Business Context and Reporting Period
LSI Industries Inc. filed an unaudited Form 10-Q for the three months ended September 30, 2016, the first quarter of fiscal 2017. The company operates Lighting, Graphics, and Technology segments, with operations located solely in the United States. The filing was signed November 4, 2016.
Financial Results and Key Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $84.2 million | $85.9 million | (2.1%) |
| Gross profit | $20.8 million | $23.3 million | (10.8%) |
| Gross margin | 24.8% | 27.2% | (240 bps) |
| Operating income | $1.1 million | $5.8 million | (81.5%) |
| Operating margin | 1.3% | 6.7% | (540 bps) |
| Net income | $0.8 million | $3.8 million | (77.9%) |
| Diluted EPS | $0.03 | $0.15 | (80.0%) |
| Operating cash flow | $0.3 million | $3.0 million | Down $2.6 million |
- Adjusted operating income, excluding restructuring, plant-closure and related inventory write-down costs and other severance, was $2.3 million versus reported operating income of $1.1 million.
- Adjusted net income was $1.6 million, or $0.06 diluted EPS, compared with reported net income of $0.8 million, or $0.03 diluted EPS.
- Segment sales were $60.4 million for Lighting, $18.9 million for Graphics, and $4.9 million for Technology.
- Lighting LED fixture sales increased 15.4% to $43.1 million and represented 71.5% of Lighting sales, compared with 63.3% in the prior-year quarter.
- Capital expenditures were $2.0 million, compared with $1.4 million in the prior-year quarter.
- Cash dividends paid were $1.3 million, compared with $0.7 million. In October 2016, the board declared a $0.05 per-share quarterly dividend, implying an annual rate of $0.20 per share.
Liquidity, Capital Structure, and Balance Sheet
- Cash and cash equivalents were $30.7 million at September 30, 2016, down from $33.8 million at June 30, 2016.
- Working capital was $89.2 million, compared with $88.5 million at June 30, 2016; the current ratio was 3.56 to 1 versus 3.26 to 1.
- Accounts receivable were $46.2 million, with reported DSO of 47 days. Inventories were $43.6 million.
- The company reported no borrowings under its $30 million unsecured revolving credit facility; $0.4 million was reserved for a standby letter of credit. The facility expires in the third quarter of fiscal 2019.
- LSI was in compliance with all loan covenants and stated that cash flows from operations and available borrowing capacity were adequate for fiscal 2017 operating and capital expenditure needs.
- Total liabilities were $35.9 million and shareholders’ equity was $156.9 million. The filing does not report outstanding funded debt at quarter-end.
Material Changes Versus the Prior Comparable Period
- Sales declined modestly because a $3.4 million, or 15.4%, reduction in Graphics sales more than offset growth in Lighting of 2.2% and Technology of 8.3%.
- Operating income fell $4.7 million, primarily because of lower sales and gross profit, higher selling and administrative expenses, and $1.1 million of restructuring, plant-closure, related inventory write-down, and other severance costs.
- Lighting operating income declined 50.9% to $2.8 million despite higher sales, reflecting lower gross margin, higher selling and administrative costs, and facility-closure charges.
- Graphics operating income declined 54.5% to $1.0 million, principally due to lower petroleum/convenience-store, retail grocery, and national drug-store sales and lower installation revenue.
- Technology operating income declined 42.5% to $0.7 million, mainly due to lower intersegment sales, restructuring charges, and higher expenses.
- Operating cash flow decreased substantially, partly because accrued expenses declined by $5.5 million during the quarter.
- The weighted-average diluted share count increased to 25.9 million from 25.2 million, while stock compensation expense remained significant at approximately $1.7 million.
Guidance, Outlook, Risks, and Unusual Items
- LSI announced the closure of its Kansas City, Kansas lighting facility, expected by December 31, 2016. Total restructuring costs are expected to be approximately $1.0 million, excluding a $0.4 million inventory write-down already recorded; the filing separately presents total fiscal 2017 restructuring expenses expected at $1.342 million.
- The Kansas City closure is expected to generate approximately $1.4 million of annual pretax operating profit improvement and cost savings beginning in the third quarter of fiscal 2017.
- The Beaverton, Oregon facility consolidation was completed September 30, 2016 and is expected to generate approximately $0.45 million of annual savings beginning in the second quarter of fiscal 2017.
- Management identified the transition from fluorescent and other traditional lighting technologies to LED as the basis for the Kansas City closure. Competitive pricing, steel costs, product mix, demand cycles, customer concentration risk, and technology changes remain relevant operating risks.
- The company recorded $273,000 of fixed-asset impairment charges and increased its warranty reserve to $5.3 million from $3.7 million at September 30, 2015.
- A contingent earn-out liability has a maximum potential undiscounted amount of $236,000, although management considers payment unlikely. The company also had a $0.4 million standby letter of credit and ordinary-course legal matters.
- Management stated that no material adverse effect is expected from pending negotiations, customer bankruptcies, or legal proceedings, but reserves are recorded when losses are probable and reasonably estimable.
- The company had no off-balance-sheet arrangements and reported no material change in market-risk exposure.
- Forward-looking statements are subject to risks involving demand, market acceptance, competition, customer financial condition, litigation, regulatory compliance, acquisitions, economic conditions, impairment assessments, and estimates for reserves and allowances.
Important Facts for Investors to Verify
- Whether the Kansas City closure and Beaverton consolidation deliver the projected annual savings and whether additional restructuring costs arise.
- Whether Graphics sales recover, particularly in petroleum/convenience-store, retail, and installation activities.
- Whether the continuing shift to LED offsets declining traditional-lighting demand without further margin pressure.
- Whether operating cash flow improves after the accrued-expense reduction and remains sufficient to fund dividends and capital expenditures.
- The adequacy of warranty, inventory-obsolescence, doubtful-account, and impairment reserves.
- The impact of the pending revenue-recognition, inventory, lease, credit-loss, and share-based-payment accounting standards; the filing states that their effects were still being evaluated.
- The company’s continued compliance with revolving-credit covenants and its remaining borrowing capacity.