NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Summary of Significant Accounting Policies
Kewaunee Scientific Corporation and subsidiaries (collectively the "Company") design, manufacture, and install laboratory, healthcare, and technical furniture products. The Company's products include steel and wood casework, fume hoods, adaptable modular systems, moveable workstations, stand-alone benches, biological safety cabinets, and epoxy resin work surfaces and sinks. The Company's sales are made through purchase orders and contracts submitted by customers through its dealers, its subsidiaries in Singapore and India, and a national stocking distributor. See Note 12, Restructuring Costs for details on the closure status of the Company's China operations. The majority of the Company's products are sold to customers located in North America, primarily within the United States. The Company's laboratory products are used in chemistry, physics, biology and other general science laboratories in the pharmaceutical, biotechnology, industrial, chemical, commercial, educational, government and health care markets. Technical products are used in facilities manufacturing computers and light electronics and by users of computer and networking furniture. Principles of Consolidation The Company's consolidated financial statements include the accounts of Kewaunee Scientific Corporation and its international subsidiaries. A brief description of each subsidiary, along with the amount of the Company's controlling financial interests, as of April 30, 2023 is as follows: (1) Kewaunee Labway Asia Pte. Ltd., a commercial sales organization for the Company's products in Singapore, is 100% owned by the Company; (2) Kewaunee Scientific Corporation Singapore Pte. Ltd., a holding company in Singapore, is 100% owned by the Company; (3) Kewaunee Labway India Pvt. Ltd., a design, installation, manufacturing, assembly and commercial sales operation for the Company's products in Bangalore, India, is 95% owned by the Company; (4) Koncepo Scientech International Pvt. Ltd., a laboratory design and strategic advisory and construction management services firm, located in Bangalore, India, is 80% owned by the Company; (5) Kequip Global Lab Solutions Pvt. Ltd. is 70% owned by Kewaunee Scientific Corporation Singapore Pte. Ltd. All intercompany balances, transactions, and profits have been eliminated. Included in the consolidated financial statements are net assets of $16,786,000 and $13,127,000 at April 30, 2023 and 2022, respectively, of the Company's subsidiaries. Net sales by the Company's subsidiaries in the amounts of $72,778,000 and $42,024,000 were included in the consolidated statements of operations for fiscal years 2023 and 2022, respectively.
Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand and highly liquid investments with original maturities of three months or less. During the years ended April 30, 2023 and 2022, the Company had cash deposits in excess of FDIC insured limits. The Company has not experienced any losses from such deposits.
The Company includes restricted cash along with the cash balance for presentation in the consolidated statements of cash flows. The reconciliation between the consolidated balance sheet and the consolidated statement of cash flows at April 30 is as follows:
| | | | | | | | | | | | | | |
$ in thousands | | 2023 | | 2022 |
Cash and cash equivalents | | $ | 8,078 | | | $ | 4,433 | |
Restricted cash | | 5,737 | | | 2,461 | |
Total cash, cash equivalents and restricted cash | | $ | 13,815 | | | $ | 6,894 | |
Restricted Cash Restricted cash includes bank deposits of subsidiaries used for performance guarantees against customer orders.
Accounts Receivable and Allowance for Doubtful Accounts Receivables are stated at the amount owed by the customer, net of allowances for estimated doubtful accounts. The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where management is aware of a customer's inability to meet its financial obligations to the Company, or a project dispute makes it unlikely that all of the receivable owed by a customer will be collected, a specific reserve for bad debts is estimated and recorded to reduce the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, a reserve for bad debts is estimated and recorded based on past loss history and an overall assessment of past due trade accounts receivable amounts outstanding. Accounts are written off when it is clearly established that the receivable is a bad debt. Recoveries of receivables previously written off are recorded when received.
The activity in the allowance for doubtful accounts for each of the years ended April 30 was:
| | | | | | | | | | | | | | |
$ in thousands | | 2023 | | 2022 |
Balance at beginning of year | | $ | 357 | | | $ | 636 | |
Bad debt provision | | 120 | | | 92 | |
Doubtful accounts written off (net) | | (1) | | | (371) | |
Balance at end of year | | $ | 476 | | | $ | 357 | |
Unbilled Receivables Accounts receivable include unbilled receivables that represent amounts earned which have not yet been billed in accordance with contractually stated billing terms, excluding retention, which is included in other assets. The amount of unbilled receivables, net of unbilled retention, at April 30, 2023 and 2022 was $13,459,000 and $9,287,000, respectively.
Inventories The Company's inventories are valued at the lower of cost or net realizable value under the first-in, first-out ("FIFO") method.
Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is determined for financial reporting purposes principally on the straight-line method over the estimated useful lives of the individual assets or, for leaseholds, over the terms of the related leases, if shorter. Property, plant and equipment consisted of the following at April 30:
| | | | | | | | | | | | | | | | | | | | |
$ in thousands | | 2023 | | 2022 | | Useful Life |
Land | | $ | 41 | | | $ | 41 | | | N/A |
Building and improvements | | 17,147 | | | 17,164 | | | 10-40 years |
Machinery and equipment | | 44,180 | | | 43,121 | | | 5-10 years |
Total | | 61,368 | | | 60,326 | | | |
Less accumulated depreciation | | (44,966) | | | (45,205) | | | |
Net property, plant and equipment | | $ | 16,402 | | | $ | 15,121 | | | |
The Company reviews the carrying value of property, plant and equipment for impairment annually or whenever changes in circumstances or events indicate that such carrying value may not be recoverable. If projected undiscounted cash flows are not sufficient to recover the carrying value of the potentially impaired asset, the carrying value is reduced to estimated fair value. There were no impairments in fiscal years 2023 or 2022.
Other Assets Other assets at April 30, 2023 and 2022 included $1,191,000 and $1,293,000, respectively, of unbilled retainage, $2,352,000 and $2,480,000, respectively, of assets held in a trust account for non-qualified benefit plan, and $111,000 and $110,000, respectively, of cash surrender values of life insurance policies. Life insurance policies are recorded at the amount that could be realized under the insurance contract as of the date of the Company's consolidated balance sheets with the change in cash surrender or contract value being recorded as income or expense during each period.
Use of Estimates The presentation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates. Significant estimates impacting the accompanying consolidated financial statements include the allowance for uncollectible accounts receivable, self-insurance reserves, income taxes, and pension liabilities.
Variable Interest Entity On December 22, 2021, the Company entered into an Agreement for Purchase and Sale of Real Property with CAI Investments Sub-Series 100 LLC (the "Buyer"), for the Company’s headquarters and manufacturing facilities (the "Property") located in Statesville, North Carolina (the "Sale Agreement") in exchange for $30,275,000 in sales proceeds, $14,864,000 of which was payable in redeemable preferred shares in CAI Investments Medical Products I Parent, LLC ("Parent"), an affiliate of Buyer. At April 30, 2022, the carrying value of the redeemable preferred shares was $13.5 million.
The Sale Agreement was finalized on March 24, 2022 and coincided with a 20-year lease, effective on such date between the Company and CAI Investments Medical Products I Master Lessee LLC ("Lessor"), an affiliate of Buyer, for the Property (the "Lease Agreement"). At the same time, the Buyer and its affiliates formed a new, debt-financed affiliate CAI Investments Medical Products I, DST ("Trust") and contributed the Property to the Trust. According to the terms of the lease, the Trust leased the Property to its affiliated Lessor, which in turn sub-leased the Property to the Company (together with the Sale Agreement, the "Sale-Leaseback Arrangement"). For additional information on the accounting for the Sale-Leaseback Arrangement, refer to Note 5, Sale-Leaseback Financing Transaction. The Company concluded as of April 30, 2022 that Parent and its direct affiliates, including the Trust, are designed primarily to acquire and manage the Property and constitute a variable interest entity because the Trust lacks sufficient equity on its own to finance its operations. The Company evaluated its lease arrangement and redeemable preferred shares in Parent as variable interests. Based on its evaluation, the Company concluded it should not consolidate Parent or its affiliates under the variable interest model or the voting interest model of ASC 810, Consolidation.
The Company recorded the redeemable preferred shares as a Note Receivable, classified as held to maturity at amortized cost, on its Consolidated Balance Sheet, rather than as an investment in preferred equity, due to the mandatory redemption feature of the preferred shares.
As of June 22, 2022, the Company had fully redeemed all shares and converted the Note Receivable to cash. The Company's maximum exposure to the Buyer and its affiliates as of April 30, 2023 was limited to the Company’s lease payments and right to use the Property.
Fair Value of Financial Instruments A financial instrument is defined as cash equivalents, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from another party. The Company's financial instruments consist primarily of cash and equivalents, mutual funds, cash surrender value of life insurance policies, a note receivable and corresponding sale-leaseback financing liability, term loans and short-term borrowings. The carrying value of these assets and liabilities approximate their fair value.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Expanded disclosures about instruments measured at fair value require the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:
Level 1 Quoted prices in active markets for identical assets or liabilities as of the reporting date.
Level 2 Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities as of the reporting date.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following tables summarize the Company's fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring and nonrecurring basis as of April 30, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Financial Assets | | | | | | | |
Trading securities held in non-qualified compensation plans (1) | $ | 1,105 | | | $ | — | | | $ | — | | | $ | 1,105 | |
Cash surrender value of life insurance policies (1) | — | | | 1,358 | | | — | | | 1,358 | |
Total | $ | 1,105 | | | $ | 1,358 | | | $ | — | | | $ | 2,463 | |
Financial Liabilities | | | | | | | |
Non-qualified compensation plans (2) | $ | — | | | $ | 2,910 | | | $ | — | | | $ | 2,910 | |
| | | | | | | |
Total | $ | — | | | $ | 2,910 | | | $ | — | | | $ | 2,910 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Financial Assets | | | | | | | |
Trading securities held in non-qualified compensation plans (1) | $ | 1,219 | | | $ | — | | | $ | — | | | $ | 1,219 | |
Cash surrender value of life insurance policies (1) | — | | | 1,371 | | | — | | | 1,371 | |
Total | $ | 1,219 | | | $ | 1,371 | | | $ | — | | | $ | 2,590 | |
Financial Liabilities | | | | | | | |
Non-qualified compensation plans (2) | $ | — | | | $ | 3,003 | | | $ | — | | | $ | 3,003 | |
| | | | | | | |
Total | $ | — | | | $ | 3,003 | | | $ | — | | | $ | 3,003 | |
(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.
Revenue Recognition Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. 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. Sales taxes that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. Certain customers' cash discounts and volume rebates are offered as sales incentives. The discounts and volume rebates are recorded as a reduction in sales at the time revenue is recognized in an amount estimated based on historical experience and contractual obligations.
Deferred revenue consists of customer deposits and advance billings of the Company's products where sales have not yet been recognized. Accounts receivable includes retainage in the amounts of $235,000 and $523,000 at April 30, 2023 and 2022, respectively. Shipping and handling costs are included in cost of product sales. Because of the nature and quality of the Company's 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 Company's consolidated financial position and results of operations and are expensed as incurred.
Credit Concentration The Company performs credit evaluations of its customers. Revenues from three of the Company's domestic dealers represented in the aggregate approximately 36% and 38% of the Company's sales in fiscal years 2023 and 2022, respectively. Accounts receivable for two domestic customers represented approximately 23% and 21% of the Company's total accounts receivable as of April 30, 2023 and 2022, respectively.
Insurance The Company maintains a self-insured health-care program. The Company accrues estimated losses for claims incurred but not reported using assumptions based on historical loss experience. The Company has also purchased specific stop-loss insurance to limit claims above a certain amount. The Company adjusts insurance reserves, as needed, in the event that future loss experience differs from historical loss patterns.
Income Taxes In accordance with ASC 740, "Income Taxes" ("ASC 740"), the Company uses the liability method in measuring the provision for income taxes and recognizing deferred income tax assets and liabilities on the consolidated balance sheets. ASC 740 clarifies the financial statement recognition threshold and measurement attribute of a tax position taken or expected to be taken in a tax return. Under ASC 740, the Company applies a more-likely-than-not recognition threshold for all tax uncertainties. ASC 740 only allows the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the taxing authorities. The Company did not have any significant uncertain tax positions at April 30, 2023 or 2022.
Research and Experimentation Expenditures Research and experimentation expenditures are charged to cost of products sold in the periods incurred. Expenditures for research and experimentation expenditures were $1,012,000 and $990,000 for the fiscal years ended April 30, 2023 and 2022, respectively.
Advertising Costs Advertising costs are expensed as incurred, and include trade shows, training materials, sales, samples, and other related expenses and are included in operating expenses. Advertising costs for the years ended April 30, 2023 and 2022 were $226,000 and $175,000, respectively.
Foreign Currency Translation The financial statements of subsidiaries located in India and China are measured using the local currency as the functional currency. Effective May 1, 2022, Kewaunee Scientific Corporation Singapore Pte. Ltd. transitioned to using the U.S. dollar as its functional currency. The financial position and operating results of Kewaunee Labway Asia Pte. Ltd. are also measured using the U.S. dollar as its functional currency. Assets and liabilities of the Company's foreign subsidiaries using local currencies are translated into United States dollars at fiscal year-end exchange rates. Sales, expenses, and cash flows are translated at weighted average exchange rates for each period. Net translation gains or losses are included in other comprehensive income, a separate component of stockholders' equity. Gains and losses from foreign currency transactions of these subsidiaries are included in operating expenses.
Earnings Per Share Basic earnings per share is based on the weighted average number of common shares outstanding during the year. Diluted earnings per share reflects the assumed exercise of outstanding stock options and the conversion of restricted stock units ("RSUs") under the Company's various stock compensation plans, except when RSUs and stock options have an antidilutive effect. There were 33,900 antidilutive RSUs and stock options outstanding at April 30, 2023. There were 44,750 antidilutive RSUs and stock options outstanding at April 30, 2022.
The following is a reconciliation of basic to diluted weighted average common shares outstanding:
| | | | | | | | | | | | | | | | | |
Shares in thousands | | 2023 | | 2022 | |
Weighted average common shares outstanding | | | | | |
Basic | | 2,824 | | | 2,786 | | |
Dilutive effect of stock options and RSUs | | 78 | | | — | | |
Weighted average common shares outstanding—diluted | | 2,902 | | | 2,786 | | |
Accounting for Stock Options and Other Equity Awards 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." Forfeitures are accounted for in the period in which the awards are forfeited. The Company granted 87,969 RSUs under the 2017 Omnibus Incentive Plan in fiscal year 2023 and 67,750 RSUs in fiscal year 2022. There were no stock options granted during fiscal years 2023 and 2022. (See Note 7, Stock Options and Share-Based Compensation) New Accounting Standards In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," which replaces the current incurred loss method used for determining credit losses on financial assets, including trade receivables, with an expected credit loss method. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company will adopt this standard in fiscal year 2024. The Company does not expect the adoption of this standard to have a significant impact on the Company's consolidated financial position or results of operations.
In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes ("Topic 740"): Simplifying the Accounting for Income Taxes." This update simplifies the accounting for income taxes through certain targeted improvements to various subtopics within Topic 740. The amendments in this update are effective for fiscal years and interim periods beginning after December 15, 2020. The Company adopted this standard effective May 1, 2021. The adoption of this standard did not have a significant impact on the Company's consolidated financial position or results of operations.
Note 2 - 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 and wood casework, fume hoods, adaptable modular systems, moveable workstations, stand-alone benches, biological safety cabinets, and epoxy resin work surfaces and sinks. 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 ten 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 Kewaunee's 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 generally fixed-price and do not contain variable consideration or a general right of return or refund. The Company's contracts with customers contain terms typical for Kewaunee's 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
The Company has elected the following practical expedients:
•The portfolio approach was applied in evaluating the accounting for the cost of obtaining a contract.
•Payment terms with the Company's customers which are one year or less are not considered a significant financing component.
•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.
•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.
Disaggregated Revenue
A summary of net sales transferred to customers at a point in time and over time for the twelve months ended April 30 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2023 |
| | Domestic | | International | | | Total |
Over Time | | $ | 141,994 | | | | $ | 72,778 | | | | $ | 214,772 | |
Point in Time | | 4,722 | | | | — | | | | 4,722 | |
Total Revenue | | $ | 146,716 | | | | $ | 72,778 | | | | $ | 219,494 | |
| | | | | | | | | | | | | | | | | | | | |
| | 2022 |
| | Domestic | | | International | | | Total |
Over Time | | $ | 119,989 | | | | $ | 42,024 | | | | $ | 162,013 | |
Point in Time | | 6,859 | | | | — | | | | 6,859 | |
Total Revenue | | $ | 126,848 | | | | $ | 42,024 | | | | $ | 168,872 | |
Contract Balances
The closing balances of contract assets included $13,459,000 in accounts receivable and $1,191,000 in other current assets at April 30, 2023. The opening balance of contract assets arising from contracts with customers included $9,287,000 in accounts receivable and $1,293,000 in other assets at April 30, 2022. The closing and opening balances of contract liabilities included in deferred revenue arising from contracts with customers were $4,097,000 at April 30, 2023 and $3,529,000 at April 30, 2022. The timing of revenue recognition, billings and cash collections results in accounts receivable, unbilled receivables, and deferred
revenue which is disclosed on the consolidated balance sheets and in the notes to the consolidated financial statements. 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 the Company performs under the contract.
During the fiscal year ended April 30, 2023, changes in contract assets and liabilities were not materially impacted by any other factors. Approximately 100% of the contract liability balance at April 30, 2023 is expected to be recognized as revenue during fiscal year 2024.
Note 3—Inventories
Inventories consisted of the following at April 30: | | | | | | | | |
(in thousands) | 2023 | 2022 |
Finished goods | $ | 3,412 | | $ | 4,555 | |
Work-in-process | 2,380 | | 2,893 | |
Materials and components | 16,097 | | 16,348 | |
Total inventories | $ | 21,889 | | $ | 23,796 | |
At April 30, 2023 and 2022, the Company's international subsidiaries' inventories were $2,740,000 and $2,811,000, respectively, measured using the lower of cost or net realizable value under the FIFO method and are included in the above tables.
Note 4—Long-term Debt and Other Credit Arrangements
On May 6, 2013, the Company entered into a credit and security agreement (the "Loan Agreement") consisting of a $20 million revolving credit facility ("Line of Credit") with Wells Fargo, National Bank, which originally matured in May 2018 and was extended numerous times until it was terminated in June 2022.
On June 19, 2019, the Company entered into a Security Agreement with Wells Fargo, National Bank, pursuant to which the Company granted a security interest in substantially all of its assets to secure its obligations under the Loan Agreement. On December 13, 2019, the Company entered into an amendment to the Loan Agreement and the Line of Credit to effect a change to an asset based lending arrangement based on eligible accounts receivable and inventory, with the available amount not to exceed $20 million through January 31, 2020, and with such maximum amount reduced to $15 million thereafter. This amendment replaced the prior financial covenants with new financial covenants, including minimum monthly liquidity and EBITDA requirements. Additionally, a requirement for the repatriation of foreign cash and restrictions on the payment of dividends were added. The Security Agreement was amended several times during fiscal years 2022 and 2023 as the Company was finalizing the Sale-Leaseback financing transaction discussed in Note 5, Sale-Leaseback Financing Transaction. These amendments were primarily driven by requirements and timing of the Company's new credit arrangement. On June 27, 2022, the Company terminated the Credit Agreement with Wells Fargo, National Bank. At the time of termination, there were no borrowings under the Credit Agreement, and the Company did not incur any material termination penalties as a result of the termination.
At April 30, 2022, there were advances of $1.6 million and $716,000 in letters of credit outstanding, leaving $2.4 million available under the Line of Credit. The borrowing rate under the Line of Credit at that date was 4.75%. Monthly interest payments under the Line of Credit were payable at the greater of the Daily One Month LIBOR interest rate, or 0.75%, plus 4.0%. At April 30, 2022, the Company was in compliance with all the financial covenants under its revolving credit facility.
On December 19, 2022, the Company entered into a Credit and Security Agreement (the "Credit Agreement") with Mid Cap Funding IV Trust, as agent (the "Agent"), and the lenders from time to time party thereto (collectively, the "Lenders"). The Credit Agreement provides for a secured revolving line of credit initially up to $15.0 million (the "Revolving Credit Facility"). Availability under the Revolving Credit Facility is subject to a borrowing base calculated in accordance with the terms of the Credit Agreement and on the basis of eligible accounts and inventory and certain other reserves and adjustments. Pursuant to the Credit Agreement, the Company granted to the Agent, for itself and the Lenders, a first priority security interest in all existing and future acquired assets owned by the Company. Subject to the terms of the Credit Agreement, from time to time the Company may request that the initial revolving loan amount available under the Revolving Credit Facility be increased with additional tranches in minimum amounts of $1,000,000, up to a maximum borrowing availability of $30.0 million. The Agent and Lenders must consent to any such increase in their sole discretion. The Revolving Credit Facility matures on December 19, 2025.
Except as set forth in the Credit Agreement, borrowings under the Revolving Credit Facility bear interest at a rate equal to Term SOFR (Secured Overnight Financing Rate) plus 4.10%. The Company is required to make monthly interest payments on the Revolving Credit Facility, with the entire principal payment due at maturity.
At April 30, 2023, there was $3,548,000 outstanding under the Revolving Credit Facility, with remaining borrowing capacity under the Revolving Credit Facility of $10,286,000. The borrowing rate under the Revolving Credit Facility was 9.02% as of April 30, 2023. At April 30, 2023, the Company was in compliance with all financial covenants under its revolving credit facility. In addition, the Company's International subsidiaries have a balance outstanding of $39,000 in short-term borrowings related to overdraft protection and short-term loan arrangements.
At April 30, 2023, there were foreign bank guarantees outstanding to customers in the amounts of $5.2 million, $142,000, $3,000, and $233,000 with expiration dates in fiscal years 2024, 2025, 2026, and 2027, respectively, collateralized by certain assets of the Company's subsidiaries in India. At April 30, 2022, there were bank guarantees issued by foreign banks outstanding to customers in the amounts of $8.2 million, $111,000, $9,000, $3,000, and $249,000 with expiration dates in fiscal years 2023, 2024, 2025, 2026, and 2027, respectively, collateralized by a $6.0 million corporate guarantee and certain assets of the Company's subsidiaries in India.
Note 5—Sale-Leaseback Financing Transaction
On December 22, 2021, the Company entered into the Sale Agreement with the Buyer for the Company’s headquarters and manufacturing facilities located at 2700 West Front Street in Statesville, North Carolina.
The Sale Agreement was finalized on March 24, 2022 and coincided with the Company and the Buyer entering into the Lease Agreement. The Sale-Leaseback Arrangement is repayable over a 20-year term, with four renewal options of five years each. Under the terms of the Lease Agreement, the Company’s initial basic rent is approximately $158,000 per month, with annual increases of approximately 2% each year of the initial term.
The Company accounted for the Sale-Leaseback Arrangement as a financing transaction with the Buyer in accordance with ASC 842, Leases, as the Lease Agreement was determined to be a finance lease. The Company concluded the Lease Agreement met the qualifications to be classified as a finance lease due to the significance of the present value of the lease payments, using a discount rate of 4.75% to reflect the Company’s incremental borrowing rate, compared to the fair value of the leased property as of the lease commencement date. In measuring the lease payments for the present value analysis, the Company elected the practical expedient to combine the lease component (the leased facilities) with the non-lease component (property management provided by the Buyer/Lessor) into a single lease component.
The presence of a finance lease indicates that control of the Property has not transferred to the Buyer/Lessor and, as such, the transaction was deemed a failed sale-leaseback and accounted for as a financing arrangement. As a result of this determination, the Company is viewed as having received the sales proceeds from the Buyer/Lessor in the form of a hypothetical loan collateralized by its leased facilities. The hypothetical loan is payable as principal and interest in the form of “lease payments” to the Buyer/Lessor. As such, the Company will not derecognize the Property from its books for accounting purposes until the lease ends. No gain or loss was recognized related to the Sale-Leaseback Arrangement under U.S. GAAP.
As of April 30, 2023, the carrying value of the financing liability was $28,774,000, net of $708,000 in debt issuance costs, of which $642,000 was classified as current on the Consolidated Balance Sheet with $28,132,000 classified as long-term. As of April 30, 2022, the carrying value of the financing liability was $29,350,000, net of $768,000 in debt issuance costs, of which $575,000 was classified as current on the Consolidated Balance Sheet with $28,775,000 classified as long-term. The monthly lease payments are split between a reduction of principal and interest expense using the effective interest rate method. Interest expense associated with the financing arrangement was $1,316,000 and $147,000 for the years ended April 30, 2023 and 2022, respectively.
The Company will depreciate the building down to zero over the 20-year assumed economic life of the Property so that at the end of the lease term, the remaining carrying amount of the financing liability will equal the carrying amount of the land of $41,000.
Remaining future cash payments related to the financing liability for the fiscal years ending April 30 are as follows:
| | | | | | | | |
($ in thousands) | | |
2024 | | $ | 1,931 | |
2025 | | 1,970 | |
2026 | | 2,009 | |
2027 | | 2,050 | |
2028 | | 2,090 | |
Thereafter | | 33,867 | |
Total Minimum Liability Payments | | 43,917 | |
Imputed Interest | | (15,143) | |
Total | | $ | 28,774 | |
Note 6—Income Taxes
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law, which contains several income tax provisions, as well as other measures, aimed at assisting businesses impacted by the economic effects of the COVID-19 pandemic. The CARES Act includes a broad range of tax reform provisions affecting businesses, including permissible net operating losses ("NOLs") carrybacks up to five years, changes in business deductions limitations, and deferral of Social Security withholdings. The Company applied the NOL carryback provision of the CARES Act with respect to its estimated NOL for fiscal year 2021 to years that had higher enacted tax rates. The Company also applied the deferral of Social Security withholdings in accordance with the CARES Act; 50% of these deferred withholdings were due and paid by December 31, 2021, with the remainder due and paid by December 31, 2022.
Effective August 1, 2019, the Company elected to revoke the indefinite reinvestment of foreign unremitted earnings position set forth by ASC 740-30-25-17 for multiple foreign subsidiaries. As a result of this election, the Company recorded a tax withholding expense imposed by the India Income Tax Department of $406,000 and $240,000 for the years ended April 30, 2023 and 2022, respectively.
On December 22, 2017, the Tax Cuts and Job Act amended Internal Revenue Code Section 174, effective for tax years beginning after December 31, 2021. This amendment to Section 174, effective during fiscal year 2023 for the Company, eliminated the current year deductibility of research and experimentation expenditures and required the Company to deduct these expenditures over five years. The impact of this tax regulation required the Company to record a new deferred tax asset of $1,558,000 as of April 30, 2023.
The Company's accounting policy with respect to the Global Intangible Low-Taxed Income ("GILTI") tax rules is that GILTI will be treated as a periodic charge in the year in which it arises.
Income tax expense consisted of the following:
| | | | | | | | | | | | | | |
$ in thousands | | 2023 | | 2022 |
Current tax expense: | | | | |
Federal | | $ | 691 | | | $ | 1,899 | |
State and local | | 197 | | | 490 | |
Foreign | | 1,736 | | | 1,008 | |
Total current tax expense | | 2,624 | | | 3,397 | |
Deferred tax expense: | | | | |
Federal | | — | | | — | |
State and local | | — | | | — | |
Foreign | | 515 | | | 121 | |
Total deferred tax expense | | 515 | | | 121 | |
Net income tax expense | | $ | 3,139 | | | $ | 3,518 | |
The reasons for the differences between the above net income tax expense and the amounts computed by applying the statutory federal income tax rate to earnings before income taxes are as follows:
| | | | | | | | | | | | | | |
$ in thousands | | 2023 | | 2022 |
Income tax expense (benefit) at statutory rate | | $ | 945 | | | $ | (432) | |
State and local taxes, net of federal income tax benefit | | (119) | | | (29) | |
Tax credits (state, net of federal benefit) | | (433) | | | (457) | |
Effects of differing US and foreign tax rates | | 260 | | | 22 | |
| | | | |
| | | | |
Net operating loss adjustment | | — | | | (286) | |
| | | | |
Return to provision adjustment | | 413 | | | — | |
Impact of foreign subsidiary income to parent | | 99 | | | 74 | |
Increase in valuation allowance | | 1,667 | | | 4,170 | |
Other items, net | | 307 | | | 456 | |
Net income tax expense | | $ | 3,139 | | | $ | 3,518 | |
Significant items comprising deferred tax assets and liabilities as of April 30 were as follows:
| | | | | | | | | | | | | | |
$ in thousands | | 2023 | | 2022 |
Deferred tax assets: | | | | |
Accrued employee benefit expenses | | $ | 153 | | | $ | 228 | |
Allowance for doubtful accounts | | 114 | | | 142 | |
Deferred compensation | | 1,156 | | | 1,196 | |
Tax credits (state, net of federal benefits) | | 170 | | | 170 | |
Foreign tax credit carryforwards | | 638 | | | 638 | |
Section 174 R&E Addback | | 1,558 | | | — | |
Unrecognized actuarial loss, defined benefit plans | | 1,064 | | | 1,202 | |
Inventory reserves and capitalized costs | | 201 | | | 110 | |
Net operating loss carryforwards | | 249 | | | 112 | |
Proceeds on Sale Leaseback | | 6,963 | | | 7,215 | |
Operating lease liabilities | | 1,558 | | | — | |
Other | | 254 | | | 449 | |
Total deferred tax assets | | 14,078 | | | 11,462 | |
Deferred tax liabilities: | | | | |
Book basis in excess of tax basis of property, plant and equipment | | (1,417) | | | (1,758) | |
Book basis in excess of tax basis of Sale Leaseback property | | (1,106) | | | (1,122) | |
Prepaid pension | | (919) | | | (949) | |
APB 23 Assertion | | (1,318) | | | (976) | |
Right of use assets | | (1,526) | | | — | |
Debt Issuance Cost on Sale Leaseback | | (167) | | | (184) | |
| | | | |
Total deferred tax liabilities | | (6,453) | | | (4,989) | |
Valuation allowance | | (8,568) | | | (6,901) | |
Net deferred tax liabilities | | $ | (943) | | | $ | (428) | |
Deferred tax assets (liabilities) classified in the balance sheet: | | | | |
| | | | |
Non-current | | (943) | | | (428) | |
Net deferred tax liabilities | | $ | (943) | | | $ | (428) | |
The Company is required to evaluate the realization of the deferred tax asset and any requirement for a valuation allowance in accordance with ASC 740-10-30-2(b). This guidance provides that the future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on sufficient taxable income of the appropriate character within the carryback or carryforward period available under the tax law. The Company evaluates all available evidence, both
positive and negative, to determine the amount of any required valuation allowance. The valuation allowance totaled $8,568,000 and $6,901,000 at April 30, 2023 and 2022, respectively.
At April 30, 2023, the Company had foreign tax credit carryforwards in the amount of $638,000, which are subject to a full valuation allowance, and which will begin to expire in 2028.
The Company files federal, state and local tax returns with statutes of limitation generally ranging from 3 to 4 years. The Company is generally no longer subject to federal tax examinations for years prior to fiscal year 2019 or state and local tax examinations for years prior to fiscal year 2018. Tax returns filed by the Company's significant foreign subsidiaries are generally subject to statutes of limitations of 3 to 7 years and are generally no longer subject to examination for years prior to fiscal year 2017. The Company has no unrecognized tax benefits.
Note 7—Stock Options and Share-Based Compensation
The Company's 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 replaced 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 and all outstanding options granted under the prior plans will remain subject to 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 shares subject to 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 Company's equity compensation plans. At April 30, 2023 there were 149,007 shares available for future issuance.
Under the 2017 Plan, the Company recorded stock-based compensation expense of $845,000 and $701,000 and deferred income tax benefit of $199,000 and $165,000 in fiscal years 2023 and 2022, respectively. The RSUs include grants with both a service and performance component vesting over a 3 year period and grants with only service components vesting over 2 and 3 year periods. The recognized expense is based upon the vesting period for service criteria and estimated attainment of the performance criteria at the end of the performance period based on the ratio of cumulative days incurred to total days over the performance period. The remaining estimated compensation expense of $812,000 will be recorded over the remaining vesting periods.
The fair value of each RSU granted to employees was estimated on the date of grant based on the weighted average price of the Company's stock reduced by the present value of the expected dividend stream during the vesting period using the risk-free interest rate. The Company issued new shares of common stock to satisfy RSUs that vested during fiscal year 2023. The following table summarizes the RSU activity and weighted averages.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 |
| | Number of RSUs | | Weighted Average Grant Date Fair Value | | Number of RSUs | | Weighted Average Grant Date Fair Value |
Outstanding at beginning of year | | 144,827 | | | $ | 12.24 | | | 125,217 | | | $ | 12.71 | |
Granted | | 87,969 | | | $ | 13.43 | | | 67,750 | | | $ | 13.74 | |
Vested | | (50,315) | | | $ | 13.86 | | | (31,943) | | | $ | 12.44 | |
Forfeited | | (22,841) | | | $ | 15.37 | | | (16,197) | | | $ | 21.83 | |
Outstanding at end of year | | 159,640 | | | $ | 11.94 | | | 144,827 | | | $ | 12.24 | |
The stockholders approved the 2008 Key Employee Stock Option Plan ("2008 Plan") in fiscal year 2009 which allowed the Company to grant options on an aggregate of 300,000 shares of the Company's common stock. On August 26, 2015, the stockholders approved an amendment to this plan to increase the number of shares available under the 2008 Plan by 300,000 shares. Under the plan, options were granted at not less than the fair market value at the date of grant and options are exercisable in such installments, for such terms (up to 10 years), and at such times, as the Board of Directors determined at the time of the grant. At April 30, 2023, there were no shares available for future grants under the 2008 Plan. Under the 2008 Plan, the Company recorded no compensation expense or deferred income tax benefit in fiscal year 2023 or 2022.
In order to determine the fair value of stock options on the date of grant, the Company applied the Black-Scholes option pricing model. Inherent in the model are assumptions related to expected stock-price volatility, option life, risk-free interest rate, and dividend yield. The stock options outstanding have the "plain-vanilla" characteristics as defined in SEC Staff Accounting Bulletin No. 107 (SAB 107). The Company utilized the Safe Harbor option "Simplified Method" to determine the expected term of these options in accordance with the guidance of SAB 107 for options outstanding.
The Company issued new shares of common stock to satisfy options exercised during fiscal years 2023 and 2022. Stock option activity and weighted average exercise price are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| Number of Shares | | Weighted Average Exercise Price | | Number of Shares | | Weighted Average Exercise Price |
Outstanding at beginning of year | 47,400 | | | $ | 19.34 | | | 84,300 | | | $ | 18.56 | |
Canceled | (7,850) | | | $ | 20.08 | | | (35,400) | | | $ | 17.94 | |
Exercised | (5,650) | | | $ | 14.54 | | | (1,500) | | | $ | 8.59 | |
Outstanding at end of year | 33,900 | | | $ | 19.97 | | | 47,400 | | | $ | 19.34 | |
| | | | | | | |
Exercisable at end of year | 33,900 | | | $ | 19.97 | | | 47,400 | | | $ | 19.34 | |
The number of options outstanding, exercisable, and their weighted average exercise prices were within the following ranges at April 30, 2023:
| | | | | |
| |
| $15.85-$23.62 |
Options outstanding | 33,900 | |
Weighted average exercise price | $ | 19.97 | |
Weighted average remaining contractual life | 2.5 years |
Aggregate intrinsic value | $ | 1,400 | |
Options exercisable | 33,900 | |
Weighted average exercise price | $ | 19.97 | |
Aggregate intrinsic value | 1,400 | |
Note 8—Accumulated Other Comprehensive Income (Loss)
The Company's other comprehensive income (loss) consists of unrealized gains and losses on the translation of the assets, liabilities, and equity of its foreign subsidiaries, and additional minimum pension liability adjustments, net of income taxes. The before tax income (loss), related income tax effect, and accumulated balances are as follows:
| | | | | | | | | | | | | | | | | | | | |
$ in thousands | | Foreign Currency Translation Adjustment | | Minimum Pension Liability Adjustment | | Total Accumulated Other Comprehensive Income (Loss) |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Balance at April 30, 2021 | | $ | (2,357) | | | $ | (1,220) | | | $ | (3,577) | |
| | | | | | |
Foreign currency translation adjustment | | (186) | | | — | | | (186) | |
| | | | | | |
Change in unrecognized actuarial loss on pension obligations | | — | | | 21 | | | 21 | |
| | | | | | |
Balance at April 30, 2022 | | (2,543) | | | (1,199) | | | (3,742) | |
Foreign currency translation adjustment | | (290) | | | — | | | (290) | |
Change in unrecognized actuarial loss on pension obligations | | — | | | 590 | | | 590 | |
Balance at April 30, 2023 | | $ | (2,833) | | | $ | (609) | | | $ | (3,442) | |
Note 9—Leases, Commitments and Contingencies
The Company recognizes lease assets and lease liabilities with respect to the rights and obligations created by leased assets previously classified as operating leases. The Company elected to:
•Record the impact of adoption using a modified retrospective method with any cumulative effect as an adjustment to retained earnings (accumulated deficit) as opposed to restating comparative periods to reflect the effects of applying the new standard.
•Elect the package of three transition practical expedients which alleviate the requirements to reassess embedded leases, lease classification and initial direct costs for leases that commenced prior to the adoption date.
•Elected to use the short-term lease recognition exemption for all asset classes. This means, for those leases that qualify, the Company will not recognize right-of-use ("ROU") assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets.
The Company has operating type leases for real estate and equipment in both the U.S. and internationally and financing leases for equipment in the United States. ROU assets totaled $9,170,000 and $7,573,000 at April 30, 2023 and 2022, respectively. Operating cash paid to settle lease liabilities was $2,278,640 and $2,019,000 for the fiscal year ended April 30, 2023 and 2022, respectively. The Company's leases have remaining lease terms of up to 8 years. In addition, some of the leases may include options to extend the leases for up to 5 years or options to terminate the leases within 1 year. Operating lease expense was $3,344,000 for the twelve months ended April 30, 2023, inclusive of period cost for short-term leases, not included in lease liabilities, of $1,065,000. Operating lease expense was $3,067,000 for the fiscal year ended April 30, 2022, inclusive of period cost for short-term leases, not included in lease liabilities, of $1,048,000.
At April 30, 2023, the weighted average remaining lease term for the capitalized operating leases was 5.1 years and the weighted average discount rate was 5.0%. At April 30, 2022, the weighted average remaining lease term for the capitalized operating leases was 5.8 years and the weighted average discount rate was 4.1%. For the financing leases, the weighted average remaining lease term was 3.1 years and the weighted average discount rate was 6.8% at April 30, 2023 as compared to 3.8 years and 6.6% at April 30, 2022. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable.
Future minimum payments under the non-cancelable lease arrangements for the fiscal years ending April 30 are as follows:
| | | | | | | | | | | | | | | | | | | |
($ in thousands) | | | Operating | | | Financing |
2024 | | | $ | 2,373 | | | | | $ | 91 | |
2025 | | | 2,175 | | | | | 91 | |
2026 | | | 1,920 | | | | | 72 | |
2027 | | | 1,658 | | | | | — | |
2028 | | | 1,130 | | | | | — | |
Thereafter | | | 1,380 | | | | | — | |
Total Minimum Lease Payments | | | 10,636 | | | | | 254 | |
Imputed Interest | | | (1,533) | | | | | (21) | |
Total | | | $ | 9,103 | | | | | $ | 233 | |
The Company is involved in certain claims and legal proceedings in the normal course of business which management believes will not have a material adverse effect on the Company's consolidated financial condition or results of operations.
Note 10—Retirement Benefits
Defined Benefit Plans
The Company has non-contributory defined benefit pension plans covering some of its domestic 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. The defined benefit plan for salaried employees provides pension benefits that are based on each employee's years of service and average annual compensation during the last ten consecutive calendar years of employment as of April 30, 2005. The benefit plan for hourly employees provides benefits at stated amounts based on years of service as of April 30, 2005. The Company uses an April 30 measurement date for its defined benefit plans.
The change in projected benefit obligations and the change in fair value of plan assets for the non-contributory defined benefit pension plans for each of the years ended April 30 are summarized as follows:
| | | | | | | | | | | | | | |
$ in thousands | | 2023 | | 2022 |
Accumulated Benefit Obligation, April 30 | | $ | 18,368 | | | $ | 20,022 | |
Change in Projected Benefit Obligations | | | | |
Projected benefit obligations, beginning of year | | $ | 20,022 | | | $ | 22,942 | |
Interest cost | | 845 | | | 710 | |
Actuarial loss | | (1,113) | | | (2,218) | |
Actual benefits paid | | (1,386) | | | (1,412) | |
Projected benefit obligations, end of year | | $ | 18,368 | | | $ | 20,022 | |
Change in Plan Assets | | | | |
Fair value of plan assets, beginning of year | | $ | 18,867 | | | $ | 21,459 | |
Actual return on plan assets | | 251 | | | (1,180) | |
Employer contributions | | — | | | — | |
Actual benefits paid | | (1,386) | | | (1,412) | |
Fair value of plan assets, end of year | | $ | 17,732 | | | $ | 18,867 | |
Funded status—under | | $ | (636) | | | $ | (1,155) | |
Amounts Recognized in the Consolidated Balance Sheets consist of: | | | | |
Non-current liabilities | | $ | (636) | | | $ | (1,155) | |
Amounts Recognized in Accumulated Other Comprehensive Income (Loss) Consist of: | | | | |
Net actual loss | | $ | 4,526 | | | $ | 5,116 | |
Deferred tax benefit | | (1,064) | | | (1,202) | |
After-tax actuarial loss | | $ | 3,462 | | | $ | 3,914 | |
Weighted-Average Assumptions Used to Determine Benefit Obligations at April 30 | | | | |
Discount rate | | 5.10 | % | | 4.40 | % |
Rate of compensation increase | | N/A | | N/A |
Mortality table | | Pri-2012 | | Pri-2012 |
Projection scale | | MP-2021 | | MP-2020 |
| | | | | | | | | | | | | | |
| | Year Ended April 30, |
Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost | | 2023 | | 2022 |
Discount rate | | 5.10 | % | | 4.40 | % |
Expected long-term return on plan assets | | 7.75 | % | | 7.75 | % |
Rate of compensation increase | | N/A | | N/A |
The components of the net periodic pension (income) expense for each of the fiscal years ended April 30 are as follows:
| | | | | | | | | | | | | | |
$ in thousands | | 2023 | | 2022 |
Interest cost | | $ | 845 | | | $ | 710 | |
Expected return on plan assets | | (1,402) | | | (1,604) | |
Recognition of net loss | | 628 | | | 539 | |
Net periodic pension expense (income) | | $ | 71 | | | $ | (355) | |
The estimated net actuarial loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost during fiscal year 2024 is $580,000.
The Company's funding policy is to contribute to the plans when pension laws and economics either require or encourage funding. The Company expects to make no contributions during fiscal year 2024. There were no contributions made to the plans in fiscal year 2023 or 2022.
The following benefit payments are expected to be paid from the benefit plans in the fiscal years ending April 30:
| | | | | | | | |
$ in thousands | | Amount |
2024 | | $ | 1,640 | |
2025 | | 1,620 | |
2026 | | 1,600 | |
2027 | | 1,560 | |
2028 | | 1,540 | |
2029- 2033 | | 7,030 | |
The expected long-term portfolio return is established via a building block approach with proper consideration of diversification and rebalancing. Historical markets are studied and long-term historical relationships between equities and fixed-income securities are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long term. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. Peer data and historical returns are also reviewed to check for reasonableness and appropriateness.
The Company uses a Yield Curve methodology to determine its GAAP discount rate. Under this approach, future benefit payment cash flows are projected from the pension plan on a projected benefit obligation basis. The payment stream is discounted to a present value using an interest rate applicable to the timing of each respective cash flow. The graph of these time-dependent interest rates is known as a yield curve. The interest rates comprising the Yield Curve are determined through a statistical analysis performed by the IRS and issued each month in the form of a pension discount curve. For this purpose, the universe of possible bonds consists of a set of bonds which are designated as corporate, have high quality ratings (AAA or AA) from nationally recognized statistical rating organizations, and have at least $250 million in par amount outstanding on at least one day during the reporting period. A 1% increase/decrease in the discount rate for fiscal years 2023 and 2022 would increase/decrease pension expense by approximately $231,000 and $271,000, respectively.
The Company uses a total return investment approach, whereby a mix of equities and fixed-income investments are used to attempt to maximize the long-term return on plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed-income investments. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value, and small and large capitalizations. The target allocations based on the Company's investment policy were 75% in equity securities and 25% in fixed-income securities at April 30, 2023 and April 30, 2022. A 1% increase/decrease in the expected return on assets for fiscal years 2023 and 2022 would increase/decrease pension expense by approximately $181,000 and $207,000, respectively.
Plan assets by asset categories as of April 30 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
$ in thousands | | 2023 | | 2022 |
Asset Category | | Amount | | % | | Amount | | % |
Equity Securities | | $ | 12,724 | | | 72 | | | $ | 13,856 | | | 73 | |
Fixed Income Securities | | 4,845 | | | 27 | | | 4,703 | | | 25 | |
Cash and Cash Equivalents | | 163 | | | 1 | | | 308 | | | 2 | |
Totals | | $ | 17,732 | | | 100 | | | $ | 18,867 | | | 100 | |
The following tables present the fair value of the assets in the Company's defined benefit pension plans at April 30:
| | | | | | | | | | | | | | | | | | | | |
| | 2023 |
Asset Category | | Level 1 | | Level 2 | | Level 3 |
Large Cap | | $ | 7,326 | | | $ | — | | | $ | — | |
Small/Mid Cap | | 2,326 | | | — | | | — | |
International | | 1,743 | | | — | | | — | |
Emerging Markets | | 702 | | | — | | | — | |
Fixed Income | | 4,845 | | | — | | | — | |
Liquid Alternatives | | 627 | | | — | | | — | |
Cash and Cash Equivalents | | 163 | | | — | | | — | |
Totals | | $ | 17,732 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
| | 2022 |
Asset Category | | Level 1 | | Level 2 | | Level 3 |
Large Cap | | $ | 7,382 | | | $ | — | | | $ | — | |
Small/Mid Cap | | 2,775 | | | — | | | — | |
International | | 2,008 | | | — | | | — | |
Emerging Markets | | 794 | | | — | | | — | |
Fixed Income | | 4,703 | | | — | | | — | |
Liquid Alternatives | | 897 | | | — | | | — | |
Cash and Cash Equivalents | | 308 | | | — | | | — | |
Totals | | $ | 18,867 | | | $ | — | | | $ | — | |
Level 1 retirement plan assets include United States currency held by a designated trustee and equity funds of common and preferred securities issued by domestic and foreign corporations. These equity funds are traded actively on exchanges and price quotes for these shares are readily available.
Defined Contribution Plan
The Company has a defined contribution plan covering substantially all domestic salaried and hourly employees. The plan provides benefits to all employees who have attained age 21, completed three months of service, and who elect to participate. The plan provides that the Company make matching contributions equal to 100% of the employee's qualifying contribution up to 3% of the employee's compensation, and make matching contributions equal to 50% of the employee's contributions between 3% and 5% of the employee's compensation, resulting in a maximum employer contribution equal to 4% of the employee's compensation. The Company's matching contributions were $932,000 and $967,000 for years ending April 30, 2023 and 2022. Additionally, the plan provides that the Company may elect to make a non-matching contribution for participants employed by the Company on December 31 of each year. The Company did not elect to make a non-matching contribution in fiscal years 2023 and 2022.
Note 11—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, casework, flexible systems, worksurfaces, workstations, workbenches, and computer enclosures. The International business segment, which consists of the foreign subsidiaries identified in Note 1, Summary of Significant Accounting Policies, provides the Company's 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 are net of expenses that have been allocated to the business segments.
The following table shows revenues, earnings, and other financial information by business segment and unallocated corporate expenses for each of the years ended April 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
$ in thousands | | Domestic | | International | | Corporate | | Total |
Fiscal Year 2023 | | | | | | | | |
Revenues from external customers | | $ | 146,716 | | | $ | 72,778 | | | $ | — | | | $ | 219,494 | |
Intersegment revenues | | 1,604 | | | 9,822 | | | (11,426) | | | — | |
Depreciation | | 2,394 | | | 282 | | | 191 | | | 2,867 | |
Earnings (loss) before income taxes | | 3,408 | | | 7,382 | | | (6,292) | | | 4,498 | |
Income tax expense | | — | | | 2,250 | | | 889 | | | 3,139 | |
Net earnings attributable to non-controlling interest | | — | | | 621 | | | — | | | 621 | |
Net earnings (loss) attributable to Kewaunee Scientific Corporation | | 3,408 | | | 4,511 | | | (7,181) | | | 738 | |
Segment assets | | 80,000 | | | 38,898 | | | — | | | 118,898 | |
Expenditures for segment assets | | 2,856 | | | 1,292 | | | — | | | 4,148 | |
Revenues (excluding intersegment) from customers in foreign countries | | 2,559 | | | 72,778 | | | — | | | 75,337 | |
| | | | | | | | |
Fiscal Year 2022 | | | | | | | | |
Revenues from external customers | | $ | 126,848 | | | $ | 42,024 | | | $ | — | | | $ | 168,872 | |
Intersegment revenues | | 882 | | | 3,519 | | | (4,401) | | | — | |
Depreciation | | 2,402 | | | 276 | | | 91 | | | 2,769 | |
Earnings (loss) before income taxes | | (179) | | | 3,585 | | | (5,891) | | | (2,485) | |
Income tax expense | | 50 | | | 1,129 | | | 2,339 | | | 3,518 | |
Net earnings attributable to non-controlling interest | | — | | | 123 | | | — | | | 123 | |
Net earnings (loss) attributable to Kewaunee Scientific Corporation | | (229) | | | 2,333 | | | (8,230) | | | (6,126) | |
Segment assets | | 91,757 | | | 27,016 | | | — | | | 118,773 | |
Expenditures for segment assets | | 1,613 | | | 295 | | | — | | | 1,908 | |
Revenues (excluding intersegment) from customers in foreign countries | | 1,317 | | | 42,024 | | | — | | | 43,341 | |
Note 12—Restructuring Costs
In December 2019, the Company initiated a restructuring, which included the closure of the Company's subsidiary in China, a commercial sales organization for the Company's products in China, that was completed in March 2023. The Company incurred operating expenses of $32,000 in its international operations related to the closure of the China subsidiary in fiscal year 2023, offset by the recovery of bad debt collections of $51,000 that were originally written off when the Company initiated the restructuring. The Company incurred operating expenses of $28,000 related to the closure in the prior year period. The Company reflected all the expenses as operating expenses in the Consolidated Statement of Operations.