LSI Industries Inc. — Form 10-Q Summary
Business context and reporting period
LSI Industries designs and manufactures lighting, graphics, electronic components and related installation, project-management and service offerings. The report covers the unaudited three months ended September 30, 2012, the first quarter of fiscal 2013, compared with the first quarter of fiscal 2012.
Reportable activities were Lighting, Graphics, Electronic Components, All Other, and Corporate and Eliminations. The petroleum/convenience-store market represented approximately 26% of consolidated sales in both periods. LED-related sales increased substantially and included lighting products, graphics containing LEDs, and LED video screens.
Key financial metrics
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $74.7 million | $65.5 million | +14.1% |
| Gross profit | $17.9 million | $15.5 million | +15.6% |
| Gross margin | 23.9% | 23.6% | +0.3 percentage points |
| Operating income | $3.0 million | $2.2 million | +39.0% |
| Operating margin | 4.1% | 3.3% | +0.7 percentage points |
| Net income | $1.8 million | $1.3 million | +38.2% |
| Diluted EPS | $0.08 | $0.05 | Increase |
| Operating cash flow | $3.5 million | $9.1 million | -$5.6 million |
| Capital expenditures | $1.3 million | $0.8 million | +$0.5 million |
Income before taxes was $3.0 million versus $2.1 million. Income tax expense was $1.2 million versus $0.8 million, producing effective tax rates of 39.1% and 38.1%, respectively. Net interest expense was approximately $20,000 versus $40,000.
Segment performance and material changes
- Lighting: Sales increased 13.5% to $55.8 million and operating income increased 36.6% to $4.5 million. Growth reflected stronger niche and national-account sales, a large LED sports video-screen sale, and increased LED lighting demand. Segment gross margin improved to 24.6% from 23.6%.
- Graphics: Sales increased 2.5% to $10.7 million. The operating loss narrowed to $355,000 from $581,000, helped by lower selling and administrative expense and the absence of the prior-year goodwill impairment charge. Gross margin declined to 16.0% from 17.5%.
- Electronic Components: Sales increased 30.7% to $5.8 million, but operating income declined to $786,000 from $1.1 million because of higher compensation and a lower margin on intersegment sales.
- All Other: Sales increased approximately 70% to $2.4 million, and the operating loss improved to $2,000 from $139,000.
- LED sales: Consolidated LED sales were $23.8 million, up 50.3% from $15.8 million. The increase was primarily attributable to Lighting.
- Corporate costs: Corporate and eliminations operating expense increased to $1.9 million from $1.5 million, primarily due to higher compensation and stock-option expense.
Cash flow, liquidity, debt and capital resources
- Cash and cash equivalents were $15.9 million at September 30, 2012, compared with $15.3 million at June 30, 2012.
- Working capital was $84.7 million, versus $83.7 million at June 30, and the current ratio was 4.18:1 versus 4.65:1.
- Operating cash flow declined primarily because accounts receivable and inventories increased. Inventory rose $3.0 million to $44.3 million; net accounts receivable rose $0.5 million to $44.9 million. DSO improved to 53 days from 55 days.
- The company had no borrowings against its $30 million U.S. unsecured revolving credit facility or its $5 million Canadian line. Both facilities were available, and the company reported compliance with all loan covenants.
- Financing cash outflows were $1.6 million, including $1.4 million of dividends and $0.1 million of treasury-share purchases through the employee deferred-compensation plan.
- Management expected fiscal 2013 capital expenditures of approximately $9.0 million, excluding potential acquisitions, and stated that cash flow and the $35 million of credit facilities were adequate for anticipated fiscal 2013 operating and capital needs.
Guidance, outlook, risks and unusual items
- The board declared a regular quarterly dividend of $0.06 per share, approximately $1.4 million, payable November 13, 2012. Management stated an indicated annual dividend rate of $0.24 per share, subject to board discretion and business requirements.
- Stock-option expense increased to approximately $518,000 from $128,000. Approximately $754,000 of unrecognized option expense remained, expected to be recognized over an average period of about 22 months.
- The prior-year quarter included a $258,000 goodwill impairment charge related to the Graphics Segment; no goodwill impairment was recorded in the current quarter. Net goodwill was $12.9 million at September 30, 2012, and the Graphics Segment goodwill was fully impaired.
- Management identified risks involving competitive products, demand and market acceptance, customer concentration and financial condition, seasonality and cyclicality, collections, litigation and regulatory compliance, acquisitions, economic conditions, tax matters, warranty and inventory reserves, and impairment testing.
- Legal proceedings, customer bankruptcies and other ordinary-course contingencies were disclosed. Management considered any potential loss remote and did not expect a material adverse effect on financial position, results, cash flows or liquidity.
- Disclosure controls were deemed effective, with no material change in internal control over financial reporting. The company reported no material change in market-risk exposure and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the rapid growth in LED sales, including the large sports video-screen project, is recurring or project-driven.
- Whether higher inventory and weaker operating cash conversion normalize as shipments and working-capital initiatives progress.
- Whether Graphics and Electronic Components margins recover, particularly given Graphics’ continuing operating loss and Electronic Components’ lower operating income.
- The sensitivity of goodwill and indefinite-lived intangible assets to changes in forecasts, discount rates, market conditions and stock price.
- The adequacy of receivable, inventory-obsolescence and warranty reserves, including the increase in the doubtful-account allowance to $484,000.
- Future capital spending, dividend sustainability and compliance with the revolving-credit covenants.