LSI Industries Inc: Form 10-Q for the period ended Dec 31, 2023

Note About Forward-Looking Statements

This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including this section. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “focus,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in in our Annual Report on Form 10-K in the following sections: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures about Market Risk,” and “Risk Factors.” All of those risks and uncertainties are incorporated herein by reference. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of LSI Industries Inc. MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended June 30, 2023, and our financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

Our condensed consolidated financial statements, accompanying notes and the “Safe Harbor” Statement, each as appearing earlier in this report, should be referred to in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Summary of Consolidated Results

(In thousands)

(In thousands)

Net sales of $109.0 million for the three months ended December 31, 2023, decreased $19.8 million or 15% as compared to net sales of $128.8 million for the three months ended December 31, 2022. The decrease in net sales was attributed to a $2.0 million decrease in net sales of the Lighting Segment, while the remainder of the decrease in net sales was attributable to the Display Solutions Segment. Despite what we believe is a temporary delay in project demand primarily affecting the grocery market of the Display Solutions Segment related to the pending merger of two large grocery industry participants, the Company maintained its focus with ongoing execution in the key markets it serves.

Net sales of $232.4 million for the six months ended December 31, 2023, decreased $23.4 million or 9% as compared to net sales of $255.9 million for the six months ended December 31, 2022. Net sales were driven by decreased net sales of the Lighting Segment (a decrease of $1.9 million or 1%) and decreased net sales of the Display Solutions Segment (a decrease of $21.5 million or 18%).

Operating income of $7.8 million for the three months ended December 31, 2023, represents a $1.2 million or 14% decrease from a record operating income of $9.0 million in the three months ended December 31, 2022. Adjusted operating income, a Non-GAAP measure, was $8.7 million in the three months ended December 31, 2023, compared to $10.6 million in the three months ended December 31, 2022. Refer to “Non-GAAP Financial Measures” below for a reconciliation of Non-GAAP financial measures to U.S. GAAP measures. The decline in sales contributed to the decline in operating profit which was partially offset by a 240 basis point increase in gross margin driven by a higher value sales mix, continued sales price disciplines, favorable material input costs, and improved manufacturing productivity.

Operating income of $18.8 million for the six months ended December 31, 2023, represents a $0.2 million or 1% decrease from operating income of $19.1 million in the six months ended December 31, 2022. Adjusted operating income, a Non-GAAP financial measure, was $21.4 million in the six months ended December 31, 2023, compared to same adjusted operating income of $21.4 million in the six months ended December 31, 2022. The Company was able to maintain the same level of operating income despite a 9% decline in sales with continued sales price disciplines, favorable material input costs, and improved manufacturing productivity. Refer to “Non-GAAP Financial Measures” below for a reconciliation of Non-GAAP financial measures to U.S. GAAP measures.

Non-GAAP Financial Measures

We believe it is appropriate to evaluate our performance after making adjustments to the as-reported U.S. GAAP operating income, net income, and earnings per share. Adjusted operating income, net income, and earnings per share, which exclude the impact of long-term performance based compensation expense, severance and restructuring costs, and consulting expense related to commercial growth initiatives, are Non-GAAP financial measures. Also included below are Non-GAAP financial measures including Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA and Adjusted EBITDA), Free Cash Flow, and Net Debt to Adjusted EBITDA. We believe that these adjusted supplemental measures are useful in assessing the operating performance of our business. These supplemental measures are used by our management, including our chief operating decision maker, to evaluate business results. Although the impacts of some of these items have been recognized in prior periods and could recur in future periods, we exclude these items because they provide greater comparability and enhanced visibility into our results of operations. These non-GAAP measures may be different from non-GAAP measures used by other companies. In addition, the non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations, in that they do not reflect all amounts associated with our results as determined in accordance with U.S. GAAP. Therefore, these measures should be used only to evaluate our results in conjunction with corresponding GAAP measures. Below is a reconciliation of these Non-GAAP measures to operating income, net income, and earnings per share for the periods indicated along with the calculation of EBITDA and Adjusted EBITDA, Free Cash Flow, and Net Debt to Adjusted EBITDA.

(In thousands)

21

(In thousands, except per share data)

The following represents the income tax effects of the adjustments in the tables above, which were calculated using the estimated combined U.S., Canada and Mexico effective income tax rates for the periods indicated (in thousands):

(5) $7

(In thousands)

(In thousands, except per share data)

22

The following represents the income tax effects of the adjustments in the tables above, which were calculated using the estimated combined U.S., Canada and Mexico effective income tax rates for the periods indicated (in thousands):

(6) $8

(In thousands)

(In thousands)

(In thousands)

23

Results of Operations

THREE MONTHS ENDED DECEMBER 31, 2023, COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2022

(In thousands)

Lighting Segment net sales of $64.8 million in the three months ended December 31, 2023, decreased 3% from net sales of $66.8 million in the same period in fiscal 2023. Despite softness in the non-residential construction market, which contributed to the small decline in sales, the Company was able to outperform the broader market and gain market share.

Gross profit of $22.7 million in the three months ended December 31, 2023, increased $2.2 million or 11% from the same period of fiscal 2023. Gross profit as a percentage of net sales was 35.0% in the three months ended December 31, 2023, compared to 30.6% in the same period of fiscal 2023. The improvement in gross profit as a percentage of sales on a 3% decrease in net sales was driven by stable pricing, a higher-value sales mix, continued sales price disciplines, favorable material input costs, and improved manufacturing productivity.

Operating expenses of $13.9 million in the three months ended December 31, 2023, increased marginally from the same period of fiscal 2023, driven by continued investments in the agent network and the sales team.

Lighting Segment operating income of $8.9 million for the three months ended December 31, 2023, increased $2.1 million from operating income of $6.8 million in the same period of fiscal 2023 primarily driven by an improvement in gross profit as a percentage of sales on lower net sales, and continued sales price disciplines, favorable material input costs, and improved manufacturing productivity.

(In thousands)

Display Solutions Segment net sales of $44.2 million in the three months ended December 31, 2023, decreased $17.8 million or 29% from net sales of $62.0 million in the same period in fiscal 2023. Sales in the Display Solutions segment were unfavorably impacted by a temporary pause in projected demand within the grocery market vertical related to the pending merger of two larger grocery chains.

Gross profit of $8.8 million in the three months ended December 31, 2023, decreased $4.8 million or 35% from the same period of fiscal 2023. Gross profit as a percentage of net sales in the three months ended December 31, 2023, was 20.0% compared to 22.1% in the same period of fiscal 2023. The reduction in gross profit as a percentage of sales was primarily driven by the decrease in net sales partially offset by favorable program pricing and prudent cost management.

Operating expenses of $5.5 million in the three months ended December 31, 2023, decreased $0.4 million from $5.9 million in the same period of fiscal 2023. The decrease in operating expenses was primarily driven by efforts to manage costs in line with the decline in net sales.

Display Solutions Segment operating income of $3.3 million in the three months ended December 31, 2023, decreased $4.5 million from operating income of $7.8 million in the same period of fiscal 2023. The decrease in operating income was primarily driven by the decrease in net sales.

(In thousands)

The gross profit/(loss) relates to the change in the intercompany profit in inventory elimination.

Operating expenses of $4.3 million in the three months ended December 31, 2023, decreased $1.1 million from the same period of fiscal 2023. The decrease was primarily the result of cost containment initiatives across several of the Company’s cost categories.

Consolidated Results

The Company reported $0.5 million and $1.3 million of net interest expense in the three months ended December 31, 2023, and December 31, 2022, respectively. The decrease in interest expense was the result of the Company’s ability to paydown it’s debt from cash generated by operations. The Company also recorded a nominal amount of other income which is related to net foreign exchange currency transaction net gains through the Company’s Mexican and Canadian subsidiaries.

The $1.5 million of income tax expense in the three months ended December 31, 2023, represents a consolidated effective tax rate of 20.1%. The $1.4 million of income tax expense in the three months ended December 31, 2022, represents a consolidated effective tax rate of 18.1%. Impacting the effective tax rate of both fiscal years was the favorable tax treatment of the Company’s long-term performance based compensation.

The Company reported net income of $5.9 million in the three months ended December 31, 2023, compared to net income of $6.4 million in the three months ended December 31, 2022. Non-GAAP adjusted net income was $6.4 million for the three months ended December 31, 2023, compared to adjusted net income of $7.6 million for the three months ended December 31, 2022 (Refer to the Non-GAAP tables above). The decrease in Non-GAAP adjusted net income is primarily the net result of a decrease in net sales partially offset by an increase in the gross profit as a percentage of sales and a decrease in operating expenses. Diluted earnings per share of $0.20 was reported in the three months ended December 31, 2023, as compared to $0.22 diluted earnings per share in the same period of fiscal 2023. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the three months ended December 31, 2023, were 30,043,000 shares compared to 29,024,000 shares in the same period last fiscal year.

SIX MONTHS ENDED DECEMBER 31, 2023, COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2022

(In thousands)

Lighting Segment net sales of $132.4 million in the six months ended December 31, 2023, decreased 1% from net sales of $134.4 million in the same period in fiscal 2023. Despite softness in the non-residential construction market, which contributed to the small decline in sales, the Company was able to outperform the broader market and gain market share.

Gross profit of $46.0 million in the six months ended December 31, 2023, increased $3.2 million or 8% from the same period of fiscal 2023. Gross profit as a percentage of net sales was 34.7% in the six months ended December 31, 2023, compared to 31.8% in the same period of fiscal 2023. The improvement in gross profit as a percentage of sales on a small decline in net sales was driven by stable pricing, a higher-value sales mix, continued sales price disciplines, favorable material input costs, and improved manufacturing productivity.

Operating expenses of $28.4 million in the six months ended December 31, 2023, increased $1.5 million from the same period of fiscal 2023, driven by continued investments in the agent network and the sales team.

Lighting Segment operating income of $17.6 million for the six months ended December 31, 2023, increased $1.7 million from operating income of $15.9 million in the same period of fiscal 2023 primarily driven by an improvement in gross profit as a percentage of sales on lower net sales, and by effectively managing operating expenses.

(In thousands)

Display Solutions Segment net sales of $100.0 million in the six months ended December 31, 2023, decreased 21.5 million or 18% from net sales of $121.5 million in the same period in fiscal 2023. Sales in the Display Solutions segment were unfavorably impacted by a temporary pause in projected demand within the grocery market vertical related to the pending merger of two larger grocery chains.

Gross profit of $22.1 million in the six months ended December 31, 2023, decreased $4.0 million or 15% from the same period of fiscal 2023. Gross profit as a percentage of net sales in the six months ended December 31, 2023, was 22.1% compared to 21.5% in the same period of fiscal 2023. The reduction in gross profit as a percentage of sales was primarily driven by the decrease in net sales partially offset by favorable program pricing and prudent cost management.

Operating expenses of $11.6 million in the six months ended December 31, 2023, decreased slightly the same period of fiscal 2022. The decrease in operating expenses was primarily driven by efforts to manage costs in line with the decline in net sales.

Display Solutions Segment operating income of $10.5 million in the six months ended December 31, 2023, decreased $3.7 million or 26% from operating income of $14.3 million in the same period of fiscal 2023. The decrease in operating income was driven by the net effect of a decrease in sales partially offset by an improvement of gross profit as a percentage of sales.

(In thousands)

The gross profit relates to the change in the intercompany profit in inventory elimination.

Operating expenses of $9.3 million in the six months ended December 31, 2023, decreased $1.8 million from the same period of fiscal 2023. The decrease was primarily the result of cost containment initiatives across several of the Company’s cost categories.

Consolidated Results

The Company reported $1.0 million and $2.0 million of net interest expense in the six months ended December 31, 2023, and December 31, 2022, respectively. The decrease in interest expense was the result of the Company’s ability to paydown its debt from cash generated by operations. The Company also recorded other expense of $0.1 million and $0.2 million in the six months ended December 31, 2023, and December 31, 2022, respectively, related to net foreign exchange currency transaction losses through the Company’s Mexican and Canadian subsidiaries.

The $3.8 million of income tax expense in the six months ended December 31, 2023, represents a consolidated effective tax rate of 21.5%. Impacting the effective tax rate was the favorable tax treatment of the Company’s long-term performance based compensation. The $4.2 million income tax expense in the six months ended December 31, 2022, represents a consolidated effective tax rate of 24.8%.

The Company reported net income of $13.9 million in the six months ended December 31, 2023, compared to net income of $12.7 million in the six months ended December 31, 2022. Non-GAAP adjusted net income was $15.1 million for the six months ended December 31, 2023, compared to adjusted net income of $14.7 million for the six months ended December 31, 2022 (Refer to the Non-GAAP tables above). The increase in Non-GAAP adjusted net income is primarily the net result of a decrease in net sales, an increase in the gross profit as a percentage of sales, lower interest expense, and a favorable effective tax rate in fiscal 2024 compared to fiscal 2023. Diluted earnings per share of $0.47 was reported in the six months ended December 31, 2023, as compared to $0.44 diluted earnings per share in the same period of fiscal 2023. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the six months ended December 31, 2023, were 29,949,000 shares compared to 28,766,000 shares in the same period last year.

Liquidity and Capital Resources

The Company considers its level of cash on hand, borrowing capacity, current ratio and working capital levels to be its most important measures of short-term liquidity. For long-term liquidity indicators, the Company believes its ratio of long-term debt to equity and our historical levels of net cash flows from operating activities to be the most important measures.

At December 31, 2023, the Company had working capital of $75.8 million compared to $73.3 million at June 30, 2023. The ratio of current assets to current liabilities was 2.2 to 1 at December 31, 2023, and 2.0 at June 30, 2023. The marginal increase in working capital from June 30, 2023, to December 31, 2023, is primarily driven by a $5.5 million decrease in net accounts receivable and a $3.6 million decrease in net inventory more than offset by a combined decrease of $11.8 million decrease in accounts payable and accrued expenses.

Net accounts receivable was $72.2 million and $77.7 million at December 31, 2023, and June 30, 2023, respectively. DSO increased marginally to 58 days at December 31, 2023, from 57 days at June 30, 2023.

Net inventories of $60.2 million at December 31, 2023, decreased $3.5 million from $63.7 million at June 30, 2023. The decrease of $3.5 million is the result of a decrease in net inventory of $3.0 million in the Lighting Segment and a $0.5 decrease in net inventory in the Display Solutions Segment.

Cash generated from operations and borrowing capacity under the Company’s line of credit is its primary source of liquidity. In September 2021, the Company amended its existing $100 million secured line of credit, to a $25 million term loan and $75 million remaining as a secured revolving line of credit. Both facilities expire in the third quarter of fiscal 2026. As of December 31, 2023, $70.7 million of the credit line was available. The Company is in compliance with all of its loan covenants. The $100 million credit facility plus cash flows from operating activities are adequate for operational and capital expenditure needs for the remainder of fiscal 2024.

The Company generated $19.9 million of cash from operating activities in the six months ended December 31, 2023, compared to a generation of cash of $20.1 million in the six months ended December 31, 2022. The Company continues to effectively manage its working capital while generating increasing cash flow from earnings in both fiscal years, resulting in continued strong cash flow from operations.

The Company used $3.3 million and $1.0 million of cash related to investing activities in the six months ended December 31, 2023, and December 31, 2022, respectively. The Company has increased its investment in equipment and tooling year-over-year to support sales growth.

The Company had a use of cash of $15.7 million and $18.8 million related to financing activities in the six months ended December 31, 2023, and December 31, 2022, respectively. The use of cash in both fiscal years was primarily the result of cash generated from improved earnings and effective working capital management, which in turn was used to pay down the Company’s line of credit. The Company also received $1.2 million and $1.3 million of cash in fiscal 2024 and fiscal 2023, respectively, related to the exercise of stock options. This influx of cash also contributed to the pay down of the Company’s line of credit.

The Company has on its balance sheet financial instruments consisting primarily of cash and cash equivalents, short-term investments, revolving lines of credit, and long-term debt. The fair value of these financial instruments approximates carrying value because of their short-term maturity and/or variable, market-driven interest rates.

Off-Balance Sheet Arrangements

The Company has no financial instruments with off-balance sheet risk and have no off-balance sheet arrangements.

Cash Dividends

In January 2024, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable February 13, 2024, to shareholders of record as of February 5, 2024. The indicated annual cash dividend rate for fiscal 2024 is $0.20 per share. The Board of Directors has adopted a policy regarding dividends which indicates that dividends will be determined by the Board of Directors in its discretion based upon its evaluation of earnings, cash flow requirements, financial condition, debt levels, stock repurchases, future business developments and opportunities, and other factors deemed relevant.

Critical Accounting Policies and Estimates

A summary of our significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2023 Annual Report on Form 10-K.

There have been no material changes in our exposure to market risk since June 30, 2022. Additional information can be found in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, which appears on page 16 of the Annual Report on Form 10-K for the fiscal year ended June 30, 2023.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is defined Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized, and reported within required time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

We conducted, under the supervision of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2023, our disclosure controls and procedures were effective. Management believes that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly presented in all material respects in accordance with GAAP for interim financial statements, and the Company’s Chief Executive Officer and Chief Financial Officer have certified that, based on their knowledge, the condensed consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for each of the periods presented in this report.

Changes in Internal Control

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the second quarter ended December 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.