LSI Industries Inc. FY2020 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2020, compared with fiscal 2019. The filing is not a 2019 fourth-quarter filing, although it includes unaudited quarterly data, including the quarter ended June 30, 2020.
Business context
LSI manufactures and sells LED indoor and outdoor lighting solutions and visual graphics, signage, digital displays, and installation services. Lighting represented 67% of fiscal 2020 sales and Graphics represented 33%. Approximately 36% of fiscal 2020 sales were concentrated in the petroleum/convenience-store market. About 5% of consolidated sales were generated outside the United States.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $305.6 million | $328.9 million | Down 7% |
| Gross profit | $73.5 million | $73.7 million | Down $0.2 million |
| Gross margin | 24.1% | 22.4% | Up 170 basis points |
| Operating income (loss) | $13.1 million | $(19.9) million | Improved $33.0 million |
| Operating margin | 4.3% | (6.0%) | Improved |
| Net income (loss) | $9.6 million | $(16.3) million | Returned to profitability |
| Diluted EPS | $0.36 | $(0.63) | Improved |
| Cash flow from operations | $29.7 million | $11.5 million | Up $18.2 million |
| Capital expenditures | $2.7 million | $2.6 million | Up $0.1 million |
| Cash and equivalents | $3.5 million | $1.0 million | Up $2.6 million |
| Long-term debt | $0 | $39.5 million | Down $39.5 million |
Reported FY2020 operating income and net income benefited materially from $4.8 million and $3.7 million pretax gains on the sales of the New Windsor and North Canton facilities, respectively. FY2019 included a $20.2 million goodwill impairment charge. On a non-GAAP basis, adjusted operating income was $6.4 million versus $4.0 million, adjusted net income was $3.2 million versus $1.0 million, and adjusted EBITDA was $15.0 million versus $14.2 million.
Free cash flow, as defined by the company, was $47.1 million in FY2020, including $20.2 million of proceeds from asset sales, compared with $8.9 million in FY2019. Working capital was $51.2 million, with a current ratio of 2.48:1. Accounts receivable declined to $37.8 million from $54.7 million, and days sales outstanding improved to 56 days from 63 days. Inventory declined to $38.8 million from $43.5 million.
LSI had no borrowings under its secured $75 million revolving credit facility at June 30, 2020 and reported full availability and compliance with all covenants. The facility expires in the third quarter of fiscal 2022. Lease liabilities recognized under the new lease standard totaled $11.4 million at June 30, 2020, including $9.4 million of operating lease liabilities and $2.0 million of finance lease liabilities.
Material changes versus the prior comparable period
- Lighting sales declined 12% to $206.2 million, principally because of COVID-19-related construction disruption, distributor inventory de-stocking, and competitive pressure. Lighting gross margin improved to 27.1% from 23.4%, and adjusted operating income increased modestly to $11.6 million from $11.2 million.
- Graphics sales increased 6% to $99.4 million, supported by petroleum-market and digital-sales growth. Graphics gross margin declined to 16.7% from 19.8% because of customer-program mix, early-stage petroleum products, start-up costs, and manufacturing realignment for digital products.
- Manufacturing was consolidated through the sale of the New Windsor, New York facility and the North Canton, Ohio facility. Production was moved to existing Ohio and Kentucky locations and a smaller leased Akron, Ohio facility.
- Net interest expense declined to $0.9 million from $2.2 million because of reduced borrowings. Other expense increased to $0.5 million from $0.1 million, primarily due to Mexican peso devaluation.
- Operating cash flow improved substantially through earnings recovery and aggressive working-capital management. Financing activities used $44.4 million, primarily reflecting debt repayments in excess of borrowings.
- The company adopted ASC 842 lease accounting in FY2020, recognizing right-of-use assets and lease liabilities; management reported no material effect on operations or cash flow.
Outlook, risks, contingencies, and unusual items
Management did not provide quantified fiscal 2021 revenue or earnings guidance. Management stated that liquidity was adequate for reasonably foreseeable needs and that the credit facility plus operating cash flow were expected to support operational and capital-expenditure requirements, while noting that COVID-19 could change liquidity needs.
- COVID-19 reduced demand across markets during the fourth quarter, disrupted non-residential construction and installation schedules, caused distributor de-stocking, and created uncertainty regarding backlog quality, production capacity, supply, customer credit, and future demand.
- Backlog declined to $26.2 million at June 30, 2020 from $30.7 million, with orders expected to ship or be installed within twelve months.
- Raw materials represented approximately 60% of cost of sales in FY2020. Steel, aluminum, LEDs, electronic components, tariffs, shortages, and supplier lead times could pressure margins; the company does not actively hedge these risks.
- The petroleum/convenience-store market accounted for approximately 36% of sales, creating exposure to oil prices, industry investment, economic conditions, and customer purchasing decisions.
- In August 2020, LSI experienced a malware incident affecting certain network systems. Management reported minimal business interruption and an immaterial financial impact, with no confidential data extracted or compromised based on third-party testing.
- Product warranties generally extend from one to five years, with some terms up to ten years. The warranty liability was $7.0 million at June 30, 2020, compared with $7.7 million at June 30, 2019.
- The company reported various routine legal proceedings, negotiations, and customer bankruptcies but stated that no material adverse outcome was expected. No standby letters of credit were outstanding at June 30, 2020.
- The company paid $5.3 million of dividends in FY2020 and maintained an indicated annual dividend rate of $0.20 per share. In August 2020, the board declared a quarterly dividend of $0.05 per share.
Important facts for investors to verify
- Whether COVID-19-related demand, construction disruption, distributor de-stocking, and backlog conversion materially affect fiscal 2021 results.
- Whether improved Lighting margins and cost savings are sustainable without the benefit of facility-sale gains and other unusual items.
- The performance and margin trajectory of the Graphics Segment during its transition from print to digital products.
- The company’s ability to maintain positive operating cash flow and dividend payments while sales remain below FY2019 levels.
- Availability, covenant compliance, and expiration terms of the $75 million revolving credit facility, including exposure to variable interest rates and LIBOR replacement.
- Potential inventory obsolescence, customer credit losses, warranty costs, raw-material inflation, tariffs, and supply-chain disruptions.
- Whether the August 2020 malware incident creates any later operational, legal, privacy, or remediation costs.