Notes to Condensed Consolidated Financial Statements
(unaudited)
A.
Financial Information
The unaudited interim condensed consolidated financial statements of Kewaunee Scientific Corporation (the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, although the Company believes that the disclosures are adequate to make the information presented not misleading.
These interim condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of these financial statements and should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2018 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. The condensed consolidated balance sheet as of April 30, 2018 included in this interim period filing has been derived from the audited financial statements at that date, but does not include all of the information and related notes required by generally accepted accounting principles (GAAP) for complete financial statements.
The preparation of the interim condensed consolidated financial statements requires management to make certain estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates.
Change in Accounting Principle and Second Quarter Financial Statements
During the second quarter of fiscal year 2019, the Company changed its method of accounting for its Domestic segment’s inventory from the last-in, first-out (LIFO) method to the first-in, first out (FIFO) method. The Company’s prior year condensed consolidated balance sheet as of April 30, 2018 and statements of stockholders’ equity for the three- and six-month periods ended October 30, 2018 presented in the second quarter of fiscal year 2019 were not adjusted for the retrospective application of the change in method of accounting to FIFO. Note E in the second quarter financial statements did include a presentation of the adjusted condensed consolidated balance sheet as of April 30, 2018, including the adjustments made for the accounting change. The prior year consolidated balance sheet and statement of stockholders’ equity have been corrected in the current presentation for the third quarter of fiscal 2019. All prior periods presented herein have been retrospectively adjusted to apply the new method of accounting. See Note E for more information on the change in inventory accounting method.
B.
Revenue Recognition
The Company recognizes revenue when control of a good or service promised in a contract (i.e., performance obligation) is transferred to a customer. Control is obtained when a customer has the ability to direct the use of and obtain substantially all of the remaining benefits from that good or service. The majority of the Company’s revenues are recognized over time as the customer receives control as the Company performs work under a contract. However, a portion of the Company’s revenues are recognized at a point-in-time as control is transferred at a distinct point in time per the terms of a contract.
Performance Obligations
A performance obligation is a distinct good or service or bundle of goods and services that is distinct or a series of distinct goods or services that are substantially the same and have the same pattern of transfer. The Company identifies performance obligations at the inception of a contract and allocates the transaction price to individual performance obligations to reasonably reflect the Company’s performance in transferring control of the promised goods or services to the customer. The Company has elected to treat shipping and handling as a fulfillment activity instead of a separate performance obligation.
The following are the primary performance obligations identified by the Company:
Laboratory Furniture
The Company principally generates revenue from the manufacture of custom laboratory, healthcare, and technical furniture and infrastructure products (herein referred to as “laboratory furniture”). The Company’s products include steel, wood, and laminate furniture, fume hoods, biological safety cabinets, laminar flow and ductless hoods, adaptable modular and column systems, moveable workstations and carts, epoxy resin worksurfaces, sinks, and accessories and related design services. Customers can benefit from each piece of laboratory furniture on its own or with resources readily available in the market place such as separately purchased installation services. Each piece of laboratory furniture does not significantly modify or customize other
laboratory furniture, and the pieces of laboratory furniture are not highly interdependent or interrelated with each other. The Company can, and frequently does, break portions of contracts into separate “runs” to meet manufacturing and construction schedules. As such, each piece of laboratory furniture is considered a separate and distinct performance obligation. The majority of the Company’s products are customized to meet the specific architectural design and performance requirements of laboratory planners and end users. The finished laboratory furniture has no alternative use to the Company and the Company has an enforceable right to payment for performance completed to date. As such, revenue from the sales of customized laboratory furniture is recognized over time once the customization process has begun, using the units-of-production output method to measure progress towards completion. There is not a material amount of work-in-process for which the customization process has begun at the end of a reporting period. The Company believes this output method most reasonably reflects the Company’s performance because it directly measures the value of the goods transferred to the customer. For standardized products sold by the Company, revenue is recognized when control transfers, which is typically freight on board (“FOB”) shipping point.
Warranties
All orders contain a standard warranty that warrants that the product is free from defects in workmanship and materials under normal use and conditions for a limited period of time. Due to the nature and quality of the Company’s products, any warranty issues have historically been determined in a relatively short period after the sale, have been infrequent in nature, and have been immaterial to the Company’s financial position and results of operations. The Company’s standard warranties are not considered a separate and distinct performance obligation as the Company does not provide a service to customers beyond assurance that the covered product is free of initial defects. Costs of providing these short term assurance warranties are immaterial and, accordingly, are expensed as incurred. Extended separately priced warranties are available which can last up to five years. Extended warranties are considered separate performance obligations as they are individually priced options providing assurances that the products are free of defects.
Installation Services
The Company sometimes performs installation services for customers. The scope of installation services primarily relates to setting up and ensuring the proper functioning of the laboratory furniture. In certain markets, the Company may provide a broader range of installation services involving the design and installation of the laboratory’s mechanical services. Installation services can be, and often are, performed by third parties and thus may be distinct from the Company’s products. Installation services create or enhance assets that the customer controls as the installation services are provided.As such, revenue from installation services is recognized over time, as the installation services are performed using the cost input method, as there is a direct relationship between the Company’s inputs and the transfer of control by means of the performance of installation services to the customer.
Custodial Services
It is common in the laboratory and healthcare furniture industries for customers to request delivery at specific future dates, as products are often to be installed in buildings yet to be constructed. Frequently, customers will request the manufacture of these products prior to the customer’s ability or readiness to receive the product due to various reasons such as changes to or delays in the construction of the building. As such, from time to time our customers require us to provide custodial services for their laboratory furniture. Custodial services are frequently provided by third parties and do not significantly alter the other goods or services covered by the contract and as such are considered a separate and distinct performance obligation. Custodial services are simultaneously received and consumed by the customer and as such revenue from custodial services is recognized over time using a straight-line time-based measure of progress towards completion, because the Company’s services are provided evenly throughout the performance period.
Payment Terms and Transaction Prices
The Company's contracts with customers are fixed-priced and do not contain variable consideration or a general right of return or refund. The Company's contracts with customers contain terms typical for our industry, including withholding a portion of the transaction price until after the goods or services have been transferred to the customer (i.e. “retainage”). The Company does not recognize this as a significant financing component because the primary purpose of retainage is to provide the customer with assurance that the Company will perform its obligations under the contract, rather than to provide financing to the customer.
Allocation of Transaction Price
The Company's contracts with customers may cover multiple goods and services, such as differing types of laboratory furniture and installation services. For these arrangements, each good or service is evaluated to determine whether it represents a distinct performance obligation. The total transaction price is then allocated to the distinct performance obligations based on their relative standalone selling price at the inception of the arrangement. If available, the Company utilizes observable prices for goods or services sold separately to similar customers in similar circumstances to determine its relative standalone selling price. Otherwise, list prices are used if they are determined to be representative of standalone selling prices. If neither of these methods are available at contract inception, such as when the Company does not sell the product or service separately, judgment may be required and the Company determines the standalone selling price using one, or a combination of, the adjusted market assessment or expected cost-plus margin approaches.
Practical Expedients Used
Accounting Standards Codification 606 - Revenue from Contracts with Customers ("ASC 606") permits the use of practical expedients under certain conditions. The Company has elected the following practical expedients allowed under ASC 606:
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•
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Under the modified retrospective approach, the Company elected to reassess revenue recognition under ASC 606 for only those contracts open as of the adoption date.
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•
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The portfolio approach was applied in evaluating the accounting for the cost of obtaining a contract.
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|
|
•
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Payment terms with the Company's customers which are one year or less are not considered a significant financing component.
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•
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The Company excludes from revenues taxes it collects from customers that are assessed by a government authority. This is primarily relevant to domestic sales but also includes taxes on some international sales which are also excluded from the transaction price.
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•
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The Company's incremental cost to obtain a contract is limited to sales commissions. The Company applies the practical expedient to expense commissions as incurred for contracts having a duration of one year or less. Sales commissions related to contracts with a duration of greater than one year are immaterial to the Company’s consolidated financial position and results of operations and are also expensed as incurred.
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Disaggregated Revenue
A summary of net sales transferred to customers at a point in time and over time for the
three and nine
months ended
January 31, 2019
is as follows (in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January 31, 2019
|
|
|
Domestic
|
|
International
|
|
Total
|
|
Over Time
|
$
|
24,414
|
|
|
$
|
7,155
|
|
|
$
|
31,569
|
|
|
Point in Time
|
803
|
|
|
—
|
|
|
803
|
|
|
|
$
|
25,217
|
|
|
$
|
7,155
|
|
|
$
|
32,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Nine Months Ended January 31, 2019
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|
Domestic
|
|
International
|
|
Total
|
|
Over Time
|
$
|
86,973
|
|
|
$
|
19,893
|
|
|
$
|
106,866
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|
|
Point in Time
|
4,936
|
|
|
—
|
|
|
4,936
|
|
|
|
$
|
91,909
|
|
|
$
|
19,893
|
|
|
$
|
111,802
|
|
Contract Balances
The closing and opening balances of contract assets and liabilities arising from contracts with customers were
$1,450,000
at
January 31, 2019
and
$1,884,000
at April 30, 2018. The timing of revenue recognition, billings and cash collections results in accounts receivable, unbilled receivables, and deferred revenue on the condensed consolidated balance sheets. In general, the Company receives payments from customers based on a billing schedule established in its contracts. Unbilled receivables represent amounts earned which have not yet been billed in accordance with contractually stated billing terms. Accounts receivable are recorded when the right to consideration becomes unconditional and the Company has a right to invoice the
customer. Deferred revenue relates to payments received in advance of performance under the contract. Deferred revenue is recognized as revenue as (or when) the Company performs under the contract.
During the
three and nine
months ended
January 31, 2019
, changes in contract assets and liabilities were not materially impacted by any other factors. Approximately
100%
of the contract liability balance at April 30, 2018 is expected to be recognized as revenue during fiscal year 2019 and
14%
and
95%
of this amount was recognized during the
three and nine
months ended
January 31, 2019
, respectively.
ASC 606 adoption impact
Under ASC 606, sales consisting of customized products sold to customers for which revenue was previously recognized at a point in time now meet the criteria of a performance obligation satisfied over time. These contracts consist of customized laboratory furniture engineered or tailored to meet the customer’s requirements. In the event the customer cancels the contract, the Company will have no alternative use for and cannot economically repurpose the laboratory furniture, and the Company has the right to payment for performance completed to date. This change results in accelerated recognition of revenue and increases the balance of contract assets compared to the previous revenue recognition standard.
The Company adopted ASC 606 on May 1, 2018 using the modified retrospective approach and elected to reassess revenue recognition under ASC 606 for only those contracts open as of the adoption date, which resulted in a cumulative effect adjustment to increase retained earnings, net of tax, of
$217,000
. Comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods presented. The Company elected to reflect the aggregate effect of all contract modifications that occurred before the beginning of the earliest period presented in determining the transaction price, identifying the satisfied and unsatisfied performance obligations and allocating the transaction price to the satisfied and unsatisfied performance obligations for the modified contract at transition. The effects of these elections were immaterial.
The following tables summarize the impact of adopting ASC 606 on the condensed consolidated statements of operations:
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Three Months Ended January 31, 2019
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|
($ in thousands, except per share amounts)
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|
|
As Reported
|
|
Adjustments
|
|
Balance Without
Adoption of
ASC 606
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Net sales
|
$
|
32,372
|
|
|
$
|
(1,668
|
)
|
|
$
|
30,704
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|
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Costs of products sold
|
27,142
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|
|
(1,519
|
)
|
|
25,623
|
|
|
Gross profit
|
5,230
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|
(149
|
)
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|
5,081
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|
|
Operating expenses
|
5,305
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|
|
6
|
|
|
5,311
|
|
|
Operating loss
|
(75
|
)
|
|
(155
|
)
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|
(230
|
)
|
|
Other income
|
186
|
|
|
—
|
|
|
186
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|
|
Interest expense
|
(76
|
)
|
|
—
|
|
|
(76
|
)
|
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Earnings (loss) before income taxes
|
35
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|
|
(155
|
)
|
|
(120
|
)
|
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Income tax expense (benefit)
|
20
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|
|
(46
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)
|
|
(26
|
)
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Net earnings (loss)
|
15
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|
|
(109
|
)
|
|
(94
|
)
|
|
Net earnings attributable to the noncontrolling interest
|
37
|
|
|
—
|
|
|
37
|
|
|
Net earnings (loss) attributable to Kewaunee Scientific Corporation
|
$
|
(22
|
)
|
|
$
|
(109
|
)
|
|
$
|
(131
|
)
|
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Basic Loss Per Share
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
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Diluted Loss Per Share
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
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)
|
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|
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|
|
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|
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|
|
|
|
|
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|
|
Nine Months Ended January 31, 2019
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|
($ in thousands, except per share amounts)
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|
|
As Reported
|
|
Adjustments
|
|
Balance Without
Adoption of
ASC 606
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Net sales
|
$
|
111,802
|
|
|
$
|
(1,720
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)
|
|
$
|
110,082
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|
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Costs of products sold
|
91,325
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|
|
(1,169
|
)
|
|
90,156
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|
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Gross profit
|
20,477
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|
|
(551
|
)
|
|
19,926
|
|
|
Operating expenses
|
17,031
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|
|
11
|
|
|
17,042
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|
Operating earnings
|
3,446
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|
|
(562
|
)
|
|
2,884
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|
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Other income
|
500
|
|
|
—
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|
|
500
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|
|
Interest expense
|
(258
|
)
|
|
—
|
|
|
(258
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)
|
|
Earnings before income taxes
|
3,688
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|
(562
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)
|
|
3,126
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|
|
Income tax expense
|
803
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|
|
(138
|
)
|
|
665
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|
|
Net earnings
|
2,885
|
|
|
(424
|
)
|
|
2,461
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|
|
Net earnings attributable to the noncontrolling interest
|
86
|
|
|
—
|
|
|
86
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|
|
Net earnings attributable to Kewaunee Scientific Corporation
|
$
|
2,799
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|
|
$
|
(424
|
)
|
|
$
|
2,375
|
|
|
Basic Earnings Per Share
|
$
|
1.02
|
|
|
$
|
(0.15
|
)
|
|
$
|
0.87
|
|
|
Diluted Earnings Per Share
|
$
|
1.00
|
|
|
$
|
(0.15
|
)
|
|
$
|
0.85
|
|
The following table summarizes the impact of adopting ASC 606 on the Company’s condensed consolidated balance sheet:
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|
|
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|
|
|
|
|
|
|
|
|
|
January 31, 2019
|
|
|
($ in thousands)
|
|
|
As Reported
|
|
Adjustments
|
|
Balance Without
Adoption of
ASC 606
|
|
Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
10,771
|
|
|
$
|
—
|
|
|
$
|
10,771
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|
|
Restricted cash
|
606
|
|
|
—
|
|
|
606
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|
|
Receivables, less allowances
|
27,929
|
|
|
(3,304
|
)
|
|
24,625
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|
|
Inventories
|
16,672
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|
|
3,106
|
|
|
19,778
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|
|
Prepaid expenses and other assets
|
3,778
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|
|
—
|
|
|
3,778
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|
|
Total Current Assets
|
59,756
|
|
|
(198
|
)
|
|
59,558
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|
|
Net property, plant and equipment
|
15,202
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|
|
—
|
|
|
15,202
|
|
|
Other assets
|
4,604
|
|
|
—
|
|
|
4,604
|
|
|
Total Assets
|
$
|
79,562
|
|
|
$
|
(198
|
)
|
|
$
|
79,364
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
Short-term borrowings and interest rate swaps
|
$
|
5,118
|
|
|
$
|
—
|
|
|
$
|
5,118
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|
|
Current portion of long-term debt and lease obligations
|
1,184
|
|
|
—
|
|
|
1,184
|
|
|
Accounts payable
|
11,106
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|
|
(4
|
)
|
|
11,102
|
|
|
Deferred revenue
|
1,450
|
|
|
661
|
|
|
2,111
|
|
|
Other current liabilities
|
4,848
|
|
|
(214
|
)
|
|
4,634
|
|
|
Total Current Liabilities
|
23,706
|
|
|
443
|
|
|
24,149
|
|
|
Other non-current liabilities
|
6,345
|
|
|
—
|
|
|
6,345
|
|
|
Total Liabilities
|
30,051
|
|
|
443
|
|
|
30,494
|
|
|
Noncontrolling interest
|
521
|
|
|
—
|
|
|
521
|
|
|
Total Kewaunee Scientific Corporation Stockholders’ Equity
|
48,990
|
|
|
(641
|
)
|
|
48,349
|
|
|
Total Stockholders’ Equity
|
49,511
|
|
|
(641
|
)
|
|
48,870
|
|
|
Total Liabilities and Stockholders’ Equity
|
$
|
79,562
|
|
|
$
|
(198
|
)
|
|
$
|
79,364
|
|
C.
Derivative Financial Instruments
The Company records derivatives on the condensed consolidated balance sheets at fair value and establishes criteria for designation and effectiveness of hedging relationships. The nature of the Company’s business activities involves the management of various financial and market risks, including those related to changes in interest rates. The Company does not enter into derivative instruments for speculative purposes. In May 2013, the Company entered into an interest rate swap agreement whereby the interest rate payable by the Company on
$3,450,000
of outstanding long-term debt was effectively converted to a fixed interest rate of
4.875%
for the period beginning
May 1, 2013
and ending
August 1, 2017
. In May 2013, the Company entered into an interest rate swap agreement whereby the interest rate payable by the Company on
$2,600,000
of outstanding long-term debt was effectively converted to a fixed interest rate of
4.37%
for the period beginning
August 1, 2017
and ending
May 1, 2020
. In May 2013, the Company entered into an interest rate swap agreement whereby the interest rate payable by the Company on
$1,218,000
of outstanding long-term debt was effectively converted to a fixed interest rate of
3.07%
for the period beginning
November 3, 2014
and ending
May 1, 2020
. The Company entered into these interest rate swap arrangements to mitigate future interest rate risk associated with its long-term debt and has designated these as cash flow hedges.
D.
Earnings Per Share
Basic earnings per share is based on the weighted average number of common shares outstanding during the
three and nine
month periods. Diluted earnings per share reflects the assumed exercise and conversion of restricted stock units and outstanding stock options under the Company’s Omnibus Incentive Plan, except when such awards have an anti-dilutive effect. There were
no
antidilutive awards outstanding at
January 31, 2019
and
January 31, 2018
.
E.
Inventories
Effective August 1, 2018, the Company elected to change its method of inventory accounting to the FIFO method from the LIFO link-chain dollar-value method for its Domestic segment inventories. The Company believes that the FIFO method is preferable as it results in increased uniformity across the Company’s operations with respect to the inventory valuation method, as the Company’s International subsidiaries use the FIFO method. The Company also believes that the change to FIFO will improve financial reporting by better reflecting the current value of inventory on the condensed consolidated balance sheets, by more closely aligning the flow of physical inventory with the accounting for the inventory, providing better matching of revenues and expenses. The Company applied this change in method of inventory accounting by retrospectively adjusting all prior period financial statements and footnote information presented herein as necessary.
Inventories consisted of the following (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
January 31,
2019
|
|
As Adjusted
April 30, 2018
|
|
Finished products
|
$
|
3,591
|
|
|
$
|
4,987
|
|
|
Work in process
|
1,804
|
|
|
2,393
|
|
|
Raw materials
|
11,277
|
|
|
11,169
|
|
|
|
$
|
16,672
|
|
|
$
|
18,549
|
|
The Company’s International subsidiaries’ inventories were
$1,410,000
at
January 31, 2019
and
$1,908,000
, at
April 30, 2018
, measured using the FIFO method at the lower of cost and net realizable value and are included in the above tables. Certain amounts in the Company’s condensed consolidated balance sheet as of
April 30, 2018
were adjusted as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2018
|
|
|
As Originally
Reported
|
|
Adjustments
|
|
As Adjusted
|
|
Inventories
|
$
|
17,662
|
|
|
$
|
887
|
|
|
$
|
18,549
|
|
|
Total Current Assets
|
63,504
|
|
|
887
|
|
|
64,391
|
|
|
Deferred Income Taxes
|
2,031
|
|
|
(162
|
)
|
|
1,869
|
|
|
Total Assets
|
84,358
|
|
|
725
|
|
|
85,083
|
|
|
Other Accrued Expenses
|
2,062
|
|
|
54
|
|
|
2,116
|
|
|
Total Current Liabilities
|
27,562
|
|
|
54
|
|
|
27,616
|
|
|
Total Liabilities
|
36,837
|
|
|
54
|
|
|
36,891
|
|
|
Retained Earnings
|
43,165
|
|
|
671
|
|
|
43,836
|
|
|
Total Kewaunee Scientific Corporation Stockholders’ Equity
|
47,059
|
|
|
671
|
|
|
47,730
|
|
|
Total Stockholders’ Equity
|
47,521
|
|
|
671
|
|
|
48,192
|
|
|
Total Liabilities and Stockholders’ Equity
|
$
|
84,358
|
|
|
$
|
725
|
|
|
$
|
85,083
|
|
Certain amounts in the Company’s condensed consolidated statement of operations for the three and nine months ended January 31, 2018 under the FIFO method would have been as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January 31, 2018
|
|
|
As Reported Under LIFO
|
Adjustments
|
As Adjusted Under FIFO
|
|
Cost of products sold
|
$
|
29,836
|
|
$
|
(45
|
)
|
$
|
29,791
|
|
|
Income tax expense
|
1,566
|
|
15
|
|
1,581
|
|
|
Net earnings
|
918
|
|
30
|
|
948
|
|
|
Net earnings attributable to Kewaunee Scientific Corporation
|
$
|
883
|
|
$
|
30
|
|
$
|
913
|
|
|
Net earnings per share attributable to Kewaunee Scientific Corporation stockholders
|
|
|
|
|
|
|
|
Basic
|
$
|
0.32
|
|
$
|
0.01
|
|
$
|
0.33
|
|
|
Diluted
|
$
|
0.31
|
|
$
|
0.01
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended January 31, 2018
|
|
|
As Reported Under LIFO
|
Adjustments
|
As Adjusted Under FIFO
|
|
Cost of products sold
|
$
|
90,456
|
|
$
|
(45
|
)
|
$
|
90,411
|
|
|
Income tax expense
|
3,149
|
|
15
|
|
3,164
|
|
|
Net earnings
|
3,875
|
|
30
|
|
3,905
|
|
|
Net earnings attributable to Kewaunee Scientific Corporation
|
$
|
3,755
|
|
$
|
30
|
|
$
|
3,785
|
|
|
Net earnings per share attributable to Kewaunee Scientific Corporation stockholders
|
|
|
|
|
|
|
|
Basic
|
$
|
1.38
|
|
$
|
0.01
|
|
$
|
1.39
|
|
|
Diluted
|
$
|
1.35
|
|
$
|
0.01
|
|
$
|
1.36
|
|
Certain amounts in the Company’s condensed consolidated statement of cash flows as of January 31, 2018 would have been as follows under the FIFO method (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended January 31, 2018
|
|
|
As Reported Under LIFO
|
Adjustments
|
As Adjusted Under FIFO
|
|
Net earnings
|
$
|
3,875
|
|
$
|
30
|
|
$
|
3,905
|
|
|
Decrease in inventories
|
(2,745
|
)
|
(45
|
)
|
(2,790
|
)
|
|
Increase in accounts payable and other accrued expenses
|
2,020
|
|
15
|
|
2,035
|
|
|
Net cash used in operating activities
|
$
|
(645
|
)
|
$
|
—
|
|
$
|
(645
|
)
|
Certain amounts in the Company’s condensed consolidated statement of operations for the
three and nine
months ended
January 31, 2019
under the former LIFO method would have been as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January 31, 2019
|
|
|
As Reported Under FIFO
|
|
Adjustments
|
|
As Computed Under LIFO
|
|
Cost of products sold
|
$
|
27,142
|
|
|
$
|
(49
|
)
|
|
$
|
27,093
|
|
|
Income tax expense
|
20
|
|
|
12
|
|
|
32
|
|
|
Net earnings
|
15
|
|
|
37
|
|
|
52
|
|
|
Net earnings (loss) attributable to Kewaunee Scientific Corporation
|
$
|
(22
|
)
|
|
$
|
37
|
|
|
$
|
15
|
|
|
Net earnings (loss) per share attributable to Kewaunee Scientific Corporation stockholders
|
|
|
|
|
|
|
Basic
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
—
|
|
|
Diluted
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended January 31, 2019
|
|
|
As Reported Under FIFO
|
|
Adjustments
|
|
As Computed Under LIFO
|
|
Cost of products sold
|
$
|
91,325
|
|
|
$
|
151
|
|
|
$
|
91,476
|
|
|
Income tax expense
|
803
|
|
|
(37
|
)
|
|
766
|
|
|
Net earnings
|
2,885
|
|
|
(114
|
)
|
|
2,771
|
|
|
Net earnings attributable to Kewaunee Scientific Corporation
|
$
|
2,799
|
|
|
$
|
(114
|
)
|
|
$
|
2,685
|
|
|
Net earnings per share attributable to Kewaunee Scientific Corporation stockholders
|
|
|
|
|
|
|
Basic
|
$
|
1.02
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.98
|
|
|
Diluted
|
$
|
1.00
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.96
|
|
Certain amounts in the Company’s condensed consolidated statement of cash flows as of
January 31, 2019
would have been as follows under the former LIFO method (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended January 31, 2019
|
|
|
As Reported Under FIFO
|
|
Adjustments
|
|
As Computed Under LIFO
|
|
Net earnings
|
$
|
2,885
|
|
|
$
|
(114
|
)
|
|
$
|
2,771
|
|
|
Decrease in inventories
|
990
|
|
|
151
|
|
|
1,141
|
|
|
Decrease in accounts payable and other accrued expenses
|
(4,879
|
)
|
|
(37
|
)
|
|
(4,916
|
)
|
|
Net cash provided by operating activities
|
$
|
4,534
|
|
|
$
|
—
|
|
|
$
|
4,534
|
|
Certain amounts in the Company’s condensed consolidated balance sheet as of
January 31, 2019
would have been as follows under the former LIFO method (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2019
|
|
|
As Reported Under
FIFO
|
|
Adjustment
|
|
As Computed Under
LIFO
|
|
Inventories
|
$
|
16,672
|
|
|
$
|
(1,038
|
)
|
|
$
|
15,634
|
|
|
Total Current Assets
|
59,756
|
|
|
(1,038
|
)
|
|
58,718
|
|
|
Deferred Income Taxes
|
1,676
|
|
|
162
|
|
|
1,838
|
|
|
Total Assets
|
79,562
|
|
|
(876
|
)
|
|
78,686
|
|
|
Other Accrued Expenses
|
2,894
|
|
|
(91
|
)
|
|
2,803
|
|
|
Total Current Liabilities
|
23,706
|
|
|
(91
|
)
|
|
23,615
|
|
|
Total Liabilities
|
30,051
|
|
|
(91
|
)
|
|
29,960
|
|
|
Retained Earnings
|
45,345
|
|
|
(785
|
)
|
|
44,560
|
|
|
Total Kewaunee Scientific Corporation Stockholders’ Equity
|
48,990
|
|
|
(785
|
)
|
|
48,205
|
|
|
Total Stockholders’ Equity
|
49,511
|
|
|
(785
|
)
|
|
48,726
|
|
|
Total Liabilities and Stockholders’ Equity
|
$
|
79,562
|
|
|
$
|
(876
|
)
|
|
$
|
78,686
|
|
F.
Segment Information
The Company’s operations are classified into
two
business segments: Domestic and International. The Domestic business segment principally designs, manufactures, and installs scientific and technical furniture, including steel and wood laboratory cabinetry, fume hoods, laminate casework, flexible systems, worksurfaces, workstations, workbenches, and computer enclosures. The International business segment, which consists of the Company’s foreign subsidiaries, provides products and services, including facility design, detailed engineering, construction, and project management from the planning stage through testing and commissioning of laboratories. Intersegment transactions are recorded at normal profit margins. All intercompany balances and transactions have been eliminated. Certain corporate expenses shown below have not been allocated to the business segments.
The following tables provide financial information by business segments for the
three and nine
months ended
January 31, 2019
and
2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
Operations
|
|
International
Operations
|
|
Corporate /
Eliminations
|
|
Total
|
|
Three months ended January 31, 2019
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
$
|
25,217
|
|
|
$
|
7,155
|
|
|
$
|
—
|
|
|
$
|
32,372
|
|
|
Intersegment revenues
|
612
|
|
|
2,135
|
|
|
(2,747
|
)
|
|
—
|
|
|
Earnings (loss) before income taxes
|
$
|
60
|
|
|
$
|
1,020
|
|
|
$
|
(1,045
|
)
|
|
$
|
35
|
|
|
Three months ended January 31, 2018
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
$
|
29,734
|
|
|
$
|
8,456
|
|
|
$
|
—
|
|
|
$
|
38,190
|
|
|
Intersegment revenues
|
1,145
|
|
|
1,361
|
|
|
(2,506
|
)
|
|
—
|
|
|
Earnings (loss) before income taxes
|
$
|
3,004
|
|
|
$
|
1,363
|
|
|
$
|
(1,838
|
)
|
|
$
|
2,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
Operations
|
|
International
Operations
|
|
Corporate/
Eliminations
|
|
Total
|
|
Nine months ended January 31, 2019
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
$
|
91,909
|
|
|
$
|
19,893
|
|
|
$
|
—
|
|
|
$
|
111,802
|
|
|
Intersegment revenues
|
1,490
|
|
|
3,969
|
|
|
(5,459
|
)
|
|
—
|
|
|
Earnings (loss) before income taxes
|
$
|
6,005
|
|
|
$
|
2,174
|
|
|
$
|
(4,491
|
)
|
|
$
|
3,688
|
|
|
Nine months ended January 31, 2018
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
$
|
80,420
|
|
|
$
|
33,122
|
|
|
$
|
—
|
|
|
$
|
113,542
|
|
|
Intersegment revenues
|
10,298
|
|
|
3,291
|
|
|
(13,589
|
)
|
|
—
|
|
|
Earnings (loss) before income taxes
|
$
|
7,765
|
|
|
$
|
4,019
|
|
|
$
|
(4,715
|
)
|
|
$
|
7,069
|
|
G.
Defined Benefit Pension Plans
The Company has non-contributory defined benefit pension plans covering substantially all domestic salaried and hourly employees. These plans were amended as of April 30, 2005; no further benefits have been, or will be, earned under the plans, subsequent to the amendment date, and no additional participants will be added to the plans. Company contributions of
$1,000,000
were paid to the plans during the nine months ended
January 31, 2019
, and the Company does not expect any contributions to be paid to the plans during the remainder of the fiscal year. Contributions of
$600,000
were paid to the plans during the nine months ended
January 31, 2018
. The Company assumed an expected long-term rate of return of
7.75%
for the period ended
January 31, 2019
as compared to
7.75%
for the period ended
January 31, 2018
. Pension expense consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January 31, 2019
|
|
Three Months Ended January 31, 2018
|
|
Service cost
|
$
|
0
|
|
|
$
|
0
|
|
|
Interest cost
|
214
|
|
|
219
|
|
|
Expected return on plan assets
|
(362
|
)
|
|
(328
|
)
|
|
Recognition of net loss
|
221
|
|
|
283
|
|
|
Net periodic pension expense
|
$
|
73
|
|
|
$
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended January 31, 2019
|
|
Nine Months Ended
January 31, 2018
|
|
Service cost
|
$
|
0
|
|
|
$
|
0
|
|
|
Interest cost
|
644
|
|
|
657
|
|
|
Expected return on plan assets
|
(1,086
|
)
|
|
(984
|
)
|
|
Recognition of net loss
|
663
|
|
|
849
|
|
|
Net periodic pension expense
|
$
|
221
|
|
|
$
|
522
|
|
H.
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and equivalents, mutual funds, cash surrender value of life insurance policies, term loans and short-term borrowings. The carrying value of these assets and liabilities approximate their fair value. The following tables summarize the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of
January 31, 2019
and
April 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2019
|
|
Financial Assets
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Trading securities held in non-qualified compensation plans (1)
|
|
$
|
2,818
|
|
|
$
|
—
|
|
|
$
|
2,818
|
|
|
Cash surrender value of life insurance policies (1)
|
|
—
|
|
|
65
|
|
|
65
|
|
|
Total
|
|
$
|
2,818
|
|
|
$
|
65
|
|
|
$
|
2,883
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
Non-qualified compensation plans (2)
|
|
$
|
—
|
|
|
$
|
3,256
|
|
|
$
|
3,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2018
|
|
Financial Assets
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Trading securities held in non-qualified compensation plans (1)
|
|
$
|
4,050
|
|
|
$
|
—
|
|
|
$
|
4,050
|
|
|
Cash surrender value of life insurance policies (1)
|
|
—
|
|
|
65
|
|
|
65
|
|
|
Total
|
|
$
|
4,050
|
|
|
$
|
65
|
|
|
$
|
4,115
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
Non-qualified compensation plans (2)
|
|
$
|
—
|
|
|
$
|
4,462
|
|
|
$
|
4,462
|
|
|
Interest rate swap derivatives
|
|
—
|
|
|
5
|
|
|
5
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
4,467
|
|
|
$
|
4,467
|
|
|
|
|
|
(1)
|
The Company maintains
two
non-qualified compensation plans which include investment assets in a rabbi trust. These assets consist of marketable securities, which are valued using quoted market prices multiplied by the number of shares owned, and life insurance policies, which are valued at their cash surrender value.
|
|
|
|
|
(2)
|
Plan liabilities are equal to the individual participants’ account balances and other earned retirement benefits.
|
I.
Stock Options and Share-based Compensation
The Company adopted ASU 2016-9, “Stock Compensation – Improvements to Employee Share-Based Payment Accounting” prospectively effective May 1, 2017. Prior periods were not retrospectively adjusted. The Company elected prospectively to account for forfeitures as they occur rather than apply an estimated rate to share-based compensation expense. Compensation costs related to stock options and other stock awards granted by the Company are charged against operating expenses during their vesting period, under ASC 718, “Compensation – Stock Compensation.”
The Company granted
17,769
restricted stock units (“RSUs”) under the 2017 Omnibus Incentive Plan in June 2018. The RSUs include both a service and a performance component, vesting over a
three
year period. The recognized expense is based upon the vesting period for service criteria and estimated attainment of the performance criteria at the end of the three year period based on the ratio of cumulative days incurred, to total days over the three year period. The Company recorded share-based compensation expense during the
three and nine
months ended
January 31, 2019
of
$45,000
and
$106,000
, respectively, for this issuance with the remaining estimated share-based compensation expense of
$406,000
to be recorded over the remaining three year period.
J.
Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was signed into law. The 2017 Tax Act includes a broad range of tax reform provisions affecting businesses, including lower corporate tax rates, changes in business deductions, and international tax provisions. In response to the 2017 Tax Act, the Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. SAB 118 provides that the measurement period is complete when a company’s accounting is complete and that the measurement period shall not extend beyond one year from the enactment date. SAB 118 provides guidance for registrants under three scenarios: (i) measurement of certain income tax effects is complete, (ii) measurement of certain income tax effects can be reasonably estimated, and (iii) measurement of certain income tax effects cannot be reasonably estimated.
The Company has completed its accounting for the enactment of the 2017 Tax Act in accordance with SAB 118 in the quarter ended January 31, 2019. No material adjustments to income tax expense were recorded in regards to the provisional amounts recorded at April 30, 2018.
During the nine months ended January 31, 2019, the Company finalized the accounting policy decision with respect to the new Global Intangible Low-Taxed Income ("GILTI") tax rules and has concluded that GILTI will be treated as a periodic charge in the year in which it arises. Therefore, the Company will not record deferred taxes for the basis associated with GILTI earnings. The Company has included estimated tax expense related to GILTI for current year operations in the forecasted effective tax rate.
K.
Reclassifications
In connection with the Company's adoption of ASU 2016-18, “Statement of Cash Flows-Restricted Cash,” the Company reclassified certain 2018 amounts in the condensed consolidated statements of cash flows to include restricted cash when reconciling the beginning-of-period and end-of-period cash amounts shown on the statement of cash flows to conform to the current period presentation. To comply with the Commission’s final rule on Disclosure Simplification, the Company’s presentation of the prior period’s condensed consolidated statement of stockholders’ equity has been reclassed to conform to the current period format.
L.
New Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers”. This update outlined a new comprehensive revenue recognition model that supersedes most current revenue recognition guidance and required companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflected the consideration to which the entity expected to be entitled in exchange for those goods or services. The Company adopted this standard effective May 1, 2018. See Note B for a discussion of the impact of the adoption of this standard.
In February 2016, the FASB issued ASU 2016-2, “Leases.” This guidance establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company will adopt this standard in fiscal year 2020. While the Company will be required to record a ROU asset and lease liability on the balance sheet related to this standard, the Company has determined that the adoption of this standard will not have a significant impact on the Company’s consolidated financial position or results of operations.
In August 2016, the FASB issued ASU 2016-15, “Cash Flow Classification of Certain Cash Receipts and Cash Payments,” which clarifies guidance on classification of certain transactions in the statement of cash flows, including classification of debt prepayments, debt extinguishment costs and contingent consideration payments after a business combination. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company adopted this standard effective May 1, 2018. The adoption of this standard did not have a significant impact on the Company’s consolidated financial position or results of operations.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows – Restricted Cash,” which requires that the statement of cash flows reconcile the change during the period in total cash, cash equivalents and restricted cash. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company adopted this standard effective May 1, 2018. The adoption of this standard did not have a significant impact on the Company’s consolidated financial position or results of operations.
In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires that the service cost component of net periodic pension cost is presented in the same line as other compensation costs arising from services rendered by the respective employees during the year. The other components of net periodic pension cost are required to be presented in the income statement separately from the service cost component and outside of earnings from operations. This guidance allows for the service cost component to be eligible for capitalization when applicable. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company adopted this standard effective May 1, 2018. The adoption of this standard did not have a significant impact on the Company’s consolidated financial position or results of operations.
In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation – Scope of Modification Accounting.” This guidance was issued in an effort to reduce diversity in practice as it relates to applying modification accounting for changes to the terms and conditions of share-based payment awards. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company adopted this standard effective May 1, 2018. The adoption of this standard did not have a significant impact on the Company’s consolidated financial position or results of operations.
In August 2018, the Commission adopted the final rule under Commission Release No. 33-10532, “Disclosure Update and Simplification,” amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements relating to the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of income is required to be filed. This final rule became effective on November 5, 2018. The Company adopted this final rule effective for the second quarter of fiscal 2019. The adoption of this standard did not have a significant impact on the Company’s consolidated financial position or results of operations.
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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The Company’s 2018 Annual Report to Stockholders contains management’s discussion and analysis of the Company’s financial condition and results of operations as of and for the year ended April 30, 2018. The following discussion and analysis describes material changes in the Company’s financial condition since April 30, 2018. The analysis of results of operations compares the
three and nine
months ended
January 31, 2019
with the comparable periods of the prior year.
Critical Accounting Policies
Inventories
The Company’s inventories are valued at the lower of cost or net realizable value. Prior to August 1, 2018, the Company’s Domestic segment’s inventories were valued under the last-in, first-out (“LIFO”) valuation method. On August 1, 2018, the Company changed its method of valuing inventory for the Domestic segment from LIFO to first-in, first-out (“FIFO”). The Company believes that this method change to FIFO will improve financial reporting by better reflecting the current value of inventory on the consolidated balance sheet, more closely aligning the flow of physical inventory with the accounting for the inventory, and providing better matching of revenues and expenses. Inventories at our International subsidiaries are, and remain, measured on the FIFO method.
Results of Operations
Sales for the quarter were $32,372,000, a 15.2% decrease from sales of $38,190,000 in the prior year third quarter. Domestic sales for the quarter were $25,217,000, down 15.2% from sales of $29,734,000 in the third quarter of last year. International sales for the quarter were $7,155,000, down 15.4% from sales of $8,456,000 in the third quarter last year. Domestic sales decreased year-over-year as the activity in the marketplace slowed dramatically throughout the quarter. The slowdown, felt across the Company’s direct, dealer, and distribution channels, reduced production below the rate necessary to generate favorable financial results. International sales decreased similarly, with strength in the Indian market being offset by softness in the Middle East and Asian markets. Also negatively impacting Kewaunee’s International segment performance was a year-over-year decline in the exchange rate of the Indian rupee versus the US dollar.
Sales for the
nine months ended January 31, 2019
were $111,802,000, a decrease of 1.5% from sales of $113,542,000 in the comparable period of the prior year. Domestic sales were $91,909,000, up from $80,420,000 in the comparable period of the prior year principally due to the strength domestically in the Company’s first quarter of the current fiscal year. International sales were $19,893,000, down from sales of $33,122,000 in the comparable period of the prior year due to the impact of a large order being delivered to a customer in the Middle East in the prior year.
The Company’s order backlog was $96 million at
January 31, 2019
, as compared to $116 million at
January 31, 2018
, and $101 million at
October 31,
2018. The Company continues to have a strong volume of outstanding quotations globally and is aggressively pursuing these projects.
The gross profit margin for the
three months ended January 31, 2019
was 16.2% of sales, as compared to 22.0% of sales in the comparable quarter of the prior year. The gross profit margin percent decreased as expected orders were delayed, resulting in our facilities being under-utilized. The quarter was also impacted by substantially higher raw material costs in steel and resin as compared to the prior year third quarter.
The gross profit margin for the
nine months ended January 31, 2019
was 18.3% of sales, as compared to 20.4% of sales in the comparable period of the prior year. The decrease in gross profit margin percentage was primarily due to an unfavorable shift in product mix, and year-over-year decline in sales, as well as continued increases in raw material and freight costs which negatively affected margins compared to the prior period. The unfavorable impact due to year-over-year increases in steel and resin material costs was approximately $1.7 million dollars for the nine-month period.
Operating expenses for the
three months ended January 31, 2019
were $5,305,000, or 16.4% of sales, as compared to $5,971,000, or 15.6% of sales, in the comparable period of the prior year. The decrease in operating expenses for the
three months ended January 31, 2019
related primarily to a decrease in the incentive compensation expense of $749,000 and a decrease in pension expense of $100,000, offset by increases in International operating expenses of $196,000. The decreases in the incentive compensation expense reflects management’s anticipated payout based on actual performance relative to companywide annual performance goals. The increase in International operating expenses related to investments made to expand the Company’s presence and capabilities in the Middle East and India.
Operating expenses for the
nine months ended January 31, 2019
were $17,031,000, or 15.2% of sales, as compared to $16,360,000, or 14.4% of sales, in the comparable period of the prior year. The increase in operating expenses for the
nine months ended January 31, 2019
related primarily to increases in professional fees of $461,000, consulting expenses of $294,000 and International operating expenses of $642,000, partially offset by decreases in incentive compensation expense of $893,000 and pension expense of $301,000. The increases in professional and consulting fees were related to the Company’s preparations in anticipation of potentially moving from smaller reporting company status to accelerated filer status for Securities and Exchange Commission reporting purposes, and increased compliance costs related to implementing the provisions of the Tax Cuts and Jobs Tax Act of 2017 (the "2017 Tax Act"). Increases in International operating expenses were substantially the same as those described above with respect to the increases in the most recent quarter.
Interest expense was $76,000 and $258,000 for the three and nine months ended January 31, 2019, as compared to $78,000 and $226,000 for the comparable periods of the prior year. The changes in interest expense in the three and nine month periods for 2019 were primarily attributable to changes in the borrowing levels.
Income tax expense of $20,000 and $1,581,000 was recorded for the
three months ended January 31, 2019
and 2018, respectively. The effective tax rates were 57.1% and 62.5% for the
three months ended January 31, 2019
and 2018, respectively. Income tax expense of $803,000 and $3,164,000 was recorded for the nine months ended January 31, 2019 and 2018, respectively. The effective tax rates were 21.8% and 44.8% for the nine months ended January 31, 2019 and 2018, respectively. The decreases in the effective tax rates for the three-month and nine-month periods reflect the favorable impact of the lower federal 21% statutory rate that was effective in the current fiscal year as a result of the enactment of the 2017 Tax Act, which was signed into law in December 2017.
Noncontrolling interests related to the Company’s subsidiary not 100% owned by the Company reduced net earnings by $37,000 and $86,000 for the three and nine months ended January 31, 2019, respectively, as compared to $35,000 and $120,000 for the comparable periods of the prior year, respectively. The change in the net earnings attributable to the noncontrolling interest in the current period was due to changes in earnings of the subsidiary in the related period.
Net losses of $22,000, or $0.01 per diluted share, were reported for the
three months ended January 31, 2019
, compared to net earnings of $913,000, or $0.32 per diluted share, in the prior year period. Net earnings of $2,799,000, or $1.00 per diluted share, were reported for the
nine months ended January 31, 2019
, compared to net earnings of $3,785,000, or $1.36 per diluted share, in the prior year period.
Liquidity and Capital Resources
Historically, the Company’s principal sources of liquidity have been funds generated from operations, supplemented as needed by short-term borrowings under the Company’s revolving credit facility. Additionally, certain machinery and equipment are financed by non-cancellable operating leases. The Company believes that these sources will be sufficient to support ongoing business requirements in the current year, including capital expenditures.
The Company had working capital of $36,050,000 at
January 31, 2019
, compared to $36,775,000 at April 30, 2018. The ratio of current assets to current liabilities was 2.5-to-1.0 at
January 31, 2019
, compared to 2.3-to-1.0 at April 30, 2018. At
January 31, 2019
, advances of $5.1 million were outstanding under the Company’s bank revolving credit facility, compared to advances of $3.8 million outstanding as of April 30, 2018. The Company had standby letters of credit outstanding of $5.2 million at
January 31, 2019
and April 30, 2018. Amounts available under the $20 million revolving credit facility were $9.7 million and $11.0 million at
January 31, 2019
and April 30, 2018, respectively. Total borrowings and interest rate swaps were $6,828,000 at
January 31, 2019
, compared to $6,316,000 at April 30, 2018.
The Company’s operations provided cash of $4,534,000 during the
nine months ended January 31, 2019
. Cash was primarily provided by earnings, a decrease in receivables of $4,674,000 and a decrease in inventories of $990,000, partially offset by a decrease in accounts payable of $4,879,000 and deferred revenue of $434,000. The Company’s operations used cash of $645,000 during the nine months ended January 31, 2018. Cash was primarily used to support an increase in receivables of $1,025,000 and inventories of $2,790,000, and a decrease in deferred revenue of $3,847,000, partially offset by cash provided by earnings and an increase in accounts payable and other accrued expenses of $2,035,000.
During the nine months ended January 31, 2019, the Company used net cash of $2,290,000 in investing activities, all of which was used for capital expenditures. During the nine months ended January 31, 2018, net cash of $1,907,000 was used in investing activities, all of which was used for capital expenditures.
The Company’s financing activities used cash of $1,234,000 during the
nine months ended January 31, 2019
, primarily for cash dividends of $1,507,000 paid to stockholders, cash dividends of $51,000 paid to minority interest holders, and payments of $880,000 on long-term debt, partially offset by an increase in net short-term borrowings of $1,233,000. The Company’s financing activities used cash of $836,000 during the
nine months ended January 31, 2018
, primarily for cash dividends of $1,331,000 paid to stockholders, cash dividends of $74,000 paid to minority interest holders, and payments of $626,000 on long-term debt, partially offset by an increase in net short-term borrowings of $1,187,000.
Outlook
The Company’s ability to predict future demand for its products continues to be limited given its role as subcontractor or supplier to dealers for subcontractors. Demand for the Company’s products is also dependent upon the number of laboratory construction projects planned and/or current progress in projects already under construction. The Company’s earnings are also impacted by fluctuations in prevailing pricing for projects in the laboratory construction marketplace and increased costs of raw materials, including stainless steel, wood, and epoxy resin, and whether the Company is able to increase product prices to customers in amounts that correspond to such increases without materially and adversely affecting sales. Additionally, since prices are normally quoted on a firm basis in the industry, the Company bears the burden of possible increases in labor and material costs between the quotation of an order and delivery of a product. There still remains a significant amount of activity for our products and services both domestically and abroad; however, economic and geopolitical uncertainty have caused many customers to postpone awards as well as the start of new projects. Looking forward, we anticipate these trends will continue through the remainder of the fiscal year and are making adjustments with the goal of returning to profitability in the fourth quarter.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This report contains statements that the Company believes to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this report, including statements regarding the Company’s future financial condition, results of operations, business operations and business prospects, are forward-looking statements. Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “predict,” “believe” and similar words, expressions and variations of these words and expressions are intended to identify forward-looking statements. All forward-looking statements are subject to important factors, risks, uncertainties and assumptions, including industry and economic conditions that could cause actual results to differ materially from those described in the forward-looking statements. Such factors, risks, uncertainties and assumptions include, but are not limited to, competitive and general economic conditions, both domestically and internationally; changes in customer demands; dependence on customers’ required delivery schedules; risks related to fluctuations in the Company’s operating results from quarter to quarter; risks related to international operations, including foreign currency fluctuations; changes in the legal and regulatory environment; changes in raw materials and commodity costs; and acts of terrorism, war, governmental action, natural disasters and other Force Majeure events. Many important factors that could cause such differences are described under the caption “Risk Factors” in Item 1A in the Company’s 2018 Annual Report on Form 10-K and in Quarterly Reports on Form 10-Q subsequently filed by the Company. These forward-looking statements speak only as of the date of this document. The Company assumes no obligation, and expressly disclaims any obligation, to update any forward-looking statements, whether as a result of new information, future events or otherwise.
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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There are no material changes to the disclosures made on this matter in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2018.
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Item 4.
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Controls and Procedures
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(a) Evaluation of disclosure controls and procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of
January 31, 2019
. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that, as of
January 31, 2019
, the Company’s disclosure controls and procedures were adequate and effective and designed to ensure that all material information required to be filed in this quarterly report is made known to them by others within the Company and its subsidiaries.
(b) Changes in internal controls
There was no significant change in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.