million. Accounts receivable increased to $49.5 million, while inventory declined to $42.4 million. The allowance for doubtful accounts was $381,000.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 1.1%, while first-half sales decreased 0.5%. Lighting sales increased 1.0% in Q2 and 1.6% for the first half; Technology sales increased 26.5% and 16.7%, respectively; Graphics sales declined 2.9% and 9.3%, respectively.
- Profitability deteriorated materially. Q2 operating income declined 48%, and first-half operating income declined 65%. Net income declined 47% in Q2 and 62% for the first half.
- Lighting LED fixture sales increased 10.9% in Q2 and 13.0% for the first half. LED products represented 76.7% of Lighting sales in Q2 and 74.1% for the first half, while traditional lighting sales declined.
- Margins were pressured by competitive pricing, product mix, inflation in steel, aluminum and copper, higher commissions, warranty and other operating costs, and restructuring charges.
- Accounts receivable days sales outstanding increased to 53 days from 47 days at June 30, 2016.
Outlook, Commentary, Risks and Unusual Items
- LSI closed its Kansas City, Kansas lighting facility and ceased operations before December 31, 2016, reflecting the shift from fluorescent and other traditional technologies toward LED. Management expects approximately $1.4 million of annual operating profit improvement and cost savings, beginning in the third quarter of fiscal 2017.
- The Woonsocket, Rhode Island manufacturing operation was consolidated into North Canton, Ohio. Management expects approximately $680,000 of annual savings. The Beaverton, Oregon facility was consolidated into Ohio facilities, with expected annual savings of approximately $450,000.
- Fiscal 2017 restructuring, plant-closure and related inventory write-down costs totaled $1.753 million for the first half, including $400,000 of inventory write-downs. Additional restructuring costs of approximately $209,000 were expected in the remainder of fiscal 2017. Facilities and certain equipment held for sale totaled $3.176 million at December 31, 2016; management expects gains on sale of the Kansas City and Woonsocket facilities.
- Management presented adjusted results excluding restructuring, plant-closure and severance costs. Adjusted operating income was $3.5 million in Q2 and $5.8 million for the first half; adjusted diluted EPS was $0.10 and $0.16, respectively. These are non-GAAP measures.
- The Board declared a quarterly dividend of $0.05 per share payable February 14, 2017, implying an indicated annual rate of $0.20 per share.
- The company expects the adoption of the new revenue standard primarily to affect the timing of revenue on certain installation projects rather than total sales; the impact has not been quantified. Other pending accounting standards, including leases and share-based compensation, had not yet been quantified.
- Key risks include competitive pressures, product demand and market acceptance, reliance on major customers, customer credit and collectability, cyclical and seasonal conditions, warranty and inventory reserves, litigation and regulatory matters, integration and restructuring execution, impairment of goodwill and intangible assets, and commodity-cost inflation.
- Management stated that pending legal proceedings, customer bankruptcies and negotiations are not expected to have a material adverse effect. No standby letters of credit or off-balance-sheet arrangements were outstanding.
Investor Verification Priorities
- Verify whether the Kansas City, Woonsocket and Beaverton closures deliver the projected annual savings and whether asset sales produce the anticipated gains.
- Track Graphics demand, installation activity, Lighting mix and pricing, Technology intersegment sales, and consolidated gross-margin recovery.
- Monitor receivables aging and DSO, warranty reserves of $6.0 million, inventory reserves, and potential additional impairment or restructuring charges.
- Reconcile reported results with management’s non-GAAP adjusted results and assess whether the excluded costs are truly nonrecurring.
- Confirm adoption impacts and revenue timing changes from the new revenue-recognition standard, particularly for installation and project-based contracts.