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LSI Industries Reports 1% Sales Increase

LSI Industries Inc. (LYTS) announced:

Third Quarter Summary

  • Sales increased 1% compared to Q3 of the prior year.
  • Adjusted Operating Income increased 74%, with adjusted operating margin improving 40 basis points
  • Adjusted Net Income of $226,000 (See Non-GAAP reconciliation below).
  • GAAP reported EPS was $0.01 versus loss of $(0.02) in PY Q3. Adjusted EPS was $0.01, flat compared to PY Q3.
  • Year-to-date sales increased 4% above prior year; while adjusted operating earnings increased 37%.  Through the first three quarters, adjusted EPS is $0.20 versus $0.17 in 2017.

Net sales in the third quarter of fiscal 2018 were $78,843,000, an increase of 1% compared to the $78,156,000 reported in the third quarter of the prior year.  Reported net income was $220,000 in the third quarter versus a loss of $(531,000) in Q3 FY 2017.  Reported EPS of $0.01 is above reported EPS of $(0.02) for the third quarter of the prior year.  Adjusted net income was $226,000 compared to $357,000 for third quarter FY 2017.  Adjusted EPS of $0.01 is flat with the third quarter prior year. The Q3 tax rate was above the prior year tax rate, with both years including discrete adjustments.  See reconciliation of net income and earnings per share in the Non-GAAP table below. The Company declared a regular cash dividend of $0.05 per share payable May 15th, 2018 to shareholders of record on May 7th, 2018.

The business generated positive cash flow in Q3, and debt has been reduced by $10 million fiscal year-to-date.  The Board approved a quarterly dividend payment of $0.05 per share.

During the conference call to discuss the 3Q earnings, John Morgan, Chairman, President and CEO of LSI Industries, made some brief comments on the recent departure of CEO Dennis Wells.  Morgan complimented Wells for the improvements Wells brought to LSI, and the company is more focused on the future and finding a new CEO who will bring different ideas to the company.  “So if you think about that going forward, we’re less interested in somebody like me that just understands the old traditional lighting business. And we’re much more interested in people that really understand the future of work and the integration of technologies and product lines to understand driving topline. The team here is worthy and well qualified when it comes to running the back of the house if you will,” Morgan told reporters.

Since the earnings report came out, LSI shares have jumped above $6 a share, up from around $5.35 after the announcement of the Wells departure.

Management Comments and Outlook

Third quarter results reflect a steadfast, balanced approach to managing in a soft market environment, while continuing progress on key priorities.  These priorities include shifting our sales focus exclusively to LED solutions in Lighting, new product introductions across the business; and continued efforts on gross margin improvement.  This approach generated year-over-year sales growth of 1%, gross margin improvement of 110 basis points, and an operating earnings improvement of 74%, or 40 basis points during the quarter.

The 1% sales growth reflects the Lighting Segment’s exclusive focus on LED solutions, combined with the continued shift away from conventional fluorescent and HID technologies.  LED growth for the quarter was 14%, while our conventional technology sales decreased 58% compared to same quarter PY.  While this accelerated shift has unfavorably impacted our organic sales in the short-term, this move positions LSI to dedicate the necessary business assets required to capitalize on the forward growth opportunities in LED lighting.

The markets for both lighting and graphics, but notably lighting, remain stubbornly soft.  Various published sources indicate that the lighting market is down mid-single digits, despite overall favorable economic fundamentals.  Given this overall environment, our LED growth and gross margin improvement suggests the business is sensibly executing.  LED now represents 92% of all lighting product sales at LSI.

The business continued a disciplined approach of managing price/volume trade-off decisions during this ongoing soft market, contributing to a 110 basis point improvement in our gross margin rate versus Q3 prior year.  Selling prices remain very competitive, driven in part by the soft market.  The business intends to launch in Q4 the “Protector” series of products to more effectively serve a broader segment of the market.  This product offering will provide a lower price point solution to market applications requiring this range while assisting in maintaining price levels of the more feature rich product range.  Pricing conditions are expected to remain extremely competitive for at least the next quarter.

The opposite side of the margin equation is product cost inflation, specifically materials.  Prices in key commodities continue to increase, compounded by the Commerce Department “Section 232” announcement of a 24% tariff on steel and 10% on aluminum.  Domestic metal producers have already published new price increases as a result.  LSI will realize modest cost increases in these categories in fiscal Q4 and Q1 2019; however, decreases in other categories, most notably electronics, are contributing to successfully offsetting the increase.  In addition, the impact of the announced tariff on a wide range of Chinese imports remains unclear.  The tariffs are not yet in effect, and we continue to analyze the harmonized tariff schedule for any potential impact and developing creative sourcing alternatives.

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