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Item 2. Management’s Discussion and Analysis

2020-09-11 compared with 2020-03-13 · 48 added, 57 removed, 28 unchanged (79% of the section changed)

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The following discussion and analysis describes material changes in the Company’s financial condition since April 30, 2020.

The analysis of results of operations compares the three and nine months ended January 31, 2020 with the comparable periods of the prior year.

The analysis of results of operations compares the three months ended July 31, 2020 with the comparable period of the prior year.

Results of Operations

Sales for the quarter were $ 34,225,000 , a 5.7% increase from sales of $32,372,000 in the comparable period of the prior year.

Domestic sales for the quarter were $26,699,000, up 5.9% from sales of $25,217,000 in the comparable period of the prior year.

International sales for the quarter were $7,526,000, up 5.2% from sales of $7,155,000 in the comparable period of the prior year.

The increase in Domestic sales for the quarter was a result of increased activity in the Company’s dealer and distribution sales channels.

International sales increased year over year as a result of continued deliveries of a large order in the Middle East market.

Sales for the nine months ended January 31, 2020 were $113,283,000, a 1.3% increase from sales of $111,802,000 in the comparable period of the prior year.

Domestic sales for the nine-month period were $87,570,000, down 4.7% from sales of $91,909,000 in the comparable period of the prior year.

International sales for the period were $25,713,000, up 29.3% from sales of $19,893,000 in the comparable period of the prior year.

The Company’s order backlog was $ 93 million at January 31, 2020 , as compared to $ 96 million at January 31, 2019 , and $ 101 million at April 30, 2019.

Sales for the quarter were $36,423,000, a 7.4% decrease from sales of $39,336,000 for the comparable period of the prior year.

Domestic sales for the quarter were $30,058,000, up 2.6% from sales of $29,287,000 for the comparable period of the prior year.

International sales for the quarter were $6,365,000, down 36.7% from sales of $10,049,000 for the comparable period of the prior year.

Domestic sales were relatively flat while International sales decreased as a result of reduced access to construction sites and re-imposed government mandated shut-downs in India during the quarter.

The Company’s order backlog was $101 million at July 31, 2020 , as compared to $102 million at July 31, 2019 , and $101 million at April 30, 2020.

The Company continues to have a strong volume of outstanding quotations globally and is aggressively pursuing these projects.

The gross profit margin for the three months ended January 31, 2020 was 15.4% of sales, as compared to 16.2% of sales in the comparable quarter of the prior year.

The gross profit margin for the nine months ended January 31, 2020 was 16.4% of sales, as compared to 18.3% of sales in the comparable period of the prior year.

The decrease in gross profit margin percentage for the three and nine months ended January 31, 2020 was a result of a number of low margin orders that the Company aggressively pursued and secured over the past year, and a strategic Middle East order aggressively secured over two years ago at lower than normal margins.

Operating expenses for the three months ended January 31, 2020 were $7,350,000, or 21.5% of sales, as compared to $5,232,000, or 16.2% of sales, in the comparable period of the prior year.

Operating expenses for the nine months ended January 31, 2020 were $19,875,000, or 17.5% of sales, as compared to $16,810,000, or 15.0% of sales, in the comparable period of the prior year.

The increase in operating expenses for the three months ended January 31, 2020 related primarily to $559,000 of restructuring costs (see Note P.), $288,000 in marketing expenses, $230,000 in administration wages and benefits, $150,000 in recruitment and relocation expenses, and a $128,000 increase in international operating expenses.

Also impacting the increase in operating expenses is an incentive compensation expense of $147,000 as compared to a credit of $309,000 for the three months ended January 31, 2019.

The increase in operating expenses for the nine months ended January 31, 2020 related primarily to $559,000 of restructuring costs, and increases of $299,000 in incentive compensation expense, $569,000 in marketing expenses, $633,000 in administration wages and benefits, $173,000 in recruitment and relocation expenses, and a $916,000 increase in international operating expenses as the Company made investments in capabilities to strengthen its position in the India market.

In December 2019, the Company initiated a restructuring plan, which consisted of a reduction in workforce and a plan to close the Company’s subsidiary in China, a commercial sales organization for the Company’s products in China as discussed in Note P.

The Company expects these measures to produce future estimated cost savings between $1.0 million and $1.3 million based on an annual run rate basis.

Interest expense was $150,000 and $452,000 for the three and nine months ended January 31, 2020 , as compared to $76,000 and $258,000 for the comparable periods of the prior year.

The changes in interest expense were primarily attributable to changes in borrowing levels.

An income tax benefit of $350,000 and an income tax expense of $20,000 was recorded for the three months ended January 31, 2020 and 2019, respectively.

For the nine months ended January 31, 2020 and 2019, income tax expense was $1,822,000 and $803,000, respectively.

The effective tax rates were 15.5% and 57.1% for the three months ended January 31, 2020 and 2019, respectively.

The decrease in the effective tax rate for the three-month period is primarily due to the reduced federal tax liability which is a result of lower foreign subsidiary income inclusions.

The increase in the tax expense for the nine-month period is primarily due to the change in the Company’s assertion regarding the reinvestment of foreign unremitted earnings, the impact of foreign earnings, which are taxed at different tax rates than the US tax rate of 21%, and additional Global Intangible Low-Taxed Income ("GILTI") inclusion in the US.

As part of the Company’s revised global treasury management strategy, the Company elected to amend the indefinite reinvestment of foreign unremitted earnings position set forth by ASC 740 and dissolve the indefinite reinvestment of unremitted earnings assertion for the Singapore, China, and Kewaunee Labway India Pvt.

international subsidiaries.

Revoking this election provides the Company with more flexibility in treasury management to invest in projects intended to improve the Company’s operating performance.

As a result of the revocation of this election, the Company recorded a Dividend Distribution Tax withholding expense, imposed by the India Income Tax Department at a rate of 20.6% , in the amounts of $50,000 and $2,214,000 for the three and nine months ended January 31, 2020, respectively, related to the unremitted earnings of the subsidiary.

Noncontrolling interests related to the Company’s subsidiaries not 100% owned by the Company reduced net earnings by $17,000 and $59,000 for the three and nine months ended January 31, 2020, respectively, as compared to $37,000 and $86,000 for the comparable periods of the prior year.

The gross profit margin for the three months ended July 31, 2020 was 16.1% of sales, as compared to 17.7% of sales in the comparable quarter of the prior year.

The decrease in gross profit margin was primarily due to the decline in sales with an unfavorable shift in product mix between the Company's business segments.

Operating expenses for the three months ended July 31, 2020 were $6,157,000, or 16.9% of sales, as compared to $6,170,000, or 15.7% of sales, in the comparable period of the prior year.

The increase in operating expenses as a percentage of sales for the three months ended July 31, 2020 was primarily related to the decline in sales while the total operating expenses remained relatively flat.

The decrease in operating expenses was primarily due to the reductions of $343,000 for international expenses

related to wages, travel and professional fees partially offset by increases of $243,000 for administration wages and benefits and $76,000 for incentive and stock compensation expenses.

Interest expense was $77,000 for the three months ended July 31, 2020, as compared to $167,000 for the comparable period of the prior year.

The changes in interest expense were primarily attributable to changes in borrowing levels and interest rates.

Income tax expense of $21,000 and $169,000 was recorded for the three months ended July 31, 2020 and 2019, respectively.

The effective tax rates were (3.6)% and 25.4% for the three months ended July 31, 2020 and 2019, respectively.

The change in the effective tax rate for the three months ending July 31, 2020 reflects the impact of international operations which are taxed at different rates, combined with a U.S.

tax benefit recorded for the current quarter which required an offsetting valuation allowance eliminating the income tax benefit on a consolidated basis.

Noncontrolling interests related to the Company’s subsidiary not 100% owned by the Company reduced net losses by $10,000 for the three months ended July 31, 2020, as compared to a reduction of net earnings of $25,000 for the comparable period of the prior year.

The change in the net earnings attributable to the noncontrolling interest in the current period was due to changes in earnings of the subsidiary in the related period.

Net loss was $1,918,000, or $0.70 per diluted share, for the three months ended January 31, 2020 , compared to a net loss of $22,000, or $0.01 per diluted share, in the prior year period.

Net losses of $3,625,000, or $1.32 per diluted share, were reported for the nine months ended January 31, 2020 , compared to net earnings of $2,799,000, or $1.00 per diluted share, in the prior year period.

A net loss of $598,000, or $(0.22) per diluted share, was reported for the three months ended July 31, 2020 , compared to net earnings of $471,000, or $0.17 per diluted share, in the prior year period.

Liquidity and Capital Resources

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Additionally, certain machinery and equipment are financed by non-cancellable operating leases.

The Company believes that these sources will be sufficient to support ongoing business requirements in the current fiscal year, including capital expenditures.

The Company had working capital of $27,725,000 at January 31, 2020 , compared to $32,624,000 at April 30, 2019.

The ratio of current assets to current liabilities was 2.1-to-1.0 at January 31, 2020 , compared to 2.0-to-1.0 at April 30, 2019.

At January 31, 2020 , advances of $4.0 million were outstanding under the Company’s credit facilities, compared to advances of $9.5 million outstanding as of April 30, 2019.

The Company had standby letters of credit outstanding of $344,000 at January 31, 2020 compared to standby letters of credit outstanding of $5.2 million at April 30, 2019.

Amounts available under the revolving credit facility were $10.2 million and $5.3 million at January 31, 2020 and April 30, 2019, respectively.

Total borrowings and interest rate swaps were $4.2 million at January 31, 2020 , compared to $10.9 million at April 30, 2019.

As previously reported in the reports on Form 8-K filed by the Company on June 21, 2019 and July 11, 2019 , and in Note 4 of the Notes to the Consolidated Financial Statements included in the Company's 2019 Annual Report on Form 10-K, the Company amended its credit facility and entered into a restated security agreement.

In September 2019, the Company paid off its term loan and terminated its interest rate swap agreements.

On December 13, 2019, the Company entered into an amendment to the Loan Agreement and the Line of Credit to effect a change to an asset based lending arrangement based on eligible accounts receivable and inventory, with the available amount not to exceed $20 million through January 31, 2020, and with such maximum amount reduced to $15 million thereafter.

This amendment replaced the prior financial covenants with new financial covenants, including minimum monthly liquidity and EBITDA requirements.

Additionally, a requirement for the repatriation of foreign cash and restrictions on the payments of dividends was added.

At January 31, 2020, the Company was in compliance with all of the then-applicable financial covenants of the agreement.

The Company’s operations provided cash of $4,611,000 during the nine months ended January 31, 2020 .

Cash was provided primarily by decreases in receivables of $5,530,000 and inventory of $1,959,000, partially offset by an decrease in accounts payable and other accrued expenses of $2,512,000.

During the nine months ended January 31, 2020 , the Company used net cash of $1,371,000 in investing activities, all of which was used for capital expenditures.

The Company’s financing activities used cash of $8,156,000 during the nine months ended January 31, 2020 , primarily for reductions in short-term borrowings of $5,496,000, cash dividends of $1,045,000 paid to stockholders, cash dividends paid to minority interest holders of $324,000 and repayments of $1,277,000 of long-term debt.

The Company’s ability to predict future demand for its products continues to be limited given its role as subcontractor or supplier to dealers for subcontractors.

The Company believes that these sources will be sufficient to support ongoing business requirements in the current year, including capital expenditures.

The Company had working capital of $27,818,000 at July 31, 2020 , compared to $27,171,000 at April 30, 2020.

The ratio of current assets to current liabilities was 1.9-to-1.0 at July 31, 2020 , compared to 2.0-to-1.0 at April 30, 2020.

At July 31, 2020 , advances of $8.5 million were outstanding under the Company’s bank revolving credit facility, compared to advances of $4.7 million outstanding as of April 30, 2020.

The Company had standby letters of credit outstanding of $512,000 at July 31, 2020 and April 30, 2020.

Amounts available under the $15 million revolving credit facility were $6.0 million and $8.7 million at July 31, 2020 and April 30, 2020, respectively.

As previously reported in the Company's Report on Form 8-K filed on July 24, 2020 and in Note 4 of the Notes to the Consolidated Financial Statements included in the Company's 2020 Annual Report on Form 10-K, during the quarter ended July 31, 2020 , the Company entered into an amendment to its Loan Agreement and Line of Credit which effected changes in certain financial covenants and included a waiver of certain non-compliance under the previous terms of the revolving credit facility.

The amendment did not change the amount of availability provided by the Company's Line of Credit.

The Company’s operations used cash of $3,268,000 during the three months ended July 31, 2020 .

Cash was provided by earnings and an increase in accounts payable and accrued expenses of $1,065,000, offset by an increase in accounts receivable of $2,843,000 and inventories of $1,128,000 and a decrease in deferred revenue of $1,076,000.

During the three months ended July 31, 2020 , the Company used net cash of $922,000 in investing activities, all of which was used for capital expenditures.

The Company’s financing activities provided cash of $3,785,000 during the three months ended July 31, 2020 , primarily from net increases in short-term borrowings of $3,805,000.

The Company continues to actively monitor the COVID-19 situation and its impact.

Any future development and effects will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic;

further adverse revenue and net income effects;

disruptions to our operations;

closure of project sites;

ability of suppliers to support our operations;

the effectiveness of our work from home arrangements;

employee impacts from illness, school closures and other community response measures;

any actions taken by governmental authorities and other third parties in response to the pandemic.

The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.

We will continue to work to ensure the safety of our people and our ability to serve our customers worldwide.

In addition, the Company’s ability to predict future demand for its products continues to be limited given its role as subcontractor or supplier to dealers for subcontractors.

Demand for the Company’s products is also dependent upon the number of laboratory construction projects planned and/or current progress in projects already under construction.

The Company’s earnings are also impacted by fluctuations in prevailing pricing for projects in the laboratory construction marketplace and increased costs of raw materials, including stainless steel, wood, and epoxy resin, and whether the Company is able to increase product prices to customers in amounts that correspond to such increases without materially and adversely affecting sales.

The Company’s

earnings are also impacted by fluctuations in prevailing pricing for projects in the laboratory construction marketplace and increased costs of raw materials, including stainless steel, wood, and epoxy resin, and whether the Company is able to increase product prices to customers in amounts that correspond to such increases without materially and adversely affecting sales.

Additionally, since prices are normally quoted on a firm basis in the industry, the Company bears the burden of possible increases in labor and material costs between the quotation of an order and delivery of a product.

Looking forward, we continue to focus on improving profitability through both short-term and long-term actions.

These include the restructuring plan initiated and substantially completed during the third quarter, as well as a multi-year plan to invest in our manufacturing capabilities and information technology platform to improve our competitiveness.

For the fourth quarter, our focus is on ensuring that our domestic production load is as full as possible and having our manufacturing facilities operating efficiently, with the goal of achieving a recovery in profitability.

Looking forward, the Company is optimistic about our opportunities for growth within our existing end-markets and we are committed to investing in, and modernizing, our capabilities to succeed.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

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changes in raw materials and commodity costs;

and acts of terrorism, war, governmental action, natural disasters and other Force Majeure events.

the effects of COVID-19 and acts of terrorism, war, governmental action, natural disasters and other Force Majeure events.

Many important factors that could cause such differences are described under the caption “Risk Factors” in Item 1A in the Company’s 2020 Annual Report on Form 10-K and in Quarterly Reports on Form 10-Q subsequently filed by the Company.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis