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Item 2. Management’s Discussion and Analysis

2021-03-12 compared with 2020-12-11 · 55 added, 47 removed, 59 unchanged (63% 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 six months ended October 31, 2020 with the comparable periods of the prior year.

The analysis of results of operations compares the three and nine months ended January 31, 2021 with the comparable periods of the prior year.

Results of Operations

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International sales for the quarter were $8,273,000, up 9.9% from sales of $7,526,000 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.

Domestic sales decreased for the most recent quarter compared to the prior year period due to continued delays in construction projects due to the coronavirus pandemic.

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

Sales for the nine months ended January 31, 2021 were $108,762,000, a 4.0% decrease from sales of $113,283,000 in the comparable period of the prior year.

Domestic sales for the nine-month period were $83,896,000, down 4.2% from sales of $87,570,000 in the comparable period of the prior year.

International sales for the period were $24,866,000, down 3.3% from sales of $25,713,000 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’s order backlog was $103 million at January 31, 2021, as compared to $93 million at January 31, 2020, 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 gross profit margin for the three months ended January 31, 2021 was 17.0% of sales, as compared to 15.4% of sales in the comparable quarter of the prior year.

The gross profit margin for the nine months ended January 31, 2021 was 16.5% of sales, relatively flat compared to 16.4% of sales in the comparable period of the prior year.

The increase in gross profit margin percentage for the three months ended January 31, 2021 was related to improved operating performance of the Company's Domestic operations with lower unfavorable manufacturing and material variances when compared to the prior year period.

Operating expenses for the three months ended January 31, 2021 were $6,030,000, or 18.1% of sales, as compared to $7,350,000, or 21.5% of sales, in the comparable period of the prior year.

Operating expenses for the nine months ended January 31, 2020 were $18,593,000, or 17.1% of sales, as compared to $19,875,000, or 17.5% of sales, in the comparable

period of the prior year.

The decrease in operating expenses for the three months ended January 31, 2021 was primarily due to reductions in salaries and fringe benefits of $441,000, incentive and stock compensation of $143,000, bad debt expense of $283,000, travel and entertainment expense of $134,000 and consulting and professional fees of $196,000.

The decrease in operating expenses for the nine months ended January 31, 2021 was primarily due to reductions in salaries and fringe benefits of $196,000, incentive and stock compensation of $173,000, bad debt expense of $261,000, travel and entertainment expense of $453,000 and consulting and professional fees of $35,000 and reduced International operating expenses of $91,000.

Interest expense was $105,000 and $310,000 for the three and nine months ended January 31, 2021, as compared to $150,000 and $452,000 for the comparable periods of the prior year, respectively.

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.

The effective income tax rates for the three and nine months ended January 31, 2021 were 113.2.4% and 59.3% compared to 15.5% and 104.5% for the three and nine months ended January 31, 2020.

Income tax benefits of $813,000 and $350,000 were recorded for the three months ended January 31, 2021 and 2020, respectively.

An income tax benefit of $989,000 and an income tax expense of $1,822,000 were recorded for the nine months ended January 31, 2021 and 2020, respectively.

The change in the effective tax rates for the three and nine months ended January 31, 2021 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 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 position, effective August 2019, for the Singapore and China subsidiaries, and Kewaunee Labway India Pvt.

The Company included a tax withholding expense, for dividends paid to the US and Singapore shareholders, imposed by the India Income Tax Department in accordance with international tax treaties between India and the U.S.

and Singapore governments at a rate of 10% and 15%, respectively, for the three and nine months ended January 31, 2021.

The Company recognized a withholding tax expense of $18,000 and $99,000 for the three and nine months ended January 31, 2021, respectively, related to the unremitted earnings position of the subsidiaries listed above.

The Company recognized a withholding tax expense of $50,000 and $2,214,000 for the three and nine months ended January 31, 2020, respectively, 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.

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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.

Noncontrolling interests related to the Company’s subsidiaries not 100% owned by the Company reduced net earnings by $14,000 and $19,000 for the three and nine months ended January 31, 2021, respectively, as compared to $17,000 and $59,000 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 subsidiaries in the related period.

Net earnings were $81,000, or $0.03 per diluted share, for the three months ended January 31, 2021, compared to a net loss of $1,918,000, or $0.70 per diluted share, in the prior year period.

A net loss of $697,000, or $0.25 per diluted share, was reported for the nine months ended January 31, 2021, compared to a net loss of $3,625,000, or $1.32 per diluted share, in the prior year period.

Liquidity and Capital Resources

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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.

The Company had working capital of $28,510,000 at January 31, 2021, compared to $27,171,000 at April 30, 2020.

The ratio of current assets to current liabilities was 1.9-to-1.0 at January 31, 2021, compared to 2.0-to-1.0 at April 30, 2020.

At January 31, 2021, advances of $4.5 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 January 31, 2021, unchanged from April 30, 2020.

Amounts available under the $15 million revolving credit facility were $8.6 million and $8.7 million at January 31, 2021 and April 30, 2020, respectively.

As previously reported in the Company's 2020 Annual Report on Form 10-K, the Company was not compliant at April 30, 2020 with all of the financial covenants under the revolving credit facility.

On July 20, 2020, the Company entered into an amendment which effected changes in certain financial covenants and included a waiver of the non-compliance.

On January 28, 2021, the Company entered into another amendment to the Loan Agreement and Line of Credit which effected changes (i) extending the maturity date under the Credit Agreement and Revolving Note from February 1, 2021 to May 3, 2021;

(ii) establishing a minimum EBITDA covenant for the fiscal quarter ending April 30, 2021 of $1,000,000, determined for the four-quarter period then ending;

and (iii) revising the covenant regarding delivery of financial projections to the Bank to, among other things, provide projections for the next succeeding fiscal year.

These amendments did not change the amount of availability under the revolving credit facility.

At January 31, 2021, the Company was in compliance with all the financial covenants under its revolving credit facility.

The Company’s operations provided cash of $3,107,000 during the nine months ended January 31, 2021.

Cash was used primarily by increases in receivables of $2,089,000, inventory of $285,000, and income tax receivable of $1,488,000, partially offset by an increase in accounts payable and other accrued expenses of $3,843,000.

During the nine months ended January 31, 2021, the Company used net cash of $1,944,000 in investing activities, all of which was used for capital expenditures.

The Company’s financing activities used cash of $379,000 during the nine months ended January 31, 2021, primarily for repayments on short-term borrowings of $226,000 and cash dividends paid to minority interest holders of $108,000.

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;

Any future developments 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;

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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.

The Company 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.

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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.

Looking forward, the Company is optimistic about opportunities for growth within existing end-markets.

As the economy continues to re-open, the Company anticipates that project awards will accelerate and the pace of construction will increase.

The Company expects its performance to continue to improve based upon its reduced cost structure and investments in modernizing its operations.

In the near-term, industry earnings are expected to be negatively impacted by rapidly escalating raw material costs.

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

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changes in raw materials and commodity costs;

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

and acts of 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.

The Company 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