LSI Industries Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three months ended September 30, 2015, representing the first quarter of fiscal 2016. The company operates through Lighting, Graphics, and Technology segments. Prior-period segment information was recast to reflect the current reporting structure. LSI sold its Canadian subsidiary, LSI Saco Technologies, on September 30, 2014 and no longer has Canadian operations.
Key financial metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $85.9 million | $78.5 million | Up 9.5% |
| Gross profit | $23.3 million | $18.6 million | Up 25.5% |
| Gross margin | 27.2% | 23.7% | Up 350 basis points |
| Operating income | $5.8 million | $2.5 million | Up 127.4% |
| Operating margin | 6.7% | 3.2% | Up approximately 350 basis points |
| Net income | $3.8 million | $1.5 million | Up 145.7% |
| Diluted EPS | $0.15 | $0.06 | Up $0.09 |
| Cash flow from operations | $3.0 million | $(0.2) million | Improved by $3.1 million |
| Capital expenditures | $1.4 million | $1.0 million | Up $0.4 million |
Segment sales were $59.1 million in Lighting, $21.8 million in Graphics, and $5.1 million in Technology. Segment operating income was $5.7 million, $2.2 million, and $1.3 million, respectively. LED-related sales increased 18.3% to $36.6 million and represented approximately 42.6% of consolidated sales.
At September 30, 2015, cash and cash equivalents were $28.4 million, working capital was $89.4 million, and the current ratio was 3.41 to 1. Accounts receivable were $46.3 million and inventories were $44.9 million. Total liabilities were $39.3 million, consisting primarily of current liabilities; the company reported no borrowings under its $30 million unsecured revolving credit facility and remained in compliance with all covenants. Shareholders’ equity was $149.1 million.
Cash increased by $2.0 million during the quarter to $28.4 million. Operating cash flow of $3.0 million exceeded capital expenditures of $1.4 million and cash dividends of $0.7 million. Financing cash flow included $1.3 million of proceeds and tax benefits from stock-option exercises.
Material changes versus the prior comparable period
- Lighting sales increased 6.0%, supported by an 18.5% increase in LED lighting sales. Lighting operating income increased 34.4% to $5.7 million.
- Graphics sales increased 35.8% to $21.8 million, primarily from image-conversion programs and petroleum/convenience-store customers. Graphics operating income increased to $2.2 million from $53,000.
- Technology sales declined 23.7% to $5.1 million because of lower transportation, medical, sports, and other customer sales. Higher intersegment sales and lower operating expenses helped increase Technology operating income to $1.3 million from $632,000.
- Gross-margin expansion reflected improved manufacturing efficiency, material and labor management, lower freight costs as a percentage of sales, and favorable sales mix.
- Selling and administrative expenses increased to $17.6 million from $15.9 million. Corporate expenses rose substantially, primarily because of higher compensation, new corporate research and development activity, and stock-based compensation.
- Stock-based compensation expense increased to approximately $1.8 million from $86,000, reflecting new stock-option and restricted-stock-unit awards. The company granted 942,800 options and awarded 72,000 restricted stock units during the quarter.
- The prior-year quarter included a $565,000 pretax loss on the sale of LSI Saco and a $343,000 gain on the sale of a building; neither item recurred in the current quarter.
- The effective tax rate declined to 34.9% from 39.5%, while income tax expense increased to $2.0 million because of higher pretax income.
Guidance, outlook, risks, contingencies, and unusual items
Management stated that cash generated from operations plus the available $30 million revolving credit facility should be adequate for fiscal 2016 operating and capital-expenditure needs. The filing does not provide formal revenue or earnings guidance.
Management identified opportunities in LED lighting, energy-saving controls, Internet-of-Things connectivity, beacons, and display technology. It also reported a reduction in force and employee retirements affecting approximately 8.3% of salaried employees, expected to reduce annual compensation and benefits by approximately $3.7 million. Severance and facility-exit charges of approximately $361,000 were recorded in the third quarter of fiscal 2015, not the current quarter.
- A petroleum/convenience-store customer represented approximately 11% of consolidated sales and 11% of consolidated net accounts receivable at September 30, 2015.
- The company recorded a $3.7 million warranty liability at quarter-end, compared with $3.4 million at June 30, 2015.
- The maximum potential undiscounted contingent earn-out liability related to the Virticus acquisition is $2.0 million through fiscal 2017, although management does not consider payment probable.
- The company is subject to ordinary-course negotiations, customer bankruptcies, and legal proceedings. Management believes these matters will not materially affect financial condition, results, cash flows, or liquidity.
- Key estimation risks include revenue recognition for installation and customer-acceptance arrangements, doubtful-account allowances, warranty and inventory reserves, income taxes, and goodwill and intangible-asset impairment.
- The company had no standby letters of credit and no off-balance-sheet arrangements. Management reported effective disclosure controls as of September 30, 2015.
- The board declared a quarterly dividend of $0.04 per share payable in November 2015, implying an annual indicated rate of $0.16 per share.
Important facts for investors to verify
- Whether Graphics growth and the higher consolidated gross margin are sustainable after the quarter’s customer-specific image-conversion activity.
- The extent to which Technology’s lower external sales are offset by intersegment demand from LED lighting.
- The recurring impact of substantially higher stock-based compensation and corporate research and development spending.
- Accounts-receivable collection trends, inventory growth, customer concentration, and adequacy of the $405,000 doubtful-account allowance.
- Warranty claims and the adequacy of the $3.7 million warranty reserve.
- Progress toward the company’s LED, controls, connectivity, and digital-display initiatives and any related impairment risk.
- Future dividend capacity, use of the revolving credit facility, covenant compliance, and the contingent earn-out exposure.
- The eventual impact of ASU 2014-09 revenue-recognition guidance, which the company had not yet determined as of the filing.