Kewaunee Scientific Corporation — Form 10-Q Summary
Business context and reporting period
This quarterly report covers the three months ended July 31, 2022, the first quarter of fiscal 2023. Kewaunee designs, manufactures and installs laboratory and technical furniture domestically and provides laboratory design, engineering, construction and project-management services internationally. The company is a non-accelerated and smaller reporting company.
Financial performance and condition
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $50.1 million | $39.5 million |
| Gross profit | $6.2 million | $5.7 million |
| Gross margin | 12.4% | 14.4% |
| Operating loss | $0.4 million | $1.1 million |
| Loss before income taxes | $0.3 million | $1.1 million |
| Net loss attributable to Kewaunee | $0.7 million | $1.3 million |
| Loss per diluted share | $0.27 | $0.48 |
| Net cash from operating activities | $3.7 million | $(1.8) million |
| Capital expenditures | $0.4 million | $0.5 million |
- Domestic sales were $37.5 million, up 26.3%; international sales were $12.7 million, up 28.7%.
- Operating expenses declined to $6.6 million, or 13.2% of sales, from $6.8 million, or 17.1%.
- Interest expense increased to $0.4 million from $0.1 million, primarily due to bank-borrowing changes and the sale-leaseback financing.
- The effective tax rate was negative 111.5%, compared with negative 23.8% in the prior-year quarter. The company recorded tax expense despite the pretax loss because of foreign tax effects and a full valuation allowance against U.S. deferred tax assets.
- Cash, cash equivalents and restricted cash totaled $21.5 million at July 31, 2022, compared with $6.9 million at April 30, 2022. Cash and cash equivalents alone were $14.4 million.
- Working capital was $48.3 million, and the current ratio was 2.0-to-1.0.
- Total liabilities were $90.5 million and total stockholders’ equity was $35.2 million at July 31, 2022.
Material changes versus the prior comparable period
- Revenue increased $10.6 million, or 26.9%, supported by higher domestic pricing and delivery of large international projects booked in the prior fiscal year.
- Gross margin fell 200 basis points. Approximately 25% of domestic revenue came from direct orders delivered at a loss, largely because contracts were executed before broad-based inflation increased costs.
- The net loss attributable to Kewaunee improved by $0.6 million, primarily because of higher sales and lower operating expenses.
- Operating cash flow improved by $5.5 million, driven mainly by a $10.6 million increase in deferred revenue from advance payments on a large international order.
- Financing activities generated $11.7 million, including $13.5 million of proceeds related to the sale-leaseback financing transaction. The company terminated its Wells Fargo revolving credit agreement on June 27, 2022; there were no borrowings outstanding at termination and no material termination penalty.
- The order backlog reached $174.0 million, compared with $120.6 million at July 31, 2021 and $173.9 million at April 30, 2022.
Guidance, outlook, risks and unusual items
- Management expects margin expansion during the fiscal year as lower-margin direct orders are delivered and replaced in backlog by higher-margin product orders. No quantified earnings or revenue guidance was provided.
- Management remains optimistic because of the record-high backlog and marketplace activity, but demand is difficult to predict because the company often acts as a subcontractor or supplier to dealers and subcontractors.
- Key risks include inflation in steel, wood, epoxy resin, labor and other inputs; firm-price contracts that may prevent timely recovery of cost increases; labor shortages; recession concerns; supply-chain and supplier constraints; international operations and foreign-currency fluctuations; COVID-19-related disruptions; cybersecurity risks associated with the November 2021 cyberattack; and geopolitical, regulatory and force-majeure events.
- The sale-leaseback was accounted for as a financing transaction rather than a sale. The related financing liability was $29.2 million at July 31, 2022, with a 20-year arrangement and initial basic rent of approximately $158,000 per month, increasing approximately 2% annually.
- The company had $14.1 million of deferred revenue at July 31, 2022, approximately 100% of which was expected to be recognized over the succeeding 12 months.
- Management concluded that disclosure controls and procedures were adequate and effective, with no significant change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether backlog conversion produces the expected margin improvement, particularly after the loss-making direct orders are completed.
- Whether inflation, labor shortages and supply constraints continue to pressure gross margins under fixed-price contracts.
- The sustainability of operating cash flow after the unusually large advance payment reflected in deferred revenue.
- The company’s ability to service the $29.2 million sale-leaseback financing liability and related long-term lease commitments.
- The impact of the full U.S. tax valuation allowance and foreign tax liabilities on future earnings and cash taxes.
- The ultimate financial and operational effects of the November 2021 cyberattack and other international, currency and macroeconomic risks.