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 10.7% of revenues for fiscal year 2022 and 11.9% for 2021.
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 holdings
have a material impact on the financial results. For the fiscal year ending
April 30, 2022, the percentage of other income (expense) was a loss of 30.11% of
income before income taxes. In comparison, the percentage of other income
(expense) was a gain of 63.27% of the income before income taxes for the year
ending April 30, 2021. 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 the Company
mostly sells 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 decreased by $1,248,000 during the year ended April 30, 2022 compared
to an increase of $868,000 during the year ended April 30, 2021. Accounts
receivable increased by $326,000 during the current year while showing a
$850,000 increase in the prior year. The current smaller increase in cash flow
from accounts receivable is the result of slower collection of accounts
receivable. At April 30, 2022, 75.19% of receivables were less than 60 days and
7.86% were over 90 days. In comparison, 77.93% of the receivables were
considered current (less than 60 days) and 3.76% of the total were over 90 days
past due for the prior year during the same period.
Inventories increased by $2,430,000 in fiscal year ended April 30, 2022, while
the prior year showed an increase of $557,000 at year end. The current year
increase is a result of having more raw materials on hand since sales have
increased and having the raw material costing more than before. In turn, with
material and labor costs rising, the work in process and finished goods
inventories have also increased.
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Prepaid expenses increased by $903,000 while they increased $67,000 in the
current and prior year, respectively. The larger 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 in the current year.
For the year ended April 30, 2022, accounts payable decreased by $157,000 as
compared to an increase of $291,000 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 decreased $5,000 for the year ended April 30,
2022, due to having slightly less accrued customer liability refund calculated
compared to the prior year.
Income tax payable increased by $196,000 for the year ended April 30, 2022,
compared to a $137,000 decrease in income tax overpayment for the year ended
April 30, 2021. The current increase is largely due to having increased sales
and income before tax and not making enough income tax estimates.
Investing
As for investment activities, $390,000 was spent on purchases of property and
equipment during the current fiscal year, compared to $517,000 during the year
ended April 30, 2021. These capitalized costs mainly consisted of purchases
machinery and equipment and making capital improvements. 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, 2022 was $787,000 versus the $506,000 spent for the
corresponding period last year. Conversely, net proceeds from the sale of
marketable securities were $452,000 and $21,000 at April 30, 2022 and 2021,
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 two items. First, for the year
ended April 30, 2022, $2,257,000 was spent on the payment of dividends. The
Company declared a dividend of $0.50 per share of common stock on September 30,
2021 for the current fiscal year, while a $0.42 per share of common stock
dividend was declared on September 30, 2020 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, 2022, the Company purchased
$211,000 of treasury stock and $35,000 was bought back for the year ended April
30, 2021. The Company has been actively searching for stockholders that have
been "lost" over the years. The payment of dividends over the last sixteen
fiscal years has also prompted many stockholders and/or their relatives and
descendants to sell back their stock to the Company.
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At April 30, 2022, working capital decreased 0.59% 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 15.549 for the year ended April 30, 2022
compared to 16.856 for the year ended April 30, 2021.
Results of Operations
GRI completed the fiscal year ending April 30, 2022 with a net profit of 17.20%
of net sales. Net sales were at $20,735,000, up 12.05% over the previous fiscal
year. The increase in sales is a result of continued growth within our product
lines and having a major competitor close its door at the end of calendar year
2019. Cost of goods sold was 51.70% of net sales for the year ended April 30,
2022 and 49.59% for the same period last year. Management's goal is to keep the
cost of goods sold percentage of less than 50% and was just slightly over that
goal for the current fiscal year. Management strives to be as efficient as
possible since wages and material costs continue to increase, due to the
increased inflation in our economy. Management offset some of these added
expenses by implementing a 10% price increase effective January 1, 2022.
Operating expenses were 21.06% of net sales for the year ended April 30, 2022 as
compared to 21.74% 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, 2022 was at $5,648,000, which is a 6.45% increase from the
corresponding period last year, which had income from operations of $5,306,000.
Other income and expense results for the fiscal year ended April 30, 2022
produced a loss of $(1,307,000). This is in comparison to a gain of $9,140,000
for the fiscal year ended April 30, 2021. Dividend and interest income was
$1,027,000, which is up 35.67% over the prior year. Dividend and interest income
at April 30, 2021 was $757,000. 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. As a result, an unrealized loss of
$(2,764,000) was recorded for the fiscal year ended April 30, 2022 and an
unrealized gain of $7,007,000 was recorded for the prior year ended April 30,
2021. Net gain on the sale of investments for the current fiscal year was
$414,000, which is a 14.05% increase over the prior year. Net gain on the sale
of investments for the fiscal year ending April 30, 2021 was $363,000.
Net income for the year ended April 30, 2022 was $3,566,000, which is down
67.05% from the prior year, which produced net income of $10,822,000. Basic and
diluted earnings per common share (EPS) for the year ended April 30, 2022 was
$0.72 per share. Basic and diluted earnings per common share (EPS) for the year
ended April 30, 2021 was $2.19 and $2.18 per share, respectively.
Management is hopeful that sales will continue to increase for the fiscal year
ending April 30, 2023. 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.
Management is also having challenges in getting certain raw materials and the
cost of the raw materials continue to increase because of inflation. The Company
also struggles to get enough workers to fill production needs. 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
2022, 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.
Explosion proof contacts that will be UL listed for hazardous locations are in
development. There has been demand from our customers for this type of high
security magnetic reed switch.
An updated version of the pool access alarm (PAA) has met electrical listing
testing (ETL) approval and production has started. 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
such as instant alarm and a seven second delay.
Wireless technology is a main area of focus for product development. We are
considering 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 monitoring devices which include glass break
detection, tilt sensing and environmental monitoring. A redesign of our brass
water valve shut-off system is near completion.
The Company is developing magnetic contacts which are listed under UL 634 Level
2. These sensors are for high security applications such as government
buildings, military use, nuclear facilities, and financial institutions.
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.
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Marketable securities-The Company has investments in publicly traded equity
securities, state and municipal debt securities, 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 loss position. When it is determined that a security will likely
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.
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 - 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 $5,058,000 for the year ended April
30, 2022 and $6,885,000 for the year ended April 30, 2021. The Company also
received interest income from FirsTier Bank in the amount of approximately
$58,800 for the fiscal year ended April 30, 2022 and approximately $54,800 was
received for the fiscal year ended April 30, 2021.
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