LSI Industries (NASDAQ: LYTS) reported Q3 EPS of ($0.04), $0.03 better than the analyst estimate of ($0.07). Revenue for the quarter came in at $71 million versus the consensus estimate of $70.98 million.

Third Quarter 2020 Highlights

• Sales of $71.0 million reflects shift to higher margin sales mix
• EPS of $0.07 versus ($0.12) prior year
• Net Income $1.9 million compared to Net Loss of ($3.2) million last year
• EBITDA $4.7 million versus $0.3 million prior year
• Free Cash Flow of $3.5 million
• Net Debt reduced to $7.1 million, decrease of $35.0 million from prior year
• Received cash proceeds of $7.6 million from facility sale

Management Commentary

James A. Clark, President and Chief Executive Officer commented, “Our planned migration toward a higher-value sales mix continued to move forward during the third quarter, resulting in improved margin realization during the period. This sharpened commercial focus, combined with an increasingly lean cost structure, contributed to a material year-over-year improvement in gross margin rate, adjusted operating income and net income.

Within our Lighting Segment, we generated a 170 basis point year-over-year improvement in gross margin rate, while total segment sales declined 7%. Consistent with our go-to-market approach, project sales of higher margin outdoor products increased during the quarter, while sales for select, lower-margin indoor products declined, as expected. Our outdoor area lighting solutions generated double-digit sales growth during the period, given improved traction within the automotive vertical, which delivered a strong quarter. Several key new lighting products are scheduled for launch in the fiscal fourth quarter, targeting the petroleum, convenience store, warehousing and parking garage vertical markets, all important lighting solution applications for LSI.

The Graphics Segment delivered another consecutive quarter of growth as segment sales increased 10% during the period, contributing to improved operating income when compared to the prior year. Segment growth was attributable to increased activity in the petroleum vertical as several large, multi-year programs in various stages of implementation continue to move forward. Backlog within the petroleum vertical remains high versus historical levels and is expected to remain so well into fiscal 2021. More recently, in response to the COVID-19 pandemic, we were able to leverage our short lead-time capabilities to fill several emergency orders for social distancing graphics products across a wide selection of our customer base including petroleum, grocery and pharma.

Last week, we announced that a leading U.S. QSR restaurant chain awarded LSI new business valued at more than $100 million dollars over the program lifecycle, currently scheduled through 2022. Our customer recognizes the benefits of partnering with one company to perform the lead system integrator function at more than 6,000 U.S. locations – as we provide the capability to manufacture, install and manage post-sales support of this critical program.

Over the last year, we have taken decisive action to invest in new products, improve our commercial leadership, drive new business and reduce our cost structure. We recently hired a new commercial leader, increased our investment in marketing and product development and have accelerated our entire innovation process. As part of our longer-term plan to improve capacity utilization and strengthen our manufacturing and customer service capabilities, we sold two manufacturing facilities resulting in $20 million in total cash proceeds while realizing more than $4 million of total annualized cost savings. These changes allowed us to leverage our existing footprint in Ohio, Kentucky, North Carolina and Texas while strengthening our commitment to U.S. based manufacturing along with a diverse and redundant supply chain.

Our leadership team continues to closely monitor the COVID-19 pandemic. Looking forward, it is not yet possible to gauge the full impact of the situation on our markets and our company, given the uncertain duration of this challenge. Our internal task force remains focused on three main areas: Employee safety, customer service and support and cost-effective business continuity. We remain fully operational at all manufacturing facilities and practice safe engagement with our customers, agents and suppliers.

We enter this current challenge with a strong balance sheet, solid liquidity and a strong management team. We also have additional plans to reduce operating costs. Our actions have positioned LSI to confront the pandemic-related volatility in the market, while providing the ability to invest strategically as we look ahead to the next phase of growth. We will continue to collaborate closely with our partners and customers as we navigate the current environment and assess opportunities.”

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