| Revenue Recognition | 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
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 work-in-process
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.
•
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 $217,000. Comparative information
for prior periods has not been restated and continues to be
reported under the accounting standards in effect for those periods
presented. The Company elected to reflect the aggregate effect of
all contract modifications that occurred before the beginning of
the earliest period presented in determining the transaction price,
identifying the satisfied and unsatisfied performance obligations
and allocating the transaction price to the satisfied and
unsatisfied performance obligations for the modified contract at
transition. The effects of these elections were immaterial.
The following table summarizes the impact of adopting ASC 606 on
the condensed consolidated statements of operations:
Three Months Ended October 31,
2018
($ in thousands,
except per share amounts)
As Reported Adjustments Balance Without
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
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
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
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 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 |
