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 nine months ended January 31, 2021 with the comparable periods of the prior year. Results of Operations Sales for the quarter were $33,339,000, a 2.6% decrease from sales of $34,225,000 in the comparable period of the prior year. Domestic sales for the quarter were $25,066,000, down 6.1% from sales of $26,699,000 in the comparable period of the prior year. 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 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 $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 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 13 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 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 position, effective August 2019, for the Singapore and China subsidiaries, and Kewaunee Labway India Pvt. Ltd. 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. 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 $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 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 $28,510,000 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. 14 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. Outlook The Company continues to actively monitor the COVID-19 pandemic and its impact. 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; 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. 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. 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 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 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 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. 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 15 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.