KEWAUNEE SCIENTIFIC CORP /DE/ 10-Q

Item 1. Financial Statements Kewaunee Scientific Corporation Condensed Consolidated Statements of Operations (Unaudited) ($ and shares in thousands, except per share amounts) Three Months Ended July 31, 2020 2019 Net sales $ 36,423 $ 39,336 Cost of products sold 30,542 32,390 Gross profit 5,881 6,946 Operating expenses 6,157 6,170 Operating earnings (loss) (276 ) 776 Pension expense (288 ) (113 ) Other income 54 169 Interest expense (77 ) (167 ) Earnings (loss) before income taxes (587 ) 665 Income tax expense 21 169 Net earnings (loss) (608 ) 496 Less: net earnings (loss) attributable to the noncontrolling interest (10 ) 25 Net earnings (loss) attributable to Kewaunee Scientific Corporation $ (598 ) $ 471 Net earnings (loss) per share attributable to Kewaunee Scientific Corporation stockholders: Basic $ (0.22 ) $ 0.17 Diluted $ (0.22 ) $ 0.17 Weighted average number of common shares outstanding: Basic 2,756 2,750 Diluted 2,756 2,771 See accompanying notes to condensed consolidated financial statements. 1 Kewaunee Scientific Corporation Condensed Consolidated Statements of Comprehensive Income (Unaudited) ($ in thousands) Three Months Ended July 31, 2020 2019 Net earnings (loss) $ (608 ) $ 496 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (13 ) 196 Change in fair value of cash flow hedge — (1 ) Other comprehensive income (loss) (13 ) 195 Comprehensive income (loss), net of tax (621 ) 691 Less: comprehensive income (loss) attributable to the noncontrolling interest (10 ) 25 Comprehensive income (loss) attributable to Kewaunee Scientific Corporation $ (611 ) $ 666 See accompanying notes to condensed consolidated financial statements. 2 Kewaunee Scientific Corporation Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) ($ in thousands, except per share amounts) Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Kewaunee Scientific Corporation Stockholders’ Equity Balance at April 30, 2020 $ 6,885 $ 3,360 $ (53 ) $ 37,821 $ (9,598 ) $ 38,415 Net loss attributable to Kewaunee Scientific Corporation — — — (598 ) — (598 ) Other comprehensive loss — — — — (13 ) (13 ) Stock based compensation 20 78 — — — 98 Balance at July 31, 2020 $ 6,905 $ 3,438 $ (53 ) $ 37,223 $ (9,611 ) $ 37,902 Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Kewaunee Scientific Corporation Stockholders’ Equity Balance at April 30, 2019 $ 6,875 $ 3,133 $ (53 ) $ 43,552 $ (6,407 ) $ 47,100 Net earnings attributable to Kewaunee Scientific Corporation — — — 471 — 471 Other comprehensive income — — — — 195 195 Cash dividends paid, $0.19 per share — — — (522 ) — (522 ) Stock based compensation 9 51 — — — 60 Balance at July 31, 2019 $ 6,884 $ 3,184 $ (53 ) $ 43,501 $ (6,212 ) $ 47,304 See accompanying notes to condensed consolidated financial statements. 3 Kewaunee Scientific Corporation Condensed Consolidated Balance Sheets ($ and shares in thousands, except per share amounts) July 31, 2020 April 30, 2020 (Unaudited) Assets Current Assets: Cash and cash equivalents $ 3,990 $ 4,365 Restricted cash 835 850 Receivables, less allowance; $612; $606, on each respective date 30,897 28,062 Inventories 16,458 15,330 Prepaid expenses and other current assets 6,298 5,624 Total Current Assets 58,478 54,231 Property, plant and equipment, at cost 58,818 57,859 Accumulated depreciation (42,310 ) (41,587 ) Net Property, Plant and Equipment 16,508 16,272 Right of use assets 8,828 9,312 Deferred income taxes 330 336 Other assets 3,034 3,778 Total Assets $ 87,178 $ 83,929 Liabilities and Stockholders’ Equity Current Liabilities: Short-term borrowings $ 8,524 $ 4,719 Current portion of capital lease liability 20 19 Current portion of operating lease liabilities 1,256 1,282 Accounts payable 14,091 13,114 Employee compensation and amounts withheld 4,001 4,159 Deferred revenue 1,432 2,508 Other accrued expenses 1,336 1,259 Total Current Liabilities 30,660 27,060 Long-term portion of capital lease liability 108 113 Long-term portion of operating lease liabilities 7,471 7,780 Accrued pension and deferred compensation costs 9,654 9,303 Deferred income taxes 369 401 Other non-current liabilities 735 569 Total Liabilities 48,997 45,226 Commitments and Contingencies Stockholders’ Equity: Common stock, $2.50 par value, Authorized – 5,000 shares; Issued – 2,762 shares; 2,754 shares; – Outstanding – 2,759 shares; 2,751 shares, on each respective date 6,905 6,885 Additional paid-in-capital 3,438 3,360 Retained earnings 37,223 37,821 Accumulated other comprehensive loss (9,611 ) (9,598 ) Common stock in treasury, at cost, 3 shares, on each date (53 ) (53 ) Total Kewaunee Scientific Corporation Stockholders’ Equity 37,902 38,415 Noncontrolling interest 279 288 Total Stockholders’ Equity 38,181 38,703 Total Liabilities and Stockholders’ Equity $ 87,178 $ 83,929 See accompanying notes to condensed consolidated financial statements. 4 Kewaunee Scientific Corporation Condensed Consolidated Statements of Cash Flows (Unaudited) ($ in thousands) Three Months Ended July 31, 2020 2019 Cash flows from operating activities: Net earnings (loss) $ (608 ) $ 496 Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation and amortization 687 644 Bad debt provision 8 36 Stock based compensation expense 112 74 Deferred income taxes (27 ) (16 ) Change in assets and liabilities: Receivables (2,843 ) (3,008 ) Inventories (1,128 ) 855 Accounts payable and other accrued expenses 1,065 835 Deferred revenue (1,076 ) (76 ) Other, net 542 (247 ) Net cash used in operating activities (3,268 ) (407 ) Cash flows from investing activities: Capital expenditures (922 ) (1,183 ) Net cash used in investing activities (922 ) (1,183 ) Cash flows from financing activities: Dividends paid — (522 ) Proceeds from short-term borrowings 23,885 16,650 Repayments on short-term borrowings (20,080 ) (12,884 ) Payments on long-term debt and lease obligations (5 ) (296 ) Net proceeds from exercise of stock options (15 ) (14 ) Net cash provided by financing activities 3,785 2,934 Effect of exchange rate changes on cash and cash equivalents 15 81 Increase (decrease) in cash, cash equivalents and restricted cash (390 ) 1,425 Cash, cash equivalents and restricted cash, beginning of period 5,215 11,156 Cash, cash equivalents and restricted cash, end of period $ 4,825 $ 12,581 See accompanying notes to condensed consolidated financial statements. 5 Kewaunee Scientific Corporation Notes to Condensed Consolidated Financial Statements (unaudited) A. Financial Information The unaudited interim condensed consolidated financial statements of Kewaunee Scientific Corporation (the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted, although the Company believes that the disclosures are adequate to make the information presented not misleading. These interim condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of these consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2020 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. The condensed consolidated balance sheet as of April 30, 2020 included in this interim period filing has been derived from the audited consolidated financial statements at that date, but does not include all of the information and related notes required by U.S. GAAP for complete financial statements. The preparation of the interim condensed consolidated financial statements requires management to make certain estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. B. Cash, Cash Equivalents and Restricted Cash Cash and cash equivalents consist of cash on hand and highly liquid investments with original maturities of three months or less. During the periods ended July 31, 2020 and April 30, 2020, the Company had cash deposits in excess of FDIC insured limits. The Company has not experienced any losses from such deposits. Restricted cash includes bank deposits of subsidiaries used for performance guarantees against customer orders. The Company includes restricted cash along with the cash balance for presentation in the condensed consolidated statements of cash flows. The reconciliation between the condensed consolidated balance sheet and the condensed consolidated statement of cash flows is as follows: July 31, 2020 April 30, 2020 Cash and cash equivalents $ 3,990 $ 4,365 Restricted cash 835 850 Total cash, cash equivalents and restricted cash $ 4,825 $ 5,215 C. 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. Disaggregated Revenue A summary of net sales transferred to customers at a point in time and over time for the periods ended July 31, 2020 and July 31, 2019 is as follows (in thousands): Three Months Ended July 31, 2020 Domestic International Total Over Time $ 29,080 $ 6,365 $ 35,445 Point in Time 978 — 978 $ 30,058 $ 6,365 $ 36,423 6 Three Months Ended July 31, 2019 Domestic International Total Over Time $ 28,235 $ 10,049 $ 38,284 Point in Time 1,052 — 1,052 $ 29,287 $ 10,049 $ 39,336 Contract Balances The closing and opening balances of contract assets arising from contracts with customers which were recorded as unbilled receivables were $ 6,996,000 at July 31, 2020 and $ 6,131,000 at April 30, 2020 . The closing and opening balances of contract liabilities arising from contracts with customers were $ 1,432,000 at July 31, 2020 and $2,508,000 at April 30, 2020 . The timing of revenue recognition, billings and cash collections results in accounts receivable, unbilled receivables, and deferred revenue which are disclosed on the condensed consolidated balance sheets and in the notes to the condensed consolidated financial statements. 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. Approximately 100% of the contract liability balances at April 30, 2020 and July 31, 2020 are expected to be recognized as revenue during the respective succeeding 12 months. D. Inventories The Company measures inventory using the first-in, first-out ("FIFO") method at the lower of cost and net realizable value. Inventories consisted of the following (in thousands): July 31, 2020 April 30, 2020 Finished products $ 2,781 $ 2,455 Work in process 2,004 1,921 Raw materials 11,673 10,954 $ 16,458 $ 15,330 The Company’s International subsidiaries’ inventories were $2,012,000 at July 31, 2020 and $2,136,000 at April 30, 2020 and are included in the above tables. E. Fair Value of Financial Instruments The Company’s financial instruments consist primarily of cash and equivalents, mutual funds, cash surrender value of life insurance policies, term loans and short-term borrowings. The carrying value of these assets and liabilities approximate their fair value. The following tables summarize the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of July 31, 2020 and April 30, 2020 (in thousands): July 31, 2020 Financial Assets Level 1 Level 2 Total Trading securities held in non-qualified compensation plans (1) $ 2,512 $ — $ 2,512 Cash surrender value of life insurance policies (1) — 87 87 Total $ 2,512 $ 87 $ 2,599 Financial Liabilities Non-qualified compensation plans (2) $ — $ 2,961 $ 2,961 Total $ — $ 2,961 $ 2,961 7 April 30, 2020 Financial Assets Level 1 Level 2 Total Trading securities held in non-qualified compensation plans (1) $ 2,485 $ — $ 2,485 Cash surrender value of life insurance policies (1) — 87 87 Total $ 2,485 $ 87 $ 2,572 Financial Liabilities Non-qualified compensation plans (2) $ — $ 2,899 $ 2,899 Total $ — $ 2,899 $ 2,899 (1) The Company maintains two non-qualified compensation plans which include investment assets in a rabbi trust. These assets consist of marketable securities, which are valued using quoted market prices multiplied by the number of shares owned, and life insurance policies, which are valued at their cash surrender value. (2) Plan liabilities are equal to the individual participants’ account balances and other earned retirement benefits. F. Derivative Financial Instruments The Company records derivatives on the condensed consolidated balance sheets at fair value and establishes criteria for designation and effectiveness of hedging relationships. The nature of the Company’s business activities involves the management of various financial and market risks, including those related to changes in interest rates. The Company does not enter into derivative instruments for speculative purposes. In May 2013, the Company entered into certain interest rate swap arrangements to mitigate future interest rate risk associated with its long-term debt and designated these as cash flow hedges. These interest rates swaps were terminated in conjunction with the payoff of the outstanding long-term debt in September 2019. G. Long-term Debt and Other Credit Arrangements 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 , unchanged from April 30, 2020 . Amounts available under the revolving credit facility were $ 6.0 million and $ 8.7 million at July 31, 2020 and April 30, 2020 , respectively. At April 30, 2020 , the Company was not in compliance with all of the financial covenants under the revolving credit facility. On July 20, 2020, the Company entered into an amendment to the Loan Agreement and Line of Credit which effected changes in certain financial covenants set forth in the Loan Agreement and included a waiver of the non-compliance described above. This amendment did not change the amount of availability provided by the Company's Line of Credit. At July 31, 2020, the Company was in compliance with all the financial covenants under its revolving credit facility. 8 H. Leases In accordance with ASC 842, "ASU No. 2016-02 Leases", the Company is required to recognize lease assets and lease liabilities reflecting the rights and obligations created by leased assets previously classified as operating leases. The Company has operating type leases for real estate and equipment in both the U.S. and internationally and a financing lease for a truck in the U.S. At July 31, 2020 and April 30, 2020 , right-of-use assets totaled $ 8,828,000 and $ 9,312,000 , respectively. Operating cash paid to settle lease liabilities was $ 410,000 and $ 314,000 for the periods ended July 31, 2020 and July 31, 2019, respectively. The Company’s leases have remaining lease terms of up to 10 years, some of which may include options to extend the leases for up to 5 years or options to terminate the leases within 1 year. Operating lease expense was $ 632,000 and $ 549,000 for the three months ended July 31, 2020 and July 31, 2019, respectively, inclusive of period cost for short-term leases, not included in lease liabilities, of $ 222,000 and $ 235,000 for the three months ended July 31, 2020 and July 31, 2019 , respectively. At July 31, 2020 , the weighted average remaining lease term for the capitalized operating leases was 7.7 years and the weighted average discount rate was 4.0% . For the financing lease, the weighted average remaining lease term was 5.2 years and the weighted average discount rate was 10.0% . The Company uses the implicit rate in determining the present value of the lease payments when available, however, most of the Company's leases do not provide an implicit rate so for those leases the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Future minimum lease payments under non-cancelable leases as of July 31, 2020 : Operating Financing Remainder of fiscal 2021 $ 1,132 $ 24 2022 1,528 32 2023 1,498 32 2024 1,217 32 2025 1,173 32 Thereafter 3,898 11 Total Minimum Lease Payments $ 10,446 $ 163 Imputed Interest (1,720 ) (36 ) Total $ 8,726 $ 127 I. Earnings Per Share Basic earnings per share is based on the weighted average number of common shares outstanding during the year. Diluted earnings per share reflects the assumed exercise of outstanding options and the conversion of restricted stock units (“RSUs”) under the Company’s various stock compensation plans, except when RSUs and options have an antidilutive effect. There were 118,696 and 30,360 antidilutive RSUs and options outstanding at July 31, 2020 and July 31, 2019 , respectively. The following is a reconciliation of basic to diluted weighted average common shares outstanding at July 31 (in thousands): 2020 2019 Basic 2,756 2,750 Dilutive effect of stock options and RSUs — 21 Weighted average common shares outstanding - diluted 2,756 2,771 J. Stock Options and Share-based Compensation Compensation costs related to stock options and other stock awards granted by the Company are charged against operating expenses during their vesting period, under ASC 718, “Compensation-Stock Compensation.” In May 2020, the Company granted 12,045 RSUs under the 2017 Omnibus Incentive Plan ("2017 Plan"). These RSUs include a service component that vests over a one -year period. The Company granted 83,816 RSUs under the 2017 Plan in June 2020. These RSUs include both a service and a performance component, vesting over a three -year period. The recognized expense is based upon the vesting period for service criteria and estimated attainment of the performance criteria at the end of the three - year period, based on the ratio of cumulative days of service to total days over the three -year period. The Company recorded 9 share-based compensation expense during the three months ended July 31, 2020 and 2019 of $59,000 and $ 21,000 , respectively. The remaining estimated share-based compensation expense of $ 1,131,000 and $696,000 , respectively, will be recorded over the remaining vesting periods. K. Income Taxes 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-month period is primarily due to the impact of foreign operations which are taxed at different rates than the U.S. tax rate of 21% . In addition, the change in the U.S. effective tax rate for the three months ended July 31, 2020 was unfavorably impacted by the recording of a valuation allowance against the deferred tax asset which resulted in the elimination of any income tax benefit. L. Defined Benefit Pension Plans The Company has non-contributory defined benefit pension plans covering substantially all domestic salaried and hourly employees. These plans were amended as of April 30, 2005; no further benefits have been, or will be, earned under the plans, subsequent to the amendment date, and no additional participants will be added to the plans. There were no Company contributions paid to the plans during the three months ended July 31, 2020 , and July 31, 2019 . The Company currently expects to contribute $30,000 to the plans during the remainder of the fiscal year. The Company assumed an expected long-term rate of return of 7.75% for the periods ended July 31, 2020 and July 31, 2019 . Pension expense consisted of the following (in thousands): Three Months Ended July 31, 2020 Three Months Ended July 31, 2019 Service cost $ 0 $ 0 Interest cost 181 208 Expected return on plan assets (321 ) (355 ) Recognition of net loss 428 260 Net periodic pension expense $ 288 $ 113 M. Segment Information The Company’s operations are classified into two business segments: Domestic and International. The Domestic business segment principally designs, manufactures, and installs scientific and technical furniture, including steel and wood laboratory cabinetry, fume hoods, laminate casework, flexible systems, worksurfaces, workstations, workbenches, and computer enclosures. The International business segment, which consists of the Company’s foreign subsidiaries, provides products and services, including facility design, detailed engineering, construction, and project management from the planning stage through testing and commissioning of laboratories. Intersegment transactions are recorded at normal profit margins. All intercompany balances and transactions have been eliminated. Certain corporate expenses shown below have not been allocated to the business segments. The following tables provide financial information by business segments for the three months ended July 31, 2020 and 2019 (in thousands): Domestic Operations International Operations Corporate / Eliminations Total Three months ended July 31, 2020 Revenues from external customers $ 30,058 $ 6,365 $ — $ 36,423 Intersegment revenues 651 811 (1,462 ) — Earnings (loss) before income taxes $ 993 $ 135 $ (1,715 ) $ (587 ) Three months ended July 31, 2019 Revenues from external customers $ 29,287 $ 10,049 $ — $ 39,336 Intersegment revenues 2,179 842 (3,021 ) — Earnings (loss) before income taxes $ 1,560 $ 608 $ (1,503 ) $ 665 10 N. New Accounting Standards In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which replaces the current incurred loss method used for determining credit losses on financial assets, including trade receivables, with an expected credit loss method. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company will adopt this standard in fiscal year 2024. The Company does not expect the adoption of this standard to have a significant impact on the Company’s consolidated financial position or results of operations. In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company adopted this standard effective May 1, 2020. The adoption of this standard did not have a significant impact on the Company’s consolidated financial position or results of operations. In August 2018, the FASB issued ASU 2018-13, "Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement," which removes, modifies, and adds certain disclosure requirements related to fair value measurements in ASC Topic 820. The Company adopted this standard effective May 1, 2020. The adoption of this standard did not have a significant impact on the Company’s consolidated financial position or results of operations. In August 2018, the FASB issued ASU 2018-14, “Compensation -Retirement Benefits -Defined Benefit Plans -General (Subtopic 715-20) - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans" ("ASU 2018-14"). The amendments in this update remove defined benefit plan disclosures that are no longer considered cost-beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. ASU 2018-14 is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company adopted this standard effective May 1, 2020. The adoption of this standard did not have a significant impact on the Company’s consolidated financial position or results of operations. In December 2019, the FASB issued ASU No. 2019-12 , "Income Taxes ("Topic 740"): Simplifying the Accounting for Income Taxes." This update simplifies the accounting for income taxes through certain targeted improvements to various subtopics within Topic 740. The amendments in this update are effective for fiscal years and interim periods beginning after December 15, 2020. The Company expects to adopt this guidance when effective and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.