Kewaunee Scientific Corp 10-Q for FY2021 Q1
Kewaunee Scientific Corp (KEQU)
10-Q
2020-09-11
For: 2020-07-31
View Original
Added on
April 06, 2026
About this 10-Q
Kewaunee Scientific Corp filed this 10-Q on September 11, 2020, covering the quarter ended July 31, 2020 (FY2021 Q1).
Headline figures
Quarter ended July 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $36.42M
- down 7.4% from $39.34M a year earlier
- Net loss
- $598K
- compared with net income of $471K a year earlier
- Diluted EPS
- -$0.22
- compared with $0.17 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-Q
_________________________
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 31, 2020
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission file number 0-5286
_________________________
KEWAUNEE SCIENTIFIC CORPORATION
(Exact name of registrant as specified in its charter)
_________________________
Delaware | 38-0715562 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
2700 West Front Street Statesville, North Carolina | 28677-2927 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (704) 873-7202
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Trading Symbol(s) Name of Exchange on which registered
Common Stock $2.50, par value KEQU NASDAQ Global Market
_________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting company | ☒ | |||
Emerging growth company | ☐ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of September 4, 2020, the registrant had outstanding 2,758,510 shares of Common Stock.
KEWAUNEE SCIENTIFIC CORPORATION
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2020
Page Number | ||
i
Part 1. Financial Information
Item 1. | Financial Statements |
Kewaunee Scientific Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
($ and shares in thousands, except per share amounts)
Three Months Ended July 31, | ||||||||
2020 | 2019 | |||||||
Net sales | $ | 36,423 | $ | 39,336 | ||||
Cost of products sold | 30,542 | 32,390 | ||||||
Gross profit | 5,881 | 6,946 | ||||||
Operating expenses | 6,157 | 6,170 | ||||||
Operating earnings (loss) | (276 | ) | 776 | |||||
Pension expense | (288 | ) | (113 | ) | ||||
Other income | 54 | 169 | ||||||
Interest expense | (77 | ) | (167 | ) | ||||
Earnings (loss) before income taxes | (587 | ) | 665 | |||||
Income tax expense | 21 | 169 | ||||||
Net earnings (loss) | (608 | ) | 496 | |||||
Less: net earnings (loss) attributable to the noncontrolling interest | (10 | ) | 25 | |||||
Net earnings (loss) attributable to Kewaunee Scientific Corporation | $ | (598 | ) | $ | 471 | |||
Net earnings (loss) per share attributable to Kewaunee Scientific Corporation stockholders: | ||||||||
Basic | $ | (0.22 | ) | $ | 0.17 | |||
Diluted | $ | (0.22 | ) | $ | 0.17 | |||
Weighted average number of common shares outstanding: | ||||||||
Basic | 2,756 | 2,750 | ||||||
Diluted | 2,756 | 2,771 | ||||||
See accompanying notes to condensed consolidated financial statements.
1
Kewaunee Scientific Corporation
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
($ in thousands)
Three Months Ended July 31, | |||||||
2020 | 2019 | ||||||
Net earnings (loss) | $ | (608 | ) | $ | 496 | ||
Other comprehensive income (loss), net of tax: | |||||||
Foreign currency translation adjustments | (13 | ) | 196 | ||||
Change in fair value of cash flow hedge | — | (1 | ) | ||||
Other comprehensive income (loss) | (13 | ) | 195 | ||||
Comprehensive income (loss), net of tax | (621 | ) | 691 | ||||
Less: comprehensive income (loss) attributable to the noncontrolling interest | (10 | ) | 25 | ||||
Comprehensive income (loss) attributable to Kewaunee Scientific Corporation | $ | (611 | ) | $ | 666 | ||
See accompanying notes to condensed consolidated financial statements.
2
Kewaunee Scientific Corporation
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
($ in thousands, except per share amounts)
Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Kewaunee Scientific Corporation Stockholders’ Equity | ||||||||||||||||||
Balance at April 30, 2020 | $ | 6,885 | $ | 3,360 | $ | (53 | ) | $ | 37,821 | $ | (9,598 | ) | $ | 38,415 | |||||||||
Net loss attributable to Kewaunee Scientific Corporation | — | — | — | (598 | ) | — | (598 | ) | |||||||||||||||
Other comprehensive loss | — | — | — | — | (13 | ) | (13 | ) | |||||||||||||||
Stock based compensation | 20 | 78 | — | — | — | 98 | |||||||||||||||||
Balance at July 31, 2020 | $ | 6,905 | $ | 3,438 | $ | (53 | ) | $ | 37,223 | $ | (9,611 | ) | $ | 37,902 | |||||||||
Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Kewaunee Scientific Corporation Stockholders’ Equity | ||||||||||||||||||
Balance at April 30, 2019 | $ | 6,875 | $ | 3,133 | $ | (53 | ) | $ | 43,552 | $ | (6,407 | ) | $ | 47,100 | |||||||||
Net earnings attributable to Kewaunee Scientific Corporation | — | — | — | 471 | — | 471 | |||||||||||||||||
Other comprehensive income | — | — | — | — | 195 | 195 | |||||||||||||||||
Cash dividends paid, $0.19 per share | — | — | — | (522 | ) | — | (522 | ) | |||||||||||||||
Stock based compensation | 9 | 51 | — | — | — | 60 | |||||||||||||||||
Balance at July 31, 2019 | $ | 6,884 | $ | 3,184 | $ | (53 | ) | $ | 43,501 | $ | (6,212 | ) | $ | 47,304 | |||||||||
See accompanying notes to condensed consolidated financial statements.
3
Kewaunee Scientific Corporation
Condensed Consolidated Balance Sheets
($ and shares in thousands, except per share amounts)
July 31, 2020 | April 30, 2020 | ||||||
(Unaudited) | |||||||
Assets | |||||||
Current Assets: | |||||||
Cash and cash equivalents | $ | 3,990 | $ | 4,365 | |||
Restricted cash | 835 | 850 | |||||
Receivables, less allowance; $612; $606, on each respective date | 30,897 | 28,062 | |||||
Inventories | 16,458 | 15,330 | |||||
Prepaid expenses and other current assets | 6,298 | 5,624 | |||||
Total Current Assets | 58,478 | 54,231 | |||||
Property, plant and equipment, at cost | 58,818 | 57,859 | |||||
Accumulated depreciation | (42,310 | ) | (41,587 | ) | |||
Net Property, Plant and Equipment | 16,508 | 16,272 | |||||
Right of use assets | 8,828 | 9,312 | |||||
Deferred income taxes | 330 | 336 | |||||
Other assets | 3,034 | 3,778 | |||||
Total Assets | $ | 87,178 | $ | 83,929 | |||
Liabilities and Stockholders’ Equity | |||||||
Current Liabilities: | |||||||
Short-term borrowings | $ | 8,524 | $ | 4,719 | |||
Current portion of capital lease liability | 20 | 19 | |||||
Current portion of operating lease liabilities | 1,256 | 1,282 | |||||
Accounts payable | 14,091 | 13,114 | |||||
Employee compensation and amounts withheld | 4,001 | 4,159 | |||||
Deferred revenue | 1,432 | 2,508 | |||||
Other accrued expenses | 1,336 | 1,259 | |||||
Total Current Liabilities | 30,660 | 27,060 | |||||
Long-term portion of capital lease liability | 108 | 113 | |||||
Long-term portion of operating lease liabilities | 7,471 | 7,780 | |||||
Accrued pension and deferred compensation costs | 9,654 | 9,303 | |||||
Deferred income taxes | 369 | 401 | |||||
Other non-current liabilities | 735 | 569 | |||||
Total Liabilities | 48,997 | 45,226 | |||||
Commitments and Contingencies | |||||||
Stockholders’ Equity: | |||||||
Common stock, $2.50 par value, Authorized – 5,000 shares; Issued – 2,762 shares; 2,754 shares; – Outstanding – 2,759 shares; 2,751 shares, on each respective date | 6,905 | 6,885 | |||||
Additional paid-in-capital | 3,438 | 3,360 | |||||
Retained earnings | 37,223 | 37,821 | |||||
Accumulated other comprehensive loss | (9,611 | ) | (9,598 | ) | |||
Common stock in treasury, at cost, 3 shares, on each date | (53 | ) | (53 | ) | |||
Total Kewaunee Scientific Corporation Stockholders’ Equity | 37,902 | 38,415 | |||||
Noncontrolling interest | 279 | 288 | |||||
Total Stockholders’ Equity | 38,181 | 38,703 | |||||
Total Liabilities and Stockholders’ Equity | $ | 87,178 | $ | 83,929 | |||
See accompanying notes to condensed consolidated financial statements.
4
Kewaunee Scientific Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
($ in thousands)
Three Months Ended July 31, | |||||||
2020 | 2019 | ||||||
Cash flows from operating activities: | |||||||
Net earnings (loss) | $ | (608 | ) | $ | 496 | ||
Adjustments to reconcile net earnings (loss) to net cash used in operating activities: | |||||||
Depreciation and amortization | 687 | 644 | |||||
Bad debt provision | 8 | 36 | |||||
Stock based compensation expense | 112 | 74 | |||||
Deferred income taxes | (27 | ) | (16 | ) | |||
Change in assets and liabilities: | |||||||
Receivables | (2,843 | ) | (3,008 | ) | |||
Inventories | (1,128 | ) | 855 | ||||
Accounts payable and other accrued expenses | 1,065 | 835 | |||||
Deferred revenue | (1,076 | ) | (76 | ) | |||
Other, net | 542 | (247 | ) | ||||
Net cash used in operating activities | (3,268 | ) | (407 | ) | |||
Cash flows from investing activities: | |||||||
Capital expenditures | (922 | ) | (1,183 | ) | |||
Net cash used in investing activities | (922 | ) | (1,183 | ) | |||
Cash flows from financing activities: | |||||||
Dividends paid | — | (522 | ) | ||||
Proceeds from short-term borrowings | 23,885 | 16,650 | |||||
Repayments on short-term borrowings | (20,080 | ) | (12,884 | ) | |||
Payments on long-term debt and lease obligations | (5 | ) | (296 | ) | |||
Net proceeds from exercise of stock options | (15 | ) | (14 | ) | |||
Net cash provided by financing activities | 3,785 | 2,934 | |||||
Effect of exchange rate changes on cash and cash equivalents | 15 | 81 | |||||
Increase (decrease) in cash, cash equivalents and restricted cash | (390 | ) | 1,425 | ||||
Cash, cash equivalents and restricted cash, beginning of period | 5,215 | 11,156 | |||||
Cash, cash equivalents and restricted cash, end of period | $ | 4,825 | $ | 12,581 | |||
See accompanying notes to condensed consolidated financial statements.
5
Kewaunee Scientific Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)
A. Financial Information
The unaudited interim condensed consolidated financial statements of Kewaunee Scientific Corporation (the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted, although the Company believes that the disclosures are adequate to make the information presented not misleading.
These interim condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of these consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2020 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. The condensed consolidated balance sheet as of April 30, 2020 included in this interim period filing has been derived from the audited consolidated financial statements at that date, but does not include all of the information and related notes required by U.S. GAAP for complete financial statements.
The preparation of the interim condensed consolidated financial statements requires management to make certain estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates.
B. Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of cash on hand and highly liquid investments with original maturities of three months or less. During the periods ended July 31, 2020 and April 30, 2020, the Company had cash deposits in excess of FDIC insured limits. The Company has not experienced any losses from such deposits. Restricted cash includes bank deposits of subsidiaries used for performance guarantees against customer orders.
The Company includes restricted cash along with the cash balance for presentation in the condensed consolidated statements of cash flows. The reconciliation between the condensed consolidated balance sheet and the condensed consolidated statement of cash flows is as follows:
July 31, 2020 | April 30, 2020 | |||||||||
Cash and cash equivalents | $ | 3,990 | $ | 4,365 | ||||||
Restricted cash | 835 | 850 | ||||||||
Total cash, cash equivalents and restricted cash | $ | 4,825 | $ | 5,215 | ||||||
C. Revenue Recognition
The Company recognizes revenue when control of a good or service promised in a contract (i.e., performance obligation) is transferred to a customer. Control is obtained when a customer has the ability to direct the use of and obtain substantially all of the remaining benefits from that good or service. The majority of the Company’s revenues are recognized over time as the customer receives control as the Company performs work under a contract. However, a portion of the Company’s revenues are recognized at a point-in-time as control is transferred at a distinct point in time per the terms of a contract.
Disaggregated Revenue
A summary of net sales transferred to customers at a point in time and over time for the periods ended July 31, 2020 and July 31, 2019 is as follows (in thousands):
Three Months Ended July 31, 2020 | |||||||||||
Domestic | International | Total | |||||||||
Over Time | $ | 29,080 | $ | 6,365 | $ | 35,445 | |||||
Point in Time | 978 | — | 978 | ||||||||
$ | 30,058 | $ | 6,365 | $ | 36,423 | ||||||
6
Three Months Ended July 31, 2019 | |||||||||||
Domestic | International | Total | |||||||||
Over Time | $ | 28,235 | $ | 10,049 | $ | 38,284 | |||||
Point in Time | 1,052 | — | 1,052 | ||||||||
$ | 29,287 | $ | 10,049 | $ | 39,336 | ||||||
Contract Balances
The closing and opening balances of contract assets arising from contracts with customers which were recorded as unbilled receivables were $6,996,000 at July 31, 2020 and $6,131,000 at April 30, 2020. The closing and opening balances of contract liabilities arising from contracts with customers were $1,432,000 at July 31, 2020 and $2,508,000 at April 30, 2020. The timing of revenue recognition, billings and cash collections results in accounts receivable, unbilled receivables, and deferred revenue which are disclosed on the condensed consolidated balance sheets and in the notes to the condensed consolidated financial statements. In general, the Company receives payments from customers based on a billing schedule established in its contracts. Unbilled receivables represent amounts earned which have not yet been billed in accordance with contractually stated billing terms. Accounts receivable are recorded when the right to consideration becomes unconditional and the Company has a right to invoice the customer. Deferred revenue relates to payments received in advance of performance under the contract. Deferred revenue is recognized as revenue as (or when) the Company performs under the contract. Approximately 100% of the contract liability balances at April 30, 2020 and July 31, 2020 are expected to be recognized as revenue during the respective succeeding 12 months.
D. Inventories
The Company measures inventory using the first-in, first-out ("FIFO") method at the lower of cost and net realizable value. Inventories consisted of the following (in thousands):
July 31, 2020 | April 30, 2020 | ||||||
Finished products | $ | 2,781 | $ | 2,455 | |||
Work in process | 2,004 | 1,921 | |||||
Raw materials | 11,673 | 10,954 | |||||
$ | 16,458 | $ | 15,330 | ||||
The Company’s International subsidiaries’ inventories were $2,012,000 at July 31, 2020 and $2,136,000 at April 30, 2020 and are included in the above tables.
E. Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and equivalents, mutual funds, cash surrender value of life insurance policies, term loans and short-term borrowings. The carrying value of these assets and liabilities approximate their fair value. The following tables summarize the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of July 31, 2020 and April 30, 2020 (in thousands):
July 31, 2020 | ||||||||||||
Financial Assets | Level 1 | Level 2 | Total | |||||||||
Trading securities held in non-qualified compensation plans (1) | $ | 2,512 | $ | — | $ | 2,512 | ||||||
Cash surrender value of life insurance policies (1) | — | 87 | 87 | |||||||||
Total | $ | 2,512 | $ | 87 | $ | 2,599 | ||||||
Financial Liabilities | ||||||||||||
Non-qualified compensation plans (2) | $ | — | $ | 2,961 | $ | 2,961 | ||||||
Total | $ | — | $ | 2,961 | $ | 2,961 | ||||||
7
April 30, 2020 | ||||||||||||
Financial Assets | Level 1 | Level 2 | Total | |||||||||
Trading securities held in non-qualified compensation plans (1) | $ | 2,485 | $ | — | $ | 2,485 | ||||||
Cash surrender value of life insurance policies (1) | — | 87 | 87 | |||||||||
Total | $ | 2,485 | $ | 87 | $ | 2,572 | ||||||
Financial Liabilities | ||||||||||||
Non-qualified compensation plans (2) | $ | — | $ | 2,899 | $ | 2,899 | ||||||
Total | $ | — | $ | 2,899 | $ | 2,899 | ||||||
(1) | The Company maintains two non-qualified compensation plans which include investment assets in a rabbi trust. These assets consist of marketable securities, which are valued using quoted market prices multiplied by the number of shares owned, and life insurance policies, which are valued at their cash surrender value. |
(2) | Plan liabilities are equal to the individual participants’ account balances and other earned retirement benefits. |
F. Derivative Financial Instruments
The Company records derivatives on the condensed consolidated balance sheets at fair value and establishes criteria for designation and effectiveness of hedging relationships. The nature of the Company’s business activities involves the management of various financial and market risks, including those related to changes in interest rates. The Company does not enter into derivative instruments for speculative purposes. In May 2013, the Company entered into certain interest rate swap arrangements to mitigate future interest rate risk associated with its long-term debt and designated these as cash flow hedges. These interest rates swaps were terminated in conjunction with the payoff of the outstanding long-term debt in September 2019.
G. Long-term Debt and Other Credit Arrangements
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, unchanged from April 30, 2020. Amounts available under the revolving credit facility were $6.0 million and $8.7 million at July 31, 2020 and April 30, 2020, respectively.
At April 30, 2020, the Company was not in compliance with all of the financial covenants under the revolving credit facility. On July 20, 2020, the Company entered into an amendment to the Loan Agreement and Line of Credit which effected changes in certain financial covenants set forth in the Loan Agreement and included a waiver of the non-compliance described above. This amendment did not change the amount of availability provided by the Company's Line of Credit. At July 31, 2020, the Company was in compliance with all the financial covenants under its revolving credit facility.
8
H. Leases
In accordance with ASC 842, "ASU No. 2016-02 Leases", the Company is required to recognize lease assets and lease liabilities reflecting the rights and obligations created by leased assets previously classified as operating leases. The Company has operating type leases for real estate and equipment in both the U.S. and internationally and a financing lease for a truck in the U.S. At July 31, 2020 and April 30, 2020, right-of-use assets totaled $8,828,000 and $9,312,000, respectively. Operating cash paid to settle lease liabilities was $410,000 and $314,000 for the periods ended July 31, 2020 and July 31, 2019, respectively. The Company’s leases have remaining lease terms of up to 10 years, some of which may include options to extend the leases for up to 5 years or options to terminate the leases within 1 year. Operating lease expense was $632,000 and $549,000 for the three months ended July 31, 2020 and July 31, 2019, respectively, inclusive of period cost for short-term leases, not included in lease liabilities, of $222,000 and $235,000 for the three months ended July 31, 2020 and July 31, 2019, respectively.
At July 31, 2020, the weighted average remaining lease term for the capitalized operating leases was 7.7 years and the weighted average discount rate was 4.0%. For the financing lease, the weighted average remaining lease term was 5.2 years and the weighted average discount rate was 10.0%. The Company uses the implicit rate in determining the present value of the lease payments when available, however, most of the Company's leases do not provide an implicit rate so for those leases the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
Future minimum lease payments under non-cancelable leases as of July 31, 2020:
Operating | Financing | |||||||
Remainder of fiscal 2021 | $ | 1,132 | $ | 24 | ||||
2022 | 1,528 | 32 | ||||||
2023 | 1,498 | 32 | ||||||
2024 | 1,217 | 32 | ||||||
2025 | 1,173 | 32 | ||||||
Thereafter | 3,898 | 11 | ||||||
Total Minimum Lease Payments | $ | 10,446 | $ | 163 | ||||
Imputed Interest | (1,720 | ) | (36 | ) | ||||
Total | $ | 8,726 | $ | 127 | ||||
I. Earnings Per Share
Basic earnings per share is based on the weighted average number of common shares outstanding during the year. Diluted earnings per share reflects the assumed exercise of outstanding options and the conversion of restricted stock units (“RSUs”) under the Company’s various stock compensation plans, except when RSUs and options have an antidilutive effect. There were 118,696 and 30,360 antidilutive RSUs and options outstanding at July 31, 2020 and July 31, 2019, respectively. The following is a reconciliation of basic to diluted weighted average common shares outstanding at July 31 (in thousands):
2020 | 2019 | ||||||||
Basic | 2,756 | 2,750 | |||||||
Dilutive effect of stock options and RSUs | — | 21 | |||||||
Weighted average common shares outstanding - diluted | 2,756 | 2,771 | |||||||
J. Stock Options and Share-based Compensation
Compensation costs related to stock options and other stock awards granted by the Company are charged against operating expenses during their vesting period, under ASC 718, “Compensation-Stock Compensation.”
In May 2020, the Company granted 12,045 RSUs under the 2017 Omnibus Incentive Plan ("2017 Plan"). These RSUs include a service component that vests over a one-year period. The Company granted 83,816 RSUs under the 2017 Plan in June 2020. These RSUs include both a service and a performance component, vesting over a three-year period. The recognized expense is based upon the vesting period for service criteria and estimated attainment of the performance criteria at the end of the three- year period, based on the ratio of cumulative days of service to total days over the three-year period. The Company recorded
9
share-based compensation expense during the three months ended July 31, 2020 and 2019 of $59,000 and $21,000, respectively. The remaining estimated share-based compensation expense of $1,131,000 and $696,000, respectively, will be recorded over the remaining vesting periods.
K. Income Taxes
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-month period is primarily due to the impact of foreign operations which are taxed at different rates than the U.S. tax rate of 21%. In addition, the change in the U.S. effective tax rate for the three months ended July 31, 2020 was unfavorably impacted by the recording of a valuation allowance against the deferred tax asset which resulted in the elimination of any income tax benefit.
L. Defined Benefit Pension Plans
The Company has non-contributory defined benefit pension plans covering substantially all domestic salaried and hourly employees. These plans were amended as of April 30, 2005; no further benefits have been, or will be, earned under the plans, subsequent to the amendment date, and no additional participants will be added to the plans. There were no Company contributions paid to the plans during the three months ended July 31, 2020, and July 31, 2019. The Company currently expects to contribute $30,000 to the plans during the remainder of the fiscal year. The Company assumed an expected long-term rate of return of 7.75% for the periods ended July 31, 2020 and July 31, 2019. Pension expense consisted of the following (in thousands):
Three Months Ended July 31, 2020 | Three Months Ended July 31, 2019 | ||||||
Service cost | $ | 0 | $ | 0 | |||
Interest cost | 181 | 208 | |||||
Expected return on plan assets | (321 | ) | (355 | ) | |||
Recognition of net loss | 428 | 260 | |||||
Net periodic pension expense | $ | 288 | $ | 113 | |||
M. Segment Information
The Company’s operations are classified into two business segments: Domestic and International. The Domestic business segment principally designs, manufactures, and installs scientific and technical furniture, including steel and wood laboratory cabinetry, fume hoods, laminate casework, flexible systems, worksurfaces, workstations, workbenches, and computer enclosures. The International business segment, which consists of the Company’s foreign subsidiaries, provides products and services, including facility design, detailed engineering, construction, and project management from the planning stage through testing and commissioning of laboratories. Intersegment transactions are recorded at normal profit margins. All intercompany balances and transactions have been eliminated. Certain corporate expenses shown below have not been allocated to the business segments.
The following tables provide financial information by business segments for the three months ended July 31, 2020 and 2019 (in thousands):
Domestic Operations | International Operations | Corporate / Eliminations | Total | ||||||||||||
Three months ended July 31, 2020 | |||||||||||||||
Revenues from external customers | $ | 30,058 | $ | 6,365 | $ | — | $ | 36,423 | |||||||
Intersegment revenues | 651 | 811 | (1,462 | ) | — | ||||||||||
Earnings (loss) before income taxes | $ | 993 | $ | 135 | $ | (1,715 | ) | $ | (587 | ) | |||||
Three months ended July 31, 2019 | |||||||||||||||
Revenues from external customers | $ | 29,287 | $ | 10,049 | $ | — | $ | 39,336 | |||||||
Intersegment revenues | 2,179 | 842 | (3,021 | ) | — | ||||||||||
Earnings (loss) before income taxes | $ | 1,560 | $ | 608 | $ | (1,503 | ) | $ | 665 | ||||||
10
N. New Accounting Standards
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which replaces the current incurred loss method used for determining credit losses on financial assets, including trade receivables, with an expected credit loss method. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company will adopt this standard in fiscal year 2024. The Company does not expect the adoption of this standard to have a significant impact on the Company’s consolidated financial position or results of operations.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company adopted this standard effective May 1, 2020. The adoption of this standard did not have a significant impact on the Company’s consolidated financial position or results of operations.
In August 2018, the FASB issued ASU 2018-13, "Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement," which removes, modifies, and adds certain disclosure requirements related to fair value measurements in ASC Topic 820. The Company adopted this standard effective May 1, 2020. The adoption of this standard did not have a significant impact on the Company’s consolidated financial position or results of operations.
In August 2018, the FASB issued ASU 2018-14, “Compensation -Retirement Benefits -Defined Benefit Plans -General (Subtopic 715-20) - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans" ("ASU 2018-14"). The amendments in this update remove defined benefit plan disclosures that are no longer considered cost-beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. ASU 2018-14 is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company adopted this standard effective May 1, 2020. The adoption of this standard did not have a significant impact on the Company’s consolidated financial position or results of operations.
In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes ("Topic 740"): Simplifying the Accounting for Income Taxes." This update simplifies the accounting for income taxes through certain targeted improvements to various subtopics within Topic 740. The amendments in this update are effective for fiscal years and interim periods beginning after December 15, 2020. The Company expects to adopt this guidance when effective and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
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.
Item 4. | Controls and Procedures |
(a) Evaluation of disclosure controls and procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of July 31, 2020. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that, as of July 31, 2020, the Company’s disclosure controls and procedures were adequate and effective and designed to ensure that all material information required to be filed in this quarterly report is made known to them by others within the Company and its subsidiaries.
(b) Changes in internal controls
There was no significant change in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
13
PART II. OTHER INFORMATION
Item 6. | Exhibits |
10.61K | (1) | ||
10.86* | (1) | ||
31.1 | |||
31.2 | |||
32.1 | |||
32.2 | |||
101.INS | XBRL Instance Document | ||
101.SCH | XBRL Taxonomy Extension Schema Document | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||
(1) Filed as an exhibit to the Kewaunee Scientific Corporation Annual Report to the Securities and Exchange Commission on Form 10-K (Commission File No. 0-5286) for the fiscal year ended April 30, 2020, and incorporated herein by reference.
*The referenced exhibit is a management contract or a compensatory plan or arrangement.
14
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
KEWAUNEE SCIENTIFIC CORPORATION (Registrant) | |||
Date: September 11, 2020 | By | /s/ Donald T. Gardner III | |
Donald T. Gardner III | |||
(As duly authorized officer and Vice President, Finance and Chief Financial Officer) | |||
15
Exhibit 31.1
CERTIFICATION
I, Thomas D Hull III, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Kewaunee Scientific Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
/s/ Thomas D. Hull III |
Thomas D. Hull III |
President and Chief Executive Officer |
Date: September 11, 2020
Exhibit 31.2
CERTIFICATION
I, Donald T. Gardner III, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Kewaunee Scientific Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
/s/ Donald T. Gardner III |
Donald T. Gardner III |
Vice President, Finance and Chief Financial Officer |
Date: September 11, 2020
Exhibit 32.1
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Kewaunee Scientific Corporation (the “Company”) for the period ended July 31, 2020, I, Thomas D. Hull III, President and Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) | such Form 10-Q of the Company for the period ended July 31, 2020, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | the information contained in such Form 10-Q of the Company for the period ended July 31, 2020, fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: September 11, 2020
/s/ Thomas D. Hull III |
Thomas D. Hull III |
President and Chief Executive Officer |
Exhibit 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Kewaunee Scientific Corporation (the “Company”) for the period ended July 31, 2020, I, Donald T. Gardner III, Vice President, Finance and Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) | such Form 10-Q of the Company for the period ended July 31, 2020, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | the information contained in such Form 10-Q of the Company for the period ended July 31, 2020, fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: September 11, 2020
/s/ Donald T. Gardner III |
Donald T. Gardner III |
Vice President, Finance and Chief Financial Officer |