KEWAUNEE SCIENTIFIC CORP /DE/ 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The Company’s 2020 Annual Report to Stockholders contains management’s discussion and analysis of the Company’s financial condition and results of operations as of and for the year ended April 30, 2020. 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 months ended July 31, 2020 with the comparable period of the prior year. Results of Operations 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 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 11 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. 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 Historically, the Company’s principal sources of liquidity have been funds generated from operations, supplemented as needed by short-term borrowings under the Company’s revolving credit facility. 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 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. Outlook 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 12 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, 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 This report contains statements that the Company believes to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this report, including statements regarding the Company’s future financial condition, results of operations, business operations and business prospects, are forward-looking statements. Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “predict,” “believe” and similar words, expressions and variations of these words and expressions are intended to identify forward-looking statements. All forward-looking statements are subject to important factors, risks, uncertainties and assumptions, including industry and economic conditions that could cause actual results to differ materially from those described in the forward-looking statements. Such factors, risks, uncertainties and assumptions include, but are not limited to, competitive and general economic conditions, both domestically and internationally; changes in customer demands; dependence on customers’ required delivery schedules; risks related to fluctuations in the Company’s operating results from quarter to quarter; risks related to international operations, including foreign currency fluctuations; changes in the legal and regulatory environment; changes in raw materials and commodity costs; 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. These forward-looking statements speak only as of the date of this document. The Company assumes no obligation, and expressly disclaims any obligation, to update any forward-looking statements, whether as a result of new information, future events or otherwise. Item 3. Quantitative and Qualitative Disclosures About Market Risk There are no material changes to the disclosures made on this matter in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2020.