Significant Accounting Policies (Policies)

12 Months Ended

Jun. 30, 2019

Accounting Policies [Abstract]

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 [Policy Text Block]

Revenue Recognition:

The Company recognizes revenue when it satisfies the performance obligations 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 our terms with the customer. The Company offers standard warranties that do

not

represent separate performance obligations.

Installation is a separate performance obligation, except for our 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 products are highly customized. As a result, these customized products do

not

have an alternative use. For these products, the Company generally 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. Installation revenue is recognized over time as our 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 contract.

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 our revenue and cash flows. The table presents a reconciliation of the disaggregation by reportable segments.

	Twelve Months Ended
( In thousands)	June 30, 2019
	Lighting Segment		Graphics Segment
Timing of revenue recognition
Products and services transferred at a point in time	$	207,577	$	54,866
Products and services transferred over time		27,537		38,872
	$	235,114	$	93,738
Type of Product and Services
New technology products	$	203,049	$	12,479
Legacy products		29,592		59,867
Turnkey services and other		2,473		21,392
	$	235,114	$	93,738

New technology products include LED lighting and controls, electronic circuit boards, and digital signage solutions. Legacy products include lighting fixtures utilizing light sources other than LED technology and printed

two

and

three

dimensional graphic products. Turnkey services and other includes installation services along with shipping and handling charges.

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 have 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.

Accounts Receivable [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,
	201 9			2018
Accounts receivable	$	55,607		$	51,018
Less: Allowance for doubtful accounts		(879	)		(409	)
Accounts receivable, net	$	54,728		$	50,609

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 and Mexico. In the United States, the FDIC limit for insurance coverage on non-interest bearing accounts is

$250,000.

As of

June 30, 2019

and

June 30, 2018,

the Company had bank balances of

$1,461,000

and

$4,507,000,

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 purchased 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

$7,460,000

and

$7,462,000

of depreciation expense in the years ended

June 30, 2019

and,

2018

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

6.

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

no

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, and in the purchase price of acquired companies. 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

to

five

years, with some exceptions where the terms extend to

10

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, 201 9			June 30, 2018
Balance at beginning of the period	$	6,876		$	7,560
Additions charged to expense		5,190			5,181
Deductions for repairs and replacements		(4,379	)		(5,865	)
Balance at end of the period	$	7,687		$	6,876

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

Employee Benefit Plans:

In fiscal

2018,

the Company changed its retirement plan to a

401

(k) match whereby employee’s contributions to the

401

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

401

(k) 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

$1,333,000

and

$1,195,000

in

June 30, 2019

and

2018,

respectively.

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

$5,266,000

and

$5,952,000

for the fiscal years ended

June 30, 2019

and

2018,

respectively.

Cost of Goods and Service [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]

(Loss) Per Common Share:

The computation of basic (loss) 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 (loss) 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

324,000

shares and

720,000

shares in fiscal

2019

and

2018,

respectively. See further discussion in Note

3.

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 22, 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 fiscal year

2018

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

December 31, 2017,

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.

Foreign Currency Transactions and Translations Policy [Policy Text Block]

Foreign

Exchange

:

The functional currency of the Mexican legal entity is the Mexican Peso. Assets and liabilities of foreign operations are translated using period end exchange rates. Revenue and expenses are translated using average exchange rates during each period reported. Translation losses (gains) are reported in accumulated other comprehensive loss (gain) as a component of shareholders equity and were

$16,000

as of

June 30, 2019.

The Company recognizes foreign currency transaction (gains) and losses on certain assets and liabilities that are denominated in the Mexican Peso. These transaction (gains) and losses are reported in other expense in the consolidated statements of operations and were

$138,000

for the

twelve

months ended

June 30, 2019.

New Accounting Pronouncements, Policy [Policy Text Block]

New Accounting Pronouncements:

On

July 1, 2018,

the Company adopted ASU

2014

-

09.

“Revenue from Contracts with Customers,” (Topic

606

) using the modified retrospective adoption method which requires a cumulative effect adjustment to the opening balance of retained earnings. This approach was applied to contracts that were

not

completed as of

June 30, 2018.

Results for reporting periods beginning

July 1, 2018

are presented under Topic

606,

while prior period amounts are

not

adjusted and continue to be reported under the accounting standards in effect for the prior period. The Company recorded a net increase to beginning retained earnings of

$591,000

on

July 1, 2018

due to the cumulative impact of adopting Topic

606,

as described below.

( In thousands)	Balance as of June 30, 2018		Adjustments			Opening Balance as of July 1, 2018
Assets:
Accounts receivable, net	$	50,609	$	4,935		$	55,544
Inventories, net	$	50,994	$	(4,167	)	$	46,827
Other long-term assets, net	$	9,786	$	(177	)	$	9,609
Shareholders’ Equity:
Retained earnings	$	15,124	$	591		$	15,715

In

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 and interim periods within those years, beginning after

December 15, 2018,

or the Company’s fiscal

2020,

with early adoption permitted. The Company will adopt this guidance effective

July 1, 2019

using a modified-retrospective transition method, under which it expects to elect

not

to adjust comparative periods. The Company intends to elect the package of practical expedients permitted under the new guidance. In addition, the Company plans to elect accounting policies to

not

record short-term leases on the balance sheet and to

not

separate lease and lease components.

The Company has completed its assessment of its lease portfolio and is in the process of finalizing the testing of its new lease accounting software solution and implementing new processes and controls to account for leases in accordance with the new guidance. The Company’s most significant leases are its

two

manufacturing facilities. Besides the

two

real estate leases, most other leases are relatively small and comprise mostly of a vehicle, forklifts and various office equipment. Upon adoption of this new guidance, the Company expects to recognize a

$9.5

million to

$12.5

million of right-of-use assets and corresponding lease liabilities on its consolidated balance sheet. The Company does

not

expect the adoption will have a material impact on its consolidated statements of operations or consolidated statements of cash flows.

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.  

No

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

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.