LSI Industries Inc. Fiscal 2021 Form 10-K Summary
Reporting period: The filing is an annual report for the fiscal year ended June 30, 2021, compared with fiscal 2020. The request metadata references “2020 Q4,” but the source document is a fiscal 2021 Form 10-K, not a quarterly filing.
Business Context
LSI produces non-residential lighting and retail display solutions. The Lighting Segment represented approximately 60% of fiscal 2021 sales, while Display Solutions represented approximately 40%. Products and services are sold primarily in the United States, with approximately 4% of consolidated sales generated outside the United States.
- Lighting products include LED fixtures, poles, controls and related electronic components for commercial and industrial markets.
- Display Solutions includes graphics, digital signage, menu boards, refrigerated displays, custom fixtures and project management services.
- LSI acquired JSI Store Fixtures on May 21, 2021 for approximately $93.7 million, including $45.8 million of acquired intangible assets and $33.4 million of goodwill.
Key Financial Metrics
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net sales | $315.6 million | $305.6 million | Up 3% |
| Gross profit | $79.0 million | $73.5 million | Up $5.4 million |
| Gross margin | 25.0% | 24.1% | Up approximately 90 basis points |
| Operating income | $8.0 million | $13.1 million | Down $5.1 million |
| Net income | $5.9 million | $9.6 million | Down $3.7 million |
| Diluted EPS | $0.21 | $0.36 | Down $0.15 |
| Cash flow from operations | $28.0 million | $29.7 million | Down $1.7 million |
| Capital expenditures | $2.2 million | $2.7 million | Down $0.5 million |
| Free cash flow | $25.8 million | $47.1 million | Down $21.3 million |
| Cash and cash equivalents | $2.3 million | $3.5 million | Down $1.2 million |
| Long-term debt | $68.2 million | $0 | New debt primarily for JSI acquisition |
Segment Performance and Material Changes
- Lighting: Sales declined 8% to $189.0 million because of COVID-19-related disruption in construction markets. Gross profit was essentially stable at $57.0 million, while gross margin improved to 30.2% from 27.6%. Fourth-quarter Lighting sales increased 30% year over year as construction activity recovered.
- Display Solutions: Sales increased 27% to $126.6 million, including $9.1 million from JSI. Growth in quick-service restaurant and grocery markets more than offset lower petroleum-market sales. Gross margin increased to 17.4% from 16.8%.
- Reported operating income: Results were reduced by $2.9 million of JSI transaction costs. Fiscal 2020 benefited from $8.5 million of gains on sales of the New Windsor and North Canton facilities.
- Adjusted operating income: Increased to $13.0 million from $7.0 million, excluding acquisition costs, stock compensation, severance and restructuring or plant-closure items.
- Adjusted net income: Increased to $9.8 million, or $0.36 per diluted share, from $4.1 million, or $0.15 per diluted share.
- Backlog: Firm backlog increased to $62.1 million at June 30, 2021 from $26.2 million, partly reflecting JSI. Orders were expected to ship or be installed within twelve months.
Liquidity, Debt and Balance Sheet
- Working capital was $54.1 million versus $51.2 million, although the current ratio declined to 1.76 from 2.48.
- Accounts receivable increased to $57.7 million from $37.8 million, and inventories increased to $58.9 million from $38.8 million, reflecting JSI, higher anticipated demand and supply-chain precautionary inventory.
- LSI expanded its secured revolving credit facility from $75 million to $100 million in March 2021. Borrowings were $68.2 million at June 30, 2021, leaving $31.8 million available at that date; availability was approximately $24 million as of August 26, 2021.
- The credit facility expires in the third quarter of fiscal 2026 and bears variable interest based on LIBOR or a base rate. The company disclosed a bank waiver for loan covenants while amendments related to the JSI acquisition were finalized and expected compliance after the amendments.
- LSI paid approximately $5.3 million of dividends in fiscal 2021 and maintained an indicated annual dividend rate of $0.20 per share. A quarterly dividend of $0.05 per share was declared in August 2021.
Outlook, Commentary and Risks
Management did not provide specific fiscal 2022 revenue or earnings guidance in the filing. Management expects the credit facility and operating cash flow to support operational and capital expenditure needs, while continuing to assess liquidity as COVID-19 conditions evolve.
- COVID-19 caused construction-market disruption, distributor inventory de-stocking, workforce constraints and supply-chain uncertainty. The duration and financial impact of future disruptions could not be reasonably estimated.
- Raw materials and purchased components represented approximately 62% of cost of sales in fiscal 2021. Steel, aluminum, LEDs, power supplies, electronics, graphics substrates, digital screens and transportation costs are exposed to inflation, shortages, tariffs and fuel-price increases.
- Approximately 34% of fiscal 2021 sales were concentrated in the petroleum/convenience-store market, making results sensitive to conditions in that industry.
- One Display Solutions customer program generated $32.4 million, or 10.3% of fiscal 2021 sales.
- LSI reported an August 2020 malware incident. Management stated that business interruption and financial impact were immaterial and that no confidential data was extracted or compromised based on third-party testing.
- Product warranty liabilities were $5.3 million at June 30, 2021. Warranty reserves, goodwill, acquired intangible assets, revenue recognition, income taxes and stock compensation are identified as significant accounting estimates.
- Goodwill and indefinite-lived intangible assets passed fiscal 2021 impairment testing, but the JSI purchase-price allocation remained preliminary and was subject to final valuation and tax adjustments.
- Purchase commitments increased to $29.0 million from $14.3 million. Management stated that existing legal proceedings and contingencies were not expected to have a material adverse effect.
Investor Verification Checklist
- Verify the final JSI purchase-price allocation, acquired-intangible valuations, goodwill and integration performance in subsequent filings.
- Monitor covenant compliance, credit-facility amendments, variable interest rates and remaining borrowing capacity.
- Assess whether the higher inventory and receivables balances convert into cash without materially higher obsolescence or credit losses.
- Compare reported results with adjusted results and separately evaluate the effect of acquisition costs and prior-year facility-sale gains.
- Track Lighting recovery, Display Solutions growth and customer concentration, particularly in petroleum/convenience markets and the 10%-plus customer program.
- Evaluate the effect of raw-material inflation, component shortages, freight costs, tariffs and the company’s ability to pass costs through to customers.
- Review future disclosures regarding COVID-19 effects, cybersecurity controls, warranty claims and goodwill or intangible-asset impairment.
Audit status: Grant Thornton LLP issued unqualified opinions on the fiscal 2021 consolidated financial statements and internal control over financial reporting. However, management and the auditor excluded JSI from the fiscal 2021 internal-control assessment; JSI represented 39% of consolidated assets and 3% of consolidated sales at the acquisition date and fiscal year-end, respectively.