Notes to Condensed Consolidated Financial Statements

(unaudited)

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 20192020 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, 20192020 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 generally accepted accounting principles ("GAAP")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.

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 JanuaryJuly 31, 2020 and April 30, 2019,2020, 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 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.

A summary of net sales transferred to customers at a point in time and over time for the periods ended JanuaryJuly 31, 2020 and JanuaryJuly 31, 2019 is as follows (in thousands):

The closing and opening balances of contract assets arising from contracts with customers which were recorded as unbilled receivables were $4,673,000$6,996,000 at JanuaryJuly 31, 2020 and $4,589,000$6,131,000 at April 30, 2019.2020. The closing and opening balances of contract liabilities arising from contracts with customers were $1,800,000$1,432,000 at JanuaryJuly 31, 2020 and $1,599,000$2,508,000 at April 30, 2019.2020. The timing of revenue recognition, billings and cash collections results in accounts receivable, unbilled receivables, and deferred revenue which are disclosed inon 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. ReceivablesAccounts 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 all100% of the contract liability balances at April 30, 20192020 and JanuaryJuly 31, 2020 are expected to be recognized as revenue during the respective succeeding 12 months.

The Company’s International subsidiaries’ inventories were $2,012,000 at JanuaryJuly 31, 2020 and $1,863,000$2,136,000 at April 30, 20192020 and are included in the above tables.

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 an interest rate swap agreement whereby the interest rate payable by the Company on $3,450,000 of outstanding long-term debt was effectively converted to a fixed interest rate of 4.875% for the period beginning May 1, 2013 and ending August 1, 2017. In May 2013, the Company entered into an interest rate swap agreement whereby the interest rate payable by the Company on $2,600,000 of outstanding long-term debt was effectively converted to a fixed interest rate of 4.37% for the period beginning August 1, 2017 and ending May 1, 2020. In May 2013, the Company entered into an interest rate swap agreement whereby the interest rate payable by the Company on $1,218,000 of outstanding long-term debt was effectively converted to a fixed interest rate of 3.07% for the period beginning November 3, 2014 and ending May 1, 2020. The Company entered into thesecertain interest rate swap arrangements to mitigate future interest rate risk associated with its long-term debt and has designated these as cash flow hedges. In September 2019, the CompanyThese interest rates swaps were terminated the interest rate swap arrangements in conjunction with the payoff of the outstanding long-term debt.debt in September 2019.

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 95,906118,696 and 30,360 antidilutive RSUs and options outstanding at JanuaryJuly 31, 2020. There were no antidilutive RSUs or options outstanding at January2020 and July 31, 2019.2019, respectively. The following is a reconciliation of basic to diluted weighted average common shares outstanding at July 31 (in thousands):

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”. TheCompensation.”

In May 2020, the Company granted 36,53412,045 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 2019. The2020. 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-yearthree- year period, based on the ratio of cumulative days incurredof service to total days over the three-year period. The Company recorded

share-based compensation expense during the three and nine months ended JanuaryJuly 31, 2020 and 2019 of $126,000$59,000 and $208,000, respectively, with the$21,000, respectively. The remaining estimated share-based compensation expense of $478,000 to$1,131,000 and $696,000, respectively, will be recorded over the remaining vesting periods.

An income tax benefit of $350,000 and an incomeIncome tax expense of $20,000$21,000 and $169,000 was recorded for the three months ended January 31, 2020 and 2019, respectively. Income tax expense of $1,822,000 and $803,000 was recorded for the nine months ended JanuaryJuly 31, 2020 and 2019, respectively. The effective tax rates were 15.5%(3.6)% and 57.1%25.4% for the three months ended JanuaryJuly 31, 2020 and 2019, respectively. The effective tax rates were 104.5% and 21.8% for the nine months ended January 31, 2020 and 2019, respectively. The decreasechange in the effective tax rate for the three-month period is primarily due to the reduced federal tax liability which was a result of lower foreign subsidiary income inclusions and the recognition of the impact of the Company's assertion regarding the reinvestment of foreign unremitted earnings in the second quarter. The increase for the nine-month period is primarily due to the change in the Company’s assertion regarding the reinvestment of foreign unremitted earnings, the impact of foreign earnings,operations which are taxed at different tax rates than the USU.S. tax rate of 21%, and additional Global Intangible Low-Taxed Income ("GILTI") inclusion. In addition, the change in the US.

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.

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.

The Company’s 20192020 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, 2019.2020. The following discussion and analysis describes material changes in the Company’s financial condition since April 30, 2019.2020. The analysis of results of operations compares the three and nine months ended JanuaryJuly 31, 2020 with the comparable periodsperiod of the prior year.

Results of Operations

Sales for the quarter were $34,225,000,$36,423,000, a 5.7% increase7.4% decrease from sales of $32,372,000 in$39,336,000 for the comparable period of the prior year. Domestic sales for the quarter were $26,699,000,$30,058,000, up 5.9%2.6% from sales of $25,217,000 in$29,287,000 for the comparable period of the prior year. International sales for the quarter were $7,526,000, up 5.2%$6,365,000, down 36.7% from sales of $7,155,000 in the comparable period of the prior year.  The increase in Domestic sales$10,049,000 for the quarter was a result of increased activity in the Company’s dealer and distribution sales channels. International sales increased year over year as a result of continued deliveries of a large order in the Middle East market. 

The Company’s order backlog was $93$101 million at JanuaryJuly 31, 2020, as compared to $96$102 million at JanuaryJuly 31, 2019, and $101 million at April 30, 2019.2020. 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 JanuaryJuly 31, 2020 was 15.4%16.1% of sales, as compared to 16.2%17.7% of sales in the comparable quarter of the prior year. The gross profit margin for the nine months ended January 31, 2020 was 16.4% of sales, as compared to 18.3% of sales in the comparable period of the prior year. The decrease in gross profit margin percentage forwas primarily due to the three and nine months ended January 31, 2020 was a result of a number of low margin orders thatdecline in sales with an unfavorable shift in product mix between the Company aggressively pursued and secured over the past year, and a strategic Middle East order aggressively secured over two years ago at lower than normal margins.Company's business segments.

Operating expenses for the three months ended JanuaryJuly 31, 2020 were $7,350,000,$6,157,000, or 21.5%16.9% of sales, as compared to $5,232,000,$6,170,000, or 16.2% of sales, in the comparable period of the prior year. Operating expenses for the nine months ended January 31, 2020 were $19,875,000, or 17.5% of sales, as compared to $16,810,000, or 15.0%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 JanuaryJuly 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 $559,000the reductions of restructuring costs (see Note P.), $288,000 in marketing$343,000 for international expenses $230,000 in

related to wages, travel and professional fees partially offset by increases of $243,000 for administration wages and benefits $150,000 in recruitment and relocation expenses,$76,000 for incentive and a $128,000 increase in international operatingstock compensation expenses. Also impacting the increase in operating expenses is an incentive compensation

Interest expense of $147,000 as compared to a credit of $309,000was $77,000 for the three months ended January 31, 2019.

An income tax benefit of $350,000 and an incomeIncome tax expense of $20,000$21,000 and $169,000 was recorded for the three months ended JanuaryJuly 31, 2020 and 2019, respectively. For the nine months ended January 31, 2020 and 2019, income tax expense was $1,822,000 and $803,000, respectively. The effective tax rates were 15.5%(3.6)% and 57.1%25.4% for the three months ended JanuaryJuly 31, 2020 and 2019, respectively. The decreasechange in the effective tax rate for the three-month period is primarily due to the reduced federal tax liability which is a result of lower foreign subsidiary income inclusions. The increase in the tax expense for the nine-month period is primarily due to the change in the Company’s assertion regarding the reinvestment of foreign unremitted earnings,three months ending July 31, 2020 reflects the impact of foreign earnings,international operations which are taxed at different rates, combined with a U.S. tax rates than the US tax rate of 21%, and additional Global Intangible Low-Taxed Income ("GILTI") inclusion in the US.

Noncontrolling interests related to the Company’s subsidiariessubsidiary not 100% owned by the Company reduced net earningslosses by $17,000 and $59,000$10,000 for the three and nine months ended JanuaryJuly 31, 2020, respectively, as compared to $37,000 and $86,000a reduction of net earnings of $25,000 for the comparable periodsperiod 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.

NetA net loss was $1,918,000,of $598,000, or $0.70$(0.22) per diluted share, was reported for the three months ended January 31, 2020, compared to a net loss of $22,000, or $0.01 per diluted share, in the prior year period. Net losses of $3,625,000, or $1.32 per diluted share, were reported for the nine months ended JanuaryJuly 31, 2020, compared to net earnings of $2,799,000,$471,000, or $1.00$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 fiscal year, including capital expenditures.

The Company had working capital of $27,725,000$27,818,000 at JanuaryJuly 31, 2020, compared to $32,624,000$27,171,000 at April 30, 2019.2020. The ratio of current assets to current liabilities was 2.1-to-1.01.9-to-1.0 at JanuaryJuly 31, 2020, compared to 2.0-to-1.0 at April 30, 2019.2020. At JanuaryJuly 31, 2020, advances of $4.0$8.5 million were outstanding under the Company’s bank revolving credit facilities,facility, compared to advances of $9.5$4.7 million outstanding as of April 30, 2019.2020. The Company had standby letters of credit outstanding of $344,000$512,000 at January 31, 2020 compared to standby letters of credit outstanding of $5.2 million at April 30, 2019. Amounts available under the revolving credit facility were $10.2 million and $5.3 million at JanuaryJuly 31, 2020 and April 30, 2019, respectively. Total borrowings2020. Amounts available under the $15 million revolving credit facility were $6.0 million and interest rate swaps were $4.2$8.7 million at JanuaryJuly 31, 2020 compared to $10.9 million atand April 30, 2019.2020, respectively. As previously reported in the reportsCompany's Report on Form 8-K filed by the Company on June 21, 2019 and July 11, 2019,24, 2020 and in Note 4 of the Notes to the Consolidated Financial Statements included in the Company's 20192020 Annual Report on Form 10-K, during the Company amended its credit facility and entered into a restated security agreement.

The Company’s operations providedused cash of $4,611,000$3,268,000 during the ninethree months ended JanuaryJuly 31, 2020. Cash was provided primarily by decreases in receivables of $5,530,000earnings and inventory of $1,959,000, partially offset by an decreaseincrease in accounts payable and other accrued expenses of $2,512,000.$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 ninethree months ended JanuaryJuly 31, 2020, the Company used net cash of $1,371,000$922,000 in investing activities, all of which was used for capital expenditures. The Company’s financing activities usedprovided cash of $8,156,000$3,785,000 during the ninethree months ended JanuaryJuly 31, 2020, primarily for reductionsfrom net increases in short-term borrowings of $5,496,000, cash dividends of $1,045,000 paid to stockholders, cash dividends paid to minority interest holders of $324,000 and repayments of $1,277,000 of long-term debt.$3,805,000.

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.

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 20192020 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.

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, 2019.2020.

(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 JanuaryJuly 31, 2020. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that, as of JanuaryJuly 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.

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.