Kewaunee Scientific Corporation — Form 10-Q Summary
Business context and reporting period
This quarterly report covers the three and six months ended October 31, 2023, Kewaunee’s fiscal 2024 second quarter and year-to-date period. The company designs, manufactures, and installs laboratory and technical furniture domestically and provides laboratory design, engineering, construction, and project-management services internationally. Kewaunee is a smaller reporting company, and the interim financial statements are unaudited.
Financial performance and position
| Metric | Three months ended October 31, 2023 | Three months ended October 31, 2022 | Six months ended October 31, 2023 | Six months ended October 31, 2022 |
|---|---|---|---|---|
| Net sales | $50.4 million | $54.6 million | $100.3 million | $104.7 million |
| Gross profit | $13.5 million | $8.7 million | $25.4 million | $14.9 million |
| Gross margin | 26.7% | 15.9% | 25.3% | 14.2% |
| Operating profit | $5.1 million | $0.8 million | $8.9 million | $0.4 million |
| Net earnings attributable to Kewaunee | $2.7 million | $(0.2) million | $5.2 million | $(1.0) million |
| Diluted earnings per share | $0.93 | $(0.09) | $1.79 | $(0.35) |
Operating expenses were $8.4 million in the quarter and $16.5 million year to date, representing 16.6% and 16.4% of sales, respectively. Operating profit margins were approximately 10.1% for the quarter and 8.9% year to date, compared with approximately 1.4% and 0.3% in the prior-year periods. Net margins attributable to Kewaunee were approximately 5.4% for the quarter and 5.2% year to date.
- Domestic quarterly sales declined 10.0% to $34.2 million; international sales were relatively flat at $16.3 million.
- Year-to-date domestic sales declined 7.8% to $69.6 million, while international sales increased 4.9% to $30.7 million.
- Backlog was $146.3 million at October 31, 2023, down from $157.8 million at October 31, 2022 and $147.9 million at April 30, 2023.
- Cash, cash equivalents, and restricted cash totaled $21.7 million at October 31, 2023, compared with $13.8 million at April 30, 2023.
- Working capital was $52.1 million, and the current ratio was 2.3-to-1.0, versus $47.9 million and 2.2-to-1.0 at April 30, 2023.
- Operating activities generated $8.9 million of cash during the first six months, compared with cash usage of $0.6 million in the prior-year period. Capital expenditures were $2.9 million.
- Total liabilities were $78.3 million and total stockholders’ equity was $43.4 million at October 31, 2023.
Debt, liquidity, and financing
Short-term borrowings were $5.9 million at October 31, 2023, including $5.0 million outstanding under the revolving credit facility and $0.9 million at international subsidiaries. The revolving facility had $7.4 million of remaining borrowing capacity and a borrowing rate of 9.53%. The company was in compliance with its financial covenants.
The failed sale-leaseback financing liability related to the company’s headquarters and manufacturing facilities was $28.5 million, including $0.7 million classified as current. The arrangement has a 20-year lease term, with initial monthly rent of approximately $158,000 and annual increases of approximately 2%. Future minimum payments under the financing arrangement totaled $43.0 million, including $14.5 million of imputed interest.
Material changes versus the prior comparable period
- Revenue decreased 7.6% in the quarter and 4.2% year to date, primarily because domestic installation revenue declined following the decision to stop selling directly to end users.
- Gross margin expanded substantially, driven primarily by improved domestic manufacturing productivity, cost-containment actions, and pricing of new orders to reflect higher raw-material costs.
- The company returned to profitability, with quarterly and year-to-date net earnings attributable to Kewaunee of $2.7 million and $5.2 million, compared with losses of $0.2 million and $1.0 million, respectively.
- Operating expenses increased $0.4 million in the quarter and $1.9 million year to date, primarily due to higher wages, benefits, incentive compensation, stock-based compensation, bad debt expense, and international operating expenses.
- The company generated positive operating cash flow, but accounts payable and other accrued expenses declined by $4.7 million and capital expenditures increased versus the prior-year period.
- Interest expense increased modestly year to date to $0.8 million, reflecting changes in borrowing levels and interest rates.
Guidance, outlook, risks, and unusual items
Management did not provide numerical earnings or revenue guidance. It stated that demand is difficult to predict because Kewaunee often acts as a subcontractor or supplier to dealers and subcontractors, and demand depends on laboratory construction activity and project timing. Management believes the company is positioned favorably due to improved operational focus, manufacturing capabilities, global management, backlog, and continued investment in laboratory-related end markets.
- Results remain exposed to project timing, customer delivery schedules, competitive conditions, economic conditions, and fluctuations in steel, wood, epoxy resin, and other raw-material costs.
- International operations create exposure to foreign currency movements, differing tax regimes, regulatory changes, and geopolitical or other disruptions.
- Income tax expense included a one-time $0.5 million foreign tax charge related to India tax matters and the decision to discontinue management fees involving the Indian subsidiary. The six-month effective tax rate was 35.3%.
- The company adopted the expected-credit-loss standard effective May 1, 2023; adoption did not have a significant effect on financial position or results.
- The board authorized repurchases of up to 100,000 shares. The company repurchased 2,423 shares for approximately $44,000 during the quarter, leaving 97,577 shares authorized for repurchase.
- A new lease entered into after October 31, 2023 has aggregate future payments of $681,000 and is expected to commence in the second quarter of fiscal 2025.
- Management reported that disclosure controls and procedures were effective as of October 31, 2023, with no significant changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the significant gross-margin improvement is sustainable after accounting for project mix, pricing, productivity, and raw-material costs.
- Whether the lower domestic revenue and declining backlog signal continued weakness in installation activity or future laboratory construction demand.
- The company’s ability to maintain liquidity while borrowing costs remain high and while funding capital expenditures, leases, and the sale-leaseback financing obligation.
- The availability and covenant conditions of the revolving credit facility, including the $7.4 million remaining capacity at October 31, 2023.
- The potential recurrence of India-related tax charges and the effect of domestic valuation allowances on future effective tax rates.
- Whether share repurchases reduce financial flexibility or offset dilution from equity compensation as intended.