Business Context and Reporting Period
LSI Industries Inc. designs and manufactures non-residential LED lighting, electronic components, digital signage, graphics, display fixtures and related installation and project-management services. Its two reportable segments are Lighting and Display Solutions, with operations located in North America.
This unaudited Form 10-Q covers the fiscal quarter and nine-month periods ended March 31, 2023, compared with the corresponding periods ended March 31, 2022. The filing is the company’s fiscal third quarter, despite the request metadata referring to “2022 Q3.”
Key Financial Metrics
| Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Nine months ended March 31, 2023 | Nine months ended March 31, 2022 |
|---|---|---|---|---|
| Net sales | $117.5 million | $110.1 million | $373.3 million | $327.7 million |
| Gross profit | $32.2 million | $26.8 million | $101.1 million | $76.8 million |
| Gross margin | 27.4% | 24.3% | 27.1% | 23.4% |
| Operating income | $7.7 million | $5.2 million | $26.8 million | $14.0 million |
| Operating margin | 6.6% | 4.7% | 7.2% | 4.3% |
| Net income | $4.7 million | $3.6 million | $17.3 million | $9.9 million |
| Diluted EPS | $0.16 | $0.13 | $0.60 | $0.35 |
- Third-quarter sales increased 7%; nine-month sales increased 14%.
- Third-quarter adjusted operating income was $8.8 million versus $6.0 million; nine-month adjusted operating income was $30.2 million versus $16.9 million.
- Third-quarter adjusted net income was $5.5 million, or $0.19 per diluted share, versus $4.2 million, or $0.15 per diluted share. Nine-month adjusted net income was $20.2 million, or $0.70 per diluted share, versus $12.0 million, or $0.43 per diluted share.
- Adjusted EBITDA was $11.2 million in the quarter and $37.5 million for the nine months, compared with $8.5 million and $24.5 million, respectively, in the prior-year periods.
Segment Performance and Material Changes
- Lighting: Third-quarter sales increased 17% to $66.7 million, gross margin improved to 30.4% from 29.2%, and operating income increased to $6.5 million from $5.0 million. Nine-month sales increased 21% to $201.1 million and operating income increased 61% to $22.4 million.
- Display Solutions: Third-quarter sales decreased 4% to $50.8 million because of shipment timing, completion of several large digital-signage programs and transition to new programs. Gross margin improved to 23.5% from 19.2%, and operating income increased to $5.5 million from $4.6 million. Nine-month sales increased 6% to $172.3 million and operating income increased 63% to $19.8 million.
- Management attributed margin improvement to volume, higher-value sales mix, price discipline, improved program pricing, favorable project mix and cost management.
- Corporate operating losses were $4.3 million in the quarter and $15.4 million for the nine months, compared with $4.4 million and $12.0 million, respectively. The nine-month increase included $0.9 million of consulting expense for commercial growth initiatives and higher performance-based compensation.
- Interest expense increased to $0.9 million in the quarter and $2.9 million for the nine months, primarily because of higher borrowing costs. The effective tax rate increased to 32.6% for the quarter and 27.0% for the nine months, from 22.9% and 22.4%, respectively, driven largely by higher profits in higher-tax jurisdictions and unfavorable discrete tax adjustments.
Cash Flow, Liquidity and Debt
| Metric | March 31, 2023 | June 30, 2022 |
|---|---|---|
| Cash and cash equivalents | $1.4 million | $2.5 million |
| Working capital | $79.8 million | $84.3 million |
| Current ratio | 2.2 to 1.0 | 2.1 to 1.0 |
| Total debt | $49.6 million | $79.6 million |
| Net debt | $48.2 million | Not separately provided in the balance-sheet table |
| Net debt to trailing adjusted EBITDA | 1.0x | 2.7x at March 31, 2022 |
- Operating cash flow was $32.5 million for the first nine months, compared with an operating cash outflow of $12.7 million in the prior-year period.
- Free cash flow was $30.8 million versus negative $13.9 million.
- Capital expenditures were $1.8 million versus $1.3 million.
- Financing activities used $32.0 million, principally reflecting debt repayments of $150.5 million partially offset by $120.5 million of borrowings, $4.1 million of dividends and $3.1 million of proceeds from stock-option exercises.
- The company had $45.1 million available under its $75 million secured revolving credit facility. The facilities expire in the third quarter of fiscal 2026, and the company was in compliance with all loan covenants at March 31, 2023. The borrowing rate on the revolver was 6.3% at quarter-end.
- Accounts receivable declined to $69.3 million and inventories declined to $67.7 million, reflecting working-capital management and supply-chain improvement. Days sales outstanding remained 54 days.
- The board declared a regular quarterly dividend of $0.05 per share payable May 16, 2023, implying an annual rate of $0.20 per share.
Guidance, Outlook, Risks and Unusual Items
- No formal revenue or earnings guidance is provided in the filing. Management stated that available credit capacity and operating cash flows are adequate for operational and capital-expenditure needs through the remainder of fiscal 2023.
- Management remains focused on new products, cross-selling, new customer programs, profitable vertical-market growth and commercial growth initiatives.
- Display Solutions faces timing risk as large digital-signage programs are completed and new programs ramp. Results may also be affected by project mix, shipment timing, pricing, customer demand and execution.
- The company’s revolving debt carries variable market-based interest rates, exposing earnings and cash flow to higher borrowing costs.
- Preliminary March 1, 2023 goodwill and indefinite-lived intangible-asset tests passed, but definitive testing was expected in the fourth quarter of fiscal 2023. Management anticipated no change, although the assets remain subject to impairment risk if assumptions concerning forecasts, cash flows, discount rates or market value deteriorate.
- The company is party to ordinary-course negotiations, customer bankruptcies and legal proceedings. Management believes these matters will not materially affect financial position, results, cash flows or liquidity; no loss range is disclosed.
- No standby letters of credit or off-balance-sheet arrangements were outstanding at March 31, 2023. Disclosure controls and procedures were reported effective, with no material changes in internal control.
Investor Verification Points
- Verify whether the improved gross margins and operating leverage are sustained after the current pricing, mix and cost-management benefits.
- Monitor Display Solutions shipment timing, replacement program wins and backlog or remaining performance obligations; the filing does not provide a clear backlog value.
- Reconcile debt repayments, variable interest rates, covenant headroom and the $45.1 million of remaining revolver availability.
- Review the definitive fiscal 2023 goodwill and indefinite-lived intangible-asset impairment tests when filed.
- Assess the sustainability of the strong working-capital-driven cash generation and whether inventory reductions affect service levels or future sales.
- Track the higher effective tax rate and its impact on future earnings and cash flow.
- Confirm future dividend declarations against earnings, cash flow, debt levels and board discretion.