Executive Summary / Key Takeaways

• LSI Industries is executing a "Fast Forward" strategy centered on vertical market specialization, offering integrated lighting and display solutions, supported by a significant shift towards domestic sourcing.
• Recent performance in the nine months ended March 31, 2025, shows robust top-line growth (+22.8% YOY), primarily fueled by strong organic growth and strategic acquisitions in the Display Solutions segment, offsetting headwinds in Lighting.
• Strategic acquisitions of EMI Industries and Canada's Best Holdings have expanded LSI's capabilities and market reach, particularly in the high-growth Refueling/C-store and recovering Grocery verticals, with integration efforts focused on realizing commercial and operational synergies.
• Technological differentiation, including the new V-LOCITY outdoor lighting platform and the transition to R290 environmentally-friendly refrigeration, provides competitive advantages and supports future growth opportunities.
• While temporary manufacturing inefficiencies from rapid demand increases impacted recent margins, management anticipates recovery as operations stabilize, supported by a healthy backlog and strong cash flow generation enabling further strategic investments and potential M&A.

Building a Differentiated Future: LSI's Strategic Evolution

LSI Industries Inc. operates at the intersection of commercial lighting and visual display solutions, serving a diverse set of non-residential vertical markets including retail, grocery, refueling/convenience stores, quick-service restaurants (QSR), warehousing, and automotive. The company's core strategy, dubbed "Fast Forward," is built upon deep specialization within these verticals, aiming to become a comprehensive, end-to-end solutions provider rather than merely a component supplier. This approach emphasizes understanding the unique needs of customers within these specific markets and offering integrated product and service packages, from lighting fixtures and controls to custom display elements, graphics, digital signage, and installation management.

A foundational element of LSI's strategic evolution, particularly since around 2019, has been a deliberate and significant shift in its manufacturing and sourcing footprint. Recognizing the vulnerabilities associated with heavy reliance on foreign supply chains, the company proactively moved to onshore and re-shore production. This transformation has seen LSI transition from approximately 80% foreign-sourced and 20% domestic-sourced products and components to a position today where roughly 70% are domestic and only 30% foreign. This strategic pivot is intended to enhance supply chain resilience, improve control over quality and lead times, and provide a competitive advantage, especially in the face of potential global trade policy shifts and tariffs.

Within the competitive landscape, LSI faces a mix of large, diversified players and more specialized niche providers. Larger competitors like Acuity Brands (AYI), Hubbell Incorporated (HUBB), and Eaton Corporation (ETN) offer broad portfolios, particularly in lighting and electrical infrastructure. AYI, for instance, is a leader in intelligent lighting and building management, boasting robust profitability margins (TTM Gross Margin ~46%, Operating Margin ~14%) and strong EPS growth (TTM EPS Growth ~10.51%). HUBB emphasizes industrial durability and utility markets (TTM Gross Margin ~34%, Operating Margin ~19%), while ETN focuses on energy management (TTM Gross Margin ~38%, Operating Margin ~19%).

Compared to these giants, LSI's competitive positioning is differentiated by its integrated solution approach within targeted vertical markets and its growing expertise in customized display elements. While AYI and HUBB may offer advantages in broad scalability or advanced IoT integration, LSI aims to win by providing a more tailored, single-source solution for specific customer programs, particularly where lighting and display elements are closely integrated. LSI's TTM gross margin stands at 24.70%, operating margin at 6.18%, and EBITDA margin at 8.30%. While these trail the higher margins of larger, more diversified competitors like AYI, HUBB, and ETN, LSI's focus on operational efficiency and margin expansion within its niche is a key part of its strategy to close this gap. The shift to domestic sourcing is also a competitive differentiator, providing a potential hedge against tariff impacts that could disproportionately affect competitors with heavier foreign reliance.

Technological innovation is central to LSI's strategy and competitive moat. The company consistently invests in research and development, launching over 30 new products annually, contributing to a vitality rate (sales from new products) exceeding 30%. This continuous innovation ensures its product portfolio remains relevant and competitive.

A key technological differentiator in the Lighting segment is LSI's focus on performance, adaptability, and ease of installation. The new V-LOCITY outdoor lighting product, building on the success of the Mirada series, exemplifies this. While specific quantifiable performance metrics for V-LOCITY relative to competitors are not detailed, management highlights its "next generation performance" and "reduced installation time and weight reduction," implying tangible benefits for customers in terms of project costs and efficiency. This focus on practical, value-added technology helps LSI compete effectively in project-based lighting sales.

In the Display Solutions segment, LSI's technological edge is increasingly evident in its refrigeration offerings. The company is strategically transitioning its refrigerated display cases to utilize R290, an environmentally-friendly refrigerant. This move, driven by EPA rulings, is seen as a "smart move" and a "competitive advantage," particularly in the format of the units LSI delivers. Furthermore, leveraging the combined expertise from its acquisitions (JSI for technology/design and EMI for case construction), LSI is developing the capability to manufacture and customize both open and closed door refrigerated cases. This evolving capability in environmentally compliant and versatile refrigeration technology positions LSI strongly in the grocery and C-store verticals as customers upgrade or expand their fresh food offerings.

The "so what" for investors is that LSI is not competing solely on price or broad market share. Its strategic focus on specific vertical markets, coupled with a commitment to integrated solutions, domestic sourcing, and targeted technological innovation, aims to create deeper customer relationships and capture higher-value project opportunities. While its overall financial metrics may currently lag larger peers, this strategy provides a pathway for differentiated growth and margin expansion by addressing specific customer needs more effectively than competitors offering fragmented solutions.

Performance Reflecting Strategic Execution and Market Dynamics

LSI's recent financial performance underscores the impact of its strategic initiatives and the dynamic market environment. For the three months ended March 31, 2025, net sales reached $132.5 million, a significant 22.5% increase compared to $108.2 million in the prior-year quarter. Over the nine-month period ended March 31, 2025, net sales grew by 22.8% to $418.3 million, up from $340.6 million in the same period of fiscal 2024.

This top-line growth was overwhelmingly driven by the Display Solutions Segment. In the third quarter of fiscal 2025, Display Solutions net sales surged by 69.8% to $73.5 million, and for the nine-month period, sales increased by 69.3% to $242.7 million. This impressive growth was a result of both strong organic performance (15% organic growth in Q3, 18% in the nine months) across product categories and vertical markets (particularly grocery and refueling C-Store) and the significant contributions from the EMI and Canada's Best acquisitions, which added $23.8 million to Q3 sales. The service business within Display Solutions also saw substantial growth, exceeding 100% in Q2 FY25, reflecting increasing customer adoption of LSI's end-to-end capabilities.

Conversely, the Lighting Segment experienced headwinds, with net sales declining by 9.1% to $59.0 million in Q3 FY25 and by 11.0% to $175.6 million in the nine-month period. This decline was primarily attributed to the comparison against large lighting projects in fiscal 2024 that did not repeat in the current year. While large project shipments were lower, small project activity continued to increase, and management noted a strong rebound in large project order activity in Q3 FY25, resulting in a book-to-bill ratio better than 1.13x and an 18% higher backlog exiting the quarter.

Despite the strong revenue growth, consolidated operating income decreased by 18.6% to $6.2 million in Q3 FY25 and by 10.2% to $23.8 million in the nine-month period. This was primarily due to a change in product mix, particularly within the Display Solutions segment. Display Solutions' gross profit margin decreased in Q3 FY25 (to 17.0% from 22.0%), impacted by product and vertical market mix and temporary manufacturing and logistics inefficiencies stemming from the rapid increase in demand and scheduling volatility, particularly in the grocery vertical. Management estimates this disruption impacted gross margin by 200-250 basis points, which they expect to recover as schedules stabilize. In contrast, the Lighting Segment saw its gross profit margin improve in Q3 FY25 (to 35.0% from 33.0%), driven by a higher mix of value applications, stable pricing, and effective cost management, partially offsetting the impact of lower sales volume on operating income.

Operating expenses increased in both segments, driven by investments in commercial initiatives to support growth and, in Display Solutions, the inclusion of acquired businesses. Corporate expenses also rose due to these investments and higher employee benefit costs. Interest expense increased due to the debt incurred for the EMI and CBH acquisitions.

From a liquidity standpoint, LSI maintains a healthy balance sheet. Working capital increased to $96.3 million at March 31, 2025, from $83.3 million at June 30, 2024, influenced by the CBH acquisition and growth in accounts receivable and inventory (in Display Solutions to support backlog). The current ratio remained stable at 2.1 to 1.0. Cash flow from operating activities for the nine months ended March 31, 2025, was $28.6 million, down from $32.3 million in the prior year, reflecting the impact of working capital changes despite increasing cash flow from earnings. Investing activities saw a significant cash outflow ($25.3 million) primarily due to the CBH acquisition ($22.8 million net of cash acquired). Financing activities resulted in a net cash use of $3.2 million, including debt funding for the acquisition and dividend payments ($4.5 million paid in the nine months). The company's debt structure includes a $75 million revolving line of credit, with $32.1 million available as of March 31, 2025. LSI remains in compliance with all loan covenants, and management views its cash position, borrowing capacity, and operating cash flow as sufficient for operational and capital expenditure needs. The Net Debt to Adjusted EBITDA ratio stood at 1.0x as of March 31, 2025, indicating a manageable leverage level.

Outlook and Strategic Momentum

Looking ahead, LSI Industries is positioned for continued growth, albeit with some near-term variability. Management expects to generate both reported and comparable sales growth in the fiscal fourth quarter, supported by the strong backlog exiting Q3 FY25 (15% above prior year).

The outlook for the Display Solutions segment remains particularly strong. Management anticipates continued elevated activity in the Refueling/C-store vertical, leveraging the substantial backlog from recent program wins. The recovery in the Grocery vertical is also a key driver; following the clarity provided by the merger court decisions, pent-up demand is being released, leading to increased order activity. A large $5M+ order for refrigerated cases booked in early April FY25 from a major grocer signals the resumption of planned store renovations. Management expects Display Solutions to remain at an elevated sales rate through the remainder of fiscal 2025, potentially matching or slightly exceeding Q2 FY25 levels, though acknowledging that the rapid surge may temper slightly.

For the Lighting segment, while large project timing remains choppy, the improved order activity and backlog in Q3 FY25 are encouraging signs. Management expects these larger projects to begin releasing, contributing to sales growth in the second half of fiscal 2025. Small project activity is also expected to continue its positive trend.

Margin recovery is a key focus, particularly in Display Solutions. As manufacturing schedules stabilize and operational efficiencies improve, management is confident in regaining the 200-250 basis points of gross margin that were temporarily impacted by the rapid ramp-up and scheduling disruptions. Stable material input costs and the value proposition of new products like V-LOCITY are expected to support margin development in Lighting.

Strategic initiatives, including the integration of EMI and Canada's Best, are expected to yield further benefits. Management is actively working on realizing commercial synergies (cross-selling opportunities) and operational/procurement efficiencies from these acquisitions, with a goal to improve EMI's margin performance over the next 12-18 months, potentially accelerating that timeline. The strategic shift to domestic sourcing is viewed as a long-term advantage, mitigating potential risks from trade policy changes and enhancing supply chain reliability.

LSI's strong cash flow generation and manageable debt position also support its ongoing M&A strategy. Management remains active in the M&A space, pursuing both "incremental" (similar in size to EMI) and "transformational" opportunities. They have indicated that it is "very likely" the company will complete another acquisition in calendar year 2025, signaling confidence in their ability to integrate new businesses and leverage them within their vertical market framework.

Key risks to this outlook include the continued volatility in the timing of large projects, which could impact the pace of revenue recognition, particularly in the Lighting segment. While LSI's domestic sourcing mitigates some tariff risks, broader changes in trade policies could still impact the supply chain or the business of LSI's customers, potentially affecting demand. Successfully integrating acquired businesses and realizing expected synergies also carries execution risk, although management's track record with JSI and early progress with EMI and CBH are positive indicators.

Conclusion

LSI Industries is executing a clear and focused strategy centered on delivering integrated lighting and display solutions within specialized vertical markets. The company's recent financial performance, particularly the robust growth in the Display Solutions segment driven by strategic acquisitions and organic momentum in key verticals like Refueling/C-store and Grocery, demonstrates the effectiveness of this approach. While temporary operational inefficiencies impacted recent margins, management has a clear plan for recovery, supported by a healthy backlog and ongoing investments in capacity and technology.

The strategic shift to increased domestic sourcing provides a valuable hedge against external volatility, while continuous innovation, exemplified by new products like V-LOCITY and R290 refrigeration, enhances LSI's competitive positioning. With a strong balance sheet, solid cash flow generation, and an active M&A pipeline, LSI is well-equipped to pursue further growth opportunities and continue building its differentiated value proposition. The investment thesis hinges on LSI's ability to leverage its vertical market expertise, successfully integrate acquisitions, and translate its operational and technological strengths into sustained profitable growth and margin expansion, navigating market fluctuations by focusing on being a trusted, end-to-end partner for its customers.