LSI Industries Inc: Form 10-Q for the period ended Mar 31, 2025

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, 2024, 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 $132.5 million for the three months ended March 31, 2025, increased 22% as compared to net sales of $108.2 million for the three months ended March 31, 2024. The increase in net sales was attributed to a $30.2 million or 70% increase in net sales of the Display Solutions Segment, partially offset by a $5.9 million or 9% decline in net sales of the Lighting Segment. The Display Solutions Segment generated organic growth of 15% driven by increased sales across all product categories and vertical markets supported mostly by the grocery and refueling/ C-Store verticals. The Company’s acquisitions of EMI and CBH (acquired March 11, 2025) contributed an additional $23.8 million of the quarter-over-quarter sales growth of the Display Solutions Segment. The decline in sales in the Lighting Segment is attributed to the comparison of quarter-over-quarter sales of large lighting projects. In fiscal 2024, the Company had several large lighting projects that did not repeat in fiscal 2025. While there was a decline in large lighting projects, small project activity continued to increase over the prior year period.

Net sales of $418.3 million for the nine months ended March 31, 2024, increased 23% as compared to net sales of $340.6 million for the nine months ended March 31, 2024. The increase in net sales was attributed to a $99.4 million or 69% increase in net sales of the Display Solutions Segment, partially offset by a $21.7 or 11% decline in net sales of the Lighting Segment. The Display Solutions Segment generated organic growth of 18% driven by increased sales across all product categories and vertical markets supported mostly by the grocery and refueling/ C-Store verticals. The Company’s acquisition of EMI and CBH contributed an additional $73.4 million of the year-over-year sales growth of the Display Solutions Segment. The decline in sales in the Lighting Segment is attributed to the comparison of year-over-year sales of large lighting projects. In fiscal 2024, the Company had several large lighting projects that did not repeat in fiscal 2025. While there was a decline in large lighting projects, small project activity continued to increase over the prior year period.

Operating income of $6.2 million for the three months ended March 31, 2025, represents a 19% decrease in operating income of $7.7 million in the three months ended March 31, 2024. Adjusted operating income, a Non-GAAP measure, was $9.7 million in the three months ended March 31, 2025, compared to $10.0 million in the three months ended March 31, 2024. The increase in net sales was offset by a change in product mix. Refer to “Non-GAAP Financial Measures” below for a reconciliation of Non-GAAP financial measures to U.S. GAAP measures.

Operating income of $23.8 million for the nine months ended March 31, 2025, represents a 10% decrease from operating income of $26.5 million in the nine months ended March 31, 2024. Adjusted operating income, a Non-GAAP financial measure, was $33.2 million in the nine months ended March 31, 2025, compared to adjusted operating income of $33.8 million in the nine months ended March 31, 2024. The increase in net sales was offset by a change in product mix. Refer to “Non-GAAP Financial Measures” below for a reconciliation of Non-GAAP financial measures to U.S. GAAP measures.

Non-GAAP Financial Measures

This report includes adjustments to GAAP operating income, net income, and earnings per share for the three months and nine ended March 31, 2025, and 2024. Operating income, net income, and earnings per share, which exclude the impact of long-term performance based compensation expense, the amortization expense of acquired intangible assets, commercial growth opportunity expense, acquisition costs, the lease expense on the step-up basis of acquired leases, and restructuring and severance costs, are non-GAAP financial measures. We further note that while the amortization expense of acquired intangible assets is excluded from the non-GAAP financial measures, the revenue of the acquired companies is included in the measures and the acquired assets contribute to the generation of revenue. We believe these non-GAAP measures will provide increased transparency to our core operating performance of the business. Also included in this report are non-GAAP financial measures, including Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA and Adjusted EBITDA), Net Debt to Adjusted EBITDA, Free Cash Flow, and organic sales growth. We believe that these are useful as supplemental measures in assessing the operating performance of our business. These measures are used by our management, including our chief operating decision maker, to evaluate business results, and are frequently referenced by those who follow the Company. 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 net income and earnings per share reported for the periods indicated along with the calculation of EBITDA, Adjusted EBITDA, Free Cash Flow, Net Debt to Adjusted EBITDA, and organic sales growth.

(In thousands)

(In thousands, except per share data)

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Effective in the first quarter of fiscal 2025, LSI includes the amortization expense related to acquired intangible assets as an add-back to its non-GAAP reconciliation. Prior quarter non-GAAP reconciliations have been adjusted accordingly.

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):

(1) $237

(2) $337

(3) $15

(4) $197

(5) $254

(6) $302

(7) $40

(In thousands)

(In thousands, except per share data)

Effective in the first quarter of fiscal 2025, LSI includes the amortization expense related to acquired intangible assets as an add-back to its non-GAAP reconciliation. Prior quarter non-GAAP reconciliations have been adjusted accordingly.

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):

(1) $930

(2) $1,021

(3) $15

(4) $195

(5) $48

(6) $19

(7) $829

(8) $927

(9) $138

(10) $6

(In thousands)

(In thousands)

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Results of Operations

THREE MONTHS ENDED MARCH 31, 2025, COMPARED TO THREE MONTHS ENDED MARCH 31, 2024

(In thousands)

Display Solutions net sales of $73.5 million increased 70% from the same period in fiscal 2024. This segment generated organic growth of 15% driven by increased sales across all major product categories and vertical markets supported mostly by the grocery and refueling/ C-Store verticals. The Company’s acquisition of EMI and CBH (acquired March 11, 2025) also contributed $23.8 million of the quarter-over-quarter sales growth of the Display Solutions Segment.

Gross profit of $12.5 million in the three months ended March 31, 2025, increased 29% from the same period of fiscal 2024. Gross profit as a percentage of net sales in the three months ended March 31, 2025, decreased to 17% from 22% in the same period of fiscal 2024 impacted by product and vertical market mix. The rapid increase in demand combined with a high level of scheduling changes also had what is expected to be a transitory impact on margins. The Company continues to maintain favorable program pricing and prudent cost management.

Operating expenses of $7.9 million in the three months ended March 31, 2025, increased 43% from the same period of fiscal 2024, primarily driven by the acquisitions of EMI and CBH and also by continued investment in commercial initiatives to drive growth.

Display Solutions Segment operating income of $4.5 million in the three months ended March 31, 2025, increased 11% from the same period of fiscal 2024. The increase in operating income of $0.4 million was driven by the net effect of an increase in net sales partially offset by the gross margin impact of product and vertical mix.

(In thousands)

Lighting Segment net sales of $59.0 million in the three months ended March 31, 2025, decreased 9% compared to net sales of $64.9 million in the same period in fiscal 2024. The decline in sales is attributed to the comparison of quarter-over-quarter sales of large lighting projects. In fiscal 2024, the Company had several large lighting projects that did not repeat in fiscal 2025. While there was a decline in large lighting projects, small project activity continued to increase over the prior year period.

Gross profit of $20.4 million in the three months ended March 31, 2025, decreased 6% from the same period of fiscal 2024. The decline in gross profit is attributed to the decline in sales. While overall demand levels were lower in the fiscal third quarter, gross profit as a percentage of sales improved from 33% to 35%. The improvement in gross margin was driven by an increase in a higher mix of value applications, stable pricing, and affective cost management.

Operating expenses of $13.2 million in the three months ended March 31, 2025, decreased 7% from the same period of fiscal 2024, driven mostly by lower commission expense from lower sales, and effective cost management.

Lighting Segment operating income of $7.2 million for the three months ended March 31, 2025, decreased 2% from operating income of $7.3 million in the same period of fiscal 2024 primarily driven by decreased net sales partially offset by an improvement in operating margins.

(In thousands)

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

Operating expenses of $5.4 million in the three months ended March 31, 2025, increased 48% from the same period of fiscal 2024. The increase in expense is primarily the result of continued investment in commercial initiatives to support the growth of the Company. Also contributing to the quarter-over-quarter change was an increase in employee benefit costs.

Consolidated Results

The Company reported $0.6 million and $0.1 million of net interest expense in the three months ended March 31, 2025, and March 31, 2024, respectively. The increase in interest expense is the result of the funds borrowed to acquire EMI in the fourth quarter of fiscal 2024 along with the funds borrowed in the third quarter of fiscal 2025 to acquire CBH partially offset by decreased borrowing costs.

The $1.7 million of income tax expense in the three months ended March 31, 2025, represents a consolidated effective tax rate of 30.6%. The $2.1 million of income tax expense in the three months ended March 31, 2024, represents a consolidated effective tax rate of 27.8%. Impacting the effective tax rate of both reported periods is the increase in pre-tax profits in foreign countries where the tax rates of these countries is higher than the US statutory tax rates.

The Company reported net income of $3.9 million in the three months ended March 31, 2025, compared to net income of $5.4 million in the three months ended March 31, 2024. Non-GAAP adjusted net income was $6.3 million for the three months ended March 31, 2025, compared to adjusted net income of $7.1 million for the three months ended March 31, 2024 (Refer to the Non-GAAP tables above). The decrease in Non-GAAP adjusted net income is primarily the net result of an increase in net sales offset by unfavorable product mix and operating efficiencies. Diluted adjusted earnings per share of $0.13 was reported in the three months ended March 31, 2025, compared to $0.18 diluted adjusted earnings per share in the same period of fiscal 2024. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the three months ended March 31, 2025 were 30,966,000 shares compared to 30,122,000 shares in the same period last year.

NINE MONTHS ENDED MARCH 31, 2025, COMPARED TO NINE MONTHS ENDED MARCH 31, 2024

(In thousands)

Display Solutions net sales of $242.7 million increased 69% from same period in fiscal 2024. This segment generated organic growth of 18% driven by increased sales across all major product categories and vertical markets supported mostly by the grocery and refueling/ C-Store verticals. The Company’s acquisitions of EMI and CBH also contributed $73.4 million of the year-over-year sales growth of the Display Solutions Segment.

Gross profit of $43.3 million in the nine months ended March 31, 2025, increased 36% from the same period of fiscal 2024. Gross profit as a percentage of net sales in the nine months ended March 31, 2025, decreased to 18% from 22% in the same period of fiscal 2024 impacted by product and vertical market mix. The rapid increase in demand over the past two quarters combined with a high level of scheduling changes also had a transitory impact on margins. The Company continues to maintain favorable program pricing and prudent cost management.

Operating expenses of $23.0 million in the nine months ended March 31, 2025 increased 33% from the same period of fiscal 2024, primarily driven by the acquisitions of EMI and CBH and by continued investment in commercial initiatives to drive growth.

Operating income of $20.3 million in the nine months ended March 31, 20254 increased 40% from the same period of fiscal 2024. The increase in operating income of 5.8 million was driven by the net effect of an increase in net sales partially offset by the gross margin impact of product mix.

(In thousands)

Lighting Segment net sales of $175.6 million in the nine months ended March 31, 2025, decreased 11% compared to net sales of $197.3 million in the same period in fiscal 2024. The decline in sales is attributed to the comparison of year-over-year sales of large lighting projects. In fiscal 2024, the Company had several large lighting projects that did not repeat in fiscal 2025. While there was a decline in large lighting projects, small project activity continues to increase over the prior year period.

Gross profit of $58.0 million in the nine months ended March 31, 2025, decreased 14% from the same period of fiscal 2024. The decline in gross profit is attributed to the decline in sales. While overall demand levels were lower in the first nine months, gross profit as a percentage of sales only decreased by 1% compared to the 34% from the margin rate reported in first nine months of fiscal 2024. Maintaining a comparable gross margin rate on lower sales was the result of an increase in a higher mix of value applications, stable pricing, and affective cost management.

Operating expenses of $39.2 million in the nine months ended March 31, 2025, decreased 8% from the same period of fiscal 2024, driven mostly by lower commission expense from lower sales, and effective cost management.

Lighting Segment operating income of $18.9 million for the nine months ended March 31, 2025, decreased 24% from operating income of $24.9 million in the same period of fiscal 2024 primarily driven by decreased net sales partially offset by an increase in a higher mix of value applications, stable pricing, and effective cost management.

(In thousands)

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

Operating expenses of $15.4 million in the nine months ended March 31, 2025, increased 19% from the same period of fiscal 2024. The increase in expense is the result of an increase in investment in commercial initiatives to support the growth of the Company. Also contributing to the year-over-year change was an increase in employee benefit costs.

Consolidated Results

The Company reported $2.3 million and $1.2 million of net interest expense in the nine months ended March 31, 2025, and March 31, 2024, respectively. The increase in interest expense is the result of the funds borrowed to acquire EMI in the fourth quarter of fiscal 2024 along with the funds borrowed to acquire CBH in the third quarter of fiscal 2025, partially offset by decreased borrowing costs. The Company also recorded other expense of $0.3 million and $0.1 million in the nine months ended March 31, 2025, and March 31, 2024, respectively, both of which is related to net foreign exchange currency transaction gains and losses through the Company’s Mexican and Canadian subsidiaries.

The $5.1 million of income tax expense in the nine months ended March 31, 2025 represents a consolidated effective tax rate of 23.7%. The $5.9 million of income tax expense in the nine months ended March 31, 2024 represents a consolidated effective tax rate of 23.4%. Impacting the effective tax rate of both reported periods was the favorable tax treatment of the Company’s long-term performance based compensation.

The Company reported net income of $16.2 million in the nine months ended March 31, 2025, compared to net income of $19.3 million in the nine months ended March 31, 2024. Non-GAAP adjusted net income was $22.3 million for the nine months ended March 31, 2025, compared to adjusted net income of $24.0 million for the nine months ended March 31, 2024 (Refer to the Non-GAAP tables above). The decrease in Non-GAAP adjusted net income is primarily the net result of an increase in net sales offset by unfavorable product mix and operating efficiencies. Diluted adjusted earnings per share of $0.53 was reported in the nine months ended March 31, 2025, compared to $0.64 diluted adjusted earnings per share in the same period of fiscal 2024. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the nine months ended March 31, 2025, were 30,790,000 shares compared to 30,005,000 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 March 31, 2025, the Company had working capital of $96.3 million compared to $83.3 million at June 30, 2024. The ratio of current assets to current liabilities was 2.1 to 1 for both March 31, 2025, and June 30, 2024. The acquisition of CBH in the third quarter of fiscal 2025 accounted for $8.3 million of the increase in net working capital. When the impact of the acquisition of CBH is removed from the year-over-year comparison, net working capital increased $4.8 million. Most of the increase is attributed to a $14.9 million increase in accounts receivable partially offset by a $9.0 increase in accounts payable and accrued expenses.

Net accounts receivable was $98.0 million and $78.6 million at March 31, 202, and June 30, 2024, respectively. The acquisition of CBH accounted for $4.5 million of the increase. DSO increased to 59 days at March 31, 2025, from 58 days at June 30, 2024.

Net inventories of $74.5 million at March 31, 2025, increased $3.5 million from $70.9 million at June 30, 2024. Lighting Segment net inventory decreased $1.9 million whereas net inventory in the Display Solutions Segment increased $5.4 million. The acquisition of CBH accounted for $4.3 million of the increase in net inventory. The growth in Display Solutions inventory excluding the impact of CBH inventory was to support the growth in backlog resulting from an increase in program activity.

Cash generated from operations and borrowing capacity under the Company’s line of credit is its primary source of liquidity. The Company has a $25 million term loan and $75 million remaining in a secured revolving line of credit. Both facilities expire in the first quarter of fiscal 2027. As of March 31, 2025, $32.2 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 2025.

The Company generated $27.1 million of cash from operating activities in the nine months ended March 31, 2025, compared to $32.3 million of cash generated from operating activities in the same period in fiscal 2024. The Company continues to effectively manage its working capital while generating increasing cash flow from earnings in both fiscal years, resulting in strong cash flow from operations.

The Company invested $2.5 million and $4.6 million of cash related to purchases of property, plant and equipment in the nine months ended March 31, 2025, and March 31, 2024, respectively. In the third quarter of FY 2025 the Company acquired CBH for $22.8 million net of cash received. The Company continues to invest in equipment and tooling to support sales growth.

The Company had a net use of cash of $3.2 million and $22.4 million related to financing activities in the nine months ended March 31, 2025, and March 31, 2024, respectively. The decrease in net cash used year-over-year was the result of the debt funding required to acquire CBH in the third quarter of fiscal 2025. The Company continues to generate positive cash flow from its operations in order to pay down its debt and fund its dividend payments to shareholders.

The Company has on its balance sheet financial instruments consisting primarily of cash and cash equivalents, 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 April 2025, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable May 13, 2025, to shareholders of record as of May 5, 2025. The indicated annual cash dividend rate for fiscal 2025 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 2024 Annual Report on Form 10-K.

There have been no material changes in our exposure to market risk since June 30, 2024. 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, 2024.

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 March 31, 2025, 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 fiscal quarter ended March 31, 2025, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.