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Note 1 - Summary of Significant Accounting Policies | 12 Months Ended
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Jun. 30, 2019
Notes to Financial Statements |
Significant Accounting Policies [Text Block] | NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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: 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.
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: 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. 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 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: 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: 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. 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 |
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 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 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. (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 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 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: 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: 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: 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.

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