LSI Industries Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2019. The filing text and financial statements identify fiscal 2019; the supplied metadata stating “2018 Q3” appears inconsistent. Financial statements are unaudited.
Business Context
LSI designs, manufactures and markets lighting, graphics and technology solutions for indoor and outdoor applications. Its reportable segments are Lighting and Graphics, serving petroleum/convenience, automotive, restaurant, retail, grocery, pharmacy and other markets. Operations are located solely in North America.
Key Financial Metrics
| Metric | Three months ended Mar. 31, 2019 | Three months ended Mar. 31, 2018 | Nine months ended Mar. 31, 2019 | Nine months ended Mar. 31, 2018 |
|---|---|---|---|---|
| Net sales | $72.8 million | $78.8 million | $247.3 million | $258.6 million |
| Gross profit | $15.3 million | $19.9 million | $56.3 million | $68.9 million |
| Gross margin | 21.1% | 25.3% | 22.8% | 26.7% |
| Operating income (loss) | $(2.3) million | $0.7 million | $(19.6) million | $(19.5) million |
| Net income (loss) | $(3.2) million | $0.2 million | $(17.2) million | $(16.9) million |
| Diluted EPS | $(0.12) | $0.01 | $(0.66) | $(0.65) |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $6.4 million | $7.9 million |
- Third-quarter sales declined 8%; nine-month sales declined 4%.
- Third-quarter interest expense was $0.6 million, compared with $0.4 million; other expense was $0.2 million, primarily foreign-currency transaction losses.
- At March 31, 2019, cash was $1.7 million, accounts receivable were $52.1 million, inventory was $51.6 million and total assets were $208.7 million.
- Working capital was $68.3 million, with a current ratio of 2.59 to 1. Accounts receivable days sales outstanding increased to 60 days from 53 days at June 30, 2018.
- Long-term debt was $43.8 million. The amended revolving facility had $31.2 million available at March 31, 2019; management reported compliance with all loan covenants.
- The company paid $3.9 million of dividends during the first nine months and declared a further $0.05 per-share quarterly dividend payable May 14, 2019.
Material Changes Versus the Prior Comparable Period
- Lighting: Third-quarter sales decreased 14% to $52.8 million and operating income declined to $0.7 million from $3.0 million. Nine-month sales decreased 11% to $177.9 million.
- Graphics: Third-quarter sales increased 16% to $20.0 million, but operating results declined to a $0.9 million loss from $0.4 million of income. Nine-month sales increased 17% to $69.5 million, while operating income declined 43% to $2.4 million.
- Management attributed weaker results to competitive pricing, lower sales volume, unfavorable product and customer mix, commodity inflation, sales-organization realignment and lower-margin large customer projects.
- Third-quarter gross margin fell to 21.1% from 25.3%; management cited lower volume, pricing pressure, inflation and restructuring costs.
- The company recognized a $20.2 million Lighting Segment goodwill impairment in the first nine months, compared with $28.0 million in the prior-year period. This non-cash charge reduced reported operating income but did not directly reduce cash.
- Reported nine-month adjusted operating income was $3.2 million versus $8.6 million, and adjusted net income was $0.9 million versus $5.2 million. These are non-GAAP measures and exclude specified impairment, restructuring, severance, transition and tax items.
- Cash from operations decreased to $6.4 million from $7.9 million, while cash declined by $1.5 million to $1.7 million during the first nine months.
Guidance, Outlook, Risks and Unusual Items
- Management expects approximately $4.0 million of annual savings from closing the New Windsor, New York lighting facility and transferring production to existing facilities. Production transfer was expected to be completed by June 30, 2019.
- The company estimated total New Windsor restructuring costs of $0.2 million to $0.6 million, primarily in the following quarter and through the sale of the facility. It had incurred $0.8 million of related restructuring costs through March 31, 2019, plus inventory write-downs.
- The company also closed a leased Hawthorne, California facility and moved assembly to Ohio. Total restructuring costs for both closures were $0.9 million through March 31, 2019, excluding $1.1 million of facility-related inventory write-downs.
- In April 2019, LSI announced an agreement to sell the New Windsor facility for approximately $12 million of gross proceeds and expects a gain of $3 million to $5.5 million. Closing was subject to final approval from New Windsor officials and was expected by June 30, 2019.
- The annual goodwill impairment test was preliminary as of the filing. Management stated that the Lighting reporting unit had estimated value 54% above carrying value and the Graphics reporting unit 297% above carrying value, but the definitive test was expected in the fourth quarter.
- The revolving credit facility was reduced from $100 million to $75 million in February 2019. It expires in the third quarter of fiscal 2022, bears variable interest, and includes leverage and fixed-charge coverage covenants.
- Management identified risks including competitive and pricing pressure, cyclical and seasonal demand, customer concentration and financial health, inventory obsolescence, supplier reliance, restructuring execution, goodwill impairment, debt covenant compliance, litigation, tax estimates and cybersecurity.
- LSI adopted ASC Topic 606 using the modified retrospective method, increasing opening retained earnings by $0.6 million. The company was evaluating the effect of the new lease standard, effective for its fiscal 2020.
- Two senior executives resigned in April 2019: the Executive Vice President of Human Resources and General Counsel, and the Chief Commercial Officer.
- Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect. No standby letters of credit were outstanding at March 31, 2019.
Important Facts for Investors to Verify
- Confirm the filing period because the supplied metadata says 2018 Q3, while the filing reports the quarter ended March 31, 2019.
- Assess whether Lighting sales and margins stabilize after sales-organization changes, pricing actions and facility consolidations.
- Monitor Graphics Segment margins and customer-project economics as large, lower-margin programs mature.
- Verify completion and proceeds from the New Windsor facility sale, including the expected gain and related tax benefit.
- Review the definitive fourth-quarter goodwill and indefinite-lived intangible-asset impairment tests.
- Evaluate liquidity given only $1.7 million of cash, $43.8 million of debt, variable interest rates, dividend payments and reliance on operating cash flow and the revolving facility.
- Track inventory levels, obsolescence reserves and receivable collection performance, including the increase in DSO to 60 days.
- Distinguish reported GAAP losses from management’s non-GAAP adjusted results and reconcile all excluded restructuring, impairment, severance and tax items.