ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note About Forward-Looking Statements
This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including this section. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in in our Annual Report on Form 10-K in the following sections: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures about Market Risk,” and “Risk Factors.” All of those risks and uncertainties are incorporated herein by reference. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of LSI Industries Inc. MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended June 30, 2019, and our financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).
The Company’s condensed consolidated financial statements, accompanying notes and the “Safe Harbor” Statement, each as appearing earlier in this report, should be referred to in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Net Sales by Business Segment
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
|
September 30
|
|
|
|
2019
|
|
|
2018
|
|
Lighting Segment
|
|
$
|
63,191
|
|
|
$
|
61,432
|
|
Graphics Segment
|
|
|
25,510
|
|
|
|
23,525
|
|
|
|
$
|
88,701
|
|
|
$
|
84,957
|
|
Operating Income (Loss) by Business Segment
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
|
September 30
|
|
|
|
2019
|
|
|
2018
|
|
Lighting Segment
|
|
$
|
9,159
|
|
|
$
|
3,850
|
|
Graphics Segment
|
|
|
1,017
|
|
|
|
2,387
|
|
Corporate and Eliminations
|
|
|
(3,337
|
)
|
|
|
(3,303
|
)
|
|
|
$
|
6,839
|
|
|
$
|
2,934
|
|
Summary Comments
Fiscal 2020 first quarter net sales of $88,701,000 increased $3.7 million or 4.4% as compared to first quarter fiscal 2019. Net sales were favorably influenced by increased net sales in both the Lighting Segment (up $1.8 million or 2.9%) and the Graphics Segment (up $2.0 million or 8.4%).
Fiscal 2020 first quarter operating income of $6.9 million increased $4.0 million from operating income of $2.9 million in the first quarter of fiscal 2019. The $4.0 million increase in operating income in fiscal 2019 was impacted by the sale of the Company’s New Windsor, New York facility in the first quarter of fiscal 2020 which favorably resulted in a pre-tax gain of $4.8 million. Also contributing to the period-over-period change in operating income is a one-time adjustment to the Company’s paid-time-off policy in fiscal 2019 which resulted in a favorable pre-tax adjustment to earnings of $1.2 million with no comparable event in fiscal 2020. When the impact of the sale of the New Windsor facility along with the other restructuring and plant closure costs are removed from the operating results along with the one-time adjustment to the Company’s paid-time-off policy in fiscal 2019, operating income period-over-period remained relatively flat. Refer to the discussions in the “results of operations” for each of the Company’s reportable segments for further explanation of the period-over-period change in sales and operating income.
Non-GAAP Financial Measures
The Company believes it is appropriate to evaluate its performance after making adjustments to the as-reported U.S. GAAP operating income, net income, and earnings per share. Adjusted operating income, net income and earnings per share, which exclude the impact of restructuring and plant closure costs, are non-GAAP financial measures. We believe that these adjusted supplemental measures are useful in assessing the operating performance of our business. These supplemental measures are used by our management, including our chief operating decision maker, to evaluate business results. We exclude these items because they are not representative of the ongoing results of operations of our business. Below is a reconciliation of these non-GAAP measures to operating income, net income, and earnings per share for the periods indicated.
|
|
Three Months Ended September 30
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of operating income to adjusted operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income as reported
|
|
$
|
6,839
|
|
|
$
|
2,934
|
|
|
|
|
|
|
|
|
|
|
Restructuring and plant closure costs (includes a $4.8 million gain on the sale of the facility)
|
|
|
(4,588
|
)
|
|
|
590
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income
|
|
$
|
2,251
|
|
|
$
|
3,524
|
|
|
|
Three months ended Septeber 30
|
|
|
(In thousands, except per share data)
|
|
2019
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
Diluted
|
|
|
Reconciliation of net income to adjusted net income
|
|
|
|
|
|
EPS
|
|
|
|
|
|
|
|
EPS
|
|
|
Net Income as reported
|
|
$
|
4,475
|
|
|
$
|
0.17
|
|
|
|
$
|
1,749
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and plant closure costs
|
|
|
(3,449
|
)
|
|
|
(0.13
|
)
|
(1)
|
|
|
454
|
|
|
$
|
0.01
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income adjusted
|
|
$
|
1,026
|
|
|
$
|
0.04
|
|
|
|
$
|
2,203
|
|
|
$
|
0.08
|
|
|
The income tax effects of the adjustments in the tables above were calculated using the estimated U.S. effective income tax rates for the periods indicated. The income tax effects were as follows (in thousands):
(1) $(1,139)
(2) $136
Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 2018 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2017
Lighting Segment
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
|
September 30
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
63,191
|
|
|
$
|
61,432
|
|
Gross Profit
|
|
$
|
17,219
|
|
|
$
|
15,475
|
|
Operating Income
|
|
$
|
9,159
|
|
|
$
|
3,850
|
|
Lighting Segment net sales of $63,191,000 in the first quarter of fiscal 2020 increased 2.9% from fiscal 2019 same period net sales of $61,432,000. Sales increased despite inconsistent market conditions as the Company continues to focus on growth in core market verticals including the Automotive, Petroleum, QSR and Retail parking lot markets.
Gross profit of $17,219,000 in the first quarter of fiscal 2020 increased $1.7million or 11.3% from the same period of fiscal 2019 and increased from 25.2% to 27.2% as a percentage of Lighting Segment net sales (customer plus inter-segment net sales). The growth in gross profit and gross profit as a percentage of sales is the result of an increase in sales and due to favorable price/mix. Also contributing to the period-over-period change in gross profit is the initial cost savings from the closure of the Company’s New Windsor, New York facility.
Selling and administrative expenses of $8,060,000 in the first quarter of fiscal year 2020 decreased $3.6 million from the same period of fiscal 2019 selling and administrative expenses of $11,625,000, primarily due to the $4.8 million gain on the sale of the New Windsor, New York facility. When the $4.8 million gain is removed from fiscal 2020 results, there was a $1.3 million or 11.1% increase in selling and administrative expenses. The increase in selling and administrative expenses is mostly driven by higher commission expense which is the result of increased sales volume and a one-time adjustment to the Company’s paid-time-off policy in fiscal 2019 with no comparable event in fiscal 2020.
The Lighting Segment first quarter fiscal 2019 operating income of $9,159,000 increased $5.3 million from operating income of $3,850,000 in the same period of fiscal 2019 primarily due to the $4.8million gain on the sale of its New Windsor, New York facility. When the impact of $4.8 million gain is removed from fiscal 2020 results along with the restructuring and plant closure costs in both fiscal years, fiscal 2020 Non-GAAP adjusted operating income of $4,510,000 was $70,000 higher than fiscal 2019 Non-GAAP adjusted operating income of $4,440,000. The increase in sales volume and gross profit was partially offset by higher selling and administrative expenses.
Graphics Segment
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
|
September 30
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
25,510
|
|
|
$
|
23,525
|
|
Gross Profit
|
|
$
|
4,626
|
|
|
$
|
5,782
|
|
Operating Income
|
|
$
|
1,017
|
|
|
$
|
2,387
|
|
Graphics Segment net sales of $25,510,000 in the first quarter of fiscal 2020 increased $2.0 million or 8.4% from fiscal 2019 same period net sales of $23,525,000. Growth was realized across three product market applications; petroleum, other retail printed graphics, and digital signage.
Gross profit of $4,626,000 in the first quarter of fiscal 2020 decreased $1.2 million or 20.0% from the same period of fiscal 2019. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 24.6% in the first quarter of fiscal 2019 to 18.1% in the first quarter of fiscal 2020. The change in amount of gross profit is due to the net effect of increased net sales (customer plus inter-segment net sales) partially offset by a change in customer program mix. Graphics gross margin was unfavorably impacted by several factors including: new and early stage petroleum projects, improved inventory levels and impact of lower absorption, alignment of manufacturing resources required to support the transition from print to digital in certain market applications, and a one-time adjustment to the Company’s paid-time-off policy in fiscal 2019 with no comparable event in fiscal 2020.
Selling and administrative expenses of $3,609,000 in the first quarter of fiscal 2020 increased $0.2 million or 6.3% from the same period of fiscal 2019 primarily as a result of increased development cost for potential customer programs.
The Graphics Segment first quarter fiscal 2020 operating income of $1,017,000 decreased $1.4 million or 57.4% from operating income of $2,387,000 in the same period of fiscal 2019. The decrease of $1.4 million was primarily the net result of increased net sales, decreased gross profit, decreased gross profit margin as a percentage of sales, and increased selling and administrative expenses.
Corporate and Eliminations
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
|
|
September 30
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
$
|
10
|
|
|
$
|
4
|
|
Operating (Loss)
|
|
$
|
(3,337
|
)
|
|
$
|
(3,303
|
)
|
The gross profit or loss relates to the elimination of intercompany profit in inventory.
Administrative expenses of $3,340,000 in the first quarter of fiscal 2020 increased slightly from the same period of the prior year. The change is primarily the result of several small increases and decreases across several cost categories
Consolidated Results
The Company reported $431,000 net interest expense in the first quarter of fiscal 2020 compared to $518,000 net interest expense in the first quarter of fiscal 2019. The change from interest expense from fiscal 2019 to fiscal 2020 is primarily the result of reduced borrowings against the Company’s line of credit. The Company also incurred $82,000 expense related to net foreign currency transaction losses from transactions with its customer and suppliers through its Mexican subsidiary.
The $1,851,000 income tax expense in the first quarter of fiscal 2020 represents a consolidated effective tax rate of 29.3% influenced mostly by the gain on the sale of its New Windsor, New York facility and by certain permanent book-tax differences and by an expense related to uncertain income tax positions. The $667,000 income tax expense in the first quarter of fiscal 2019 is also by certain permanent book-tax differences and by an expense related to uncertain income tax positions.
The Company reported a net income of $4,475,000 in the first quarter of fiscal 2020 compared to net income of $1,749,000 in the same period of the prior year. The change in net income between fiscal 2019 and fiscal 2020 includes the $4.8 million gain on the sale of the Company’s New Windsor, New York facility along with other restructuring and plant closure costs. The change in net income is also the net result of increased net sales, increased gross profit, increased selling and administrative expenses, decreased interest expense, and a higher tax rate. Diluted earnings per share of $0.17 was reported in the first quarter of fiscal 2020 as compared to $0.07 diluted earnings per share in the same period of fiscal 2018. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first quarter of fiscal 2020 were 26,293,000 shares as compared to 26,365,000 shares in the same period last year.
Liquidity and Capital Resources
The Company considers its level of cash on hand, borrowing capacity, current ratio and working capital levels to be its most important measures of short-term liquidity. For long-term liquidity indicators, the Company believes its ratio of long-term debt to equity and its historical levels of net cash flows from operating activities to be the most important measures.
At September 30, 2019, the Company had working capital of $62.4 million, compared to $71.1 million at June 30, 2019. The ratio of current assets to current liabilities was 2.38 to 1 as compared to a ratio of 2.78 to 1 at June 30, 2019. The balance sheet at June 30, 2019 included an asset held for sale of $7.5 million which was sold in the first quarter of fiscal 2020. When June 30, 2019 current assets are restated to exclude the asset held for sale, adjusted working capital and current assets to current liability ratios are $63.6 million and 2.59 to 1 respectively, which provides for a more appropriate comparison to these results for September 30, 2019. The $1.2million decrease in working capital between these periods (as adjusted and excluding the sale of the New Windsor facility) is primarily driven by two offsetting variances: a $3.7million increase in accounts receivable and an increase in accounts payable of $4.6 million.
The Company generated $6.4 million of cash from operating activities in the first quarter of fiscal 2020 as compared to a source of cash of $2.2 million in the same period of the prior year. This $4.2 million increase in net cash flows from operating activities is the result the Company’s strategy to aggressively manage its working capital which includes the reduction of the accounts receivable days sales outstanding (DSO), increasing inventory turns while simultaneously reducing inventory levels, and effectively managing the Company’s supply chain which includes partnering with its suppliers to find the appropriate service level while effectively managing payment terms.
Net accounts receivable was $58.4 million and $54.7 million at September 30, 2019 and June 30, 2019, respectively. DSO decreased to 57 days at September 30, 2019 from 63 days at June 30, 2019. The Company believes that its receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.
Net inventories of $43.1 million at September 30, 2019 decreased $0.4 million from $43.5 million at June 30, 2019. The decrease of $0.4 million is the result of a decrease in gross inventory of $0.3 million and an increase in obsolescence reserves of $0.1 million. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory decreased 0.8 million in the first quarter of fiscal 2020 in the Graphics Segment which more than offset an increase in net inventory in the Lighting Segment of $0.4 million.
Cash generated from operations and borrowing capacity under the Company’s line of credit is the Company’s primary source of liquidity. The Company has a secured $75 million revolving line of credit with its bank, with $53.0 million of the credit line available as of October 21, 2019. This line of credit is a $75 million five-year credit line expiring in the third quarter of fiscal 2022. The Company believes that its $75 million line of credit plus cash flows from operating activities are adequate for the Company’s fiscal 2020 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.
The Company had a source of cash of $12.0 million related to investing activities in the first quarter of fiscal 2020 as compared to a use of cash of $0.6 million in the same period of the prior year, resulting in a favorable change of $12.6 million. Capital expenditures for the first quarter of fiscal 2020 decreased $0.3 million to $0.4 million from the same period in fiscal 2019. The Company sold its New Windsor, New York manufacturing facility for $12.3 million in the first quarter of fiscal 2020 which contributed to the change in cash flow from investing activities from fiscal 2019 to fiscal 2020.
The Company used $17.7 million of cash related to financing activities in the first quarter of fiscal 2020 compared to a use of cash of $0.5 million in the first quarter of fiscal 2019. The $17.2 million unfavorable change in cash flow was the net result of payments in excess of borrowings of long-term debt of $17.2 million.
The Company has, or could have, on its balance sheet financial instruments consisting primarily of cash and cash equivalents, short-term investments, revolving lines of credit, and long-term debt. The fair value of these financial instruments approximates carrying value because of their short-term maturity and/or variable, market-driven interest rates.
Off-Balance Sheet Arrangements
The Company has no financial instruments with off-balance sheet risk and has no off-balance sheet arrangements, except for various operating leases. However, none of these operating leases, individually or in the aggregate have or are reasonably likely to have a current effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material.
Cash Dividends
In November 2019, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable November 26, 2019 to shareholders of record as of November 18, 2019. The indicated annual cash dividend rate for fiscal 2020 is $0.20 per share. The Board of Directors has adopted a policy regarding dividends which indicates that dividends will be determined by the Board of Directors in its discretion based upon its evaluation of earnings, cash flow requirements, financial condition, debt levels, stock repurchases, future business developments and opportunities, and other factors deemed relevant.
Critical Accounting Policies and Estimates
A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2019 Annual Report on Form 10-K.