KEQU 10-Q Quarter ended Oct. 31, 2018

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2018

or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-5286

KEWAUNEE SCIENTIFIC CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		38-0715562
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
2700 West Front Street Statesville, North Carolina		28677-2927
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (704) 873-7202

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☐ (Do not check if a smaller reporting company)		Smaller reporting company		☒
				Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of December 4, 2018, the registrant had outstanding 2,744,325 shares of Common Stock.

KEWAUNEE SCIENTIFIC CORPORATION

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2018

				Page Number
PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements
		Condensed Consolidated Statements of Operations (unaudited) – Three and six months ended October 31, 2018 and 2017			1
		Condensed Consolidated Statements of Comprehensive Income (unaudited) – Three and six months ended October 31, 2018 and 2017			2
		Condensed Consolidated Statement of Stockholders’ Equity (unaudited) – Three and six months ended October 31, 2018			3
		Condensed Consolidated Balance Sheets – October  31, 2018 (unaudited) and April 30, 2018			4
		Condensed Consolidated Statements of Cash Flows (unaudited) – Six months ended October 31, 2018 and 2017			5
		Notes to Condensed Consolidated Financial Statements (unaudited)			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			19
Item 4.		Controls and Procedures			19
PART II. OTHER INFORMATION
Item 1A.		Risk Factors			19
Item 6.		Exhibits			19
SIGNATURES					21

i

Part 1. Financial Information

Item 1.

Financial Statements

Kewaunee Scientific Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

($ and shares in thousands, except per share amounts)

		Three months ended October 31								Six months ended October 31
		2018				2017				2018				2017
Net sales		$	37,278			$	41,471			$	79,430			$	75,352
Costs of products sold			29,505				33,560				64,183				60,620
Gross profit			7,773				7,911				15,247				14,732
Operating expenses			5,963				5,256				11,726				10,389
Operating earnings			1,810				2,655				3,521				4,343
Other income			150				177				314				345
Interest expense, net			(91	)			(89	)			(182	)			(148	)
Earnings before income taxes			1,869				2,743				3,653				4,540
Income tax expense			415				978				783				1,583
Net earnings			1,454				1,765				2,870				2,957
Less: net earnings attributable to the noncontrolling interest			40				41				49				85
Net earnings attributable to Kewaunee Scientific Corporation		$	1,414			$	1,724			$	2,821			$	2,872
Net earnings per share attributable to Kewaunee Scientific Corporation stockholders
Basic		$	0.52			$	0.64			$	1.03			$	1.06
Diluted		$	0.51			$	0.62			$	1.01			$	1.04
Weighted average number of common shares outstanding
Basic			2,743				2,717				2,740				2,715
Diluted			2,800				2,776				2,802				2,766

See accompanying notes to condensed consolidated financial statements.

1

Kewaunee Scientific Corporation

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

($ in thousands)

		Three months ended October 31								Six months ended October 31
		2018				2017				2018				2017
Net earnings		$	1,454			$	1,765			$	2,870			$	2,957
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments			(725	)			(229	)			(1,113	)			(154	)
Change in fair value of cash flow hedge			1				10				5				18
Other comprehensive income (loss)			(724	)			(219	)			(1,108	)			(136	)
Comprehensive income, net of tax			730				1,546				1,762				2,821
Less: comprehensive income attributable to the noncontrolling interest			40				41				49				85
Comprehensive income attributable to Kewaunee Scientific Corporation		$	690			$	1,505			$	1,713			$	2,736

See accompanying notes to condensed consolidated financial statements.

2

Kewaunee Scientific Corporation

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

($ in thousands, except share and per share amounts)

		Six Months Ended October 31, 2018
		Common Stock				Additional Paid-in Capital				Treasury Stock				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Stockholders’ Equity
Balance at April 30, 2018		$	6,841			$	3,006			$	(53	)		$	43,165			$	(5,900	)		$	47,059
Net earnings attributable to Kewaunee Scientific Corporation			—				—				—				1,407				—				1,407
Other comprehensive income (loss)			—				—				—				—				(384	)			(384	)
Cash dividends paid, $0.17 per share			—				—				—				(465	)			—				(465	)
Stock options exercised, 9,250 shares			13				(13	)			—				—				—				—
Stock based compensation			7				99				—				—				—				106
Cumulative adjustment for ASC 606, net of tax			—				—				—				217				—				217
Balance at July 31, 2018			6,861				3,092				(53	)			44,324				(6,284	)			47,940
Net earnings attributable to Kewaunee Scientific Corporation			—				—				—				1,414				—				1,414
Other comprehensive income (loss)			—				—				—				—				(724	)			(724	)
Cash dividends paid, $0.19 per share			—				—				—				(521	)			—				(521	)
Stock options exercised, 5,800 shares			8				(8	)			—				—				—				—
Stock based compensation			—				140				—				—				—				140
Cumulative adjustment for accounting change, net of tax			—				—				—				671				—				671
Balance at October 31, 2018		$	6,869			$	3,224			$	(53	)		$	45,888			$	(7,008	)		$	48,920
		Six Months Ended October 31, 2017
		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			—				—				—				1,148				—				1,148
Other comprehensive income (loss)			—				—				—				—				83				83
Cash dividends paid, $0.15 per share			—				—				—				(406	)			—				(406	)
Stock options exercised, 500 shares			1				8				—				—				—				9
Stock based compensation			—				52				—				—				—				52
Balance at July 31, 2017			6,790				2,755				(53	)			40,513				(6,236	)			43,769
Net earnings attributable to Kewaunee Scientific Corporation			—				—				—				1,724				—				1,724
Other comprehensive income (loss)			—				—				—				—				(219	)			(219	)
Cash dividends paid, $0.17 per share			—				—				—				(462	)			—				(462	)
Stock options exercised, 15,241 shares			15				(16	)			—				—				—				(1	)
Stock based compensation			4				122				—				—				—				126
Balance at October 31, 2017		$	6,809			$	2,861			$	(53	)		$	41,775			$	(6,455	)		$	44,937

See accompanying notes to condensed consolidated financial statements.

3

Kewaunee Scientific Corporation

Condensed Consolidated Balance Sheets

($ and shares in thousands, except per share amounts)

		October 31, 2018				April 30, 2018
		(Unaudited)
Assets
Current Assets:
Cash and cash equivalents		$	9,477			$	9,716
Restricted cash			679				1,242
Receivables, less allowance; $372; $384, on each respective date			29,785				32,660
Inventories			17,097				17,662
Prepaid expenses and other current assets			3,251				2,224
Total Current Assets			60,289				63,504
Property, plant and equipment, at cost			56,120				54,648
Accumulated depreciation			(41,252	)			(39,987	)
Net Property, Plant and Equipment			14,868				14,661
Deferred income taxes			1,888				2,031
Other			3,551				4,162
Total Other Assets			5,439				6,193
Total Assets		$	80,596			$	84,358
Liabilities and Stockholders’ Equity
Current Liabilities:
Short-term borrowings and interest rate swaps		$	4,658			$	3,885
Current portion of long-term debt and lease obligations			1,184				1,167
Accounts payable			10,726				14,754
Employee compensation and amounts withheld			3,162				3,810
Deferred revenue			1,563				1,884
Other accrued expenses			2,743				2,062
Total Current Liabilities			24,036				27,562
Long-term debt			822				1,264
Accrued pension and deferred compensation costs			6,016				7,465
Income taxes payable			339				546
Total Liabilities			31,213				36,837
Commitments and Contingencies
Stockholders’ Equity:
Common Stock, $2.50 par value, Authorized – 5,000 shares; Issued – 2,747 shares; 2,736 shares; – Outstanding – 2,744 shares; 2,733 shares, on each respective date			6,869				6,841
Additional paid-in-capital			3,224				3,006
Retained earnings			45,888				43,165
Accumulated other comprehensive loss			(7,008	)			(5,900	)
Common stock in treasury, at cost, 3 shares, on each date			(53	)			(53	)
Total Kewaunee Scientific Corporation Stockholders’ Equity			48,920				47,059
Noncontrolling interest			463				462
Total Stockholders’ Equity			49,383				47,521
Total Liabilities and Stockholders’ Equity		$	80,596			$	84,358

See accompanying notes to condensed consolidated financial statements.

4

Kewaunee Scientific Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

($ in thousands)

		Six months ended October 31
		2018				2017
Cash flows from operating activities:
Net earnings		$	2,870			$	2,957
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation			1,263				1,403
Bad debt provision			20				45
Share-based compensation expense			275				178
Provision for deferred income taxes			143				50
Change in assets and liabilities:
Decrease (increase) in receivables			2,855				(3,401	)
Decrease (increase) in inventories			565				(1,504	)
(Decrease) increase in accounts payable and other accrued expenses			(4,202	)			3,514
(Decrease) in deferred revenue			(321	)			(4,300	)
Other, net			(1,167	)			(1,055	)
Net cash provided by (used in) by operating activities			2,301				(2,113	)
Cash flows from investing activities:
Capital expenditures			(1,311	)			(1,437	)
Net cash used in investing activities			(1,311	)			(1,437	)
Cash flows from financing activities:
Dividends paid			(986	)			(868	)
Dividends paid to holders of noncontrolling interest in subsidiaries			—				(74	)
Proceeds from short-term borrowings			34,135				28,476
Repayments on short-term borrowings			(33,362	)			(24,356	)
Payments on long-term debt and lease obligations			(583	)			(334	)
Net proceeds from exercise of stock options			(29	)			8
Net cash (used in) provided by financing activities			(825	)			2,852
Effect of exchange rate changes on cash and cash equivalents			(967	)			(59	)
Decrease in cash, cash equivalents and restricted cash			(802	)			(757	)
Cash, cash equivalents and restricted cash, beginning of period			10,958				13,941
Cash, cash equivalents and restricted cash, end of period		$	10,156			$	13,184

See accompanying notes to condensed consolidated financial statements.

5

Kewaunee Scientific Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

A. Financial Information

The unaudited interim condensed consolidated financial statements of Kewaunee Scientific Corporation (the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, although the Company believes that the disclosures are adequate to make the information presented not misleading.

These interim condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of these financial statements and should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2018 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. The condensed consolidated balance sheet as of April 30, 2018 included in this interim period filing has been derived from the audited financial statements at that date, but does not include all of the information and related notes required by generally accepted accounting principles (GAAP) for complete financial statements.

The preparation of the interim condensed consolidated financial statements requires management to make certain estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates.

Adjusted Financial Information for Change in Accounting Principle

During the second quarter of 2019, the Company changed its method of accounting for its Domestic segment’s inventory from the last-in, first-out (LIFO) method to the first-in, first out (FIFO) method. All prior periods presented have been retrospectively adjusted to apply the new method of accounting. See Note E for more information on the change in inventory accounting method.

B. Revenue Recognition

The Company recognizes revenue when control of a good or service promised in a contract (i.e., performance obligation) is transferred to a customer. Control is obtained when a customer has the ability to direct the use of and obtain substantially all of the remaining benefits from that good or service. The majority of the Company’s revenues are recognized over time as the customer receives control as the Company performs work under a contract. However, a portion of the Company’s revenues are recognized at a point-in-time as control is transferred at a distinct point in time per the terms of a contract.

Performance Obligations

A performance obligation is a distinct good or service or bundle of goods and services that is distinct or a series of distinct goods or services that are substantially the same and have the same pattern of transfer. The Company identifies performance obligations at the inception of a contract and allocates the transaction price to individual performance obligations to reasonably reflect the Company’s performance in transferring control of the promised goods or services to the customer. The Company has elected to treat shipping and handling as a fulfillment activity instead of a separate performance obligation.

The following are the primary performance obligations identified by the Company:

Laboratory Furniture

The Company principally generates revenue from the manufacture of custom laboratory, healthcare, and technical furniture and infrastructure products (herein referred to as “laboratory furniture”). The Company’s products include steel, wood, and laminate furniture, fume hoods, biological safety cabinets, laminar flow and ductless hoods, adaptable modular and column systems, moveable workstations and carts, epoxy resin worksurfaces, sinks, and accessories and related design services. Customers can benefit from each piece of laboratory furniture on its own or with resources readily available in the market place such as separately purchased installation services. Each piece of laboratory furniture does not significantly modify or customize other laboratory furniture, and the pieces of laboratory furniture are not highly interdependent or interrelated with each other. The Company can, and frequently does, break pieces 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.

6

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. An extended separately priced warranty is available that can last up to five years. Separately priced extended warranties are considered separate performance obligations as they are a separately priced option available for purchase and they involve providing a service in addition to assurance that the product is free of defects.

Installation Services

The Company sometimes performs installation services for customers. The scope of installation services primarily relates to setting up the laboratory furniture, 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 and, as such, revenue from installation services is recognized over time as the installation services are performed using the cost input method, because there is a direct relationship between the Company’s inputs and the transfer of control of installation services to the customer.

Custodial Services

It is common in the laboratory and healthcare furniture industries for customers to request delivery at specific future dates, as products are often to be installed in buildings yet to be constructed. Frequently, customers will request the manufacture of these products prior to the customer’s ability or readiness to receive the product due to various reasons such as changes to or delays in the construction of the building. As such, from time to time our customers require us to provide custodial services for their laboratory furniture. Custodial services are frequently provided by third parties and do not significantly alter the other goods or services covered by the contract and as such are considered a separate and distinct performance obligation. Custodial services are simultaneously received and consumed by the customer and as such revenue from custodial services is recognized over time using a straight-line time-based measure of progress towards completion, because the Company’s services are provided evenly throughout the performance period.

Payment Terms and Transaction Prices

Our contracts with customers are fixed-priced and do not contain variable consideration or a general right of return or refund. Our contracts with customers contain terms typical for our industry, including withholding a portion of the transaction price until after the goods or services have been transferred to the customer (i.e. “retainage”). The Company does not recognize this as a significant financing component because the primary purpose of retainage is to provide the customer with assurance that the Company will perform its obligations under the contract, rather than to provide financing to the customer.

Allocation of Transaction Price

Our contracts with customers may contain 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 we do not sell the product or service separately, judgment may be required and we determine the standalone selling price using one, or a combination of, the adjusted market assessment or expected cost-plus margin approaches.

Practical Expedients Used

ASC 606 permits the use of practical expedients under certain conditions. We have elected the following practical expedients allowed under ASC 606:

•

Under the modified retrospective approach the Company elected to reassess revenue recognition under ASC 606 for only those contracts open as of the adoption date.

7

•

The portfolio approach was applied in evaluating the accounting for the cost of obtaining a contract.

•

Payment terms with our 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.

•

Our incremental cost to obtain a contract is limited to sales commissions. We apply 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 three and six months ended October 31, 2018 is as follows (in thousands):

		Three Months Ended October 31, 2018
		Domestic				International				Total
Over Time		$	28,311			$	6,656			$	34,967
Point in Time			2,311				—				2,311
		$	30,622			$	6,656			$	37,278

		Six Months Ended October 31, 2018
		Domestic				International				Total
Over Time		$	62,559			$	12,738			$	75,297
Point in Time			4,133				—				4,133
		$	66,692			$	12,738			$	79,430

Contract Balances

The closing and opening balances of contract assets and liabilities arising from contracts with customers were $1,563,000 at October 31, 2018 and $1,884,000 at April 30, 2018. The timing of revenue recognition, billings and cash collections results in accounts receivable, unbilled receivables, and deferred revenue on the condensed consolidated balance sheets. In general, the Company receives payments from customers based on a billing schedule established in its contracts. Unbilled receivables represent amounts earned which have not yet been billed in accordance with contractually stated billing terms. Accounts receivable are recorded when the right to consideration becomes unconditional and the Company has a right to invoice the customer. Deferred revenue relates to payments received in advance of performance under the contract. Deferred revenue is recognized as revenue as (or when) the Company performs under the contract.

During the three and six months ended October 31, 2018, changes in contract assets and liabilities were not materially impacted by any other factors. Approximately 100% of the contract liability balance at April 30, 2018 is expected to be recognized as revenue during fiscal year 2019 and 35% and 81% of this amount was recognized during the three and six months ended October 31, 2018, respectively.

ASC 606 adoption impact

Under ASC 606, sales consisting of customized products sold to customers for which revenue was previously recognized at a point in time now meet the criteria of a performance obligation satisfied over time. These contracts consist of customized laboratory furniture engineered or tailored to meet the customer’s requirements. In the event the customer cancels the contract, the Company will have no alternative use for and cannot economically repurpose the laboratory furniture, and the Company has the right to payment for performance completed to date. This change results in accelerated recognition of revenue and increases the balance of contract assets compared to the previous revenue recognition standard.

The Company adopted ASC 606 on May 1, 2018 using the modified retrospective approach and elected to reassess revenue recognition under ASC 606 for only those contracts open as of the adoption date, which resulted in a cumulative effect adjustment to increase Retained Earnings, net of tax, of $217,000. Comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods presented. The Company elected to reflect the aggregate effect of all contract modifications that occurred before the beginning of the earliest period presented in determining the transaction price, identifying the satisfied and unsatisfied performance obligations and allocating the transaction price to the satisfied and unsatisfied performance obligations for the modified contract at transition. The effects of these elections were immaterial.

8

The following table summarizes the impact of adopting ASC 606 on the condensed consolidated statements of operations:

		Three Months Ended October 31, 2018
		($ in thousands, except per share amounts)
		As Reported				Adjustments				Balance Without Adoption of ASC 606
Net sales		$	37,278			$	1,117			$	38,395
Costs of products sold			29,505				1,035				30,540
Gross profit			7,773				82				7,855
Operating expenses			5,963				3				5,966
Operating earnings			1,810				79				1,889
Other income			150				—				150
Interest expense			(91	)			—				(91	)
Earnings before income taxes			1,869				79				1,948
Income tax expense			415				25				440
Net earnings			1,454				54				1,508
Net earnings attributable to the noncontrolling interest			40				—				40
Net earnings attributable to Kewaunee Scientific Corporation			1,414				54				1,468
Basic Earnings Per Share		$	0.52			$	0.02			$	0.54
Diluted Earnings Per Share		$	0.51			$	0.02			$	0.53

		Six Months Ended October 31, 2018
		($ in thousands, except per share amounts)
		As Reported				Adjustments				Balance Without Adoption of ASC 606
Net sales		$	79,430			$	(52	)		$	79,378
Costs of products sold			64,183				350				64,533
Gross profit			15,247				(402	)			14,845
Operating expenses			11,726				5				11,731
Operating earnings			3,521				(407	)			3,114
Other income			314				—				314
Interest expense			(182	)			—				(182	)
Earnings before income taxes			3,653				(407	)			3,246
Income tax expense			783				(92	)			691
Net earnings			2,870				(315	)			2,555
Net earnings attributable to the noncontrolling interest			49				—				49
Net earnings attributable to Kewaunee Scientific Corporation			2,821				(315	)			2,506
Basic Earnings Per Share		$	1.03			$	(0.11	)		$	0.92
Diluted Earnings Per Share		$	1.01			$	(0.11	)		$	0.90

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The following table summarizes the impact of adopting ASC 606 on the Company’s condensed consolidated balance sheet:

		October 31, 2018
		($ in thousands)
		As Reported				Adjustments				Balance Without Adoption of ASC 606
Assets
Cash and cash equivalents		$	9,477							$	9,477
Restricted cash			679								679
Receivables, less allowances			29,785				(2,297	)			27,488
Inventories			17,097				1,587				18,684
Prepaid expenses and other assets			3,251								3,251
Total Current Assets			60,289				(710	)			59,579
Net property, plant and equipment			14,868								14,868
Other assets			5,439								5,439
Total Assets		$	80,596			$	(710	)		$	79,886
Liabilities and Stockholders’ Equity
Short-term borrowings and interest rate swaps		$	4,658			$	—			$	4,658
Current portion of long-term debt and lease obligations			1,184				—				1,184
Accounts payable			10,726				(10	)			10,716
Other current liabilities			7,468				(168	)			7,300
Total Current Liabilities			24,036				(178	)			23,858
Other non-current liabilities			7,177				—				7,177
Total Liabilities			31,213				(178	)			31,035
Noncontrolling interest			463				—				463
Total Kewaunee Scientific Corporation Stockholders’ Equity			48,920				(532	)			48,388
Total Stockholders’ Equity			49,383				(532	)			48,851
Total Liabilities and Stockholders’ Equity		$	80,596			$	(710	)		$	79,886

C. Derivative Financial Instruments

The Company records derivatives on the condensed consolidated balance sheets at fair value and establishes criteria for designation and effectiveness of hedging relationships. The nature of the Company’s business activities involves the management of various financial and market risks, including those related to changes in interest rates. The Company does not enter into derivative instruments for speculative purposes. In May 2013, the Company entered into an interest rate swap agreement whereby the interest rate payable by the Company on $3,450,000 of outstanding long-term debt was effectively converted to a fixed interest rate of 4.875% for the period beginning May 1, 2013 and ending August 1, 2017. In May 2013, the Company entered into an interest rate swap agreement whereby the interest rate payable by the Company on $2,600,000 of outstanding long-term debt was effectively converted to a fixed interest rate of 4.37% for the period beginning August 1, 2017 and ending May 1, 2020. In May 2013, the Company entered into an interest rate swap agreement whereby the interest rate payable by the Company on $1,218,000 of outstanding long-term debt was effectively converted to a fixed interest rate of 3.07% for the period beginning November 3, 2014 and ending May 1, 2020. The Company entered into these interest rate swap arrangements to mitigate future interest rate risk associated with its long-term debt and has designated these as cash flow hedges.

D. Earnings Per Share

Basic earnings per share is based on the weighted average number of common shares outstanding during the three and six month periods. Diluted earnings per share reflects the assumed exercise and conversion of restricted stock units and outstanding stock options under the Company’s Omnibus Incentive Plan, except when such awards have an anti-dilutive effect. There were no antidilutive awards outstanding at October 31, 2018 and October 31, 2017.

E. Inventories

Effective August 1, 2018, the Company elected to change its method of inventory accounting to the first in, first out (“FIFO”) method from the last in, first out (“LIFO”) link-chain dollar-value method for its Domestic segment inventories. The Company has previously

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incorrectly disclosed that it used the double-extension technique to calculate its LIFO reserve. The Company believes that the FIFO method is preferable as it results in increased uniformity across the Company’s operations with respect to the inventory valuation method, as the Company’s International subsidiaries use the FIFO method. The Company also believes that the change to FIFO will improve financial reporting by better reflecting the current value of inventory on the condensed consolidated balance sheets, by more closely aligning the flow of physical inventory with the accounting for the inventory, providing better matching of revenues and expenses. The Company applied this change in method of inventory accounting by retrospectively adjusting all prior period financial statements and footnote information presented herein as necessary.

There was no impact upon the Company’s condensed consolidated statements of operations for the three-month and six-month periods ended October 31, 2017 as there was no adjustment to the LIFO reserve amount during those periods. Consequently, there was no change in the Company’s condensed consolidated statement of cash flows for the six-month period ending October 31, 2017. Inventories consisted of the following (in thousands):

		October 31, 2018				As Adjusted April 30, 2018
Finished products		$	3,807			$	4,987
Work in process			1,375				2,393
Raw materials			11,915				11,169
		$	17,097			$	18,549

The Company’s International subsidiaries’ inventories were $1,258,000 at October 31, 2018 and $1,908,000, at April 30, 2018, measured using the first-in, first-out (“FIFO”) method at the lower of cost and net realizable value and are included in the above tables. Certain amounts in the Company’s condensed consolidated balance sheet as of April 30, 2018 was adjusted as follows (in thousands):

		April 30, 2018
		As Originally Reported				Adjustments				As Adjusted
Inventories		$	17,662			$	887			$	18,549
Total Current Assets			63,504				887				64,391
Deferred income taxes			2,031				(162	)			1,869
Total Assets			84,358				725				85,083
Other accrued expenses			2,062				54				2,116
Total Current Liabilities			27,562				54				27,616
Total Liabilities			36,837				54				36,891
Retained earnings			43,165				671				43,836
Total Kewaunee Scientific Corporation Stockholders’ Equity			47,059				671				47,730
Total Stockholders’ Equity			47,521				671				48,192
Total Liabilities and Stockholders’ Equity		$	84,358			$	725			$	85,083

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Certain amounts in the Company’s condensed consolidated statement of operations for the three and six months ended October 31, 2018 under the former LIFO method would have been as follows (in thousands, except per share amounts):

		Three months ended October 31, 2018
		As reported under FIFO				Adjustments				As computed under LIFO
Cost of products sold		$	29,505			$	100			$	29,605
Income tax (benefit)			415				(24	)			391
Net earnings			1,454				(76	)			1,378
Net earnings attributable to Kewaunee Scientific Corporation		$	1,414			$	(76	)		$	1,338
Net earnings attributable to Kewaunee Scientific Corporation shareholders
Basic		$	0.52			$	(0.03	)		$	0.49
Diluted		$	0.51			$	(0.03	)		$	0.48

		Six months ended October 31, 2018
		As reported under FIFO				Adjustments				As computed under LIFO
Cost of products sold		$	64,183			$	200			$	64,383
Income tax (benefit)			783				(49	)			734
Net earnings			2,870				(151	)			2,719
Net earnings attributable to Kewaunee Scientific Corporation		$	2,821			$	(151	)		$	2,670
Net earnings attributable to Kewaunee Scientific Corporation shareholders
Basic		$	1.03			$	(0.05	)		$	0.98
Diluted		$	1.01			$	(0.05	)		$	0.96

Certain amounts in the Company’s condensed consolidated statement of cash flows as of October 31, 2018 would have been as follows under the former LIFO method (in thousands):

		Six months ended October 31, 2018
		As reported under FIFO				Adjustments				As computed under LIFO
Net earnings		$	2,870			$	(151	)		$	2,719
Decrease (increase) in inventories			565				200				765
Decrease (increase) in accounts payable and other accrued expenses			(4,202	)			(49	)			(4,251	)
Net cash provided by (used in) operating activities		$	2,301			$	—			$	2,301

Certain amounts in the Company’s condensed consolidated balance sheet as of October 31, 2018 would have been as follows under the former LIFO method (in thousands):

		October 31, 2018
		As reported under FIFO				Adjustment				As computed under LIFO
Inventories		$	17,097			$	(1,087	)		$	16,010
Total Current Assets			60,289				(1,087	)			59,202
Deferred income taxes			1,888				162				2,050
Total Assets			80,596				(925	)			79,671
Other accrued expenses			2,743				(103	)			2,640
Total Current Liabilities			24,036				(103	)			23,933
Total Liabilities			31,213				(103	)			31,110
Retained earnings		$	45,888			$	(822	)		$	45,066
Total Kewaunee Scientific Corporation Stockholders’ Equity			48,920				(822	)			48,098
Total Stockholders’ Equity			49,383				(822	)			48,561
Total Liabilities and Stockholders’ Equity		$	80,596			$	(925	)		$	79,671

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F. Segment Information

The Company’s operations are classified into two business segments: Domestic and International. The Domestic business segment principally designs, manufactures, and installs scientific and technical furniture, including steel and wood laboratory cabinetry, fume hoods, laminate casework, flexible systems, worksurfaces, workstations, workbenches, and computer enclosures. The International business segment, which consists of the Company’s foreign subsidiaries, provides products and services, including facility design, detailed engineering, construction, and project management from the planning stage through testing and commissioning of laboratories. Intersegment transactions are recorded at normal profit margins. All intercompany balances and transactions have been eliminated. Certain corporate expenses shown below have not been allocated to the business segments.

The following table provides financial information by business segments for the three and six months ended October 31, 2018 and 2017 (in thousands):

		Domestic Operations				International Operations				Corporate / Eliminations				Total
Three months ended October 31, 2018
Revenues from external customers		$	30,622			$	6,656			$	—			$	37,278
Intersegment revenues			416				1,108				(1,524	)			—
Earnings (loss) before income taxes			2,946				705				(1,782	)			1,869
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

		Domestic Operations				International Operations				Corporate/ Eliminations				Total
Six months ended October 31, 2018
Revenues from external customers		$	66,692			$	12,738			$	—			$	79,430
Intersegment revenues			878				1,834				(2,712	)			—
Earnings (loss) before income taxes			5,945				1,154				(3,446	)			3,653
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

G. Defined Benefit Pension Plans

The Company has non-contributory defined benefit pension plans covering substantially all domestic salaried and hourly employees. These plans were amended as of April 30, 2005; no further benefits have been, or will be, earned under the plans, subsequent to the amendment date, and no additional participants will be added to the plans. Company contributions of $1,000,000 were paid to the plans during the six months ended October 31, 2018, and the Company does not expect any contributions to be paid to the plans during the remainder of the fiscal year. Contributions of $600,000 were paid to the plans during the six months ended October 31, 2017. The Company assumed an expected long-term rate of return of 7.75% for the period ended October 31, 2018 as compared to 7.75% for the period ended October 31, 2017. Pension expense consisted of the following (in thousands):

		Three months ended October 31, 2018				Three months ended October 31, 2017
Service cost		$	-0-			$	-0-
Interest cost			215				219
Expected return on plan assets			(362	)			(317	)
Recognition of net loss			221				283
Net periodic pension expense		$	74			$	185

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		Six months ended October 31, 2018				Six months ended October 31, 2017
Service cost		$	-0-			$	-0-
Interest cost			430				438
Expected return on plan assets			(724	)			(656	)
Recognition of net loss			442				566
Net periodic pension expense		$	148			$	348

H. Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and equivalents, mutual funds, cash surrender value of life insurance policies, term loans and short-term borrowings. The carrying value of these assets and liabilities approximate their fair value. The following tables summarize the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of October 31, 2018 and April 30, 2018 (in thousands):

		October 31, 2018
Financial Assets		Level 1				Level 2				Total
Trading securities held in non-qualified compensation plans (1)		$	3,443			$	—			$	3,443
Interest rate swap derivatives			—				2				2
Cash surrender value of life insurance policies (1)			—				65				65
Total		$	3,443			$	67			$	3,510
Financial Liabilities
Non-qualified compensation plans (2)		$	—			$	3,864			$	3,864
		April 30, 2018
Financial Assets		Level 1				Level 2				Total
Trading securities held in non-qualified compensation plans (1)		$	4,050			$	—			$	4,050
Cash surrender value of life insurance policies (1)			—				65				65
Total		$	4,050			$	65			$	4,115
Financial Liabilities
Non-qualified compensation plans (2)		$	—			$	4,462			$	4,462
Interest rate swap derivatives			—				5				5
Total		$	—			$	4,467			$	4,467

(1)

The Company maintains two non-qualified compensation plans which include investment assets in a rabbi trust. These assets consist of marketable securities, which are valued using quoted market prices multiplied by the number of shares owned, and life insurance policies, which are valued at their cash surrender value.

(2)	Plan liabilities are equal to the individual participants’ account balances and other earned retirement benefits.

I. Stock Options and Share-based Compensation

The Company adopted ASU 2016-9, “Stock Compensation – Improvements to Employee Share-Based Payment Accounting” prospectively effective May 1, 2017. Prior periods were not retrospectively adjusted. The Company elected prospectively to account for forfeitures as they occur rather than apply an estimated rate to share-based compensation expense. Compensation costs related to stock options and other stock awards granted by the Company are charged against operating expenses during their vesting period, under ASC 718, “Compensation – Stock Compensation.”

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