Executive Overview
George Risk Industries, Inc. (GRI) (the "Company") is a diversified manufacturer
of electronic components, encompassing the security industry's widest variety of
door and window contact switches, environmental products, wire and cable
installation tools, proximity switches and custom keyboards. The security
products division comprises the largest portion of GRI sales and products are
sold worldwide through distributors, who in turn sell these products to security
installation companies. These products are used for residential, commercial,
industrial and government installations. International sales accounted for
approximately 12.5% of revenues for fiscal year 2020 and 11.4% for 2019.
GRI is known for its quality American made products, top-notch customer service
and the willingness to work with customers on their special applications.
GRI owns and operates its main manufacturing plant and offices in Kimball,
Nebraska with a satellite plant 40 miles away in Gering, Nebraska.
The Company has substantial marketable securities holdings and these holding
have a material impact on the financial results. For the fiscal year ending
April 30, 2020, other income (expense) showed a loss of 39.96% of income before
income taxes . In comparison, other income accounted for 31.01% of the income
before income taxes for the year ending April 30, 2019. Management's philosophy
behind having holdings in marketable securities is to keep the money working and
gaining interest on the cash that is not needed to be put back into the
business. Over the years, the investments have kept the earnings per share up
when the results from operations have not fared as well.
Management is always open to the possibility of acquiring a business that would
complement our existing operations, which is exactly what took place in October
2017 when the Company purchased substantially all of the assets from Labor
Saving Devices, Inc. ("LSDI") and Roy Bowling ("Bowling").
There are no known seasonal trends with any of GRI's products, since we mostly
sell to distributors and original equipment manufacturers (OEMs). The products
are tied to the housing industry and will fluctuate with building trends.
Liquidity and Capital Resources
Operating
Net cash increased by $1,585,000 during the year ended April 30, 2020 compared
to an increase of $579,000 during the year ended April 30, 2019. Accounts
receivable increased by $266,000 during the current year while showing a
$155,000 increase in the prior year. The current larger increase in cash flow
from accounts receivable is result of increased sales but having delays in
payments from customers because of the COVID-19 pandemic. At April 30, 2020,
74.75% of receivables were less than 60 days and 5.70% were over 90 days. In
comparison, 72.17% of the receivables were considered current (less than 60
days) and 5.87% of the total were over 90 days past due for the prior year
during the same period.
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Inventories increased by $567,000 in fiscal year ended April 30, 2020 while the
prior year showed an increase of $1,316,000 at year end. The current year
increase is a result of having more raw materials on hand since sales have
increased.
Prepaid expenses increased by $137,000 while they decreased $207,000 in the
current and prior year, respectively. The increase in the current year is due to
having more prepayments of raw materials than at year-end last year and having
to renew multi-year subscriptions.
Income tax overpayments decreased by $203,000 for the year ended April 30, 2020.
The smaller decrease in the current year is a result of having income tax
estimates calculated better to match the actual taxable income.
For the year ended April 30, 2020, accounts payable decreased by $19,000 as
compared to a decrease of $130,000 for the same period the year before. The
change in cash with regards to accounts payable is largely based on timing.
Payables are paid within terms and fluctuate based primarily on inventory needs
for production. Accrued expenses increased $94,000 for the year ended April 30,
2020, due to increased commissions and having a few more days of accrued payroll
compared to the prior year.
Investing
As for investment activities, $731,000 was spent on purchases of property and
equipment during the current fiscal year, compared to $154,000 during the year
ended April 30, 2019. These capitalized costs mainly consisted of purchases of
buildings and machinery and equipment. Additionally, the Company continues to
purchase marketable securities, which include municipal bonds and quality
stocks. Cash spent on purchases of marketable securities for the year ended
April 30, 2020 was $831,000 versus the $942,000 spent for the corresponding
period last year. Conversely, net proceeds from the sale of marketable
securities were $776,000 and $766,000 at April 30, 2020 and 2019, respectively.
The Company uses "money manager" accounts for most stock transactions. By doing
this, the Company gives an independent third-party firm, who are experts in this
field, permission to buy and sell stocks at will. The Company pays quarterly
service fees based on the value of the investments.
Financing
Cash used in financing activities consists of three items. First, for the year
ended April 30, 2020, $1,803,000 was spent on the payment of dividends. The
Company declared a dividend of $0.40 per share of common stock on September 30,
2019 for the current fiscal year, while a $0.38 per share of common stock
dividend was declared on September 30, 2018 and issued in the prior fiscal year.
Secondly, the Company continues to purchase back its Class A common stock when
the opportunity arises. For the year ended April 30, 2020, the Company purchased
$74,000 of treasury stock and $79,000 was bought back for the year ended April
30, 2019. We have been actively searching for stockholders that have been "lost"
over the years. The payment of dividends over the last fourteen fiscal years has
also prompted many stockholders and/or their relatives and descendants to sell
back their stock to the Company. Third, the Company applied for and received a
Paycheck Protection Program (PPP) loan in the fourth quarter of fiscal year
2020. With all the uncertainties of the COVID-19 pandemic, management decided
that it would be wise to apply for the loan. The Company received $950,000 in
loan proceeds in April 2020.
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At April 30, 2020, working capital decreased 2.0% in comparison to the previous
fiscal year. The Company measures liquidity using the quick ratio, which is the
ratio of cash, securities and accounts receivables to current obligations. The
Company's quick ratio decreased to 11.623 for the year ended April 30, 2020
compared to 17.570 for the year ended April 30, 2019.
Results of Operations
GRI completed the fiscal year ending April 30, 2020 with a net profit of 14.21%
of net sales. Net sales were at $14,809,000, up 4.84% over the previous fiscal
year. The increase in sales is a result of continued growth within our product
lines and having a major competitor closed its door at the end of calendar year
2019. Cost of goods sold was 50.00% of net sales for the year ended April 30,
2020 and 51.86% for the same period last year. Management's goal is to keep the
cost of goods sold percentage of less than 50%, but since wages and other
expenses continue to increase to stay competitive with the workforce that is the
reason why the cost of goods percentage is just past management's goal.
Management also increased prices slightly in January 2020 to offset the growing
expenses and cost of raw materials.
Operating expenses were 24.82% of net sales for the year ended April 30, 2020 as
compared to 24.73% for the corresponding period last year. Management's goal is
to keep the operating expenses around 30% or less of net sales, so the goal has
been met for the current fiscal year. Income from operations for the year ended
April 30, 2020 was at $3,730,000, which is a 12.83% increase from the
corresponding period last year, which had income from operations of $3,306,000.
Other income and expense results for the fiscal year ended April 30, 2020
produced a loss of ($1,065,000). This is in comparison to a gain of $1,486,000
for the fiscal year ended April 30, 2019. Dividend and interest income was
$931,000, which is down 5.10% over the prior year. Dividend and interest income
at April 30, 2019 was $981,000. Investments in marketable securities are
presented at fair value and an unrealized gain or loss is recorded within the
statements of operations, a non-cash entry, at each period beginning May 1, 2018
and previously recorded unrealized gain or loss in other comprehensive income
(loss). As a result, an unrealized loss of $(1,619,000) was recorded for the
fiscal year ended April 30, 2020 and an unrealized gain of $444,000 was recorded
for the prior year ended April 30, 2019. Net loss on the sale of investments for
the current fiscal year was $(384,000), which is an 729.51% decrease over the
prior year. Net gain on the sale of investments for the fiscal year ending April
30, 2019 was $61,000.
Net income for the year ended April 30, 2020 was $2,104,000, which is down
41.52% from the prior year, which produced net income of $3,598,000. Basic and
diluted earnings per common share (EPS) for the year ended April 30, 2020 was
$0.42 per share. Basic and diluted earnings per common share (EPS) for the year
ended April 30, 2019 was $0.73 and $0.72 per share, respectively.
Management is hopeful that sales will continue to increase for the fiscal year
ending April 30, 2021. With the purchase of the assets from Labor Saving
Devices, Inc., the Company has seen an overall increase in sales, and we have
also seen growth in our existing product lines as well with a major competitor
going out of business at the end of 2019. Because of this closure, we have seen
our orders increase and we are still adjusting to grow to fulfill these orders.
Our Security sales division, which is our largest sales generator, is directly
tied to the housing industry and we normally experience the same fluctuations.
We are always researching and developing new products that will help our sales
increase. While only a few new or improved products were successfully launched
in fiscal year 2020, we are confident that more new products will be released
soon, and we are searching for products that complement our current offerings.
Management is always open to the possibility of acquiring a business or product
line that would complement our existing operations. Due to the Company's strong
cash position, management believes this could be achieved without the need for
outside financing. The intent is to utilize the equipment, marketing techniques
and established customers to deliver new products and increase sales and
profits.
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New product development
The GRI Engineering department continues to develop enhancements to our existing
products as well as to develop new products that will continue to secure our
position in the industry.
A new face plate for our pool alarms is nearing completion. The innovative
design is slim in style and will also allow the homeowner to change the plate to
match their décor.
An updated version of the pool access alarm is currently going through
electrical listing testing. Since the COVID-19 pandemic has happened, not much
testing has progressed. This next-generation model combines our battery operated
DPA series with our hard wired 289 series. A variety of installation options
will be available through jumper pin settings.
Wireless technology is a main area of focus for product development. We are
looking into adding wireless technology to some of our current products. A
wireless contact switch is in the final stages of development. Also, we are
working on wireless versions of our Pool Alarm and environmental sensors that
will be easy to install in current construction. We are also concentrating on
making products compatible with Wi-Fi, smartphone technology and the increasing
popular Z-Wave standard for wireless home automation.
In the next month we are introducing a couple of new security products. They are
listed below:
? The 2707 Series are triple high biased magnetic reed contacts for high
security and are available in SPDT and DPDT models. These contacts are
resistant to magnetic tamper and defeat. They are used in applications such as
airports, biotechnology labs, manufacturing plants, banks, military bases and
energy-generation facilities.
? The 3040 Panic Switch contains screw terminals and uses an actuating lever
which can be triggered with only the tip of the finger. It can be installed
under a counter or desk or any similar place. The 3040CT uses 12' extreme
temperature rated wire for installation in refrigerators and freezers. Both
models have a latching LED indicating when the switch is activated and
automatically resets when the lever is closed and is fully re-armed.
We have launched our new GR1840 Oval Metal Door Channel Magnet. This is a direct
replacement for the obsolete Interlogix magnet. This magnet fits into the top
channel of a metal door and does not require drilling into the door core. We
have also paired this with several of our ¾" and 1" steel door contacts.
There have been several new products that have been introduced for our cable and
wiring tools segment. They are listed below:
? A 12" adjustable hole cutter which compliments the popular 10" hole cutter.
Using a standard drill, this tool allows you to drill various size holes in
the ceiling for speakers and canned lights. The dust bin which buts against
the ceiling keeps the ceiling material and dust enclosed making for a clean,
time saving installation.
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? The lighted Bullnose tips come in a variety of colors; red, green and blue to
go along with the standard clear lights. These colored lights are placed on
FiberFuse wire running rods which allows easy location of the rod ends in dark
places such as attics and crawlspaces. The rods can be color coded for wire
paths running into different rooms. Larger batteries add to the longevity of
these new lights.
Critical Accounting Policies
The discussion and analysis of the financial condition and results of operations
are based upon the financial statements, which have been prepared in conformity
with generally accepted accounting principles in the United States. The
preparation of these financial statements requires the use of estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses reported in those financial statements. These judgments can be
subjective and complex, and consequently actual results could differ from those
estimates. The most critical accounting policies relate to accounts receivable;
marketable securities; inventory; income taxes; and segment reporting.
Accounts receivable-Accounts receivable are customer obligations due under
normal trade terms. The Company sells its products to security alarm
distributors, alarm installers, and original equipment manufacturers. Management
performs continuing credit evaluations of its customers' financial condition and
the Company generally does not require collateral.
The Company records an allowance for doubtful accounts based on an analysis of
specifically identified customer balances. The Company has a limited number of
customers with individually large amounts due at any given date. Any
unanticipated change in any one of these customers' credit worthiness or other
matters affecting the collectability of amounts due from such customers could
have a material effect on the results of operations in the period in which such
changes or events occur. After all attempts to collect a receivable have failed,
the receivable is written off.
Marketable securities-The Company has investments in publicly traded equity
securities, state and municipal debt securities, corporate bonds and real-estate
investment trusts (REITs). The investments in securities are reported at fair
value. The Company uses the average cost method to determine the cost of
securities sold and any unrealized gains or losses on equity securities are
reported in the respective period's earnings. Unrealized gains and losses on
debt securities are excluded from earnings and reported separately as a
component of stockholder's equity. Dividend and interest income are reported as
earned.
In accordance with the Generally Accepted Accounting Principles in the United
States (US GAAP), the Company evaluates all marketable securities for other-than
temporary declines in fair value. When the cost basis exceeds the fair market
value for approximately one year, management evaluates the nature of the
investment, cause of impairment and number of investments that are in an
unrealized position. When it is determined that a security will probably remain
impaired, a recognized loss is booked and the investment is written down to its
new fair value. The investments are periodically evaluated to determine if
impairment changes are required.
Inventories-Inventories are valued at the lower of cost or net realizable value.
Costs are determined using the average cost-pricing method. The Company uses
actual costs to price its manufactured inventories, approximating average costs.
The reported net value of inventory includes finished saleable products,
work-in-process and raw materials that will be sold or used in future periods.
Inventory costs include raw materials, direct labor and overhead. The Company's
overhead expenses are applied, based in part, upon estimates of the proportion
of those expenses that are related to procuring and storing raw materials as
compared to the manufacture and assembly of finished products. These
proportions, the method of their application, and the resulting overhead
included in ending inventory, are based in part on subjective estimates and
approximations and actual results could differ from those estimates.
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In addition, the Company records an inventory obsolescence reserve, which
represents the cost of the inventory that has had no movement in over two years.
There is inherent professional judgment and subjectivity made by management in
determining the estimated obsolescence percentage. In addition, and as
necessary, the Company may establish specific reserves for future known or
anticipated events.
Income Taxes-US GAAP requires use of the assets and liability method; whereby
current and deferred tax assets and liabilities are determined based on tax
rates and laws enacted as of the balance sheet date. Deferred tax expense
represents the change in the deferred tax asset/liability balances.
Segment Reporting and Related Information-The Company designates the internal
organization that is used by management for allocating resources and assessing
performance as the source of the Company's reportable segments. US GAAP also
requires disclosures about products and services, geographic area and major
customers.
Related Party Transactions - The Company purchased a building in November 2019
that was previously leased from Bonita Risk, thus terminating the lease during
the fiscal year ended April 30, 2020. Bonita Risk is a director and an employee
of the Company and is the majority holder of George Risk Industries, Inc. stock.
This building contains the Company's sales and accounting departments,
maintenance department, engineering department and some production facilities.
This lease required a minimum payment of $1,535 on a month-to-month basis. The
total lease expense for this arrangement was $ 7,675 during the fiscal year
ended April 30, 2020 and $18,420 for the fiscal year ended April 30, 2019.
One of the directors of the board, Joel Wiens, is the principal shareholder of
FirsTier Bank. FirsTier Bank is the financial institution the Company uses for
its day to day banking operations. Year end balances of accounts held at this
bank are $5,167,000 for the year ended April 30, 2020 and $4,224,000 for the
year ended April 30, 2019. The Company also received interest income from
FirsTier Bank in the amount of approximately $74,600 for the fiscal year ended
April 30, 2020 and approximately $63,400 was received for the fiscal year ended
April 30, 2019.
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