LSI INDUSTRIES INC 10-Q

lyts20220930_10q.htm     UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC    20549 _________________________   FORM 10-Q   ☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2022 , OR           ☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO ________________.     Commission File No. 0-13375   LSI Industries Inc. (Exact name of registrant as specified in its charter)   Ohio   31-0888951 (State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)   10000 Alliance Road , Cincinnati , Ohio   45242 (Address of principal executive offices)   (Zip Code) ( 513 ) 793-3200 Registrant’s telephone number, including area code)   Securities registered pursuant to Section 12(b) of the Act:   Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, no par value LYTS NASDAQ Global Select Market   Indicate by checkmark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes ☒  No ☐   Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No ☐   Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.   Large accelerated filer ☐   Accelerated filer ☒ Emerging growth company ☐ Non-accelerated filer ☐  Smaller reporting company ☒     If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐   No ☒   As of October 28, 2022, there were 27,777,410 shares of the registrant's common stock, no par value per share, outstanding.               LSI INDUSTRIES INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2022   INDEX       PART I.   FINANCIAL INFORMATION 3     ITEM 1. FINANCIAL STATEMENTS 3         CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 3         CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 4         CONDENSED CONSOLIDATED BALANCE SHEETS 5         CONDENSED CONSOLIDATED BALANCE SHEETS 6         CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY 7         CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 8         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 9       ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20       ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26       ITEM 4. CONTROLS AND PROCEDURES 26       PART II.   OTHER INFORMATION 27       ITEM 5. OTHER INFORMATION 27       ITEM 6. EXHIBITS 27         SIGNATURES 28   Page 2       PART I.     FINANCIAL INFORMATION   ITEM 1.     FINANCIAL STATEMENTS   LSI INDUSTRIES INC.   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)       Three Months Ended       September 30   (In thousands, except per share data)   2022     2021                     Net Sales   $ 127,069     $ 106,397                     Cost of products and services sold     92,319       81,887                     Severance costs     12       -                     Gross profit     34,738       24,510                     Selling and administrative expenses     24,717       20,066                     Operating income     10,021       4,444                     Interest expense     788       234                     Other expense     213       79                     Income before income taxes     9,020       4,131                     Income tax expense     2,758       998                     Net income   $ 6,262     $ 3,133                                       Earnings per common share (see Note 4)                 Basic   $ 0.23     $ 0.12   Diluted   $ 0.22     $ 0.11                                       Weighted average common shares outstanding                 Basic     27,641       26,996   Diluted     28,664       27,743       The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.   Page 3       LSI INDUSTRIES INC.   CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)       Three Months Ended       September 30   (In thousands)   2022     2021                     Net Income   $ 6,262     $ 3,133                     Foreign currency translation adjustment     7       ( 44 )                   Comprehensive Income   $ 6,269     $ 3,089       The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.   Page 4       LSI INDUSTRIES INC.   CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)         September 30,     June 30,   (In thousands, except shares)   2022     2022                     ASSETS                                   Current assets                                   Cash and cash equivalents   $ 9,028     $ 2,462                     Accounts receivable, less allowance for credit losses of $ 508 and $ 499 , respectively     75,449       77,750                     Inventories     80,457       74,421                     Refundable income taxes     1,118       1,041                     Other current assets     4,355       3,243                     Total current assets     170,407       158,917                     Property, Plant and Equipment, at cost                 Land     4,010       4,010   Buildings     24,469       24,495   Machinery and equipment     67,115       66,762   Buildings under finance leases     2,033       2,033   Construction in progress     563       618         98,190       97,918   Less accumulated depreciation     ( 71,913 )     ( 70,760 ) Net property, plant and equipment     26,277       27,158                     Goodwill     45,030       45,030                     Other intangible assets, net     66,774       67,964                     Operating lease right-of-use assets     7,826       8,664                     Other long-term assets, net     3,187       3,347                     Total assets   $ 319,501     $ 311,080       The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.   Page 5     LSI INDUSTRIES INC.   CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)       September 30,     June 30,   (In thousands, except shares)   2022     2022                     LIABILITIES & SHAREHOLDERS' EQUITY                                   Current liabilities                 Current maturities of long-term debt   $ 3,571     $ 3,571   Accounts payable     41,133       34,783   Accrued expenses     35,231       36,264                     Total current liabilities     79,935       74,618                     Long-term debt     73,975       76,025                     Finance lease liabilities     1,174       1,246                     Operating lease liabilities     7,381       8,240                     Other long-term liabilities     3,307       3,182                     Commitments and contingencies (Note 12)     -       -                     Shareholders' Equity                 Preferred shares, without par value; Authorized 1,000,000 shares, none issued     -       -   Common shares, without par value; Authorized 40,000,000 shares; Outstanding 27,777,410 and 27,484,514 shares, respectively     140,599       139,500   Treasury shares, without par value     ( 6,439 )     ( 5,927 ) Deferred compensation plan     6,439       5,927   Retained earnings     13,078       8,224   Accumulated other comprehensive income     52       45                     Total shareholders' equity     153,729       147,769                     Total liabilities & shareholders' equity   $ 319,501     $ 311,080       The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.   Page 6       LSI INDUSTRIES INC.   CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)         Common Shares     Treasury Shares     Key Executive     Accumulated Other     Retained     Total   (In thousands, except per share data)   Number Of Shares             Number Of Shares             Compensation Amount     Comprehensive Income (Loss)     Earnings (Loss)     Shareholders' Equity         Amount         Amount                                                                                     Balance at June 30, 2021     26,863     $ 132,526       ( 346 )   $ ( 2,450 )   $ 2,450     $ 49     $ ( 1,405 )   $ 131,170                                                                     Net Income     -       -       -       -       -       -       3,133       3,133   Other comprehensive loss     -       -       -       -       -       ( 44 )     -       ( 44 ) Stock compensation awards     10       75       -       -       -       -       -       75   Restricted stock units issued, net of shares withheld for tax withholdings     79       ( 247 )     -       -       -       -       -       ( 247 ) Shares issued for deferred compensation     263       2,042       -       -       -       -       -       2,042   Activity of treasury shares, net     -       -       ( 261 )     ( 2,021 )     -       -       -       ( 2,021 ) Deferred stock compensation     -       -       -       -       2,021       -       -       2,021   Stock compensation expense     -       556       -       -       -       -       -       556   Stock options exercised, net     3       16       -       -       -       -       -       16   Dividends — $ 0.20 per share     -       -       -       -       -       -       ( 1,328 )     ( 1,328 )                                                                   Balance at September 30, 2021     27,218     $ 134,968       ( 607 )   $ ( 4,471 )   $ 4,471     $ 5     $ 400     $ 135,373         Common Shares     Treasury Shares     Key Executive     Accumulated Other     Retained     Total       Number Of Shares             Number Of Shares             Compensation Amount     Comprehensive Income (Loss)     Earnings (Loss)     Shareholders' Equity           Amount         Amount                                                                                     Balance at June 30, 2022     27,484     $ 139,500       ( 822 )   $ ( 5,927 )   $ 5,927     $ 45     $ 8,224     $ 147,769                                                                     Net Income     -       -       -       -       -       -       6,262       6,262   Other comprehensive loss     -       -       -       -       -       7       -       7   Stock compensation awards     12       75       -       -       -       -       -       75   Restricted stock units issued, net of shares withheld for tax withholdings     201       ( 66 )     -       -       -       -       -       ( 66 ) Shares issued for deferred compensation     80       539       -       -       -       -       -       539   Activity of treasury shares, net     -       -       ( 77 )     ( 512 )     -       -       -       ( 512 ) Deferred stock compensation     -       -       -       -       512       -       -       512   Stock compensation expense     -       551       -       -       -       -       -       551   Stock options exercised, net     -       -       -       -       -       -       -       -   Dividends — $ 0.20 per share     -       -       -       -       -       -       ( 1,408 )     ( 1,408 )                                                                   Balance at September 30, 2022     27,777     $ 140,599       ( 899 )   $ ( 6,439 )   $ 6,439     $ 52     $ 13,078     $ 153,729       The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.   Page 7       LSI INDUSTRIES INC.   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)         Three Months Ended       September 30   (In thousands)   2022     2021                     Cash Flows from Operating Activities                 Net income   $ 6,262     $ 3,133   Non-cash items included in net income                 Depreciation and amortization     2,421       2,563   Deferred income taxes     350       ( 13 ) Deferred compensation plan     539       2,042   Stock compensation expense     551       556   Issuance of common shares as compensation     75       75   Loss on disposition of fixed assets     2       14   Allowance for doubtful accounts     8       10   Inventory obsolescence reserve     250       572                     Changes in certain assets and liabilities                 Accounts receivable     2,293       ( 6,260 ) Inventories     ( 6,286 )     ( 9,578 ) Refundable income taxes     ( 77 )     138   Accounts payable     6,350       8,359   Accrued expenses and other     ( 1,943 )     ( 6,663 ) Customer prepayments     ( 212 )     ( 2,837 ) Net cash flows provided by (used in) operating activities     10,583       ( 7,889 )                   Cash Flows from Investing Activities                 Purchases of property, plant and equipment     ( 434 )     ( 297 ) Net cash flows (used in) investing activities     ( 434 )     ( 297 )                   Cash Flows from Financing Activities                 Payments of long-term debt     ( 47,123 )     ( 42,533 ) Borrowings of long-term debt     45,073       52,659   Cash dividends paid     ( 1,408 )     ( 1,326 ) Shares withheld for employees' taxes     ( 66 )     ( 247 ) Payments on financing lease obligations     ( 66 )     ( 64 ) Proceeds from stock option exercises     -       16   Net cash flows (used in) provided by financing activities     ( 3,590 )     8,505                     Change related to foreign currency     7       ( 31 )                   Increase in cash and cash equivalents     6,566       288                     Cash and cash equivalents at beginning of period     2,462       2,282                     Cash and cash equivalents at end of period   $ 9,028     $ 2,570       The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.   Page 8     LSI INDUSTRIES INC.   NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     NOTE 1   -   INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS   The interim condensed consolidated financial statements are unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the interim financial statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of September 30, 2022, the results of its operations for the three-month periods ended September 30, 2022, and 2021, and its cash flows for the three-month periods ended September 30, 2022, and 2021. These statements should be read in conjunction with the financial statements and footnotes included in the fiscal 2022 Annual Report on Form 10-K. Financial information as of June 30, 2022, has been derived from the Company’s audited consolidated financial statements.     NOTE 2   -   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   Consolidation:   A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2022 Annual Report on Form 10-K.   Revenue Recognition:   The Company recognizes revenue when it satisfies the performance obligation in its customer contracts or purchase orders. Most of the Company’s products have a single performance obligation which is satisfied at a point in time when control is transferred to the customer. Control is generally transferred at time of shipment when title and risk of ownership passes to the customer. For customer contracts with multiple performance obligations, the Company allocates the transaction price and any discounts to each performance obligation based on relative standalone selling prices. Payment terms are typically within 30 to 90 days from the shipping date, depending on the terms with the customer. The Company offers standard warranties that do not represent separate performance obligations.   Installation is a separate performance obligation, except for the Company’s digital signage products. For digital signage products, installation is not a separate performance obligation as the product and installation is the combined item promised in digital signage contracts. The Company is not always responsible for installation of products it sells and has no post-installation responsibilities other than standard warranties.   A number of the Company's display solutions and select lighting products are customized for specific customers. As a result, these customized products do not have an alternative use. For these products, the Company has a legal right to payment for performance to date and generally does not accept returns on these items. The measurement of performance is based upon cost plus a reasonable profit margin for work completed. Because there is no alternative use and there is a legal right to payment, the Company transfers control of the item as the item is being produced and therefore, recognizes revenue over time. The customized product types are as follows:     ● Customer specific branded print graphics   ● Electrical components based on customer specifications   ● Digital signage and related media content   The Company also offers installation services for its display solutions elements and select lighting products. Installation revenue is recognized over time as the customer simultaneously receives and consumes the benefits provided through the installation process.   For these customized products and installation services, revenue is recognized using a cost-based input method: recognizing revenue and gross profit as work is performed based on the relationship between the actual cost incurred and the total estimated cost for the performance obligation.   Page 9     On occasion, the Company enters into bill-and-hold arrangements on a limited basis. Each bill-and-hold arrangement is reviewed and revenue is recognized only when certain criteria have been met: (1) the customer has requested delayed delivery and storage of the products by the Company because the customer wants to secure a supply of the products but lacks storage space; (ii) the risk of ownership has passed to the customer; (iii) the products are segregated from the Company’s other inventory items held for sale; (iv) the products are ready for shipment to the customer; and (v) the Company does not have the ability to use the products or direct them to another customer.   Disaggregation of Revenue   The Company disaggregates the revenue from contracts with customers by the timing of revenue recognition because the Company believes it best depicts the nature, amount, and timing of its revenue and cash flows. The table below presents a reconciliation of the disaggregation by reportable segments:       Three Months Ended   (In thousands)   September 30, 2022     September 30, 2021       Lighting Segment     Display Solutions Segment     Lighting Segment     Display Solutions Segment   Timing of revenue recognition                                 Products and services transferred at a point in time   $ 58,077     $ 47,489     $ 44,582     $ 37,431   Products and services transferred over time     9,456       12,047       6,678       17,706       $ 67,533     $ 59,536     $ 51,260     $ 55,137         Three Months Ended       September 30, 2022     September 30, 2021       Lighting Segment     Display Solutions Segment     Lighting Segment     Display Solutions Segment   Type of Product and Services                                 LED lighting, digital signage solutions, electronic circuit boards   $ 55,535     $ 7,175     $ 41,879     $ 12,428   Poles, other display solution elements     11,129       41,471       8,966       33,302   Project management, installation services, shipping and handling     869       10,890       415       9,407       $ 67,533     $ 59,536     $ 51,260     $ 55,137       Practical Expedients and Exemptions     ● The Company’s contracts with customers have an expected duration of one year or less, as such, the Company applies the practical expedient to expense sales commissions as incurred and has omitted disclosures on the amount of remaining performance obligations.   ● Shipping costs that are not material in context of the delivery of products are expensed as incurred.   ● The Company’s accounts receivable balance represents the Company’s unconditional right to receive payment from its customers with contracts. Payments are generally due within 30 to 90 days of completion of the performance obligation and invoicing; therefore, payments do not contain significant financing components.   ● The Company collects sales tax and other taxes concurrent with revenue-producing activities which are excluded from revenue. Shipping and handling costs are treated as fulfillment activities and included in cost of products and services sold on the Consolidated Statements of Operations.   New Accounting Pronouncements:   In October 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” creating an exception to the recognition and measurement principles in ASC 805. The amendment requires that entities apply ASC 606, “Revenue from Contracts with Customers,” rather than using fair value, to recognize and measure contracts assets and contract liabilities from contracts with customers acquired in a business combination. The ASU is effective for fiscal years beginning after December 15, 2022, and interim periods therein. Early adoption is permitted, including adoption in an interim period, regardless of whether a business combination occurs in that period. The guidance should be applied prospectively; however, an entity that elects to early adopt in an interim period should apply the amendments to all business combinations that occurred during the fiscal year that includes that interim period. The Company is evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.   Page 10     In December 2019, the Financial Accounting Standards Board ("FASB") issued ASU 2019-12, "Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740)." This guidance removes certain exceptions to the general principles in ASC 740 such as recognizing deferred taxes for equity investments, the incremental approach to performing intra-period tax allocation and calculating income taxes in interim periods. The standard also simplifies accounting for income taxes under U.S. GAAP by clarifying and amending existing guidance, including the recognition of deferred taxes for goodwill, the allocation of taxes to members of a consolidated group and requiring that an entity reflect the effect of enacted changes in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The Company adopted ASC 2019-12 effective July 1, 2021, which did not have a material impact on its consolidated financial statements or disclosures.       NOTE 3 - SEGMENT REPORTING INFORMATION   The accounting guidance on Segment Reporting establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (the Company’s Chief Executive Officer or “CODM”) in making decisions on how to allocate resources and assess performance. The Company’s two operating segments are Lighting and Display Solutions (formerly known as the Graphics Segment), with one executive team under the organizational structure reporting directly to the CODM with responsibilities for managing each segment. Corporate and Eliminations, which captures the Company’s corporate administrative activities, is also reported in the segment information.   The Lighting Segment includes non-residential outdoor and indoor lighting fixtures utilizing LED light sources that have been fabricated and assembled for the Company’s markets, primarily the refueling and convenience store markets, parking lot and garage markets, quick-service restaurant market, retail and grocery store markets, the automotive market, the warehouse market, and the sports court and field market. The Company also offers a variety of lighting controls to complement its lighting fixtures which include sensors, photocontrols, dimmers, motion detection and Bluetooth systems. The Company also services lighting product customers through the commercial and industrial project, stock and flow, and renovation channels. The Lighting Segment also includes the design, engineering and manufacturing of electronic circuit boards, assemblies and sub-assemblies which are sold directly to customers.   The Display Solutions Segment manufactures, sells and installs exterior and interior visual image and display elements, including printed graphics, structural graphics, digital signage, menu board systems, display fixtures, refrigerated displays, and custom display elements. These products are used in visual image programs in several markets including the refueling and convenience store markets, parking lot and garage markets, quick-service restaurant market, retail and grocery store markets, the automotive market, the warehouse market, and the sports court and field market. The Display Solutions Segment also provides a variety of project management services to complement our display elements, such as installation management, site surveys, permitting, and content management which are offered to our customers to support our digital signage.   The Company’s corporate administration activities are reported in the Corporate and Eliminations line item. These activities primarily include intercompany profit in inventory eliminations, expense related to certain corporate officers and support staff, the Company’s internal audit staff, expense related to the Company’s Board of Directors, equity compensation expense for various equity awards granted to corporate administration employees, certain consulting expenses, investor relations activities, and a portion of the Company’s legal, auditing, and professional fee expenses. Corporate identifiable assets primarily consist of cash, invested cash (if any), refundable income taxes (if any), and deferred income taxes.   There were no customers or customer programs representing a concentration of 10% or more of the Company’s consolidated net sales in the three months ended September 30, 2022. One customer program in the Display Solutions Segment represents $ 12.3 million or 12 % of the Company’s net sales in the three months ended September 30, 2021. One customer in the Display Solutions represents $ 8.5 million or 11 % of accounts receivable at September 30, 2022. There was no concentration of accounts receivable at September 30, 2021.   Page 11     Summarized financial information for the Company’s operating segments is provided for the indicated periods and as of September 30, 2022, and September 30, 2021:         Three Months Ended   (In thousands)   September 30       2022     2021   Net Sales:                 Lighting Segment   $ 67,533     $ 51,260   Display Solutions Segment     59,536       55,137       $ 127,069     $ 106,397                     Operating Income (Loss):                 Lighting Segment   $ 9,158     $ 4,339   Display Solutions Segment     6,496       3,749   Corporate and Eliminations     ( 5,633 )     ( 3,644 )     $ 10,021     $ 4,444                     Capital Expenditures:                 Lighting Segment   $ 249     $ 180   Display Solutions Segment     162       221   Corporate and Eliminations     23       ( 104 )     $ 434     $ 297                     Depreciation and Amortization:                 Lighting Segment   $ 1,387     $ 1,461   Display Solutions Segment     974       1,031   Corporate and Eliminations     60       71       $ 2,421     $ 2,563         September 30, 2022     June 30, 2022   Total Assets:                 Lighting Segment   $ 151,856     $ 152,431   Display Solutions Segment     160,099       152,302   Corporate and Eliminations     7,546       6,347       $ 319,501     $ 311,080       The segment net sales reported above represent sales to external customers. Segment operating income, which is used in management’s evaluation of segment performance, represents net sales less all operating expenses. Identifiable assets are those assets used by each segment in its operations.   The Company records a 10 % mark-up on intersegment revenues. Any intersegment profit in inventory is eliminated in consolidation. Intersegment revenues were eliminated in consolidation as follows:   Inter-segment sales                     Three Months Ended   (In thousands)   September 30       2022     2021   Lighting Segment inter-segment net sales   $ 6,143     $ 10,457                     Display Solutions Segment inter-segment net sales   $ 66     $ 163       The Company’s operations are located solely within North America. As a result, the geographic distribution of the Company’s net sales and long-lived assets originate within North America.   Page 12       NOTE 4 -   EARNINGS PER COMMON SHARE   The following table presents the amounts used to compute basic and diluted earnings per common share, as well as the effect of dilutive potential common shares on weighted average shares outstanding (in thousands, except per share data):       Three Months Ended       September 30       2022     2021                     BASIC EARNINGS PER SHARE                                   Net income   $ 6,262     $ 3,133                     Weighted average shares outstanding during the period, net of treasury shares     26,730       26,553   Weighted average vested restricted stock units outstanding     46       17   Weighted average shares outstanding in the Deferred Compensation Plan during the period     865       426   Weighted average shares outstanding     27,641       26,996                     Basic earnings per common share   $ 0.23     $ 0.12                                       DILUTED EARNINGS PER SHARE                                   Net income   $ 6,262     $ 3,133                     Weighted average shares outstanding:                                   Basic     27,641       26,996                     Effect of dilutive securities (a):                 Impact of common shares to be issued under stock option plans, and contingently issuable shares, if any     1,023       747   Weighted average shares outstanding     28,664       27,743                     Diluted earnings per common share   $ 0.22     $ 0.11                                       Anti-dilutive securities (b)     213       989         (a) Calculated using the “Treasury Stock” method as if dilutive securities were exercised and the funds were used to purchase common shares at the average market price during the period.     (b) Anti-dilutive securities were excluded from the computation of diluted net income per share for the three months ended September 30, 2022, and September 30, 2021, because the exercise price was greater than the average fair market price of the common shares or because the assumed proceeds from the award’s exercise or vesting was greater than the average fair market price of the common shares.   Page 13       NOTE 5  –  INVENTORIES, NET   The following information is provided as of the dates indicated:       September 30,     June 30,   (In thousands)   2022     2022                     Inventories:                 Raw materials   $ 53,962     $ 51,637   Work-in-progress     6,156       3,029   Finished goods     20,339       19,755   Total Inventories   $ 80,457     $ 74,421         NOTE 6   - ACCRUED EXPENSES   The following information is provided as of the dates indicated:       September 30,     June 30,   (In thousands)   2022     2022                     Accrued Expenses:                 Customer prepayments   $ 6,204     $ 6,416   Compensation and benefits     8,752       9,611   Accrued warranty     4,319       4,491   Operating lease liabilities     1,187       1,274   Accrued sales commissions     2,506       4,783   Accrued Freight     4,139       3,680   Accrued FICA     1,161       1,122   Finance lease liabilities     280       275   Accrued income tax     1,835       109   Other accrued expenses     4,848       4,503   Total Accrued Expenses   $ 35,231     $ 36,264         NOTE 7   -   GOODWILL AND OTHER INTANGIBLE ASSETS   The carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment. The Company may first assess qualitative factors in order to determine if goodwill and indefinite-lived intangible assets are impaired. If through the qualitative assessment it is determined that it is more likely than not that goodwill and indefinite-lived assets are not impaired, no further testing is required. If it is determined more likely than not that goodwill and indefinite-lived assets are impaired, or if the Company elects not to first assess qualitative factors, the Company’s impairment testing continues with the estimation of the fair value of the reporting unit using a combination of a market approach and an income (discounted cash flow) approach, at the reporting unit level. The estimation of the fair value of reporting unit requires significant management judgment with respect to revenue and expense growth rates, changes in working capital and the selection and use of an appropriate discount rate. The estimates of the fair value of reporting units are based on the best information available as of the date of the assessment. The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease an impairment charge. Company management uses its judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as adverse business conditions, economic factors and technological change or competitive activities may signal that an asset has become impaired.   The Company identified its reporting units in conjunction with its annual goodwill impairment testing. The Company has a total of  three  reporting units that contain goodwill. One reporting unit is within the Lighting Segment and  two  reporting units are within the Display Solutions Segment. The tradename intangible assets have an indefinite life and are also tested separately on an annual basis. The Company relies upon a number of factors, judgments and estimates when conducting its impairment testing including, but not limited to, the Company’s stock price, operating results, forecasts, anticipated future cash flows and marketplace data. There are inherent uncertainties related to these factors and judgments in applying them to the analysis of goodwill impairment.   Page 14     The following table presents information about the Company's goodwill on the dates or for the periods indicated:   Goodwill                         (In thousands)           Display               Lighting     Solutions               Segment     Segment     Total   Balance as of September 30, 2022                         Goodwill   $ 70,971     $ 63,347     $ 134,318   Accumulated impairment losses     ( 61,763 )     ( 27,525 )     ( 89,288 ) Goodwill, net as of September 30, 2022   $ 9,208     $ 35,822     $ 45,030                             Balance as of June 30, 2022                         Goodwill   $ 70,971     $ 63,347     $ 134,318   Accumulated impairment losses     ( 61,763 )     ( 27,525 )     ( 89,288 ) Goodwill, net as of June 30, 2022   $ 9,208     $ 35,822     $ 45,030       The gross carrying amount and accumulated amortization by each major intangible asset class is as follows:   Other Intangible Assets                             September 30, 2022   (In thousands)   Gross                       Carrying     Accumulated     Net       Amount     Amortization     Amount   Amortized Intangible Assets                         Customer relationships   $ 62,083     $ 15,254     $ 46,829   Patents     268       268       -   LED technology firmware, software     20,966       14,895       6,071   Trade name     2,658       1,075       1,583   Non-compete     260       71       189   Total Amortized Intangible Assets     86,235       31,563       54,672                             Indefinite-lived Intangible Assets                         Trademarks and trade names     12,102       -       12,102   Total indefinite-lived Intangible Assets     12,102       -       12,102                             Total Other Intangible Assets   $ 98,337     $ 31,563     $ 66,774     Other Intangible Assets                             June 30, 2022   (In thousands)   Gross                       Carrying     Accumulated     Net       Amount     Amortization     Amount   Amortized Intangible Assets                         Customer relationships   $ 62,083     $ 14,400     $ 47,683   Patents     268       268       -   LED technology firmware, software     20,966       14,598       6,368   Trade name     2,658       1,049       1,609   Non-compete     260       58       202   Total Amortized Intangible Assets     86,235       30,373       55,862                             Indefinite-lived Intangible Assets                         Trademarks and trade names     12,102       -       12,102   Total indefinite-lived Intangible Assets     12,102       -       12,102                             Total Other Intangible Assets   $ 98,337     $ 30,373     $ 67,964     Page 15         Three Months Ended       September 30   (In thousands)   2022     2021                     Amortization Expense of Other Intangible Assets   $ 1,190     $ 1,215     The Company expects to record annual amortization expense as follows:   (In thousands)                   2023   $ 3,618   2024     4,760   2025     4,760   2026     4,760   2027     4,754   After 2027     32,020         NOTE 8   -   DEBT   The Company’s long-term debt as of September 30, 2022, and June 30, 2022, consisted of the following:       September 30,     June 30,   (In thousands)   2022     2022                     Secured line of credit   $ 56,144     $ 57,275   Term loan, net of debt issuance costs of $ 26 and $ 30, respectively     21,402       22,321   Total debt     77,546       79,596   Less: amounts due within one year     3,571       3,571   Total amounts due after one year, net   $ 73,975     $ 76,025     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. The principal of the term loan is repaid annually in the amount of $ 3.6 million over a five-year period with a balloon payment of the remaining balance due on the last month. Interest on both the revolving line of credit and the term loan is charged based upon an increment over the LIBOR rate or a base rate, at the Company’s option. The base rate is calculated as the highest of (a) the Prime rate, (b) the sum of the Overnight Funding Rate plus 50 basis points and (c) the sum of the Daily LIBOR Rate plus 100 basis points as long as a Daily LIBOR rate is offered, ascertainable and not unlawful. The increment over the LIBOR borrowing rate fluctuates between 100 and 225 basis points, and the increment over the Base Rate fluctuates between 0 and 125 basis points, both of which depend upon the ratio of indebtedness to earnings before interest, taxes, depreciation, and amortization (“EBITDA”), as defined in the line of credit agreement. As of September 30, 2022, the Company’s borrowing rate against its revolving line of credit was 4.8% . The increment over LIBOR borrowing rate will be 175 basis points for the second quarter of fiscal 2023. The fee on the unused balance of the $ 75 million committed line of credit fluctuates between 15 and 25 basis points. Under the terms of this line of credit, the Company has agreed to a negative pledge of real estate assets and is required to comply with financial covenants that limit the ratio of indebtedness to EBITDA and require a minimum fixed charge ratio. As of September 30, 2022, there was $ 18.9 million available for borrowing under the $ 75 million line of credit.   The Company is in compliance with all of its loan covenants as of September 30, 2022.     NOTE 9   -   CASH DIVIDENDS   The Company paid cash dividends of $ 1.4 million and $ 1.3 million in both the three months ended September 30, 2022, and September 30, 2021, respectively. Dividends on restricted stock units in the amount of $ 0.2 million and $ 0.1 million were accrued as of both September 30, 2022, and 2021, respectively. These dividends will be paid upon the vesting of the restricted stock and performance stock units when shares are issued to the award recipients. In November 2022, the Board of Directors declared a regular quarterly cash dividend of $ 0.05 per share payable November 22, 2022, to shareholders of record as of November 14, 2022. The indicated annual cash dividend rate is $ 0.20 per share.   Page 16       NOTE 10  –  EQUITY COMPENSATION   In November 2022, the Company’s shareholders approved an amendment to the 2019 Omnibus Award Plan (“2019 Omnibus Plan”) which increased the number of shares authorized for issuance under the plan by 2,350,000 and to remove the Plan’s fungible share counting feature. The purpose of the 2019 Omnibus Plan is to provide a means through which the Company may attract and retain key personnel and to provide a means by which directors, officers, and employees can acquire and maintain an equity interest in the Company. The number of shares that remain reserved for issuance under the 2019 Omnibus Plan prior to the amendment of the Plan equates to 1,253,908 as of September 30, 2022. The 2019 Omnibus Plan allows for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units (“RSUs”), performance stock units (“PSUs”) and other stock-based awards.   In the three months ended September 30, 2022, the Company granted 164,348 PSU’s and 196,522 RSU’s, both with a weighted average market value of $ 6.90 . Stock compensation expense was $ 0.6 million for both the three months ended September 30, 2022, and 2021.     NOTE 11   -   SUPPLEMENTAL CASH FLOW INFORMATION     Three Months Ended   (In thousands)   September 30       2022     2021   Cash Payments:                 Interest   $ 679     $ 203   Income taxes   $ 664     $ 1,183                     Non-cash investing and financing activities                 Issuance of common shares as compensation   $ 75     $ 75   Issuance of common shares to fund deferred compensation plan   $ 539     $ 2,042       NOTE 12 - COMMITMENTS AND CONTINGENCIES   The Company is party to various negotiations, customer bankruptcies, and legal proceedings arising in the normal course of business. The Company provides reserves for these matters when a loss is probable and reasonably estimable. The Company does not disclose a range of potential loss because the likelihood of such a loss is remote. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations, cash flows or liquidity.   The Company may occasionally issue a standby letter of credit in favor of third parties. As of September 30, 2022, there were no such standby letters of credit issued.     NOTE 13 - LEASES   The Company leases certain manufacturing facilities along with a small office space, several forklifts, several small tooling items, and various items of office equipment. The Company also acquired buildings, machinery, and forklift leases with the acquisition of JSI, as well as one sublease. All but two of the Company’s leases are operating leases. Leases have a remaining term of one to seven years some of which have an option to renew. The Company does not assume renewals in determining the lease term unless the renewals are deemed reasonably certain. The lease agreements do not contain any material residual guarantees or material variable lease payments.   The Company has periodically entered into short-term operating leases with an initial term of twelve months or less. The Company elected not to record these leases on the balance sheet. For the three months ended September 30, 2022, and 2021, the rent expense for these leases is immaterial.   The Company has certain leases that contain lease and non-lease components and has elected to utilize the practical expedient to account for these components together as a single lease component.   Lease expense is recognized on a straight-line basis over the lease term. The Company used its incremental borrowing rate when determining the present value of lease payments.   Page 17         Three Months Ended       September 30   (In thousands)   2022     2021                     Operating lease cost   $ 863     $ 879   Financing lease cost:                 Amortization of right of use assets     74       74   Interest on lease liabilities     18       21   Variable lease cost     22       22   Sublease income     ( 116 )     ( 94 ) Total lease cost   $ 861     $ 902       Supplemental Cash Flow Information:                     Three Months Ended       September 30   (In thousands)   2022     2021                     Cash flows from operating leases                 Fixed payments - operating cash flows   $ 885     $ 887   Liability reduction - operating cash flows   $ 779     $ 744                     Cash flows from finance leases                 Interest - operating cash flows   $ 18     $ 21   Repayments of principal portion - financing cash flows   $ 66     $ 64       Operating Leases:   September 30,     June 30,       2022     2022                     Total operating right-of-use assets   $ 7,826     $ 8,664                     Accrued expenses (Current liabilities)   $ 1,187     $ 1,274   Long-term operating lease liability     7,381       8,240   Total operating lease liabilities   $ 8,568     $ 9,514                     Weighted Average remaining Lease Term (in years)     2.83       3.05                     Weighted Average Discount Rate     4.82 %     4.81 %     Finance Leases:   September 30,     June 30,       2022     2022                     Buildings under finance leases   $ 2,033     $ 2,033   Equipment under finance leases     30       30   Accumulated depreciation     ( 719 )     ( 634 ) Total finance lease assets, net   $ 1,344     $ 1,429                     Accrued expenses (Current liabilities)   $ 280     $ 275   Long-term finance lease liability     1,174       1,246   Total finance lease liabilities   $ 1,454     $ 1,521                     Weighted Average remaining Lease Term (in years)     4.54       4.80                     Weighted Average Discount Rate     4.86 %     4.86 %   Page 18     Maturities of Lease Liability:   Operating Lease Liabilities     Finance Lease Liabilities     Operating Subleases     Net Lease Commitments   2023   $ 2,792     $ 275     $ 377     $ 3,444   2024     3,285       337       377       3,999   2025     2,136       362       31       2,529   2026     835       362       -       1,197   2027     215       303       -       518   Thereafter     4       -       -       4   Total lease payments   $ 9,267     $ 1,639     $ 785     $ 11,691   Less: Interest     ( 699 )     ( 185 )             ( 884 ) Present Value of Lease Liabilities   $ 8,568     $ 1,454             $ 10,807         NOTE 16 – INCOME TAXES   The Company's effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year's taxable income as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions.       Three Months Ended       September 30       2022     2021   Reconciliation of effective tax rate:                                   Provision for income taxes at the anticipated annual tax rate     26.20 %     24.2 % Uncertain tax positions     1.0       0.8   Deferred Income Tax Adjustment     1.6       -   Share-based compensation     1.8       ( 0.8 ) Effective tax rate     30.6 %     24.2 %   Page 19       ITEM 2. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     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, 2022, 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   Net Sales by Business Segment                     Three Months Ended       September 30   (In thousands)   2022     2021                     Lighting Segment   $ 67,533     $ 51,260   Display Solutions Segment     59,536       55,137       $ 127,069     $ 106,397       Operating Income (Loss) by Business Segment                     Three Months Ended       September 30   (In thousands)   2022     2021                     Lighting Segment   $ 9,158     $ 4,339   Display Solutions Segment     6,496       3,749   Corporate and Eliminations     (5,633 )     (3,644 )     $ 10,021     $ 4,444       Net sales of $127.1 million for the three months ended September 30, 2022, increased $20.7 million or 19% as compared to net sales of $106.4 million for the three months ended September 30, 2021. Net sales were driven by increased net sales of the Lighting Segment (an increase of $16.2 million or 32%) and increased net sales of the Display Solutions Segment (an increase of $4.4 million or 8%). Growth in both reportable segments reflects the ongoing strength in demand levels from our key vertical markets, focusing on higher-value applications where our differentiated products and solutions meet the unique requirements of our customers.   Page 20     Operating income of $10.0 million for the three months ended September 30, 2022, represents a $5.6 million increase from operating income of $4.4 million in the three months ended September 30, 2021. Adjusted operating income, a Non-GAAP measure, was $10.9 million in the three months ended September 30, 2022, compared to $5.0 million in the three months ended September 30, 2021. Refer to “Non-GAAP Financial Measures” below for a reconciliation of Non-GAAP financial measures to U.S. GAAP measures. The increase in operating income was the result of increased volume leveraged by a higher-value sales mix, price realization offsetting inflation, and effective cost management.The Company continues to focus on actions which increase its value and importance to customers in verticals where the Company sees profitable growth.   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 stock compensation expense, severance 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. . Reconciliation of net income to adjusted net income                                                 Three Months Ended       September 30   (In thousands, except per share data)   2022     2021                     Diluted EPS                   Diluted EPS                                                 Net Income as reported   $ 6,262           $ 0.22     $ 3,133           $ 0.11                                                 Stock compensation expense     420     (1 )     0.01       407     (5 )     0.02                                                 Consulting expense: Commercial Growth Initiatives     226     (2 )     0.01       -             -                                                 Severance costs     9     (3 )     -       -             -                                                 Tax rate difference between reported and adjusted net income     160     (4 )     0.01       -             -                                                 Net Income adjusted   $ 7,077           $ 0.25     $ 3,540           $ 0.13     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) $131 (2) $77 (3) $3 (4) $160 (5) $149   Page 21     Reconciliation of operating income to adjusted operating income:               Three Months Ended       September 30   (In thousands)   2022     2021                     Operating Income as reported   $ 10,021     $ 4,444                     Stock compensation expense     551       556                     Consulting expense: Commercial Growth Initiatives     303       -                     Severance costs     12       -                     Adjusted Operating Income   $ 10,887     $ 5,000     Reconciliation of operating income to EBITDA and Adjusted EBITDA                     Three Months Ended       September 30   (In thousands)   2022     2021                     Operating Income as reported   $ 10,021     $ 4,444                     Depreciation and Amortization     2,421       2,563                     EBITDA   $ 12,442     $ 7,007                     Stock compensation expense     551       556   Consulting expense: Commercial Growth Initiatives     303       -   Severance costs     12       -                     Adjusted EBITDA   $ 13,308     $ 7,563         Reconciliation of cash flow from operations to free cash flow                     Three Months Ended       September 30   (In thousands)   2022     2021                     Cash Flow from Operations   $ 10,583     $ (7,889 )                   Capital expenditures     (434 )     (297 )                   Free Cash Flow   $ 10,149     $ (8,186 )   Net Debt to Adjusted EBITDA                     September 30,   (In thousands)   2022     2021                     Current portion and long-term debt as reported   $ 3,571     $ 3,571                     Long-Term Debt     73,975       76,025   Total Debt     77,546       79,596                     Less: Cash and cash equivalents     9,028       2,570                     Net Debt   $ 68,518     $ 77,026                     Adjusted EBITDA - Trailing 12 Months   $ 40,836     $ 30,907                     Net Debt to Adjusted EBITDA     1.7       2.5     Page 22     Results of Operations   THREE MONTHS ENDED SEPTEMBER 30, 2022, COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2021   Lighting Segment                     Three Months Ended       September 30   (In thousands)   2022     2021                     Net Sales   $ 67,533     $ 51,260   Gross Profit     22,279       15,457   Operating Income     9,158       4,339     Lighting Segment net sales of $67.5 million in the three months ended September 30, 2022, increased 32% from net sales of $51.3 million in the same period in fiscal 2022. Growth was broad-based, with sales increasing double digits in both project business and shipments to distributor stock. The Company’s efforts over the last two years to strengthen its lighting offering for select vertical market applications continues to position LSI to win additional business which has resulted in a growth in net sales.   Gross profit of $22.3 million in the three months ended September 30, 2022, increased $6.8 million or 44% from the same period of fiscal 2022. Gross profit as a percentage of net sales was 33.0% in the three months ended September 30, 2022, compared to 30.2% in the same period of fiscal 2022. The improvement in gross profit as a percentage of sales was driven by the increase in net sales and from targeted pricing actions to offset the impact of inflation, and effective cost control.   Operating expenses of $13.1 million in the three months ended September 30, 2022, increased $2.0 million from the same period of fiscal 2022, primarily driven by higher commission expense as a result of higher net sales.   Lighting Segment operating income of $9.2 million for the three months ended September 30, 2022, increased $4.8 million from operating income of $4.3 million in the same period of fiscal 2022 primarily driven by sales volume and by an improvement in gross profit as a percentage of sales.   Display Solutions Segment                     Three Months Ended       September 30   (In thousands)   2022     2021                     Net Sales   $ 59,536     $ 55,137   Gross Profit   $ 12,453     $ 9,036   Operating Income   $ 6,496     $ 3,749     Display Solutions Segment net sales of $59.5 million in the three months ended September 30, 2022, increased $4.4 million or 8% from net sales of $55.1 million in the same period in fiscal 2022. The sales increase is primarily the result of growth in both the grocery and refueling/convenience-store verticals.   Gross profit of $12.5 million in the three months ended September 30, 2022, increased $3.4 million or 38% from the same period of fiscal 2022. Gross profit as a percentage of net sales in the three months ended September 30, 2022, was 20.9% compared to 16.4% in the same period of fiscal 2022. The improvement in gross profit as a percentage of sales was driven by the increase in net sales and from targeted pricing actions to offset the impact of inflation, as well as favorable project mix.   Operating expenses of $6.0 million in the three months ended September 30, 2022, increased $0.7 million from $5.3 million in the same period of fiscal 2022, primarily driven by investments in commercial resources.   Display Solutions Segment operating income of $6.5 million in the three months ended September 30, 2022, increased $2.7 million from operating income of $3.7 million in the same period of fiscal 2022. The increase of $2.8 million was primarily driven by an increase in sales and an improvement of gross profit as a percentage of sales.   Page 23     Corporate and Eliminations                     Three Months Ended       September 30   (In thousands)   2022     2021                     Gross Profit   $ 6     $ 17   Operating (Loss)   $ (5,633 )   $ (3,644 )   The gross profit relates to the change in the intercompany profit in inventory elimination.   Operating expenses of $5.6 million in the three months ended September 30, 2022, increased $2.0 million or 55% from the same period of fiscal 2022. The increase was primarily the result of an increase in short-term and long-term performance-based incentive plan expense driven by improved business performance.   Consolidated Results   The Company reported $0.8 million and $0.2 million of net interest expense in the three months ended September 30, 2022, and September 30, 2021, respectively. The increase in interest expense is the results of increased borrowing costs. The Company also recorded other expense of $0.2 million and $0.1 million in the three months ended September 30, 2022, and September 30, 2021, respectively, both of which is related to net foreign exchange currency transaction losses through our Mexican and Canadian subsidiaries.   The $2.8 million of income tax expense in the three months ended September 30, 2022, represents a consolidated effective tax rate of 30.6%. Impacting the effective tax rate is an increase in a valuation reserve related to the Company’s deferred tax assets and from a higher anticipated annual tax rate. The $1.0 million of income tax expense in the three months ended September 30, 2021, represents a consolidated effective tax rate of 24.2%.   The Company reported net income of $6.3 million in the three months ended September 30, 2022, compared to net income of $3.1 million in the three months ended September 30, 2021. Non-GAAP adjusted net income was $7.1 million for the three months ended September 30, 2022, compared to adjusted net income of $3.5 million for the three months ended September 30, 2021 (Refer to the Non-GAAP tables above). The increase in Non-GAAP adjusted net income is primarily the net result of an increase in sales and an increase in the gross profit as a percentage of sales. Diluted earnings per share of $0.22 was reported in the three months ended September 30, 2022, as compared to $0.11 diluted earnings per share in the same period of fiscal 2022. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the three months ended September 30, 2022, were 28,664,000 shares compared to 27,743,000 shares in the same period last year.   Page 24     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 September 30, 2022, the Company had working capital of $90.5 million compared to $84.3 million at June 30, 2022. The ratio of current assets to current liabilities was 2.13 to 1 for both September 30, 2022, and June 30, 2022. The increase in working capital from June 30, 2022, to September 30, 2022, is primarily driven by a $6.0 million increase in net inventory, a $1.0 million decrease in accrued expenses and a $6.6 million increase in cash and cash equivalents, partially offset by a $6.4 million increase in accounts payable and a $2.3 million decrease in net accounts receivable.   Net accounts receivable was $75.5 million and $77.8 million at September 30, 2022, and June 30, 2022, respectively. DSO increased to 55 days at September 30, 2022, from 54 days at June 30, 2022.   Net inventories of $80.5 million at September 30, 2022, increased $6.1 million from $74.4 million at June 30, 2022. The increase of $6.1 million is the result of an increase in gross inventory of $6.1 million and a negligible change in obsolescence reserves. Lighting Segment net inventory increased $3.4 million as the Company continues to mitigate the risk of any lingering supply chain challenges. Net inventory in the Display Solutions Segment increased $2.7 million to support several on-going programs.   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 September 30, 2022, $18.9 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 2023. The Company also has on file with the SEC a shelf registration statement which allows it to sell any combination of common stock, preferred stock warrants, senior or subordinated debt securities or other securities in one or more offerings if it chooses to do so in the future. The Company expects to maintain the effectiveness of this shelf registration statement for the foreseeable future.   The Company had a source of $10.6 million of cash from operating activities in the three months ended September 30, 2022, compared to a use of cash of $7.9 million in the three months ended September 30, 2021. The increase in net cash flows from operating activities is primarily the result of effective management of the Company’s working capital and from improved earnings.   The Company used $0.4 million and $0.3 million of cash related to investing activities in the three months ended September 30, 2022, and September 30, 2021, respectively.   The Company had a use of cash of $3.6 million related to financing activities in the three months ended September 30, 2022, compared to a source of cash of $8.5 million in the three months ended September 30, 2021. The $12.1 million change in cash flow was primarily the result of cash generated from improved working capital management and from improved earnings, which was used to pay down the Company’s line of credit in the first quarter of fiscal 2023.   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 November 2022, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable November 22, 2022, to shareholders of record as of November 14, 2022. The indicated annual cash dividend rate for fiscal 2023 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.   Page 25     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 2022 Annual Report on Form 10-K.     ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   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 18 of the Annual Report on Form 10-K for the fiscal year ended June 30, 2022.     ITEM 4.     CONTROLS AND PROCEDURES   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 September 30, 2022, 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 September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.   Page 26     PART II.     OTHER INFORMATION   ITEM 5. OTHER INFORMATION   None.     ITEM 6.     EXHIBITS   Exhibits:   10.1 Fiscal Year 2023 Long-Term Incentive Plan (LTIP)*++   10.2 Fiscal Year 2023 Short-Term Incentive Plan (STIP)*++   10.3 Nonqualified Deferred Compensation Plan Amended and Restated as of August 17, 2022*   31.1 Certification of Principal Executive Officer required by Rule 13a-14(a)   31.2 Certification of Principal Financial Officer required by Rule 13a-14(a)   32.1 Section 1350 Certification of Principal Executive Officer   32.2 Section 1350 Certification of Principal Financial Officer   101.INS Inline XBRL Instance Document   101.SCH Inline XBRL Taxonomy Extension Schema Document   101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document   101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document   101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document   101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document   104 Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)   * Management compensatory agreement. ++ Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K. The omitted information is not material and would likely cause competitive harm to the Registrant if publicly disclosed. The Registrant hereby agrees to furnish a copy of any omitted portion to the SEC upon request.   Page 27     SIGNATURES   Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.     LSI Industries Inc.                     By: /s/ James A. Clark       James A. Clark       Chief Executive Officer and President       (Principal Executive Officer)                     By: /s/ James E. Galeese       James E. Galeese       Executive Vice President and Chief Financial Officer       (Principal Financial Officer)   November 4, 2022         Page 28