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Significant Accounting Policies (Policies)

12 Months Ended

Jun. 30, 2018

Consolidation, Policy [Policy Text Block]

Consolidation:

The consolidated financial statements include the accounts of LSI Industries Inc. (an Ohio corporation) and its subsidiaries (collectively, the “Company”), all of which are wholly owned. All intercompany transactions and balances have been eliminated in consolidation.

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition:

Revenue is recognized when title to goods and risk of loss have passed to the customer, there is persuasive evidence of a purchase arrangement, delivery has occurred or services have been rendered, and collectability is reasonably assured. Sales are recorded net of estimated returns, rebates and discounts. Amounts received from customers prior to the recognition of revenue are accounted for as customer pre-payments and are included in accrued expenses.

The Company has

five

sources of revenue: revenue from product sales; revenue from installation of products; service revenue generated from providing integrated design, project and construction management, site engineering and site permitting, and commissioning of lighting controls; revenue from the management of media content and digital hardware related to active digital signage; and revenue from shipping and handling.

Product revenue is recognized on product-only orders upon passing of title and risk of loss, generally at time of shipment. In certain arrangements with customers, as is the case with the sale of some of our solid-state LED (light emitting diode) video screens, revenue is recognized upon customer acceptance of the video screen at the job site. Product revenue related to orders where the customer requires the Company to install the product is recognized when the product is installed. The Company provides product warranties and certain post-shipment service, support and maintenance of certain solid state LED video screens.

Installation revenue is recognized when the products have been fully installed. The Company is

not

always responsible for installation of products it sells and has

post-installation responsibilities, other than normal warranties.

Service revenue from integrated design, project and construction management, and site permitting is recognized when all products at a customer site have been installed.

Revenue from the management of media content and digital hardware related to active digital signage is recognized evenly over the service period with the customer. Media content service periods with most customers range from

one

month to

one

year.

Shipping and handling revenue coincides with the recognition of revenue from sale of the product.

In situations where the Company is responsible for re-imaging programs with multiple sites, each site is viewed as a separate unit of accounting and has stand-alone value to the customer. Revenue is recognized upon the Company’s complete performance at the location, which

may

include a site survey, graphics products, lighting products, and installation of products. The selling price assigned to each site is based upon an agreed upon price between the Company and its customer and reflects the estimated selling price for that site relative to the selling price for sites with similar image requirements.

The Company also evaluates the appropriateness of revenue recognition in accordance with the accounting standards on software revenue recognition. Our solid-state LED video screens and active digital signage contain software elements which the Company has determined are incidental.

Trade and Other Accounts Receivable, Policy [Policy Text Block]

Credit and Collections:

The Company maintains allowances for doubtful accounts receivable for probable estimated losses resulting from either customer disputes or the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company

may

be required to record additional allowances or charges against income. The Company determines its allowance for doubtful accounts by

first

considering all known collectability problems of customers’ accounts, and then applying certain percentages against the various aging categories based on the due date of the remaining receivables. The resulting allowance for doubtful accounts receivable is an estimate based upon the Company’s knowledge of its business and customer base, and historical trends. Receivables deemed uncollectable are written-off against the allowance for doubtful accounts receivable after all reasonable collection efforts have been exhausted. The Company also establishes allowances, at the time revenue is recognized, for returns, discounts, pricing and other possible customer deductions. These allowances are based upon historical trends.

The following table presents the Company’s net accounts receivable at the dates indicated.

(In thousands)	June 30,			June 30,
	2018			2017

Accounts receivable	$	51,018		$	49,386
Less: Allowance for doubtful accounts		(409	)		(506	)
Accounts receivable, net	$	50,609		$	48,880

Cash and Cash Equivalents, Policy [Policy Text Block]

Cash and Cash Equivalents:

The cash balance includes cash and cash equivalents which have original maturities of less than

three

months. Cash and cash equivalents consist primarily of bank deposits and a bank money market account that is stated at cost, which approximates fair value. The Company maintains balances at financial institutions in the United States. In the United States, the FDIC limit for insurance coverage on non-interest bearing accounts is

$250,000.

As of

June 30, 2018

and

June 30, 2017,

the Company had bank balances of

$4,507,000

and

$4,488,000,

respectively, without insurance coverage.

Inventory, Policy [Policy Text Block]

Inventories and Inventory Reserves:

Inventories are stated at the lower of cost or net realizable value. Cost of inventories includes the cost of purchased raw materials and components, direct labor, as well as manufacturing overhead which is generally applied to inventory based on direct labor and on material content. Cost is determined on the

first

-in,

first

-out basis.

The Company maintains an inventory reserve for obsolete and excess inventory. The Company

first

determines its obsolete inventory reserve by considering specific known obsolete items, and then by applying certain percentages to specific inventory categories based upon inventory turns. The Company uses various tools, in addition to inventory turns, to identify which inventory items have the potential to become obsolete. Judgment is used to establish excess and obsolete inventory reserves and management adjusts these reserves as more information becomes available about the ultimate disposition of the inventory item.

Property, Plant and Equipment, Policy [Policy Text Block]

Property, Plant and Equipment and Related Depreciation:

Property, plant and equipment are stated at cost. Major additions and betterments are capitalized while maintenance and repairs are expensed. For financial reporting purposes, depreciation is computed on the straight-line method over the estimated useful lives of the assets as follows:

Buildings (in years)	28	-	40
Machinery and equipment (in years)	3	-	10
Computer software (in years)	3	-	8

Costs related to the purchase, internal development, and implementation of the Company’s fully integrated enterprise resource planning/business operating software system are either capitalized or expensed. Leasehold improvements are depreciated over the shorter of

fifteen

years or the remaining term of the lease.

The Company recorded

$7,462,000,

$7,005,000

and

$6,171,000

of depreciation expense in the years ended

June 30, 2018,

2017

and

2016,

respectively.

Goodwill and Intangible Assets, Policy [Policy Text Block]

Goodwill and Intangible Assets:

Intangible assets consisting of customer relationships, trade names and trademarks, patents, technology and software, and non-compete agreements are recorded on the Company's balance sheet. The definite-lived intangible assets are being amortized to expense over periods ranging between

seven

and

twenty

years. The Company evaluates definite-lived intangible assets for possible impairment when triggering events are identified. Neither indefinite-lived intangible assets nor the excess of cost over fair value of assets acquired ("goodwill") are amortized, however they are subject to review for impairment. See additional information about goodwill and intangibles in Note

Fair Value Measurement, Policy [Policy Text Block]

Fair Value:

The Company has financial instruments consisting primarily of cash and cash equivalents, revolving lines of credit, accounts receivable, accounts payable, 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. The Company has

financial instruments with off-balance sheet risk.

Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in goodwill and other intangible asset impairment analyses, long-lived asset impairment analyses, in the purchase price of acquired companies, and in the valuation of the contingent earn-out. The accounting guidance on fair value measurement was used to measure the fair value of these nonfinancial assets and nonfinancial liabilities.

Standard Product Warranty, Policy [Policy Text Block]

Product Warranties:

The Company offers a limited warranty that its products are free from defects in workmanship and materials. The specific terms and conditions vary somewhat by product line, but generally cover defective products returned within

one

five

years, with some exceptions where the terms extend to

years, from the date of shipment. The Company records warranty liabilities to cover the estimated future costs for repair or replacement of defective returned products as well as products that need to be repaired or replaced in the field after installation. The Company calculates its liability for warranty claims by applying estimates based upon historical claims as a percentage of sales to cover unknown claims, as well as estimating the total amount to be incurred for known warranty issues. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

Changes in the Company’s warranty liabilities, which are included in accrued expenses in the accompanying consolidated balance sheets, during the periods indicated below were as follows:

(In thousands)	June 30, 2018			June 30, 2017

Balance at beginning of the period	$	7,560		$	5,069
Additions charged to expense		5,181			4,956
Addition from acquired company		—			907
Deductions for repairs and replacements		(5,865	)		(3,372	)
Balance at end of the period	$	6,876		$	7,560

Pension and Other Postretirement Plans, Policy [Policy Text Block]

Employee Benefit Plans:

In fiscal

2017,

the Company provided a defined contribution retirement plan and a discretionary profit sharing plan covering substantially all of its non-union employees. In fiscal

2018,

the Company changed its retirement plan to a

401k

match whereby employee’s contributions to the

401k

are matched by the Company. As with the previous defined contribution retirement plan and a discretionary profit sharing plan, the

401k

match program covers substantially all of its non-union employees. The Company also has a nonqualified deferred compensation plan covering certain employees. The costs of employee benefit plans are charged to expense and funded annually. Total costs were

$1,195,214

2018,

$2,373,000

2017,

and

$2,327,000

2016.

Research, Development, and Computer Software, Policy [Policy Text Block]

Research and Development Costs:

Research and development costs are directly attributable to new product development, including the development of new technology for both existing and new products, and consist of salaries, payroll taxes, employee benefits, materials, outside legal costs and filing fees related to obtaining patents, supplies, depreciation and other administrative costs. The Company expenses as research and development all costs associated with development of software used in solid-state LED products. All costs are expensed as incurred and are included in selling and administrative expenses. Research and development costs related to both product and software development totaled

$5,952,000,

$5,700,000

and

$5,549,000

for the fiscal years ended

June 30, 2018,

2017

and

2016,

respectively.

Cost of Sales, Policy [Policy Text Block]

Cost of Products and Services Sold:

Cost of products sold is primarily comprised of direct materials and supplies consumed in the manufacture of products, as well as manufacturing labor, depreciation expense and direct overhead expense necessary to acquire and convert the purchased materials and supplies into finished product. Cost of products sold also includes the cost to distribute products to customers, inbound freight costs, internal transfer costs, warehousing costs and other shipping and handling activity. Cost of services sold is primarily comprised of the internal and external labor costs required to support the Company’s service revenue along with the management of media content.

Earnings Per Share, Policy [Policy Text Block]

Earnings Per Common Share:

The computation of basic earnings per common share is based on the weighted average common shares outstanding for the period net of treasury shares held in the Company’s nonqualified deferred compensation plan. The computation of diluted earnings per share is based on the weighted average common shares outstanding for the period and includes common share equivalents. Common share equivalents include the dilutive effect of stock options, restricted stock units, stock warrants, contingently issuable shares and common shares to be issued under a deferred compensation plan, all of which totaled

720,000

shares in fiscal

2018;

844,000

shares in fiscal

2017;

and

872,000

shares in fiscal

2016.

See further discussion in Note

Income Tax, Policy [Policy Text Block]

Income Taxes:

The Company accounts for income taxes in accordance with the accounting guidance for income taxes. Accordingly, deferred income taxes are provided on items that are reported as either income or expense in different time periods for financial reporting purposes than they are for income tax purposes. Deferred income tax assets are reported on the Company’s balance sheet. Significant management judgment is required in developing the Company’s income tax provision, including the estimation of taxable income and the effective income tax rates in the multiple taxing jurisdictions in which the Company operates, the estimation of the liability for uncertain income tax positions, the determination of deferred tax assets and liabilities, and any valuation allowances that might be required against deferred tax assets.

The Tax Cuts and Jobs Act (the “Act”) was signed into law on

December

22nd,

2017

and makes numerous changes to the Internal Revenue Code. Among other changes, the Act reduces the U.S. corporate income tax rate to

21%

effective

January 1, 2018.

Because the Act became effective mid-way through the Company’s tax year, the Company will have a U.S statutory income tax rate of

27.6%

for fiscal

2018,

and will have a

21%

U.S. statutory income tax rate for fiscal years thereafter. As of

June 30, 2018,

the Company re-valued the deferred tax balances because of the change in U.S. tax rate resulting in a

one

-time deferred tax expense of

$3,323,000.

New Accounting Pronouncements, Policy [Policy Text Block]

New Accounting Pronouncements:

June 2014,

the Financial Accounting Standards Board issued ASU

2014

09,

“Revenue from Contracts with Customers.” This amended guidance supersedes and replaces all existing U.S. GAAP revenue recognition guidance. The guidance established a new revenue recognition model, changes the basis for deciding when revenue is recognized, provides new and more detailed guidance on specific revenue topics, and expands and improves disclosures about revenue. In

April 2016,

the FASB issued ASU

2016

10,

“Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing.” In

May 2016,

the FASB issued ASU

2016

12,

“Revenue from Contracts with Customers: Narrow Scope Improvements and Practical Expedients.” In

December 2016,

the FASB issued ASU

2016

20,

“Technical Corrections and Improvements to Topic

606,

Revenue from Contracts with Customers.” These

three

standards clarify or improve guidance from ASU

2014

and are effective for fiscal years and interim periods within those years, beginning after

December 15, 2017,

or the Company’s fiscal year

2019.

The Company has adopted the standard as of

July 1, 2018

and applied the modified retrospective approach. The recognition of revenue from most product sales is largely unaffected by the new standard. However, the Company has changed the timing of recognition of certain product sales requiring installation. Under the new standard, revenue for the product portion of a sales order containing installation is recognized when shipment occurs. Additionally, revenue will be recognized on certain custom product orders when the product is produced and committed to inventory. The Company expects to recognize an approximate

$0.6

million to

$1.0

million cumulative effect of applying the new revenue standard as a credit adjustment to the

2018

opening balance of retained earnings. Effective

July 1, 2018,

the Company has implemented appropriate changes to policies, processes, systems, and controls to support revenue recognition and disclosures in accordance with the ASU

2014

guidance.

November 2015,

the FASB issued ASU

2015

17,

“Balance Sheet Classification of Deferred Taxes,” which eliminates the current requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts in the statement of financial position. This update requires that deferred tax liabilities and assets be classified as noncurrent. This update is effective for financial statements issued for fiscal years beginning

April

2017.

This update

may

be applied either prospectively or retrospectively. However, early adoption is permitted and the Company has chosen to adopt the standard retrospectively as of

June 30, 2016.

As a result, prior periods have been adjusted to reflect this change. This update affected the presentation, but

not

the measurement of deferred tax liabilities and assets.

February 2016,

the Financial Accounting Standards Board issued ASU

2016

02,

“Leases.” The amended guidance requires an entity to recognize assets and liabilities that arise from leases. The amended guidance is effective for financial statements issued for fiscal years and interim periods within those years, beginning after

December 15, 2018,

or the Company’s fiscal year

2020,

with early adoption permitted. The Company has

not

yet determined the impact the amended guidance will have on its financial statements.

Comprehensive Income, Policy [Policy Text Block]

Comprehensive Income:

The Company does

not

have any comprehensive income items other than net income.

Subsequent Events, Policy [Policy Text Block]

Subsequent Events:

The Company has evaluated subsequent events for potential recognition and disclosure through the date the consolidated financial statements were filed.

items were identified during this evaluation that required adjustment to or disclosure in the accompanying consolidated financial statements.

Reclassification, Policy [Policy Text Block]

Reclassifications:

Certain prior year amounts have been reclassified to conform to the current year presentation within the cash flows from operating activities section and cash flows from financing activities section of the statement of cash flows. Additionally, certain prior year amounts have been reclassified to conform to the current year presentation within the statement of shareholders’ equity. These reclassifications have

impact on net income or earnings per share.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.