CINCINNATI — LSI Industries Inc. reported operating results for the first quarter and declared a regular cash dividend.
First Quarter Operating Results:
- Sales of $85.0 million, 3% below Q1 of the prior year
- GAAP Reported operating income of $2.9 million
- Adjusted operating income of $3.5 million, 11% above last year
- GAAP reported EPS of $0.07 versus $(0.61) in Q1 2018
- Adjusted EPS of $0.08 compared to $0.07 in Q1 prior year
- Declares regular quarterly dividend of $0.05
Net sales in the first quarter of fiscal 2019 were $84,957,000, or 3% below the $87,466,000 reported in the same period of the prior year. Reported net income was $1,749,000 compared to a net loss of $(15,629,000) in the first quarter of fiscal 2018. Reported EPS of $0.07 was above the reported EPS loss of $(0.61) for the first quarter of the prior year (first quarter fiscal 2018 contained a pretax, non-cash goodwill impairment charge of $28 million). The Company recorded a first quarter fiscal 2019 charge of $590,000 related to the closure of the Hawthorne, California facility, which was announced earlier in the quarter. This charge impacts GAAP reported results and is excluded from adjusted results. Adjusted operating income in the first quarter of fiscal 2019 was $3,524,000 compared to $3,186,000 for the first quarter last year. First quarter operating income includes a one-time favorable impact due to a benefit program change net of other adjustments. Adjusted EPS of $0.08 increased $0.01 versus $0.07 for the first quarter prior year. The Company declared a regular cash dividend of $0.05 per share payable November 27, 2018 to shareholders of record on November 16, 2018.
Cash generation was positive for the quarter even as investment in working capital increased as planned. The debt level at the end of the first quarter decreased $5.7 million versus the same period last year, further strengthening our solid financial position. Inventory and accounts receivable were responsible for the working capital increase, as investment was required to support several key growth initiatives.
Management Comments and Outlook
Ron Brown, former Interim Chief Executive Officer and elected member of the Board of Directors, commented, “The first quarter was extremely active as we took aggressive actions on a number of our key priorities. First, we announced a new organizational structure aligned around our key markets and customers. This is enabling the Company to better package our technology, products and services, providing our customers with innovative solutions in order to accelerate growth. Second, we executed on several actions aimed at driving productivity and savings in our integral supply chain, as well as our overall cost structure. We announced the closure of the Hawthorne, California assembly and warehouse facility, which was completed in October. More recently, we announced the closure of the New Windsor, New York manufacturing facility, which will occur over the next several quarters. In addition, through fiscal year-to-date, we’ve also made a number of key new talent additions, while eliminating a number of salaried roles through productivity and process improvement. The combined impacts of these actions are estimated to generate annual savings of over $6 million.
Brown continued, “Of course, the most exciting news was our October 17th announcement of the appointment of James (Jim) Clark as President and Chief Executive Officer effective November 1st. Jim’s track record of driving transformative growth by providing customers with innovative solutions and services makes him the right leader for LSI. His experience in leading and capitalizing on changing market environments driven by technology and increasing end-user expectations will be extremely valuable to LSI moving forward. We all look forward to Jim’s leadership as the LSI team takes this Company to the next level.”
Jim Galeese, LSI’s Chief Financial Officer commented, “Our first quarter results reflect the changes we are driving to improve the growth and profitability of the business. The Graphics segment generated sales growth of 24% with operating income increasing 62%. Conversely, Lighting segment sales decreased 10%, with the shortfall realized in project business. Lighting operating earnings declined 12%.
Galeese continued, “The 24% increase in Graphics segment sales was driven by significant growth in the Petroleum and Quick Service Restaurant (QSR) customer markets. Petroleum growth was generated in each of our top three accounts, including activity in the opportunity developing in Mexico. As discussed last quarter, domestic oil companies are rapidly expanding into the Mexico market, and our proven solutions and strong partnerships are generating significant levels of incremental orders and sales in this regional market. QSR growth was fueled by our supply agreement with a national chain for their complete re-imaging program which is expected to be completed over the next eighteen months. This customer is implementing our SOAR digital technology solution at the majority of its sites. Approximately 100 individual site locations were completed in the first quarter, with the schedule projecting over 300 sites to be completed in the second quarter. Quotation activity for our digital signage solution offerings remains strong, with several major customer quotes in-progress. The intermediate term outlook for the Graphics segment remains positive.
“The decline in Lighting segment sales reflects ongoing competitiveness and softness in commercial and industrial market applications. This was partially offset in markets where our products and solutions meet specific customer requirements. For example, sales in the renovation segment continue to be strong, and generated solid margins for the quarter. Our product roadmap contains several new products to be launched over the next several quarters that will support our renovation initiative. Despite a soft first quarter, the outlook for Automotive is favorable. Several large automotive customers have specified our solution and have placed orders, generating an improved backlog. Similar new product and solution investment plans are in place for warehouse, parking, and other target market applications. Lighting growth is expected to remain sluggish in the short-term as we increase our emphasis on opportunities requiring customer specific solutions and reduce priority on price driven type projects.
“The adjusted gross margin rate for the quarter was 140 basis points below prior year, impacted primarily by lower Lighting volumes, mix of large Graphics projects, which typically command a lower margin, and initial margins on the custom digital solution for the large QSR program. We expect QSR margins to improve as volumes continue to accelerate, and several cost reductions are implemented. Operating expenses decreased 190 basis points year-over-year, serving to offset the lower margins.
“We continue to manage developments in the procurement area, including the ongoing volatility in key commodities, and the initial impact of Chinese tariffs, which went into effect September 13th. In the first quarter, we were successful in offsetting the majority of increases in steel, aluminum and plastics through cost reductions in other purchase categories along with design productivity. Our recently announced selling price increases are aimed at offsetting the 10% tariff now in effect for many HTS (harmonized tariff schedule) categories purchased from China.”
Brown concluded, “We have implemented numerous organizational changes which will allow us to more effectively exploit opportunities for growth in our target markets and customer segments. While there is still more to be done, many programs are now in place to further develop the products and solutions required to better satisfy customer requirements in these areas. Our integral supply chain is being aligned to support this market strategy, as is our overall cost structure. All these actions are positioning LSI to successfully achieve sustainable profitable growth moving forward.”Tagged with earnings, LSI Industries