LSI Industries Inc. Q1 Fiscal 2021 Summary
Business Context and Reporting Period
LSI Industries Inc. filed an unaudited Form 10-Q for the three months ended September 30, 2020, compared with the three months ended September 30, 2019. The company operates through Lighting and Graphics segments serving commercial, industrial, petroleum, convenience-store, retail, quick-service restaurant, automotive and related markets, primarily in North America.
Financial Performance and Liquidity
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $70.0 million | $88.7 million | Down 21% |
| Gross profit | $18.3 million | $21.9 million | Down 16% |
| Gross margin | 26.1% | 24.6% | Up approximately 150 bps |
| Operating income | $2.2 million | $6.8 million | Down $4.6 million |
| Operating margin | 3.1% | 7.7% | Down approximately 460 bps |
| Net income | $2.0 million | $4.5 million | Down 56% |
| Diluted EPS | $0.07 | $0.17 | Down $0.10 |
| Cash flow from operations | $7.6 million | $6.4 million | Up $1.3 million |
| Capital expenditures | $0.4 million | $0.4 million | Approximately unchanged |
| Free cash flow | $7.2 million | $18.3 million | Down $11.1 million |
Lighting sales declined 28% to $45.4 million, while Graphics sales declined 4% to $24.6 million. Lighting operating income was $3.6 million versus $9.2 million; Graphics operating income improved to $1.8 million from $1.0 million. Adjusted operating income, excluding restructuring or plant-closure items and stock compensation, was $2.7 million versus $2.6 million.
At September 30, 2020, cash and cash equivalents were $9.5 million, working capital was $55.1 million, and the current ratio was 2.29 to 1. The company had no long-term debt, $75.0 million available under its revolving credit facility, and was in compliance with all loan covenants. Finance lease liabilities were $1.9 million and operating lease liabilities were $8.9 million.
Material Changes Versus the Prior Comparable Period
- Sales were adversely affected by COVID-19-related disruption, particularly lower construction activity and a reduced Lighting backlog entering the quarter.
- The prior-year period benefited from a $4.8 million pretax gain on the sale of the New Windsor, New York facility and related net restructuring benefits. The current quarter included only $3,000 of restructuring costs.
- Despite lower consolidated sales, adjusted operating income increased modestly because of improved gross margins, cost reductions and lower operating expenses.
- Graphics operating income improved primarily from organizational realignment and lower spending.
- Operating cash flow increased because of earnings and working-capital management, including lower inventory and improved receivables collection. Accounts receivable increased to $44.1 million, while reported DSO improved to 54 days from 56 days at June 30, 2020.
- The effective tax rate fell to 11.6% from 29.3%, mainly because of a $0.4 million favorable tax benefit related to the CARES Act net operating-loss carryback.
- The company adopted the current expected credit loss standard on July 1, 2020 without a material financial statement impact.
Outlook, Commentary, Risks and Unusual Items
Management did not provide quantitative revenue or earnings guidance. Management stated that the $75 million credit facility and operating cash flows were adequate for fiscal 2021 operating and capital expenditure needs, while noting that liquidity needs would continue to be assessed as COVID-19 impacts evolve.
- COVID-19 may continue to affect demand, construction activity, project installations, supply chains, operating results and financial condition. Future outbreaks and government responses remain uncertain.
- Graphics experienced project installation delays and lower Petroleum-market sales, partly offset by growth in other retail and digital markets.
- Goodwill and intangible asset impairment testing depends on judgments concerning forecasts, future cash flows, discount rates, stock price and market conditions. Net goodwill was $10.4 million at September 30, 2020.
- The company reported an August 2020 cybersecurity incident that caused minimal business interruption and an immaterial net financial impact.
- Management stated that ordinary-course legal proceedings, customer bankruptcies and negotiations were not expected to have a material adverse effect. No standby letters of credit were outstanding.
- The board declared a quarterly dividend of $0.05 per share payable November 17, 2020, implying an annual rate of $0.20 per share.
Investor Verification Checklist
- Verify whether Lighting demand and backlog recover from COVID-19-related construction and market disruptions.
- Assess whether improved gross margins and cost controls are sustainable at current or recovering sales levels.
- Monitor working-capital conversion, receivables collection, inventory reserves and operating cash flow.
- Confirm continued compliance with revolving-credit covenants and availability through the facility’s fiscal 2022 maturity.
- Evaluate potential goodwill or intangible-asset impairment if operating results, market conditions or the share price weaken.
- Review subsequent filings for developments related to COVID-19, cybersecurity, customer bankruptcies, project delays and dividend capacity.