Basis of Presentation (Policies)

9 Months Ended

Jun. 30, 2020

Accounting Policies [Abstract]

Accounting Pronouncements and Policies

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), amending its accounting guidance related to revenue recognition. Under this ASU and subsequently issued amendments, revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted ASU 2014-09 in the first quarter of fiscal 2019. The Company elected to adopt the standard using the modified retrospective method. The adoption of ASU 2014-09 did not have a significant impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). With adoption of this standard, lessees must recognize most leases as a right-of-use asset and a lease liability on their balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification is based on criteria that are similar to those applied in prior lease accounting. ASU 2016-02 must be applied on a modified retrospective basis and is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. The Company adopted ASU 2016-02 in the first quarter of fiscal 2020. The adoption of ASU 2016-02 did not have a significant impact on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). The new guidance clarifies when a change to the terms or conditions of a share based payment award must be accounted for as a modification. ASU 2017-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company adopted ASU 2017-09 in the first quarter of fiscal 2019. The adoption of ASU 2017-09 did not have a significant impact on its consolidated financial statements.

No other accounting pronouncements recently issued or newly effective have had, or are expected to have, a material impact on the Company’s consolidated financial statements.

Marketable Securities

Marketable debt and equity securities are categorized as trading securities and are thus marked to market and stated at fair value. Fair value is determined using the quoted closing or latest bid prices for Level 1 investments and market standard valuation methodologies for Level 2 investments. Realized gains and losses on investment transactions are determined by specific identification and are recognized as incurred in the condensed consolidated statements of income. Changes in net unrealized gains and losses are reported in the condensed consolidated statements of income in the current period and represent the change in the fair value of investment holdings during the period.

Fair Value Measurements

Fair Value Measurements

The fair value of financial instruments is presented based upon a hierarchy of levels that prioritizes the inputs of valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The fair value of marketable equity securities, mutual funds, exchange-traded funds, government securities, and cash and money funds are substantially based on quoted market prices (Level 1). Corporate and municipal bonds are valued using market standard valuation methodologies, including: discounted cash flow methodologies, matrix pricing or other similar techniques. The inputs to these market standard valuation methodologies include, but are not limited to: interest rates, credit standing of the issuer or counterparty, industry sector of the issuer, coupon rate, call provisions, maturity, estimated duration and assumptions regarding liquidity and estimated future cash flows. In addition to bond characteristics, the valuation methodologies incorporate market data, such as actual trades completed, bids and actual dealer quotes, where such information is available. Accordingly, the estimated fair values are based on available market information and judgments about financial instruments (Level 2). Fair values of the Level 2 investments, if any, are provided by the Company’s professional investment management firm.

The following table sets forth, by level, within the fair value hierarchy, the Company’s marketable securities measured at fair value as of June 30, 2020:

	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
Equities	$	12,089,000	$	—	$	—	$	12,089,000
Mutual Funds		3,983,000		—		—		3,983,000
Exchange-Traded Funds		7,140,000		—		—		7,140,000
Corporate Bonds		—		38,058,000		—		38,058,000
Government Securities		33,789,000		—		—		33,789,000
Cash and Money Funds		10,616,000		—		—		10,616,000
Total	$	67,617,000	$	38,058,000	$	—	$	105,675,000

Changes in net unrealized gains and (losses) included in the condensed consolidated statements of income for the quarter and nine months ended June 30, 2020, were $(857,000) and $3,979,000, respectively. There were no transfers of investments between Level 1 and Level 2 during the nine months ended June 30, 2020.

The following table sets forth by level, within the fair value hierarchy, the Company’s assets measured at fair value as of September 30, 2019:

	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
Equities	$	10,412,000	$	—	$	—	$	10,412,000
Mutual Funds		3,987,000		—		—		3,987,000
Exchange-Traded Funds		5,163,000		—		—		5,163,000
Corporate Bonds		—		38,690,000		—		38,690,000
Government Securities		45,171,000		—		—		45,171,000
Cash and Money Funds		1,899,000		—		—		1,899,000
Total	$	66,632,000	$	38,690,000	$	—	$	105,322,000

Changes in net unrealized gains and (losses) included in the condensed consolidated statements of income for the quarter and nine months ended June 30, 2019, were $3,979,000 and $(857,000), respectively. There were no transfers of investments between Level 1 and Level 2 during the nine months ended June 30, 2019.

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term nature of these items.

Inventories

Inventories are valued at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price of goods less reasonable costs of completion and delivery. During the fourth quarter of fiscal 2019, the Company changed its method for accounting for cost of inventories from the last-in, first-out (“LIFO”) method to the first-in, first-out (“FIFO”) method. As required by accounting principles generally accepted in the United States of America (“GAAP”), the Company reflected this change in accounting principle on a retrospective basis, resulting in changes to the historical periods presented. The Company believes the FIFO method improves financial reporting by better reflecting the current value of inventory on the consolidated balance sheets, by more closely aligning the flow of physical inventory with the accounting for the inventory, and by providing better matching of revenues and expenses.

The fiscal 2018 consolidated financial statements were retrospectively adjusted to apply the new method of FIFO cost accounting for inventories. The cumulative effect of this change on periods prior to those presented herein resulted in an increase in retained earnings of $2,708,000. There was no material impact to the previously reported unaudited interim fiscal 2018 quarterly condensed consolidated results of operations or statements of income as a result of the retrospective application of the change in inventory accounting principle.

Appropriate consideration is given to obsolescence, excessive levels, deterioration, possible alternative uses and other factors in determining net realizable value. The cost of work in process and finished goods includes materials, direct labor, variable costs and overhead. The Company evaluates the need to record inventory adjustments on all inventories, including raw material, work in process, finished goods, spare parts and used equipment. Used equipment acquired by the Company on trade-in from customers is carried at estimated net realizable value. Unless specific circumstances warrant different treatment regarding inventory obsolescence, the cost basis of inventories three to four years old are reduced by 50%, while the cost basis of inventories four to five years old are reduced by 75%, and the cost basis of inventories greater than five years old are reduced to zero. Inventory is typically reviewed for obsolescence on an annual basis computed as of September 30, the Company’s fiscal year end. If significant known changes in trends, technology or other specific circumstances that warrant consideration occur during the year, then the impact on obsolescence is considered at that time.

Earnings per Share

Earnings per Share Data

The following table sets forth the computation of basic and diluted earnings per share for the quarters and nine months ended June 30, 2020 and 2019:

	Quarter Ended June 30,				Nine Months Ended June 30,
	2020		2019		2020		2019
Net Income	$	4,322,000	$	2,444,000	$	6,156,000	$	10,217,000
Common Shares:
Weighted average common shares outstanding		14,601,000		14,541,000		14,592,000		14,541,000
Effect of dilutive stock options		118,000		164,000		125,000		163,000
Diluted shares outstanding		14,719,000		14,705,000		14,717,000		14,704,000
Basic:
Net earnings per share	$	0.30	$	0.17	$	0.42	$	0.70
Diluted:
Net earnings per share	$	0.29	$	0.17	$	0.42	$	0.69

Basic earnings per share are based on the weighted-average number of shares outstanding. Diluted earnings per share are based on the sum of the weighted average number of shares outstanding plus common stock equivalents.

The weighted-average shares issuable upon the exercise of stock options included in the diluted earnings per share calculation for the quarter and nine months ended June 30, 2020 were 250,000 and 257,000, respectively, which equates to 118,000 and 125,000 dilutive common stock equivalents, respectively. There were 7,000 weighted-average shares issuable upon the exercise of stock options, which were not included in the diluted earnings per share calculation for the quarter ended June 30, 2020 because they were anti-dilutive. The weighted-average shares

issuable upon the exercise of stock options included in the diluted earnings per share calculation for the quarter and nine months ended June 30, 2019 were 317,000 and 317,000, respectively, which equates to 164,000 and 163,000 dilutive common stock equivalents, respectively. There were no anti-dilutive shares for the quarter ended June 30, 2019, and for the nine months ended June 30, 2020 and June 30, 2019.

Income Taxes

Income Taxes

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law by President Donald Trump. The Tax Reform Act significantly lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities for tax years beginning after December 31, 2017, implementing a territorial tax system and imposing repatriation tax on deemed repatriated earnings of foreign subsidiaries. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.

On the condensed consolidated balance sheet as of June 30, 2020, deferred income taxes decreased $2.1 million as compared to September 30, 2019, reflecting payment of taxes due of $1.9 million on the filing of the Company’s Form 3115 with the Internal Revenue Service to reflect the revenue recognition method change to the percentage of completion method for tax purposes pursuant to Internal Revenue Code Sections 460 and 451(b).

The Company’s income tax provision is based on management’s estimate of the effective tax rate for the full year. The tax provision in any period will be affected by, among other things, permanent, as well as temporary differences in the deductibility of certain items, in addition to changes in tax legislation. As a result, the Company may experience significant fluctuations in the effective book tax rate (that is, its tax expense divided by pre-tax book income) from period to period. The Company’s effective tax rates for the first nine months of fiscal 2020 and 2019 reflect the impact of the reduced rates under the Tax Reform Act.

Revenue Recognition and Related Costs

Revenue Recognition and Related Costs

As discussed in Note 1, the Company adopted the provisions of ASU No. 2014-09 and related amendments effective for the quarter ended December 31, 2018 using the modified retrospective method. The adoption of this standard did not have a material impact on the timing or amounts of revenues recognized by the Company, and, as such, no cumulative effect adjustment was recorded with the adoption of the standard.

The following table disaggregates the Company’s net revenue by major source for the quarter and nine months ended June 30, 2020 and 2019:

	Quarter Ended June 30,				Nine Months Ended June 30,
	2020		2019		2020		2019
Equipment sales recognized over time	$	10,350,000	$	7,844,000	$	32,269,000	$	36,203,000
Equipment sales recognized at a point in time		8,995,000		6,747,000		20,946,000		17,190,000
Parts and component sales		2,671,000		2,870,000		10,492,000		10,387,000
Freight revenue		822,000		1,312,000		2,926,000		2,744,000
Other		102,000		75,000		330,000		321,000
Net revenue	$	22,940,000	$	18,848,000	$	66,963,000	$	66,845,000

Revenues from contracts with customers for the design, manufacture and sale of custom equipment are recognized over time when the performance obligation is satisfied by transferring control of the equipment. Control of the equipment transfers over time as the equipment is unique to the specific contract and thus does not create an asset

with an alternative use to the Company. Revenues and costs are recognized in proportion to actual labor costs incurred, as compared with total estimated labor costs expected to be incurred, during the entire contract. All incremental costs related to obtaining a contract are expensed as incurred as the amortization period is less than one year. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined.

Contract assets (excluding accounts receivable) under contracts with customers represent revenue recognized in excess of amounts billed on equipment sales recognized over time. These contract assets were $10,064,000 at June 30, 2020 and $13,838,000 at September 30, 2019 and are included in current assets as costs and estimated earnings in excess of billings on the Company’s condensed consolidated balance sheets at June 30, 2020 and September 30, 2019, respectively. The Company anticipates that all these contract assets at June 30, 2020, will be billed and collected within one year.

Revenues from all other contracts for the design and manufacture of equipment, for service and for parts sales, net of any discounts and return allowances, are recorded at a point in time when control of the goods or services has been transferred. Control of the goods or service typically transfers at time of shipment or upon completion of the service.

Payment for equipment under contract with customers is typically due prior to shipment. Payment for services under contract with customers is due as certain milestones are completed. Accounts receivable related to contracts with customers for equipment sales was $281,000 at June 30, 2020 and $301,000 at September 30, 2019.

Product warranty costs are estimated using historical experience and known issues and are charged to production costs as revenue is recognized. Provisions for estimated returns and allowances and other adjustments are provided for in the same period the related sales are recorded. Returns and allowances, which reduce product revenue, are estimated using historical experience.

Under certain contracts with customers, recognition of a portion of the consideration received may be deferred and recorded as a contract liability if the Company has to satisfy a future obligation, such as to provide installation assistance. There were no contract liabilities other than customer deposits at June 30, 2020 and September 30, 2019. Customer deposits related to contracts with customers were $2,651,000 at June 30, 2020 and $1,918,000 at September 30, 2019, and are included in current liabilities on the Company’s condensed consolidated balance sheets at June 30, 2020 and September 30, 2019, respectively.

The Company records revenues earned for shipping and handling as freight revenue at the time of shipment, regardless of whether or not it is identified as a separate performance obligation. The cost of shipping and handling is classified as production costs concurrently with the revenue recognition.