Part 1. Financial Information
Item 1.
|
Financial Statements
|
Kewaunee Scientific Corporation
Consolidated Statements of Operations
(Unaudited)
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
October 31
|
|
|
Six months ended
October 31
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net sales
|
|
$
|
41,471
|
|
|
$
|
36,329
|
|
|
$
|
75,352
|
|
|
$
|
73,608
|
|
Costs of products sold
|
|
|
33,560
|
|
|
|
29,225
|
|
|
|
60,620
|
|
|
|
59,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
7,911
|
|
|
|
7,104
|
|
|
|
14,732
|
|
|
|
14,243
|
|
Operating expenses
|
|
|
5,256
|
|
|
|
4,816
|
|
|
|
10,389
|
|
|
|
9,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
2,655
|
|
|
|
2,288
|
|
|
|
4,343
|
|
|
|
4,349
|
|
Other income
|
|
|
177
|
|
|
|
119
|
|
|
|
345
|
|
|
|
238
|
|
Interest expense
|
|
|
(89
|
)
|
|
|
(78
|
)
|
|
|
(148
|
)
|
|
|
(158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
2,743
|
|
|
|
2,329
|
|
|
|
4,540
|
|
|
|
4,429
|
|
Income tax expense
|
|
|
978
|
|
|
|
792
|
|
|
|
1,583
|
|
|
|
1,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
1,765
|
|
|
|
1,537
|
|
|
|
2,957
|
|
|
|
2,867
|
|
Less: net earnings attributable to the noncontrolling interest
|
|
|
41
|
|
|
|
51
|
|
|
|
85
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Kewaunee Scientific Corporation
|
|
$
|
1,724
|
|
|
$
|
1,486
|
|
|
$
|
2,872
|
|
|
$
|
2,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share attributable to Kewaunee Scientific Corporation stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.64
|
|
|
$
|
0.55
|
|
|
$
|
1.06
|
|
|
$
|
1.03
|
|
Diluted
|
|
$
|
0.62
|
|
|
$
|
0.54
|
|
|
$
|
1.04
|
|
|
$
|
1.02
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,717
|
|
|
|
2,706
|
|
|
|
2,715
|
|
|
|
2,699
|
|
Diluted
|
|
|
2,776
|
|
|
|
2,729
|
|
|
|
2,766
|
|
|
|
2,718
|
|
See accompanying notes to consolidated financial statements.
1
Kewaunee Scientific Corporation
Consolidated Statements of Comprehensive Income
(Unaudited)
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
October 31
|
|
|
Six months ended
October 31
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net earnings
|
|
$
|
1,765
|
|
|
$
|
1,537
|
|
|
$
|
2,957
|
|
|
$
|
2,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(229
|
)
|
|
|
(143
|
)
|
|
|
(154
|
)
|
|
|
(169
|
)
|
Change in fair value of cash flow hedge
|
|
|
10
|
|
|
|
14
|
|
|
|
18
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
(219
|
)
|
|
|
(129
|
)
|
|
|
(136
|
)
|
|
|
(151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax
|
|
|
1,546
|
|
|
|
1,408
|
|
|
|
2,821
|
|
|
|
2,716
|
|
Less: comprehensive income attributable to the noncontrolling interest
|
|
|
41
|
|
|
|
51
|
|
|
|
85
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Kewaunee Scientific Corporation
|
|
$
|
1,505
|
|
|
$
|
1,357
|
|
|
$
|
2,736
|
|
|
$
|
2,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
2
Kewaunee Scientific Corporation
Consolidated Statement of Stockholders Equity
(Unaudited)
(in
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Treasury
Stock
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Total
Stockholders
Equity
|
|
Balance at April 30, 2017
|
|
$
|
6,789
|
|
|
$
|
2,695
|
|
|
$
|
(53
|
)
|
|
$
|
39,771
|
|
|
$
|
(6,319
|
)
|
|
$
|
42,883
|
|
Net earnings attributable to
Kewaunee Scientific Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,872
|
|
|
|
|
|
|
|
2,872
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(136
|
)
|
|
|
(136
|
)
|
Cash dividends paid, $0.32 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(868
|
)
|
|
|
|
|
|
|
(868
|
)
|
Stock options exercised, 15,741 shares
|
|
|
16
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Stock based compensation
|
|
|
4
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2017
|
|
$
|
6,809
|
|
|
$
|
2,861
|
|
|
$
|
(53
|
)
|
|
$
|
41,775
|
|
|
$
|
(6,455
|
)
|
|
$
|
44,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
3
Kewaunee Scientific Corporation
Consolidated Balance Sheets
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
October 31,
2017
|
|
|
April 30,
2017
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11,792
|
|
|
$
|
12,506
|
|
Restricted cash
|
|
|
1,392
|
|
|
|
1,435
|
|
Receivables, less allowance; $227; $191, on each respective date
|
|
|
33,245
|
|
|
|
29,889
|
|
Inventories
|
|
|
16,439
|
|
|
|
14,935
|
|
Prepaid expenses and other current assets
|
|
|
1,888
|
|
|
|
1,047
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
64,756
|
|
|
|
59,812
|
|
Property, plant and equipment, at cost
|
|
|
52,999
|
|
|
|
51,568
|
|
Accumulated depreciation
|
|
|
(38,938
|
)
|
|
|
(37,541
|
)
|
|
|
|
|
|
|
|
|
|
Net Property, Plant and Equipment
|
|
|
14,061
|
|
|
|
14,027
|
|
Deferred income taxes
|
|
|
3,108
|
|
|
|
3,158
|
|
Other
|
|
|
3,943
|
|
|
|
3,919
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets
|
|
|
7,051
|
|
|
|
7,077
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
85,868
|
|
|
$
|
80,916
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Short-term borrowings and interest rate swaps
|
|
$
|
7,711
|
|
|
$
|
3,591
|
|
Current portion of long-term debt
|
|
|
1,167
|
|
|
|
918
|
|
Accounts payable
|
|
|
14,364
|
|
|
|
11,995
|
|
Employee compensation and amounts withheld
|
|
|
2,808
|
|
|
|
2,765
|
|
Deferred revenue
|
|
|
1,506
|
|
|
|
5,806
|
|
Other accrued expenses
|
|
|
2,954
|
|
|
|
1,852
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
30,510
|
|
|
|
26,927
|
|
Long-term debt
|
|
|
1,848
|
|
|
|
2,431
|
|
Accrued pension and deferred compensation costs
|
|
|
8,192
|
|
|
|
8,301
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
40,550
|
|
|
|
37,659
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Common Stock, $2.50 par value, Authorized 5,000 shares; Issued 2,724 shares; 2,715
shares;
Outstanding 2,721 shares; 2,712 shares, on each respective date
|
|
|
6,809
|
|
|
|
6,789
|
|
Additional
paid-in-capital
|
|
|
2,861
|
|
|
|
2,695
|
|
Retained earnings
|
|
|
41,775
|
|
|
|
39,771
|
|
Accumulated other comprehensive loss
|
|
|
(6,455
|
)
|
|
|
(6,319
|
)
|
Common stock in treasury, at cost, 3 shares, on each date
|
|
|
(53
|
)
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
Total Kewaunee Scientific Corporation Stockholders Equity
|
|
|
44,937
|
|
|
|
42,883
|
|
Noncontrolling interest
|
|
|
381
|
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
45,318
|
|
|
|
43,257
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
85,868
|
|
|
$
|
80,916
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
Kewaunee Scientific Corporation
Consolidated Statements of Cash Flows
(Unaudited)
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Six months ended
October 31
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
2,957
|
|
|
$
|
2,867
|
|
Adjustments to reconcile net earnings to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,403
|
|
|
|
1,301
|
|
Bad debt provision
|
|
|
45
|
|
|
|
23
|
|
Stock based compensation expense
|
|
|
178
|
|
|
|
98
|
|
Deferred income tax expense (benefit)
|
|
|
50
|
|
|
|
(44
|
)
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase in receivables
|
|
|
(3,401
|
)
|
|
|
(1,228
|
)
|
Increase in inventories
|
|
|
(1,504
|
)
|
|
|
(1,163
|
)
|
Increase in accounts payable and other accrued expenses
|
|
|
3,514
|
|
|
|
456
|
|
(Decrease) increase in deferred revenue
|
|
|
(4,300
|
)
|
|
|
330
|
|
Other, net
|
|
|
(1,055
|
)
|
|
|
(434
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(2,113
|
)
|
|
|
2,206
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(1,437
|
)
|
|
|
(1,762
|
)
|
Decrease (increase) in restricted cash
|
|
|
43
|
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,394
|
)
|
|
|
(1,844
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(868
|
)
|
|
|
(757
|
)
|
Dividends paid to noncontrolling interest in subsidiaries
|
|
|
(74
|
)
|
|
|
|
|
Proceeds from short-term borrowings
|
|
|
28,476
|
|
|
|
29,602
|
|
Repayments on short-term borrowings
|
|
|
(24,356
|
)
|
|
|
(26,698
|
)
|
Payments on long-term debt
|
|
|
(334
|
)
|
|
|
(210
|
)
|
Net proceeds from exercise of stock options
|
|
|
8
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,852
|
|
|
|
2,078
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(59
|
)
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(714
|
)
|
|
|
2,357
|
|
Cash and cash equivalents, beginning of period
|
|
|
12,506
|
|
|
|
5,222
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
11,792
|
|
|
$
|
7,579
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
Kewaunee Scientific Corporation
Notes to Consolidated Financial Statements
(unaudited)
A.
Financial Information
The unaudited interim 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 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 Companys 2017 Annual Report to Stockholders. 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 consolidated balance sheet as of April 30, 2017 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 consolidated financial statements requires management to make certain estimates and assumptions that affect reported amounts
and disclosures. Actual results could differ from those estimates.
B.
Revenue Recognition
Product sales and installation revenue are recognized when all of the following criteria have been met: (1) products have been shipped, or customers have
purchased and accepted title to the goods, but because of construction delays, have requested that the Company temporarily store the finished goods on the customers behalf; service revenue for installation of products sold is recognized as the
installation services are performed, (2) persuasive evidence of an arrangement exists, (3) the price to the customer is fixed, and (4) collectability is reasonably assured. The Company utilizes either the percentage of completion or
completed contract method based on facts and circumstances of individual contracts.
Deferred revenue consists of customer deposits and advance billings
of the Companys products where sales have not yet been recognized. Shipping and handling costs are included in cost of product sales. Because of the nature and quality of the Companys products, any warranty issues are determined in a
relatively short period after the sale and are infrequent in nature, and as such, warranty costs are immaterial to the Companys consolidated financial position and results of operations and are expensed as incurred.
Product sales resulting from fixed-price construction contracts involve a signed contract for a fixed price to provide the Companys laboratory furniture
and fume hoods for a construction project. In these instances, the Company is usually in the role of a subcontractor, but in some cases may enter into a contract directly with the
end-user
of the products.
Contract arrangements normally do not contain a general right of return relative to the delivered items. Product sales resulting from fixed-price construction contracts are generated from multiple-element arrangements that require separate units of
accounting and estimates regarding the fair value of individual elements. The Company has determined that its multiple-element arrangements that qualify as separate units of accounting are (1) product sales and (2) installation services.
There is objective and reliable evidence of fair value for both the product sales and installation services and allocation of arrangement consideration for each of these units is based on their relative fair values. Each of these elements represent
individual units of accounting, as the delivered item has value to a customer on a stand-alone basis. The Companys products are regularly sold on a stand-alone basis to customers which provides either best estimate of selling prices or
vendor-specific objective evidence of fair value. The fair value of installation services is separately calculated using expected costs of installation services. Many times the value of installation services is calculated using price quotations from
subcontractors to the Company who perform installation services on a stand-alone basis.
Product sales resulting from purchase orders involve a purchase
order received by the Company from its dealers or stocking distributor. This category includes product sales for standard products, as well as products which require some customization. Any customization requirements are approved by the customer
prior to manufacture of the customized product. Sales from purchase orders are recognized under the terms of the purchase order which generally are freight on board (FOB) shipping point and do not include rights of return. Accordingly,
these sales are recognized at the time of shipment.
6
C.
Derivative Financial Instruments
The Company records derivatives on the consolidated balance sheet at fair value and establishes criteria for designation and effectiveness of hedging
relationships. The nature of the Companys 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 six month periods. Diluted earnings per
share reflects the assumed exercise and conversion of restricted stock units and outstanding stock options under the Companys Omnibus Incentive Plan, except when such awards have an anti-dilutive effect. There were no antidilutive awards
outstanding at October 31, 2017. Stock options to purchase 45,200 shares were not included in the computation of diluted earnings per share for the three and six month periods ended October 31, 2016, because the option exercise prices were
greater than the average market price of the common shares during the quarter, and accordingly, such stock options would have an antidilutive effect.
E.
Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, 2017
|
|
|
April 30, 2017
|
|
Finished products
|
|
$
|
3,260
|
|
|
$
|
3,179
|
|
Work in process
|
|
|
2,036
|
|
|
|
1,950
|
|
Raw materials
|
|
|
11,143
|
|
|
|
9,806
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,439
|
|
|
$
|
14,935
|
|
|
|
|
|
|
|
|
|
|
The Company uses the
last-in,
first-out
(LIFO)
method of valuing inventory for its domestic operations, which represents $14,619,000 of inventory at October 31, 2017 and $12,730,000 at April 30, 2017. An actual valuation of inventory under the LIFO method can be made only at the end of
each year based on the inventory levels and costs at that time. Interim LIFO calculations are based on managements estimates of expected
year-end
inventory levels and costs, and are subject to the final
year-end
LIFO inventory valuation. The Companys international subsidiaries inventories were $1,820,000 at October 31, 2017 and $2,205,000, at April 30, 2017, measured using the
first-in,
first-out
(FIFO) method at the lower of cost and net realizable value.
7
F.
Segment Information
The Companys 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 Companys 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 table provides financial information by business segments for the three and six months ended October 31, 2017 and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
Operations
|
|
|
International
Operations
|
|
|
Corporate /
Eliminations
|
|
|
Total
|
|
Three months ended October 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
28,540
|
|
|
$
|
12,931
|
|
|
$
|
|
|
|
$
|
41,471
|
|
Intersegment revenues
|
|
|
5,068
|
|
|
|
1,062
|
|
|
|
(6,130
|
)
|
|
|
|
|
Earnings (loss) before income taxes
|
|
|
2,945
|
|
|
|
1,286
|
|
|
|
(1,488
|
)
|
|
|
2,743
|
|
Three months ended October 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
28,211
|
|
|
$
|
8,118
|
|
|
$
|
|
|
|
$
|
36,329
|
|
Intersegment revenues
|
|
|
2,571
|
|
|
|
1,263
|
|
|
|
(3,834
|
)
|
|
|
|
|
Earnings (loss) before income taxes
|
|
|
2,444
|
|
|
|
1,250
|
|
|
|
(1,365
|
)
|
|
|
2,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
Operations
|
|
|
International
Operations
|
|
|
Corporate/
Eliminations
|
|
|
Total
|
|
Six months ended October 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
50,686
|
|
|
$
|
24,666
|
|
|
$
|
|
|
|
$
|
75,352
|
|
Intersegment revenues
|
|
|
9,153
|
|
|
|
1,930
|
|
|
|
(11,083
|
)
|
|
|
|
|
Earnings (loss) before income taxes
|
|
|
4,761
|
|
|
|
2,656
|
|
|
|
(2,877
|
)
|
|
|
4,540
|
|
Six months ended October 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
57,848
|
|
|
$
|
15,760
|
|
|
$
|
|
|
|
$
|
73,608
|
|
Intersegment revenues
|
|
|
3,437
|
|
|
|
2,398
|
|
|
|
(5,835
|
)
|
|
|
|
|
Earnings (loss) before income taxes
|
|
|
5,017
|
|
|
|
2,067
|
|
|
|
(2,655
|
)
|
|
|
4,429
|
|
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
$600,000 were paid to the plans during the six months ended October 31, 2017, and the Company does not expect any contributions to be paid to the plans during the remainder of the fiscal year. Contributions of $555,000 were paid to the plans
during the six months ended October 31, 2016. The Company assumed an expected long-term rate of return of 7.75% for the period ended October 31, 2017 as compared to 8.0% for the period ended October 31, 2016. Pension expense consisted
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended
October 31, 2017
|
|
|
Three months ended
October 31, 2016
|
|
Service cost
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
Interest cost
|
|
|
219
|
|
|
|
232
|
|
Expected return on plan assets
|
|
|
(317
|
)
|
|
|
(311
|
)
|
Recognition of net loss
|
|
|
283
|
|
|
|
318
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension expense
|
|
$
|
185
|
|
|
$
|
239
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Six months ended
October 31, 2017
|
|
|
Six months ended
October 31, 2016
|
|
Service cost
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
Interest cost
|
|
|
438
|
|
|
|
463
|
|
Expected return on plan assets
|
|
|
(656
|
)
|
|
|
(621
|
)
|
Recognition of net loss
|
|
|
566
|
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension expense
|
|
$
|
348
|
|
|
$
|
470
|
|
H.
Fair Value of Financial Instruments
The Companys 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 Companys fair value hierarchy for its financial assets and liabilities measured at fair value on a
recurring basis as of October 31, 2017 and April 30, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities held in
non-qualified
compensation
plans (1)
|
|
$
|
3,858
|
|
|
$
|
|
|
|
$
|
3,858
|
|
Cash surrender value of life insurance policies (1)
|
|
|
|
|
|
|
75
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,858
|
|
|
$
|
75
|
|
|
$
|
3,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified
compensation plans (2)
|
|
$
|
|
|
|
$
|
4,329
|
|
|
$
|
4,329
|
|
Interest rate swap derivatives
|
|
|
|
|
|
|
33
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
4,362
|
|
|
$
|
4,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities held in
non-qualified
compensation
plans (1)
|
|
$
|
3,748
|
|
|
$
|
|
|
|
$
|
3,748
|
|
Cash surrender value of life insurance policies (1)
|
|
|
|
|
|
|
75
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,748
|
|
|
$
|
75
|
|
|
$
|
3,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified
compensation plans (2)
|
|
$
|
|
|
|
$
|
4,186
|
|
|
$
|
4,186
|
|
Interest rate swap derivatives
|
|
|
|
|
|
|
62
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
4,248
|
|
|
$
|
4,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
Share-based Compensation
The stockholders approved
the 2017 Omnibus Incentive Plan (2017 Plan) on August 30, 2017, which enables the Company to grant a broad range of equity, equity-related, and
non-equity
types of awards, with potential
recipients including directors, consultants and employees. This plan replaces the 2010 Stock Option Plan for Directors and the 2008 Key Employee Stock Option Plan. No new awards will be granted under the prior plans. All outstanding options granted
under the prior plans will remain subject to and be paid under the prior plans. At the date of approval of the 2017 Plan there were 280,100 shares available for issuance under the prior plans. These shares and any outstanding awards that
subsequently cease to be subject to such awards are available under the 2017 Plan. The 2017 Plan did not increase the total number of shares available for issuance under the Companys equity compensation plans.
9
The Company issued restricted stock units (RSUs) under the 2017 Plan and recorded stock-based
compensation expense of $40,000 during the three and six months ended October 31, 2017 in accordance with ASC 718. The RSUs include both a service and 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 cumulative days incurred and remaining over the three year period. The remaining estimated compensation expense
of $569,000 will be recorded over the remaining three year period.
J.
Reclassifications
Certain 2016 amounts have been reclassified to conform to the 2017 presentation in the consolidated statements of cash flows. Such reclassifications had no
impact on net earnings.
K.
New Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
2014-09,
Revenue from Contracts with Customers (ASU
2014-09).
This update outlines a new comprehensive revenue recognition model that supersedes most current revenue recognition guidance and
requires companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU
2014-09
also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The FASB has
issued several updates and/or practical expedients to ASU
2014-09.
ASU
2014-09
and the subsequent updates and/or practical expedients to the standard will be effective
for the Company during the first quarter of our fiscal year 2019 and we do not plan to early adopt. ASU
2014-09
provides two methods of adopting the standard: using either a full retrospective approach or
modified retrospective approach. We expect to elect the modified retrospective approach of adopting the standard. We have conducted a preliminary assessment of how ASU
2014-09
is likely to affect us,
identifying the Companys revenue streams and performance obligations. Our contracts with customers currently may be for single performance obligations or for multiple performance obligations. Based on our preliminary assessment, we do not
believe the new standard materially changes our accounting policy for these types of performance obligations. We have also conducted a preliminary evaluation of the impact the new standard will have on our existing policies, contracts, accounting
processes, internal controls, reporting systems and disclosure processes and are in the process of identifying improvements and or enhancements that we will make to the aforementioned in preparing to comply with the new guidance. We continue to
evaluate the implications of the new guidance and at this time do not believe the adoption of ASU
2014-09
will have a material impact on the Companys consolidated financial position, results of
operations, equity or cash flows.
In July 2015, the FASB issued ASU
2015-11,
Inventory
Simplifying the Measurement of Inventory. This guidance changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. Net realizable value is defined as estimated selling prices
in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The
Company adopted this standard effective May 1, 2017. The adoption of this standard did not have a significant impact on the Companys consolidated financial position or results of operations.
In March 2016, the FASB issued ASU
2016-9,
Stock Compensation Improvements to Employee Share-Based
Payment Accounting. This guidance simplifies various aspects related to how share-based payments are accounted for and presented in the financial statements. This guidance is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2016. The Company adopted this standard prospectively effective May 1, 2017. Prior periods were not retrospectively adjusted. The adoption of this standard did not have a significant impact on the
Companys consolidated financial position or results of operations.
L.
Subsequent Events
On December 7, 2017, the Company experienced a criminal network cyber-attack that led to a disruption of its domestic operations, including manufacturing,
engineering, administration, and sales operations. As of December 12, 2017 the Company had restored nearly all domestic operations. The Company has engaged third party experts, including a leading cybersecurity firm, to perform a forensic
investigation of this attack. The Company has insurance coverage against recovery costs and business interruption resulting from cyber-attacks. However, the Company may have incurred, and may incur in the future, expenses and losses related to this
attack that are not covered by insurance. The total amount of such expenses or losses, if any, cannot be estimated at this time.
10
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
The Companys 2017 Annual Report to Stockholders contains managements discussion and analysis of financial condition and results of operations as of
and for the year ended April 30, 2017. The following discussion and analysis describes material changes in the Companys financial condition since April 30, 2017. The analysis of results of operations compares the three and six months
ended October 31, 2017 with the comparable periods of the prior year.
Results of Operations
Sales for the three months ended October 31, 2017 were $41,471,000, an increase of 14.2% from sales of $36,329,000 in the comparable period of the prior
year. Domestic sales were $28,540,000, up from $28,211,000 in the comparable period of the prior year. International sales were $12,931,000, up from sales of $8,118,000 in the comparable period of the prior year, as sales were favorably impacted by
shipments of a large Middle East order during the quarter.
Sales for the six months ended October 31, 2017 were $76,352,000, an increase of 2.4%
from sales of $73,608,000 in the comparable period of the prior year. Domestic sales were $50,686,000, down from $57,846,000 in the comparable period of the prior year, as domestic orders from dealers were lower than the prior year period.
International sales were $24,666,000, up from sales of $15,760,000 in the comparable period of the prior year due to the impact of the large order mentioned above.
The order backlog was $118.0 million at October 31, 2017, as compared to $113.5 million at April 30, 2017 and $101.1 million at
October 31, 2016.
The gross profit margin for the three months ended October 31, 2017 was 19.1% of sales as compared to 19.6% of sales in the
comparable quarter of the prior year. The decrease in the gross profit margin percent was primarily due to a shift in the product mix to lower value products in the current quarter versus the prior year second quarter. The gross profit margin for
the six months ended October 31, 2017 was 19.6% of sales, as compared to 19.3% of sales in the comparable period of the prior year. The increase in the gross profit margin percent was primarily due to continued execution of the Companys
cost reduction and productivity improvement programs, partially offset by an unfavorable shift in product mix.
Operating expenses for the three months
ended October 31, 2017 were $5,256,000, or 12.7% of sales, as compared to $4,816,000, or 13.3% of sales, in the comparable period of the prior year. The increase in operating expenses for the three months ended October 31, 2017 related
primarily to increases in corporate governance expenses of $78,000, marketing expenses of $73,000, wages and incentive compensation of $120,000, depreciation expense of $28,000, bad debt expense of $41,000, and an increase of $139,000 in operating
expenses for the Companys International operations, partially offset by decreases in pension expense of $53,000 and professional services of $194,000 when compared to the prior period.
Operating expenses for the six months ended October 31, 2017 were $10,389,000, or 13.8% of sales, as compared to $9,894,000, or 13.4% of sales, in the
comparable period of the prior year. The increase in operating expenses for the six months ended October 31, 2017 related primarily to increases in corporate governance expenses of $238,000, marketing expenses of $54,000, wages and incentive
compensation of $192,000, depreciation expense of $ 24,000, bad debt expense of $22,000, and an increase of $165,000 in operating expenses for the Companys International operations, partially offset by decreases in pension expense of $122,000
and professional services of $100,000 when compared to the prior period.
Interest expense was $89,000 and $148,000 for the three and six months ended
October 31, 2017, as compared to $78,000 and $158,000 for the comparable periods of the prior year. The changes in interest expense in the current three and six month periods were attributable to changes in the borrowing levels.
Income tax expense of $978,000 and $792,000 was recorded for the three months ended October 31, 2017 and 2016, respectively.
The effective tax rates were 35.7% and 34.0% for the three months ended October 31, 2017 and 2016, respectively. The effective tax rate for the current
period reflects an unfavorable adjustment to tax expense attributable to foreign tax consequences of dividend distributions of certain foreign subsidiaries.
Income tax expense of $1,583,000 and $1,562,000 was recorded for the six months ended October 31, 2017 and 2016, respectively. The effective tax rates
were 34.9% and 35.3% for the six months ended October 31, 2017 and 2016, respectively. The effective tax rate for the prior period reflects an unfavorable adjustment to tax expense attributable to the domestic tax consequences of the earnings
of certain foreign subsidiaries.
Noncontrolling interests related to the Companys subsidiary not 100% owned by the Company reduced net earnings by
$41,000 and $85,000 for the three and six months ended October 31, 2017, as compared to $51,000 and $81,000 for the comparable periods of the prior year. 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.
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Net earnings for $1,724,000, or $0.62 per diluted share, were reported for the three months ended
October 31, 2017, compared to net earnings of $1,486,000, or $0.54 per diluted share, in the prior year period. Net earnings of $2,872,000, or $1.04 per diluted share, were reported for the six months ended October 31, 2017, compared to
net earnings of $2,786,000, or $1.02 per diluted share, in the prior year period.
Liquidity and Capital Resources
Historically, the Companys principal sources of liquidity have been funds generated from operations, supplemented as needed by short-term borrowings
under the Companys 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 $34.2 million at
October 31, 2017, compared to $32.9 million at April 30, 2017. The ratio of current assets to current liabilities was
2.1-to-1.0
at October 31, 2017,
compared to
2.2-to-1.0
at April 30, 2017. At October 31, 2017, advances of $7.2 million were outstanding under the Companys bank revolving credit
facility, compared to advances of $3.5 million outstanding as of April 30, 2017. The Company had standby letters of credit outstanding of $4.2 million at October 31, 2017 and April 30, 2017. Amounts available under the
$20 million revolving credit facility were $8.6 million and $12.3 million at October 31, 2017 and April 30, 2017, respectively. Total bank borrowings and interest rate swaps were $10.7 million at October 31, 2017,
compared to $6.9 million at April 30, 2017.
The Companys operations used cash of $2,113,000 during the six months ended October 31,
2017. Cash was primarily used for increases in receivables of $3,401,000 and inventories of $1,504,000, and a decrease in deferred revenue of $4,300,000, partially offset by cash provided by earnings and an increase in accounts payable and other
accrued expenses of $3,514,000.
The Companys operations provided cash of $2,206,000 during the six months ended October 31, 2016. Cash was
primarily provided from earnings, an increase in deferred revenue of $330,000, and a decrease in accounts payable and other accrued expenses of $456,000, which was partially offset by an increase in receivables of $1,228,000 and an increase in
inventories of $1,163,000.
During the six months ended October 31, 2017, the Company used net cash of $1,394,000 in investing activities, which
included $1,437,000 for capital expenditures, offset by a $43,000 decrease in restricted cash. During the six months ended October 31, 2016, net cash of $1,844,000 was used in investing activities, which included $1,762,000 for capital
expenditures and an $82,000 increase in restricted cash.
The Companys financing activities provided cash of $2,852,000 during the six months ended
October 31, 2017, primarily from an increase in short-term borrowings of $4,120,000, partially offset by cash dividends of $868,000 paid to stockholders, cash dividends of $74,000 paid to minority interest holders, and payments of $334,000 on
long-term debt. The Companys financing activities provided cash of $2,078,000 during the six months ended October 31, 2016, primarily from a $2,904,000 net increase in short-term borrowings, partially offset by cash dividends of $757,000
paid to stockholders, and payments of $210,000 on long-term debt.
Financial Outlook
As previously discussed (See Note L. to the financial statements), on December 7, 2017, the Company experienced a criminal network cyber-attack that led to a
disruption of its domestic operations, including manufacturing, engineering, administration, and sales operations. As of December 12, 2017 the Company had restored nearly all domestic operations. The Company believes that the temporary production
disruption will have an immaterial impact on sales and earnings for fiscal year 2018.
The Companys 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 Companys products is also dependent upon the number of laboratory construction projects planned and/or current progress
in projects already under construction. The Companys 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. Looking forward the Company is optimistic that fiscal year 2018 will result in sales
and earnings growth as our order backlog and opportunities in the marketplace remain strong.
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 Companys 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 Companys 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 a difference are described under the caption Risk Factors in Item 1A in the Companys 2017 Annual Report on Form
10-K.
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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