What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-07-15 compared with 2020-07-27 · 68 added, 91 removed, 87 unchanged (65% of the section changed)

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The Company's corporate headquarters are located in Statesville, North Carolina.

Direct sales offices are located in the United States, India, and Singapore.

Direct sales offices are located in the United States, India, Saudi Arabia, and Singapore.

Three manufacturing facilities are located in Statesville serving the domestic and international markets, and one manufacturing facility is located in Bangalore, India serving the Indian, Middle East and Asian markets.

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Our products are primarily sold through purchase orders and contracts submitted by customers through our dealers and commissioned agents, a national distributor, and through competitive bids submitted by us and our subsidiaries.

Products are sold

principally to pharmaceutical, biotechnology, industrial, chemical and commercial research laboratories, educational institutions, healthcare institutions, governmental entities, manufacturing facilities and users of networking furniture.

Products are sold principally to pharmaceutical, biotechnology, industrial, chemical and commercial research laboratories, educational institutions, healthcare institutions, governmental entities, manufacturing facilities and users of networking furniture.

We consider the markets in which we compete to be highly competitive, with a significant amount of the business involving competitive public bidding.

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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.

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.

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We evaluate the collectability of our 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 us, 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 we believe will ultimately be collected.

In circumstances where management is aware of a customer's inability to meet its financial obligations to us, or a project dispute makes it unlikely that the outstanding amount 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 we believe will ultimately be collected.

In addition to specific customer identification of potential bad debts, a general reserve for bad debts is estimated and recorded based on our recent past loss history and an overall assessment of past due trade accounts receivable amounts outstanding.

The Company’s inventories are valued at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method.

Pension Benefits

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Several statistical and other factors, which attempt to anticipate future events, are used in calculating the expense and liability related to the pension plans.

These factors include assumptions about the discount rate used to calculate and determine benefit obligations and the expected return on plan assets within certain guidelines.

These factors include actuarial assumptions about the discount rate used to calculate and determine benefit obligations and the expected return on plan assets within certain guidelines.

The actuarial assumptions used by us may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants.

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The Company's exposure reflected in the self-insurance reserves varies depending upon market conditions in the insurance industry, availability of cost-effective insurance coverage, and actual claims versus estimated future claims.

We are subject to income taxes in the U.S.

(federal and state) and numerous foreign jurisdictions.

Tax laws, regulations, administrative practices, and interpretations in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes.

There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain.

In addition, our actual and forecasted earnings are subject to change due to economic, political, and other conditions, such as the COVID-19 pandemic, and significant judgment is required in determining our ability to use our deferred tax assets.

Our effective tax rates could be affected by numerous factors, such as changes in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, including earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize related tax benefits, the applicability of special tax regimes, changes in foreign currency exchange rates, changes to our forecasts of income and loss and the mix of jurisdictions to which they relate, changes in our deferred tax assets and liabilities and their valuation, and interpretations related to tax laws and accounting rules in various jurisdictions.

RESULTS OF OPERATIONS

Sales for fiscal year 2020 were $147.5 million, an increase of 0.7% from fiscal year 2019 sales of $146.6 million.

Sales for fiscal year 2021 were $147.5 million, relatively unchanged from fiscal year 2020 sales of $147.5 million.

Domestic sales for fiscal year 2021 were $111.0 million, a decrease of 3.5% compared to fiscal year 2020 sales of $115.1 million.

The decrease in Domestic sales in fiscal year 2021 was related to delays in construction projects as well as the timing of awards for new projects due to the coronavirus pandemic.

International sales for fiscal year 2021 were $36.4 million, an increase of 12.3% from fiscal year 2020 sales of $32.4 million.

The increase in International sales for fiscal year 2020 is the result of continued deliveries of a large order in the Middle East market.

The increase in International sales for fiscal year 2021 is the result of strong international demand coupled with accelerated delivery dates to achieve project completions prior to the government mandated shut-downs in response

to the surge of COVID-19 cases in India, although activity slowed in the Middle East and other Asian markets due to COVID-19 restrictions.

Our order backlog was $114.5 million at April 30, 2021, as compared to $100.9 million at April 30, 2020.

Gross profit represented 16.3% and 15.9% of sales in fiscal years 2021 and 2020, respectively.

The decrease in gross profit margin percentage was a result of a number of low margin orders that the Company aggressively pursued and secured over the past year, which included a strategic Middle East order aggressively secured over two years ago at lower than normal margins which was delivered in the current fiscal year.

Additionally, profitability was impacted during the year as a result of the coronavirus pandemic.

The increase in gross profit margin percentage was related to improved operating performance of the Company's Domestic operations with lower unfavorable manufacturing variances when compared to the prior year, combined with a favorable shift in product mix between the Company's business segments.

Raw material costs were higher in fiscal year 2021, particularly in the fourth quarter, due to supplier capacity constraints resulting from COVID-19, as well as other supply disruptions.

Operating expenses were $25.3 million and $25.8 million in fiscal years 2021 and 2020, respectively, and 17.2% and 17.5% of sales, respectively.

The increase in operating expense dollars in fiscal year 2020 as compared to fiscal year 2019 is related primarily to an increase in personnel expenses of $798,000, incentive and stock compensation of $385,000, restructuring expenses of $312,000, and depreciation expense of $136,000.

The increased personnel expenses were driven by investments in talent to accelerate our strategy to modernize our manufacturing capabilities and information technology platform.

Also contributing to the increase was an increase of bad debt expense of $299,000 related primarily to the closure of our China subsidiary, other China closure expenses of $48,000, $134,000 of expenses related to our new Indian subsidiary, and increases of $510,000 in other International subsidiary operating expenses, partially offset by decreases in management separation expenses of $388,000 and professional and consulting fees of $308,000.

See Note 11 of the Notes to the Consolidated Financial Statements included in Item 8 for additional information concerning the Company's restructuring costs.

Other income (expense) was $426,000 and $684,000 in fiscal years 2020 and 2019, respectively.

The decrease in other income (expense) in fiscal year 2020 was primarily due to the decrease in interest income related to the repatriation of foreign cash utilized to reduce debt as discussed in Note 9 of the Notes to the Consolidated Financial Statements included in Item 8.

The decrease in operating expense in fiscal year 2021 as compared to fiscal year 2020 was primarily due to reductions in salaries and fringe benefits of $722,000, bad debt expense of $310,000, and travel and entertainment expense of $536,000, partially offset by increased incentive and stock compensation of $488,000, and repairs and maintenance expense of $242,000.

During fiscal year 2021, operating expenses were also unfavorably impacted by additional COVID-related expenses, and expenses related to strategic initiatives, including data communications and processing expense of $155,000.

See Note 11 , Restructuring Costs , of the Notes to the Consolidated Financial Statements included in Item 8 for additional information concerning the Company's restructuring costs.

Pension expense was $1,153,000 and $454,000 in fiscal years 2021 and 2020, respectively.

The increase in pension expense was due to changes in underlying valuation assumptions as of the prior fiscal year.

Other income, net was $241,000 and $426,000 in fiscal years 2021 and 2020, respectively.

The decrease in other income in fiscal year 2021 was primarily due to the decrease in interest income.

Interest expense was $389,000 and $493,000 in fiscal years 2021 and 2020, respectively.

The increase in interest expense for fiscal year 2020 was primarily due to increases in the levels of bank borrowings.

Income tax expense was $1.8 million and $446,000 in fiscal years 2020 and 2019, respectively, or -61.3% and 20.9% of pretax earnings, respectively.

The unfavorable effective rate for fiscal year 2020 compared to the prior fiscal year is primarily due to additional tax expense of $2.0 million as a result of the Company’s elimination of its indefinite reinvestment of foreign unremitted earnings and an increase in valuation allowances of $1.7 million, partially offset by the favorable tax benefit of $939,000 for net operating losses to be carried back to prior years with higher enacted tax rates as discussed in Note 5 of the Notes to the Consolidated Financial Statements included in Item 8.

Net earnings attributable to the noncontrolling interest related to our subsidiaries that are not 100% owned by the Company were $63,000 and $159,000 for fiscal years 2020 and 2019, respectively.

The changes in the net earnings attributable to the noncontrolling interest for each year were due to changes in the levels of net income of the subsidiaries.

Net loss in fiscal year 2020 was $4,687,000, or $1.70 per diluted share.

Net earnings in fiscal year 2019 were $1,529,000, or $0.55 per diluted share.

The decrease in earnings was attributable to the factors discussed above.

The change in interest expense for fiscal year 2021 was primarily due to changes in the levels of bank borrowings.

Income tax expense was $990,000 and $1.8 million for fiscal years 2021 and 2020, respectively, or -37.8% and -61.3% of pretax loss, respectively.

The effective rate change for fiscal year 2021 is primarily due to changes in valuation allowance and a lesser fiscal year 2021 benefit on net operating loss carryback compared with fiscal year 2020.

The effective rate in fiscal year 2020 was also unfavorably impacted due to the elimination of the indefinite reinvestment assertion of foreign earnings.

The impact of the additional tax expense for fiscal year 2020 was $2.0 million.

Net earnings attributable to the non-controlling interest related to our subsidiaries that are not 100% owned by the Company were $65,000 and $63,000 for fiscal years 2021 and 2020, respectively.

The changes in the net earnings attributable to the non-controlling interest for each year were due to changes in the levels of net income of the subsidiaries.

Net loss was $3,672,000, or $1.33 per diluted share and $4,687,000, or $1.70 per diluted share for fiscal years ended April 30, 2021 and April 30, 2020, respectively.

The decrease in net loss was attributable to the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

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We believe that these sources of funds will be sufficient to support ongoing business requirements, including capital expenditures, through fiscal year 2022.

At April 30, 2020, we had advances of $4.7 million and standby letters of credit aggregating $512,000 outstanding under our unsecured revolving credit facility.

On June 19, 2019 we entered into a Security Agreement pursuant to which we granted a security interest in substantially all of our assets to secure our obligations under the credit facility.

See Note 4 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report for additional information concerning our credit facility.

At April 30, 2021, we had advances of $6.8 million and standby letters of credit aggregating $704,000 outstanding under our secured, $15 million revolving credit facility.

See Note 4 , Long-term Debt and Other Credit Arrangements , of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report for additional information concerning our credit facility.

We did not have any off balance sheet arrangements at April 30, 2021.

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($ in thousands)

Contractual Cash Obligations

After 5 years

Contractual Cash Obligations Total 1 Year 2-3 Years 4-5 Years After 5 years

Operating Leases $ 10,841 $ 2,018 $ 3,308 $ 2,651 $ 2,864

Capital Lease Obligations

Financing Lease Obligations 141 32 64 45 —

Total Contractual Cash Obligations $ 10,982 $ 2,050 $ 3,372 $ 2,696 $ 2,864

Operating activities provided cash of $912,000 in fiscal year 2021, primarily from operations, and decreases in inventories of $1,188,000 and receivables of $6,087,000, partially offset by decreases in accounts payable and accrued expenses of $4,567,000 and a decrease in income tax receivable of $1,762,000.

Operating activities provided cash of $4,161,000 in fiscal year 2020, primarily from operations, and decreases in inventories of $1,876,000 and receivables of $4,833,000, partially offset by decreases in accounts payable and accrued expenses of $2,016,000.

Operating activities provided cash of $2,490,000 in fiscal year 2019, primarily from operating earnings, and an increase in accounts payable and other accrued expenses, partially offset by increases in inventories and deferred revenue.

The Company's financing activities provided cash of $1,982,000 during fiscal year 2021 from proceeds from the net increase in short-term borrowings of $2,109,000, partially offset by cash dividends of $108,000 paid to minority interest holders and repayment of long-term debt of $19,000.

The Company's financing activities used cash of $7,458,000 during fiscal year 2020 for payments on short-term borrowings of $4,794,000, cash dividends of $1,044,000 paid to stockholders, cash dividends of $324,000 paid to minority interest holders and repayment of long-term debt of $1,282,000.

The Company’s financing activities provided cash of $2,334,000 during fiscal year 2019 as a result of an increase in short-term borrowings of $5,628,000, which was partially utilized for cash dividends of $2,030,000 paid to stockholders, cash dividends of $51,000 paid to minority interest holders and repayment of long-term debt of $1,177,000.

See Note 4 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report for additional information concerning our credit facility.

The majority of the April 30, 2021 accounts receivable balances are expected to be collected during the first quarter of fiscal year 2022, with the exception of retention amounts on fixed-price contracts which are collected when the entire construction project is completed and all retention funds are paid by the owner.

As discussed above, no further benefits have been, or will be, earned under our pension plans after April 30, 2005, and no additional participants have been, or will be, added to the plans.

There were no contributions to the plans in fiscal year 2020 and we expect to make contributions of $30,000 to the plans in fiscal year 2021.

We made contributions of $1,000,000 to the plans in fiscal year 2019.

Capital expenditures were $2.5 million and $4.2 million in fiscal years 2020 and 2019, respectively.

In fiscal year 2021, we made contributions to the plans of $30,000.

There were no contributions to the plans in fiscal year 2020.

We expect to make no contributions to the plans for fiscal year 2022.

Capital expenditures were $2,397,000 and $2,465,000 in fiscal years 2021 and 2020, respectively.

Capital expenditures in fiscal year 2021 were funded primarily from operations.

During fiscal 2020, the Company established a strategy for a multi-year transformation of the business, which is designed to lead to sustained profitability and growth.

Fiscal year 2021 capital expenditures are anticipated to be approximately $2.0 million, with the majority of these expenditures related to investing in modernizing our manufacturing capabilities and information technology platform.

During fiscal year 2020, the Company established a strategy for a multi-year transformation of the business, which is designed to lead to sustained profitability and growth.

Fiscal year 2022 capital expenditures are anticipated to be approximately $2.0 million.

The fiscal year 2022 expenditures are expected to be funded primarily by operating activities, supplemented as needed by borrowings under our revolving credit facility.

Working capital was $27.2 million at April 30, 2020, down from $32.6 million at April 30, 2019, and the ratio of current assets to current liabilities was 2.0-to-1.0 at April 30, 2020 and April 30, 2019.

The decrease in working capital for fiscal year 2020 was primarily due to the decrease in cash and accounts receivable partially offset by a decrease in outstanding debt.

We paid cash dividends of $0.38 per share in fiscal year 2020.

Working capital was $26.3 million at April 30, 2021, down from $27.2 million at April 30, 2020, and the ratio of current assets to current liabilities was 1.8-to-1.0 at April 30, 2021 and 2.0-to-1.0 at April 30, 2020.

The decrease in working capital for fiscal year 2021 was primarily due to the decrease in income tax receivable of $1.8 million, increases in short term borrowings of $2.1 million, and accounts payable of $3.7 million, partially offset by increases in accounts receivable of $6.1 million and inventories of $1.2 million.

We paid cash dividends of $0.38 per share in fiscal year 2020.

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RECENT ACCOUNTING STANDARDS

New Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”).

This update outlined a new comprehensive revenue recognition model that supersedes most prior revenue recognition guidance and required companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflected the consideration to which the entity expected to be entitled in exchange for those goods or services.

The Company adopted this standard effective May 1, 2018.

In February 2016, the FASB issued ASU 2016-02, “Leases.” This guidance establishes a right-of-use ("ROU") model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.

Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the

income statement.

A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.

This guidance became effective for fiscal years, and interim periods within those years, beginning after December 15, 2018.

The Company adopted this standard effective May 1, 2019.

The adoption of ASU 2016-02 resulted in the recognition of ROU assets and corresponding lease liabilities on the Company's consolidated financial position.

See Note 8 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report for additional information.

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 January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge.

This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019.

The Company will adopt this standard in fiscal year 2021.

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 March 2017, the FASB issued ASU 2017-07, “Compensation—Retirement Benefits—Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires that the service cost component of net periodic pension cost is presented in the same line as other compensation costs arising from services rendered by the respective employees during the year.

The other components of net periodic pension cost are required to be presented in the income statement separately from the service cost component and outside of earnings from operations.

This guidance allows for the service cost component to be eligible for capitalization when applicable.

This guidance became effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.

The Company adopted this standard effective May 1, 2018 using the full retrospective approach.

In February 2018, the FASB issued ASU 2018-2, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This guidance provides the Company with an option to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act ("2017 Tax Act") from accumulated other comprehensive income to retained earnings.

This guidance became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.

The Company adopted this standard effective May 1, 2019 and did not elect to reclassify tax effects as a result of tax reform;

therefore, the adoption did not have a significant impact on the Company's consolidated financial position or results of operations.

In March 2018, the FASB issued ASU 2018-09, “Compensation - Stock Compensation ("Topic 718"):

Improvements to Employee Share-Based Payment Accounting” ("ASU 2018-09").

This ASU makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation, and the financial statement presentation of excess tax benefits or deficiencies.

ASU 2018-09 also clarifies the statement of cash flows presentation for certain components of share-based awards.

The standard is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted.

The Company adopted this standard effective May 1, 2019.

The adoption of this standard did not have a significant impact on the Company's consolidated financial position or results of operations.

In August 2018, the FASB issued ASU 2018-14, “Compensation -Retirement Benefits -Defined Benefit Plans -General (Subtopic 715-20) - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans" ("ASU 2018-14").

The amendments in this update remove defined benefit plan disclosures that are no longer considered cost-beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant.

ASU 2018-14 is effective for fiscal years ending after December 15, 2020.

Early adoption is permitted.

The Company will adopt this standard in fiscal year 2021.

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 expects to adopt this guidance when effective and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

See Note 1 , Summary of Significant Accounting Policies , to our Consolidated Financial Statements in this Form 10-K for a discussion of new accounting pronouncements, which is incorporated herein by reference.

Financial Outlook

The Company’s ability to predict future demand for its products continues to be limited given its role as subcontractor or supplier to dealers for subcontractors.

The Company continues to actively monitor the COVID-19 pandemic and its impact.

Any future developments and effects will be highly uncertain and cannot be predicted, including:

the scope and duration of the pandemic;

further adverse revenue and net income effects;

disruptions to our operations;

closure of project sites;

ability of suppliers to support our operations;

effectiveness of our work from home arrangements;

employee impacts from illness, school closures and other community response measures;

and any actions taken by governmental authorities and other third parties in response to the pandemic.

The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.

The Company will continue to work to ensure the safety of our people and our ability to serve our customers worldwide.

In addition, the Company's ability to predict future demand for its products continues to be limited given its role as subcontractor or supplier to dealers for subcontractors.

Demand for the Company's products is also dependent upon the number of laboratory construction projects planned and/or current progress in projects already under construction.

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Additionally, since prices are normally quoted on a firm basis in the industry, the Company bears the burden of possible increases in labor and material costs between the quotation of an order and delivery of a product.

Looking forward, we are optimistic about our opportunities for growth within our existing end-markets and are committed to investing and modernizing our capabilities to succeed.

Looking forward, the Company is optimistic about opportunities for growth within existing end-markets.

As the economy continues to re-open, the Company anticipates that project awards will accelerate and the pace of construction will increase.

In the near-term, escalating raw material pricing will continue to unfavorably impact net earnings due to the fixed price nature of our contracts.

The Company has, however, taken steps to implement surcharges on new orders to offset broad based price increases for materials including steel, aluminum, hard woods, and resin products.

The impact of these surcharges, to the extent we are able to implement them successfully, will lag what has been an immediate impact of rising commodity prices.

Over the long-term, the Company expects its financial performance to continue to improve based upon its investments in modernizing its operations and reduced operating cost structure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis