LSI(LYTS) - 2023 Q4 - Annual Report

Part I Business LSI Industries Inc. is a leading producer of non-residential lighting and retail display solutions, organized into Lighting and Display Solutions segments, primarily serving the U.S. market - LSI is a leading producer of non-residential lighting and retail display solutions, with a focus on high-performance, American-made products[16] - The company operates out of eleven manufacturing facilities located in six U.S. states and one province in Ontario, Canada[25] - Research and development costs totaled $3.4 million in fiscal 2023 and $3.6 million in fiscal 2022[28] - As of June 30, 2023, the company had 1,540 full-time employees and 87 agency employees[33] Net Sales by Business Segment (in thousands) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | Lighting Segment | $272,451 | $233,449 | | Display Solutions Segment | $224,528 | $221,671 | | Total Net Sales | $496,979 | $455,120 | Lighting Segment The Lighting Segment, representing 55% of fiscal 2023 net sales, manufactures and sells outdoor and indoor LED lighting fixtures and control solutions for various commercial markets - The Lighting Segment serves vertical markets such as refueling/convenience stores, parking lots/garages, quick-service restaurants, retail, grocery, automotive dealerships, sports courts, and warehouses[18] - Products include a variety of lighting fixtures, poles, and accessories, with a focus on energy-efficient LED light sources and advanced control options like sensors and wireless technologies[19] Display Solutions Segment The Display Solutions Segment, accounting for 45% of fiscal 2023 net sales, provides visual image and display elements, including digital signage and refrigerated displays, with project management services - Major products include signage, canopy graphics, digital signage, menu board systems, and refrigerated/non-refrigerated merchandising displays[20] - The segment provides comprehensive project management services, including installation, site surveys, permitting, and content management, to support large rollout programs for customers[20] Risk Factors The company faces strategic, operational, legal/regulatory, and financial risks, including economic downturns, competitive pressures, supply chain disruptions, and cybersecurity threats - Strategic Risks include potential negative impacts from lower economic activity in key end markets (refueling, grocery, etc.), inability to execute business strategies, intense competition affecting prices, and concentration of sales in the refueling/convenience store and grocery markets[43][45][46][48] - Operational Risks include supply chain vulnerabilities such as price increases and shortages of raw materials (steel, aluminum, LEDs), cybersecurity threats to IT systems, labor shortages, potential product recalls or warranty claims, and reliance on independent sales representatives[54][55][59][60] - Legal and Regulatory Risks: Potential changes in U.S. trade policies, such as import tariffs, could increase costs for components sourced from foreign countries and adversely affect the business[68][69] - Financial Risks include stock price volatility affecting capital raising, adverse effects from inflation and interest rate increases, and anti-takeover provisions in organizational documents and Ohio law that could deter a change in control[72][73][74] Unresolved Staff Comments The company reports no unresolved written comments from the Securities and Exchange Commission staff issued 180 days or more before the end of fiscal year 2023 - There are no unresolved staff comments[77] Properties The company operates owned and leased properties for corporate headquarters, manufacturing, and office functions, with key facilities in Ohio, Kentucky, Maine, Texas, North Carolina, and Ontario - The company owns its corporate headquarters and several manufacturing facilities in Cincinnati, OH, Independence, KY, and Columbus, OH[78] - Key leased manufacturing facilities are located in Houston, TX; Burlington, NC; and Collingwood, ON, Canada[78] Legal Proceedings Information regarding legal proceedings is detailed in Note 13 of the Consolidated Financial Statements, with the company believing their ultimate disposition will not have a material adverse effect - For information on legal proceedings, refer to Note 13 – Contingencies of the Notes to the Consolidated Financial Statements[78] Mine Safety Disclosures This item is not applicable to the company - Not applicable[79] Part II Market for Common Equity, Stockholder Matters, and Issuer Purchases LSI's common stock trades on NASDAQ under 'LYTS', with an indicated annual dividend of $0.20 per share, and no shares repurchased in fiscal 2023 under its program - The company's common stock is traded on the NASDAQ Global Select Market under the symbol "LYTS"[81] - The indicated annual cash dividend rate at the end of fiscal 2023 was $0.20 per share[82] - The company did not repurchase any shares during the fiscal year ended June 30, 2023, under its $15 million share repurchase program[83] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) In fiscal 2023, LSI's net sales increased 9.2% to $497.0 million, with operating income rising significantly to $37.0 million, driven by strong operating cash flow of $49.6 million used to reduce debt Fiscal 2023 vs. 2022 Consolidated Results (in thousands) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total Net Sales | $496,979 | $455,120 | +9.2% | | Total Operating Income | $37,028 | $21,201 | +74.7% | | Adjusted Operating Income (Non-GAAP) | $41,956 | $24,973 | +68.0% | | Net Income | $25,762 | $15,032 | +71.4% | | Diluted EPS | $0.88 | $0.54 | +63.0% | - The company generated $49.6 million of cash from operating activities in fiscal 2023, a significant turnaround from a $3.8 million use of cash in fiscal 2022, primarily due to effective working capital management and higher earnings[146] - Net Debt to Adjusted EBITDA ratio improved significantly from 2.20 at the end of fiscal 2022 to 0.65 at the end of fiscal 2023[125] Results of Operations The Lighting Segment's net sales grew 16.7% to $272.5 million, with operating income up 51.1%, while Display Solutions sales increased 1.3% to $224.5 million, with operating income up 41.7%, both driven by improved margins and mix Lighting Segment Performance (in thousands) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $272,451 | $233,449 | +16.7% | | Gross Profit | $86,761 | $70,120 | +23.7% | | Operating Income | $31,633 | $20,942 | +51.1% | Display Solutions Segment Performance (in thousands) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $224,528 | $221,671 | +1.3% | | Gross Profit | $50,179 | $39,076 | +28.4% | | Operating Income | $24,920 | $17,589 | +41.7% | Liquidity and Capital Resources The company's liquidity improved in fiscal 2023, with working capital decreasing to $73.3 million due to inventory reduction, and $49.6 million cash from operations used to pay down debt - Working capital decreased by $8.5 million to $73.3 million at June 30, 2023, mainly driven by a $10.7 million decrease in inventory[141][144] - Cash from operations was $49.6 million in FY2023, compared to a use of cash of $3.8 million in FY2022[146] - The company used cash from operations and financing activities to pay down its line of credit, reducing total debt from $79.6 million to $35.2 million year-over-year[148][240] Critical Accounting Policies and Use of Estimates The warranty reserve is a critical accounting policy requiring significant judgment, with the liability increasing to $6.5 million at the end of fiscal 2023 from $4.5 million in the prior year - The most critical accounting policy is the warranty reserve, which involves estimating future costs for repair or replacement of defective products[151][152] Product Warranty Liability Changes (in thousands) | | June 30, 2023 | June 30, 2022 | | :--- | :--- | :--- | | Beginning Balance | $4,491 | $5,295 | | Additions charged to expense | $6,626 | $2,960 | | Deductions for repairs | ($4,616) | ($3,764) | | Ending Balance | $6,501 | $4,491 | Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rate fluctuations on variable-rate debt, raw material price volatility, and minimal foreign currency risk, without using derivative instruments for hedging - The company is exposed to interest rate risk due to its variable-rate $75 million revolving line of credit and $25 million term loan[86][87] - The company faces raw material price risk for commodities like steel, aluminum, and LEDs; in fiscal 2023, the raw material component of cost of goods sold subject to this risk was approximately $226.3 million[88] - Foreign currency risk is minimal, as sales from Mexican and Canadian subsidiaries represent only about 4% of consolidated net sales[90] Financial Statements and Supplementary Data This section includes the company's consolidated financial statements for fiscal years 2023 and 2022, along with management's report on internal control and the independent auditor's unqualified opinions - The independent auditor, Grant Thornton LLP, issued an unqualified opinion on both the consolidated financial statements and the effectiveness of the company's internal control over financial reporting as of June 30, 2023[161][168] Consolidated Balance Sheet Highlights (in thousands) | | June 30, 2023 | June 30, 2022 | | :--- | :--- | :--- | | Total Current Assets | $149,876 | $158,917 | | Total Assets | $296,149 | $311,080 | | Total Current Liabilities | $76,562 | $77,082 | | Total Long-Term Debt | $31,629 | $76,025 | | Total Shareholders' Equity | $177,578 | $147,769 | Consolidated Cash Flow Highlights (in thousands) | | 2023 | 2022 | | :--- | :--- | :--- | | Net cash from Operating Activities | $49,588 | ($3,863) | | Net cash from Investing Activities | ($3,203) | ($1,573) | | Net cash from Financing Activities | ($47,149) | $5,633 | Changes in and Disagreements with Accountants This item is not applicable - Not applicable[91] Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes in internal control over financial reporting during the fourth fiscal quarter - The Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2023, the company's disclosure controls and procedures were effective[94] - There were no changes in internal control over financial reporting during the quarter ended June 30, 2023, that materially affected, or are reasonably likely to materially affect, the company's internal control[96] Other Information No directors or officers reported the adoption or termination of Rule 10b5-1 trading arrangements during the fourth quarter of fiscal 2023 - No directors or officers reported the adoption or termination of Rule 10b5-1 trading arrangements in the fourth quarter[97] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, the Audit Committee, and the company's code of ethics is incorporated by reference from the 2023 Proxy Statement - Information required for this item is incorporated by reference from the Proxy Statement for the Annual Meeting of Shareholders to be held November 1, 2023[100] Executive Compensation Information regarding director and executive compensation, including the Compensation Discussion and Analysis, is incorporated by reference from the company's 2023 Proxy Statement - Information required for this item is incorporated by reference from the 2023 Proxy Statement[103] Security Ownership and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management, as well as equity compensation plan information, is incorporated by reference from the company's 2023 Proxy Statement - Information required for this item is incorporated by reference from the 2023 Proxy Statement[103] Certain Relationships, Related Transactions, and Director Independence Information regarding related person transactions and director independence is incorporated by reference from the company's 2023 Proxy Statement - Information required for this item is incorporated by reference from the 2023 Proxy Statement[104] Principal Accountant Fees and Services Information concerning fees and services provided by the principal accountant, Grant Thornton LLP, is incorporated by reference from the company's 2023 Proxy Statement - Information required for this item is incorporated by reference from the 2023 Proxy Statement[105] Part IV Exhibits and Financial Statement Schedules This section lists documents filed as part of the Form 10-K, including consolidated financial statements, various exhibits, and certifications from principal executive and financial officers - The report includes consolidated financial statements, exhibits, and certifications as part of the filing[108] - Key exhibits filed include loan agreements, employment agreements, and equity incentive plans[108][109] - Financial Statement Schedule II – Valuation and Qualifying Accounts is provided on page 61[90][288] Form 10-K Summary This item is not included in the report - Not included[112]