Business Context and Reporting Period
LSI Industries Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2021, the first quarter of fiscal 2022. The company operates through Lighting and Display Solutions segments, with operations solely in North America. The Display Solutions segment includes the results of JSI Store Fixtures, acquired on May 21, 2021.
Financial Performance and Key Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $106.4 million | $70.0 million | +52% |
| Gross profit | $24.5 million | $18.3 million | +34% |
| Gross margin | 23.0% | 26.1% | Down 310 bps |
| Operating income | $4.4 million | $2.2 million | +102% |
| Operating margin | 4.2% | 3.1% | Up 100 bps |
| Net income | $3.1 million | $2.0 million | +57% |
| Diluted EPS | $0.11 | $0.07 | +57% |
| Cash flow from operations | $(7.9) million | $7.6 million | Decrease of $15.5 million |
| Free cash flow | $(8.2) million | $7.2 million | Decrease of $15.4 million |
- Lighting sales increased 13% to $51.3 million, while operating income increased 21% to $4.3 million. Lighting gross margin declined to 30.2% from 30.5% because of material and supply-chain cost increases.
- Display Solutions sales increased 124% to $55.1 million, primarily from the inclusion of JSI and growth in quick-service restaurant business. Operating income increased to $3.7 million from $1.8 million, while gross margin declined to 16.4% from 18.1%.
- Adjusted operating income was $5.0 million versus $2.7 million. Adjusted net income was $3.5 million, or $0.13 diluted EPS, versus $2.1 million, or $0.08 diluted EPS.
- Adjusted EBITDA was $7.6 million versus $4.7 million; reported EBITDA was $7.0 million versus $4.2 million.
- Cash and cash equivalents were $2.6 million at September 30, 2021, compared with $2.3 million at June 30, 2021.
- Working capital was $67.1 million, compared with $54.1 million at June 30, 2021. The current ratio improved to 1.91 from 1.76.
- Accounts receivable increased to $63.9 million and inventories increased to $67.9 million, including inventory accumulation to support expected demand and mitigate supply-chain challenges.
Debt, Liquidity, and Capital Allocation
- Total debt was $78.3 million at September 30, 2021, compared with $68.2 million at June 30, 2021. Net debt was $75.7 million versus $65.9 million.
- In September 2021, the company amended its $100 million secured credit facility into a $25 million term loan and a $75 million revolving line. Both mature in the third quarter of fiscal 2026.
- The term loan requires annual principal payments of approximately $3.6 million over five years, with the remaining balance due at maturity.
- Available borrowing capacity under the revolving facility was $21.7 million. The company was in compliance with all loan covenants.
- Capital expenditures were $0.3 million. Cash dividends paid were $1.3 million, and the board subsequently declared a quarterly dividend of $0.05 per share, implying an annual rate of $0.20 per share.
Material Changes Versus the Prior Comparable Period
- Revenue growth was strongly affected by the JSI acquisition. Excluding JSI, organic net sales were $83.1 million versus $70.0 million, an increase of approximately 19%.
- JSI was acquired for approximately $93.7 million, funded with cash on hand and $71.6 million drawn from the revolving credit facility. The preliminary purchase price allocation included $33.4 million of goodwill and $45.8 million of identifiable intangible assets.
- Consolidated gross margin contracted because of higher material and supply-chain costs and delayed price realization, particularly in Display Solutions.
- Operating income improved despite higher corporate expenses, commissions, and acquisition-related operating costs.
- The effective tax rate increased to 24.2% from 11.6%. The prior-year rate benefited from a $0.4 million tax benefit associated with a CARES Act net operating loss carryback.
- Operating cash flow turned negative primarily because of increases in inventory and accounts receivable and decreases in accrued expenses and customer prepayments.
Guidance, Outlook, Commentary, and Risks
- Management stated that price adjustments had been secured for certain national, multi-site Display Solutions programs. Higher pricing was expected to be realized during the second quarter and to align more closely with input costs by the end of that quarter.
- Management expected the credit facility, available borrowing capacity, and operating cash flows to be adequate for operating and capital expenditure needs for the remainder of fiscal 2022, while noting that COVID-19 developments could affect liquidity needs.
- Key operating risks include COVID-19 effects, supply-chain disruptions, material cost inflation, delayed customer pricing decisions, and execution and integration risks related to JSI.
- Debt carries variable interest rates based on LIBOR or a base rate, creating exposure to interest-rate and reference-rate transition risks. The company was evaluating optional reference-rate reform guidance.
- One Display Solutions customer program represented $12.3 million, or 11.6%, of quarterly sales, creating a customer-program concentration.
- The company reported ongoing negotiations, customer bankruptcies, and legal proceedings in the ordinary course. Management did not expect these matters to have a material adverse effect. No standby letters of credit were outstanding at quarter-end.
- Goodwill and indefinite-lived intangible assets are subject to impairment testing involving judgments about forecasts, discount rates, cash flows, stock price, and market conditions. Net goodwill was $43.8 million, and other intangible assets were $71.6 million.
- Disclosure controls and procedures were assessed as effective, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the final purchase price allocation for JSI, including any revisions to goodwill, intangible assets, tax liabilities, and post-closing adjustments.
- Monitor whether pricing actions offset material, freight, labor, and supply-chain cost inflation and whether Display Solutions margins recover as management expected.
- Track inventory levels, receivables, customer prepayments, and operating cash flow because working-capital investment materially reduced liquidity during the quarter.
- Review debt covenant compliance, revolving availability, variable-rate exposure, scheduled term-loan repayments, and the eventual replacement of LIBOR-based pricing.
- Assess customer concentration and the sustainability of the $12.3 million Display Solutions program.
- Reconcile reported GAAP results with adjusted operating income, adjusted EBITDA, adjusted net income, and organic sales, recognizing that these are non-GAAP measures.