LSI Industries Inc. — Q1 Fiscal 2023 Form 10-Q
Business context and reporting period
LSI Industries Inc. designs and manufactures LED lighting, digital signage, visual display systems, electronic assemblies and related installation and project-management services. Operations are organized into Lighting and Display Solutions segments and are located solely in North America. This unaudited Form 10-Q covers the three months ended September 30, 2022, compared with the three months ended September 30, 2021.
Financial performance and key metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $127.1 million | $106.4 million | Up 19% |
| Gross profit | $34.7 million | $24.5 million | Up 42% |
| Gross margin | 27.3% | 23.0% | Up 4.3 percentage points |
| Operating income | $10.0 million | $4.4 million | Up 126% |
| Operating margin | 7.9% | 4.2% | Up 3.7 percentage points |
| Net income | $6.3 million | $3.1 million | Up 100% |
| Net margin | 4.9% | 2.9% | Improved |
| Diluted EPS | $0.22 | $0.11 | Up $0.11 |
| Cash flow from operations | $10.6 million | $(7.9) million | Improved $18.5 million |
| Free cash flow | $10.1 million | $(8.2) million | Improved $18.3 million |
- Lighting sales increased 32% to $67.5 million; operating income increased to $9.2 million from $4.3 million. Lighting gross margin improved to 33.0% from 30.2%.
- Display Solutions sales increased 8% to $59.5 million; operating income increased to $6.5 million from $3.7 million. Segment gross margin improved to 20.9% from 16.4%.
- Adjusted operating income was $10.9 million versus $5.0 million, and adjusted EBITDA was $13.3 million versus $7.6 million. These are non-GAAP measures that exclude specified stock compensation, consulting and severance costs.
- Cash and cash equivalents were $9.0 million at September 30, 2022, versus $2.5 million at September 30, 2021 and $2.5 million at June 30, 2022.
- Working capital was $90.5 million, with a current ratio of 2.13 to 1. Accounts receivable were $75.5 million and inventories were $80.5 million, with inventory up $6.1 million from June 30, 2022.
- Total debt was $77.5 million, consisting primarily of a $56.1 million secured revolving line and a $21.4 million term loan. Net debt was $68.5 million, and net debt to trailing adjusted EBITDA was 1.7x.
- Capital expenditures were $0.4 million. Cash dividends paid were $1.4 million, and the company declared a subsequent quarterly dividend of $0.05 per share.
Material changes versus the prior comparable period
- Revenue growth reflected stronger demand in key vertical markets, higher-value applications, pricing actions and increased volume in both segments.
- Profitability benefited from sales leverage, favorable product and project mix, pricing intended to offset inflation and cost management.
- Interest expense increased to $0.8 million from $0.2 million because of higher borrowing costs. The effective tax rate increased to 30.6% from 24.2%, including effects from deferred tax valuation reserves and a higher anticipated annual tax rate.
- Corporate operating losses increased to $5.6 million from $3.6 million, primarily due to higher performance-based incentive compensation.
- Financing activities used $3.6 million of cash versus providing $8.5 million in the prior-year quarter, primarily because operating cash generation was used to repay borrowings.
- Net debt to adjusted EBITDA improved from 2.5x at September 30, 2021 to 1.7x at September 30, 2022.
Guidance, outlook, risks and unusual items
- Management stated that demand remained strong in key vertical markets and that the company was focused on profitable growth, differentiated products and higher-value applications. The filing does not provide formal revenue or earnings guidance.
- Management expects the $100 million credit facility and operating cash flows to be adequate for operational and capital expenditure needs through the remainder of fiscal 2023.
- The amended credit facilities expire in the third quarter of fiscal 2026. As of September 30, 2022, $18.9 million was available under the $75 million revolving line, and the company was in compliance with all loan covenants. The revolving borrowing rate was 4.8% at quarter-end.
- Key risks include inflation and pricing execution, supply-chain constraints, inventory growth and obsolescence, customer concentration, variable interest rates, foreign exchange exposure, goodwill and intangible-asset impairment, and performance of major customer programs.
- One Display Solutions customer represented $8.5 million, or 11%, of accounts receivable at September 30, 2022. No customer or program represented at least 10% of consolidated sales in the current quarter.
- The company reported various ordinary-course negotiations, customer bankruptcies and legal proceedings, but management does not expect them to have a material adverse effect. No standby letters of credit were outstanding.
- Unusual or non-recurring adjustments included $0.3 million of consulting expense for commercial growth initiatives and $12 thousand of severance costs. Stock compensation expense was $0.6 million.
- Disclosure controls were effective as of September 30, 2022, and no material changes in internal control were reported.
Important facts for investors to verify
- Verify whether revenue growth and margin improvement persist after pricing actions and favorable mix benefits.
- Monitor inventory growth, supply-chain conditions and the adequacy of inventory-obsolescence reserves.
- Assess exposure to higher interest rates, including the 4.8% revolving borrowing rate and future rate resets.
- Review revolving-credit availability, debt covenants and the scheduled fiscal 2026 facility expiration.
- Track the concentration of accounts receivable and customer-program demand in Display Solutions.
- Evaluate the sensitivity of goodwill and intangible assets to changes in forecasts, discount rates and operating performance.
- Reconcile management’s non-GAAP measures with GAAP results and confirm the nature and recurrence of excluded costs.