LSI Industries Inc. Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2015, compared with the same periods ended March 31, 2014. Although the request identifies “2014 Q3,” the filing is for fiscal 2015 third quarter. Financial statements are unaudited.
Business Context
LSI operates through Lighting, Graphics, and Technology segments. The Company realigned segment reporting during the quarter following the appointment of a new chief executive officer; prior-period segment data was revised for comparability. LSI sold its Canadian subsidiary, LSI Saco Technologies, on September 30, 2014 and no longer has Canadian operations.
Key Financial Metrics
| Metric | Q3 FY2015 | Q3 FY2014 | 9M FY2015 | 9M FY2014 |
|---|---|---|---|---|
| Net sales | $68.6 million | $69.0 million | $231.8 million | $225.6 million |
| Gross profit | $16.3 million | $13.7 million | $55.5 million | $49.6 million |
| Gross margin | 23.8% | 19.9% | 23.9% | 22.0% |
| Operating income | $0.6 million | $(0.9) million | $5.3 million | $3.4 million |
| Net income | $0.4 million | $(1.0) million | $3.5 million | $1.7 million |
| Diluted EPS | $0.02 | $(0.04) | $0.14 | $0.07 |
| Operating cash flow | Not separately provided | Not separately provided | $21.8 million | $10.8 million |
Liquidity and capital structure: Cash and equivalents were $28.0 million at March 31, 2015, compared with $9.0 million at June 30, 2014. Working capital was $81.1 million and the current ratio was 3.60 to 1. The Company had no borrowings under its $30 million unsecured revolving credit facility, which expires in the third quarter of fiscal 2018, and was in compliance with all covenants. Capital expenditures were $3.4 million for the first nine months, compared with $4.5 million in the prior-year period. Dividends paid were $2.2 million, or $0.09 per share, compared with $4.3 million, or $0.18 per share.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 0.6%, while nine-month sales increased 2.7%.
- Lighting sales declined 7.0% in the quarter and 1.9% year to date, reflecting lower traditional-lighting sales and migration toward lower-cost LED products. Lighting operating income nevertheless increased 31.3% in the quarter and 29.4% year to date.
- Graphics sales increased 25.6% in the quarter and 23.0% year to date. The segment’s quarterly operating loss improved to $0.3 million from $1.6 million, and its nine-month result improved to $0.8 million of income from a $1.2 million loss.
- Technology sales increased 15.5% in the quarter and 7.4% year to date. Quarterly operating income increased to $0.9 million from $0.1 million, while year-to-date operating income increased 22.0%.
- Consolidated gross margin improved to 23.8% from 19.9% in the quarter and to 23.9% from 22.0% for the nine months, driven by manufacturing efficiencies, cost management, product mix, and lower selected expenses.
- LED-related sales increased 16.0% in the quarter to $29.5 million and 24.5% year to date to $97.4 million.
- Operating cash flow increased by $11.0 million year over year, aided by lower inventories, reduced receivables, and higher accrued expenses.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that cash flows from operations and the $30 million revolving facility should be adequate for fiscal 2015 operating and capital expenditure needs. No formal revenue or earnings guidance was provided.
- LSI initiated a reduction in force and employee retirements representing approximately 8.3% of salaried employees and approximately $3.7 million of annual compensation and benefit reductions. Third-quarter severance and facility-exit charges totaled approximately $0.3 million; nine-month severance charges were $1.3 million before adjustments.
- A $1.0 million self-insured death benefit was accrued in the third quarter following the death of former CEO Robert J. Ready. The remaining $0.6 million severance liability was recognized as income upon his death.
- The sale of LSI Saco generated $1.5 million of net cash proceeds and a $0.6 million pretax loss. The Company also recognized a $0.3 million gain on the sale of a manufacturing facility.
- Management presented non-GAAP adjusted results. Nine-month adjusted operating income was $7.2 million versus reported operating income of $5.3 million; adjusted net income was $4.8 million, or $0.20 diluted EPS, versus reported net income of $3.5 million, or $0.14 EPS. These measures exclude specified severance, death-benefit, asset-sale, subsidiary-sale, and tax items.
- Preliminary annual impairment testing indicated that goodwill and indefinite-lived intangible assets passed the impairment tests; final testing was expected in the fourth quarter. The Company stated that a material change was not anticipated.
- The maximum potential undiscounted Virticus earn-out liability was $3.0 million through fiscal 2017, but management considered payment unlikely. The Company disclosed ordinary-course legal proceedings and customer bankruptcies but assessed a material adverse outcome as unlikely.
- Previously identified internal-control material weakness concerning communication of extended customer warranty terms was reported as fully remediated. Management concluded disclosure controls were effective as of March 31, 2015.
- Key risks include competitive pressure, product demand and market acceptance, customer concentration or financial distress, seasonality and cyclicality, warranty and doubtful-account estimates, integration and retention risks, tax and accounting uncertainties, impairment judgments, litigation, and adverse economic conditions.
Investor Verification Checklist
- Verify the sustainability of margin improvement and whether the reduction in force produces the expected annual savings without impairing execution.
- Track Lighting’s transition from traditional products to LED products, including sales volume, pricing, product mix, and customer demand.
- Assess whether Graphics can sustain its sales growth and progress from a quarterly operating loss to consistent profitability.
- Review cash conversion, inventory reductions, receivable collections, warranty reserves, and the $3.4 million year-to-date capital spending level.
- Confirm completion of fourth-quarter goodwill and intangible-asset impairment testing and monitor the related assumptions.
- Evaluate the impact of the Saco divestiture and the Company’s continuing obligations, including the potential earn-out and warranty liabilities.
- Confirm the continuation of the $0.03 quarterly dividend and the Company’s ability to fund dividends while maintaining liquidity and covenant compliance.