LSI Industries Inc. — Fiscal 2023 Second-Quarter Form 10-Q Summary
Business context and reporting period
LSI Industries Inc. reported results for the three and six months ended December 31, 2022. The company operates through two segments: Lighting, which provides LED lighting, controls, and electronic assemblies, and Display Solutions, which provides printed graphics, digital signage, display fixtures, and related project-management and installation services. Operations are located in North America.
Key financial metrics
| Metric | Three months ended Dec. 31, 2022 | Three months ended Dec. 31, 2021 | Six months ended Dec. 31, 2022 | Six months ended Dec. 31, 2021 |
|---|---|---|---|---|
| Net sales | $128.8 million | $111.1 million | $255.9 million | $217.5 million |
| Gross profit | $34.1 million | $25.4 million | $68.9 million | $50.0 million |
| Gross margin | 26.5% | 22.9% | 26.9% | 23.0% |
| Operating income | $9.0 million | $4.4 million | $19.1 million | $8.9 million |
| Operating margin | 7.0% | 4.0% | 7.4% | 4.1% |
| Net income | $6.4 million | $3.1 million | $12.7 million | $6.2 million |
| Diluted EPS | $0.22 | $0.11 | $0.44 | $0.22 |
Six-month operating cash flow was $20.1 million, compared with an operating cash outflow of $16.5 million in the prior-year period. Free cash flow, as defined by the company, was $19.1 million versus negative $17.3 million. Capital expenditures were $1.0 million.
At December 31, 2022, cash and cash equivalents were $2.8 million. Total debt was $62.8 million, consisting primarily of $42.3 million drawn on a secured revolving line and a $20.5 million term loan. Net debt was $60.1 million, and reported net debt to trailing twelve-month adjusted EBITDA was 1.3x, compared with 2.2x at June 30, 2022. The company had $32.7 million available under its $75 million revolving credit facility and was in compliance with all loan covenants.
Working capital was $84.9 million, with a current ratio of 2.32:1. Accounts receivable declined to $67.4 million from $77.8 million at June 30, 2022, and reported days sales outstanding improved to 52 days from 55 days. Inventory was $73.2 million, compared with $74.4 million at fiscal year-end.
Material changes versus the prior comparable period
- Three-month sales increased 16%, while six-month sales increased 18%.
- Lighting sales increased 17% for the quarter and 24% year to date; Lighting operating income increased 46% for the quarter and 78% year to date.
- Display Solutions sales increased 15% for the quarter and 12% year to date; Display Solutions operating income increased 102% for the quarter and 88% year to date.
- Consolidated gross margin improved to 26.5% from 22.9% for the quarter, primarily from higher-value sales mix, pricing discipline, and improved program pricing. Display Solutions gross margin increased to 22.1% from 15.9%; Lighting gross margin increased to 30.6% from 29.5%.
- Interest expense increased to $1.3 million for the quarter and $2.0 million for the six-month period, primarily due to higher borrowing costs.
- Corporate operating losses increased to $5.5 million for the quarter and $11.1 million year to date, driven partly by higher performance-based compensation and commercial growth initiative consulting expenses.
- Cash generation and working-capital management enabled $18.8 million of net financing cash outflows, including substantial debt repayments. Total debt declined from $79.6 million at June 30, 2022.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide specific quantitative revenue or earnings guidance. Management stated that demand remained strong in key vertical markets, including grocery, refueling and convenience stores, and that it is focusing on higher-value applications, differentiated products, pricing discipline, and cost management. Management believes available cash, operating cash flow, and borrowing capacity are adequate for operating and capital expenditure needs through the remainder of fiscal 2023.
- Results remain exposed to demand in the company’s principal vertical markets, pricing and product mix, operating costs, and the ability to sustain improved margins.
- Debt carries variable interest rates; the revolving borrowing rate was 6.1% at December 31, 2022. Higher rates could increase interest expense and pressure liquidity.
- The credit agreement contains leverage and fixed-charge covenants. The company reported compliance as of December 31, 2022.
- Goodwill and indefinite-lived intangible assets totaled $57.1 million net at December 31, 2022. Impairment testing depends on assumptions regarding forecasts, future cash flows, market conditions, and discount rates.
- Non-GAAP adjusted results exclude stock compensation, severance, and consulting or acquisition costs. For the quarter, adjusted operating income was $10.6 million versus reported operating income of $9.0 million; adjusted net income was $7.6 million versus reported net income of $6.4 million.
- The company reported normal-course negotiations, customer bankruptcies, and legal proceedings, but management believes these matters will not materially affect financial position, results, cash flows, or liquidity. No standby letters of credit were outstanding at December 31, 2022.
- In January 2023, the board declared a quarterly dividend of $0.05 per share, implying an indicated annual rate of $0.20 per share.
Most important facts for investors to verify
- Whether strong segment demand and improved pricing and mix persist into the second half of fiscal 2023.
- Whether Display Solutions can sustain its substantial gross-margin and operating-income improvement.
- The effect of variable interest rates on future interest expense and compliance with credit covenants.
- Progress in converting earnings and working-capital improvements into recurring operating and free cash flow.
- Any deterioration in goodwill reporting-unit performance or other impairment indicators.
- The comparability and recurring nature of management’s non-GAAP adjustments, particularly commercial growth initiative consulting costs, incentive compensation, and stock compensation.