LSI Industries Inc. Fiscal 2022 Third-Quarter Form 10-Q
Business Context and Reporting Period
LSI Industries Inc. designs and manufactures commercial lighting, electronic components, digital signage, graphics, display fixtures and related installation and program-management services. The company reports two segments: Lighting and Display Solutions. This unaudited Form 10-Q covers the three and nine months ended March 31, 2022, compared with the corresponding fiscal 2021 periods. The Display Solutions segment includes JSI Store Fixtures, acquired in May 2021 for approximately $93.7 million.
Financial Performance and Key Metrics
| Metric | Three Months Ended March 31 | Year-over-Year Change | Nine Months Ended March 31 | Year-over-Year Change |
|---|---|---|---|---|
| Net sales | $110.1 million | Up 53% | $327.7 million | Up 50% |
| Gross profit | $26.8 million | Up 48% | $76.8 million | Up 37% |
| Gross margin | 24.3% | Compared with 25.1% | 23.4% | Compared with 25.7% |
| Operating income | $5.2 million | Up 146% | $14.0 million | Up 101% |
| Net income | $3.6 million | Up 146% | $9.9 million | Up 74% |
| Diluted EPS | $0.13 | Compared with $0.05 | $0.35 | Compared with $0.21 |
- Lighting sales were $57.1 million in the quarter and $165.7 million year to date, increases of 25% and 22%, respectively. Lighting operating income increased to $5.0 million for the quarter and $13.9 million year to date.
- Display Solutions sales were $53.0 million in the quarter and $162.0 million year to date, increases of 100% and 97%, respectively, primarily reflecting the JSI acquisition. Segment operating income rose to $4.6 million for the quarter and $12.1 million year to date.
- Lighting gross margin declined to 29.2% in the quarter and 29.6% year to date, as selling-price realization lagged higher input and transportation costs. Display Solutions quarterly gross margin improved to 19.2%, while its nine-month margin was 17.1%.
- Adjusted operating income, excluding stock compensation, acquisition, severance and restructuring costs, was $6.0 million for the quarter and $16.9 million year to date. Adjusted EBITDA was $8.5 million and $24.5 million, respectively.
- The effective tax rate was 22.9% for the quarter and 22.4% year to date, compared with 26.4% and 19.1% in the prior-year periods.
Cash Flow, Debt and Liquidity
- Operating cash flow was negative $12.7 million for the nine months, compared with positive $24.6 million in the prior-year period. Free cash flow was negative $13.9 million, compared with positive $23.1 million.
- Cash usage primarily reflected increases of $16.1 million in accounts receivable and $20.2 million in inventories, partly offset by higher earnings and accounts payable.
- Cash and cash equivalents were $1.2 million at March 31, 2022, down from $2.3 million at June 30, 2021.
- Total debt was $85.0 million, including $61.8 million drawn on the secured revolving facility and $23.2 million on the term loan, compared with $68.2 million at June 30, 2021. Net debt was $83.7 million.
- The amended credit facility consists of a $25 million term loan and a $75 million secured revolving line, both expiring in the third quarter of fiscal 2026. Available revolving capacity was $13.2 million at March 31, 2022. The company was in compliance with its loan covenants.
- Working capital increased to $83.4 million from $54.1 million, and the current ratio improved to 2.11 from 1.76. Inventory increased to $78.4 million and accounts receivable to $73.6 million.
- Capital expenditures were $1.3 million year to date. The company paid approximately $4.0 million in dividends and declared a subsequent quarterly dividend of $0.05 per share.
Material Changes, Outlook and Risks
- Reported growth was substantially affected by the JSI acquisition. Organic sales were $81.1 million in the quarter and $254.7 million year to date, compared with reported sales of $110.1 million and $327.7 million, respectively.
- Management stated that the credit facility and operating cash flows are expected to provide adequate liquidity for operating and capital expenditure needs over the next 12 months, while noting uncertainty from COVID-19 effects and ongoing supply-chain challenges.
- Input-cost inflation, transportation costs and supply-chain disruptions remain material risks. Management increased Lighting inventory to support product availability and mitigate supply constraints.
- Preliminary annual goodwill and indefinite-lived intangible-asset impairment tests passed. Definitive testing was expected in the fourth quarter of fiscal 2022, with management anticipating no change; however, the Display Solutions reporting unit had only a 12% estimated enterprise-value cushion over carrying value.
- The JSI purchase-price allocation remained preliminary pending completion of pre-acquisition tax filings, expected in the fourth quarter of fiscal 2022.
- The company disclosed routine legal proceedings, negotiations and customer bankruptcies, but stated that they were not expected to have a material adverse effect. No standby letters of credit were outstanding.
- No specific revenue, earnings or margin guidance was provided in the filing. Forward-looking statements remain subject to economic, market, supply-chain, COVID-19, customer-demand and execution risks.
- The company determined that a prior shareholder approval to increase authorized common shares was invalid because of a proxy disclosure and broker non-vote counting discrepancy. It plans to seek shareholder approval again and has not issued the additional shares.
Most Important Facts to Verify
- Whether working-capital investment, particularly inventory and receivables, converts into operating cash flow and reduces reliance on borrowing.
- The sustainability of JSI-related revenue and margin contributions after the acquisition comparison benefit diminishes.
- Progress on passing through higher input and transportation costs, especially in the Lighting segment.
- Available borrowing capacity, interest-rate exposure, debt covenant compliance and the scheduled term-loan amortization.
- The final fiscal 2022 goodwill and indefinite-lived intangible-asset impairment conclusions, particularly for Display Solutions.
- Completion of the JSI purchase-price allocation and any resulting changes to goodwill, intangible assets or deferred taxes.
- Whether the company obtains renewed shareholder approval to increase authorized common shares.