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Item 2. Management’s Discussion and Analysis

2020-12-11 compared with 2020-09-11 · 70 added, 40 removed, 36 unchanged (75% 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 months ended July 31, 2020 with the comparable period of the prior year.

The analysis of results of operations compares the three and six months ended October 31, 2020 with the comparable periods 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.

Sales for the quarter were $39,000,000, a 1.8% decrease from sales of $39,722,000 in the comparable period of the prior year.

Domestic sales for the quarter were $28,772,000, down 8.9% from sales of $31,584,000 in the comparable period of the prior year.

International sales for the quarter were $10,228,000, up 25.7% from sales of $8,138,000 in the comparable period of the prior year.

Domestic sales decreased for the most recent quarter compared to the prior year period due to delays in project completions and limited access to construction sites as the coronavirus (“COVID-19”) pandemic continued to impact our customer base.

International sales increased for the most recent quarter compared to the prior year period due to strong international demand coupled with reduced COVID-19 related restrictions in certain markets that allowed access to project sites and increased billings.

Sales for the six months ended October 31, 2020 were $75,423,000, a 4.6% decrease from sales of $79,058,000 in the comparable period of the prior year.

Domestic sales for the six-month period were $58,830,000, down 3.4% from sales of $60,871,000 in the comparable period of the prior year.

International sales for the period were $16,593,000, down 8.8% from sales of $18,187,000 in the comparable period of the prior year.

The Company’s order backlog was $96 million at October 31, 2020, as compared to $92 million at October 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

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 gross profit margin for the three months ended October 31, 2020 was 16.4% of sales, as compared to 15.9% of sales in the comparable quarter of the prior year.

The gross profit margin for the six months ended October 31, 2020 was 16.3% of sales, as compared to 16.8% of sales in the comparable period of the prior year.

The increase in gross profit margin percentage for the three months ended October 31, 2020 as compared to the prior year period was related to increased sales and improved operating performance of the International segment.

The decrease in gross profit margin percentage for the six months ended October 31, 2020 as compared to prior year period was related to the overall decline in sales with an unfavorable shift in product mix between the Company’s business segments.

Operating expenses for the three months ended October 31, 2020 remained relatively flat at $6,406,000, or 16.4% of sales, as compared to $6,355,000, or 16.0% of sales, in the comparable period of the prior year.

Operating expenses for the six months ended October 31, 2020 were $12,563,000, or 16.7% of sales, as compared to $12,525,000, or 15.8% of sales, in the comparable period of the prior year.

The increase in operating expenses for the three months ended October 31, 2020 was primarily for consulting and professional fees of $83,000 related to the implementation of strategic initiatives and International operating expenses of $146,000, partially offset by decreases in travel expenses of $181,000.

The increase in operating expenses for the six months ended October 31, 2020 was primarily related to investments in talent of $245,000 and consulting fees and professional fees of $161,000, both of which are related to previously disclosed strategic initiatives.

Additionally, expenses for improvements in technology increased by $176,000 to enable remote working and support strategic initiatives.

These increases were mostly offset by decreases in travel expense of $319,000 and reduced International operating expenses of $198,000.

Interest expense was $128,000 and $205,000 for the three and six months ended October 31, 2020, as compared to $135,000 and $302,000 for the comparable periods of the prior year.

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

The effective income tax rates for the three and six months ended October 31, 2020 were 54.4% and 18.5% compared to 1,267.7% and 428.4% for the three and six months ended October 31, 2019.

An income tax benefit of $197,000 and an income tax expense of $2,003,000 were recorded for the three months ended October 31, 2020 and 2019, respectively.

An income tax benefit of $176,000 and an income tax expense $2,172,000 were recorded for the six months ended October 31, 2020 and 2019, respectively.

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

tax benefit recorded for the most recent quarter.

The change in the effective tax rates from the same periods in the previous fiscal year is due to the Company’s revocation of its indefinite reinvestment of foreign unremitted earnings, effective August 2019, for the Singapore and China subsidiaries, and Kewaunee Labway India Pvt.

The Company included a tax withholding expense, imposed by the India Income Tax Department in accordance with international tax treaties between the U.S.

and Singapore governments at a rate of 10% and 15%, respectively, for the three and six months ended October 31, 2020.

The Company recognized a withholding tax expense of $92,000 and $80,000 for the three and six months ended October 31, 2020, respectively, related to the unremitted earnings of the subsidiaries listed above.

The Company recognized a withholding tax expense of $2,083,000 for the three and six months ended October 31, 2019 related to the unremitted earnings position of the subsidiaries listed above.

The Company will record the tax withholding on all future Kewaunee Labway India Pvt.

earnings at an estimated rate of 10% and 15% for the U.S.

and Singapore shareholders, respectively, in addition to the corporate income taxes.

See Note K of the Notes to Condensed Consolidated Financial Statements for additional information.

Noncontrolling interests related to the Company’s subsidiaries not 100% owned by the Company reduced net earnings by $15,000 and $5,000 for the three and six months ended October 31, 2020, respectively, as compared to $17,000 and $42,000 for the comparable periods 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.

Net loss was $180,000, or $0.07 per diluted share, for the three months ended October 31, 2020, compared to a net loss of $2,178,000, or $0.79 per diluted share, in the prior year period.

A net loss of $778,000, or $0.28 per diluted share, was reported for the six months ended October 31, 2020, compared to a net loss of $1,707,000, or $0.62 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 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.

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 $28,530,000 at October 31, 2020, compared to $27,171,000 at April 30, 2020.

The ratio of current assets to current liabilities was 1.8-to-1.0 at October 31, 2020, compared to 2.0-to-1.0 at April 30, 2020.

At October 31, 2020, advances of $7.6 million were outstanding under the Company’s credit facilities, 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 October 31, 2020, unchanged from April 30, 2020.

Amounts available under the $15 million revolving credit facility were $8.3 million and $8.7 million at October 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.

The Company’s operations used cash of $516,000 during the six months ended October 31, 2020.

Cash was used primarily by increases in receivables of $5,784,000 and inventory of $794,000, partially offset by an increase in accounts payable and other accrued expenses of $4,379,000.

During the six months ended October 31, 2020, the Company used net cash of $1,292,000 in investing activities, all of which was used for capital expenditures.

The Company’s financing activities provided cash of $2,792,000 during the six months ended October 31, 2020, primarily from increases in short-term borrowings of $2,873,000.

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

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

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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.

and 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.

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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.

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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;

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 and the rapidly evolving COVID-19 pandemic, including disruptions from government mandates, both domestically and internationally;

changes in customer demands;

technological changes in our operations or in our industry;

dependence on customers’ required delivery schedules;

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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.

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

The cautionary statements made pursuant to the Reform Act herein and elsewhere by us should not be construed as exhaustive.

We cannot always predict what factors would cause actual results to differ materially from those indicated by the forward-looking statements.

Over time, our actual results, performance, or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such difference might be significant and harmful to our stockholders’ interest.

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