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.

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 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

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