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 and six months ended October 31, 2020 with the comparable periods of the prior year. Results of Operations 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. 12 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 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. Ltd. 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. Ltd. 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. 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 13 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 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 $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. Outlook 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; 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; 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. 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. 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 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; 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; and acts of 14 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. 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.