LSI Industries Inc. — Fiscal 2022 Second-Quarter Form 10-Q
Reporting period: Three and six months ended December 31, 2021, compared with the corresponding periods ended December 31, 2020. The company operates through Lighting and Display Solutions segments. Display Solutions includes JSI Store Fixtures, acquired on May 21, 2021 for approximately $93.7 million.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net sales | $111.1 million | $76.4 million | $217.5 million | $146.4 million |
| Gross profit | $25.4 million | $19.7 million | $50.0 million | $38.0 million |
| Gross margin | 22.9% | 25.8% | 23.0% | 25.9% |
| Operating income | $4.4 million | $2.7 million | $8.9 million | $4.9 million |
| Operating margin | 4.0% | 3.5% | 4.1% | 3.3% |
| Net income | $3.1 million | $2.2 million | $6.2 million | $4.2 million |
| Diluted EPS | $0.11 | $0.08 | $0.22 | $0.15 |
| Adjusted operating income | $5.9 million | $3.1 million | $10.9 million | $5.8 million |
| Adjusted EBITDA | $8.4 million | $5.1 million | $16.0 million | $9.8 million |
Segment and operating developments
- Lighting: Q2 sales increased 27% to $57.3 million; operating income increased to $4.6 million from $2.1 million. Growth reflected stronger project and distributor-stock sales and new products. Gross margin declined to 29.5% from 30.4% because of input-cost inflation.
- Display Solutions: Q2 sales increased 72% to $53.9 million, primarily due to JSI. Operating income increased to $3.8 million from $3.1 million, while gross margin declined to 15.9% from 19.2% due to inflation and project mix.
- For the six-month period, organic sales were $173.6 million, up from $146.4 million in the prior-year period, excluding $43.9 million of JSI sales from fiscal 2022.
- One Display Solutions customer program represented $11.4 million, or 10.3%, of Q2 sales and $23.7 million, or 10.9%, of six-month sales.
Cash flow, liquidity, debt, and capital allocation
- Six-month operating cash flow was an outflow of $16.5 million versus an inflow of $13.4 million in the prior-year period. The change primarily reflected increased accounts receivable and inventory, lower accrued expenses, and lower customer prepayments.
- Six-month free cash flow was negative $17.3 million versus positive $12.5 million in the prior-year period. Capital expenditures were $0.7 million versus $0.9 million.
- Cash and equivalents were $0.9 million at December 31, 2021, down from $2.3 million at June 30, 2021. Working capital increased to $78.8 million from $54.1 million, and the current ratio improved to 2.16 from 1.76.
- Net inventory increased to $72.0 million from $58.9 million, and accounts receivable increased to $69.2 million from $57.7 million. Management cited product-availability initiatives and supply-chain challenges as drivers.
- Total debt was $86.6 million, including $62.5 million drawn on the secured revolving facility and $24.1 million on the term loan, compared with $68.2 million at June 30, 2021. Net debt was $85.7 million versus $65.9 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. Borrowing availability was $13.4 million at December 31, 2021. The company was in compliance with all debt covenants.
- Six-month financing cash flow was positive $15.4 million, reflecting $96.2 million of borrowings and $77.7 million of debt repayments, partially offset by $2.7 million of dividends. The company declared a regular quarterly dividend of $0.05 per share in January 2022.
Material changes, outlook, and risks
- Revenue and operating income increased substantially, but reported gross margins declined in both segments because of inflationary input costs and project mix. Management stated that price increases, productivity, and price management partially mitigated inflation.
- Interest expense increased because of higher debt levels used to fund the JSI acquisition and working-capital growth. Six-month effective tax rate was 22.2%, compared with 16.2% in the prior-year period, which benefited from a CARES Act-related tax adjustment.
- The JSI purchase-price allocation remains preliminary pending completion of pre-acquisition tax filings. Goodwill increased by $0.6 million during the quarter.
- The filing does not provide formal revenue or earnings guidance. Management stated that the credit facility and operating cash flows are expected to be adequate for operational and capital-expenditure needs through the remainder of fiscal 2022, while noting that COVID-19 developments will continue to be assessed.
- Key risks include supply-chain disruptions, inflation in materials and other inputs, dependence on successful JSI integration, customer-program concentration, variable-rate debt exposure, COVID-19-related economic effects, and potential goodwill or intangible-asset impairment. Management reported no material adverse effect expected from disclosed legal proceedings and no standby letters of credit outstanding.
Investor verification points
- Verify whether operating cash flow improves as elevated inventory and receivables convert to cash.
- Track debt reduction, revolving-facility availability, interest rates, and compliance with fixed-charge and leverage covenants.
- Assess whether pricing actions offset inflation without further gross-margin deterioration.
- Separate organic growth from JSI acquisition growth and monitor JSI integration and final purchase-price accounting.
- Monitor the Display Solutions customer program exceeding 10% of consolidated sales.
- Review goodwill and intangible-asset carrying values, particularly given accumulated goodwill impairment losses of $89.3 million.