Kewaunee Scientific Corporation 10-Q Summary
Business context and reporting period
Kewaunee Scientific Corporation designs, manufactures, and installs laboratory and technical furniture and provides international laboratory design, engineering, construction, and project-management services. This Form 10-Q covers the three and six months ended October 31, 2020, the second quarter and first six months of fiscal 2021. The filing was submitted December 11, 2020.
Financial performance and position
| Metric | Three months ended October 31, 2020 | Three months ended October 31, 2019 | Six months ended October 31, 2020 | Six months ended October 31, 2019 |
|---|---|---|---|---|
| Net sales | $39.0 million | $39.7 million | $75.4 million | $79.1 million |
| Gross profit | $6.4 million | $6.3 million | $12.3 million | $13.3 million |
| Gross margin | 16.4% | 15.9% | 16.3% | 16.8% |
| Operating earnings (loss) | $(11,000) | $(39,000) | $(287,000) | $737,000 |
| Net loss attributable to Kewaunee | $(180,000) | $(2.178) million | $(778,000) | $(1.707) million |
| Loss per diluted share | $(0.07) | $(0.79) | $(0.28) | $(0.62) |
- Domestic quarterly sales declined 8.9% to $28.8 million, while international sales increased 25.7% to $10.2 million. For the six-month period, domestic sales declined 3.4% and international sales declined 8.8%.
- Six-month operating cash flow was an outflow of $516,000, compared with $4.496 million of cash provided in the prior-year period. Capital expenditures were $1.292 million, compared with $715,000.
- Cash, cash equivalents, and restricted cash totaled $6.240 million at October 31, 2020, versus $5.215 million at April 30, 2020. Unrestricted cash and cash equivalents were $5.759 million.
- Working capital was $28.530 million, compared with $27.171 million at April 30, 2020. The current ratio was 1.8-to-1.0, compared with 2.0-to-1.0.
- Revolving-credit advances were $7.592 million, with $8.3 million of remaining availability under the $15 million facility. Standby letters of credit totaled $512,000.
- Total liabilities were $53.293 million and total stockholders’ equity was $38.069 million at October 31, 2020. Operating and finance lease liabilities totaled approximately $9.1 million and $123,000, respectively.
Material changes versus the prior comparable period
- Quarterly sales decreased 1.8%, while six-month sales decreased 4.6%, primarily reflecting COVID-19-related project delays, restricted construction-site access, and lower domestic activity.
- Quarterly gross margin improved by 50 basis points because of stronger international operating performance. Six-month gross margin declined by 50 basis points because of lower sales and an unfavorable segment mix.
- Quarterly net loss attributable to Kewaunee improved substantially from $2.178 million to $180,000. The prior-year period included a $2.083 million withholding-tax expense related to previously unremitted foreign earnings.
- Six-month net loss improved to $778,000 from $1.707 million, but operating earnings declined to a $287,000 loss from $737,000 of earnings.
- Operating expenses were broadly flat in the quarter but increased for the six-month period due to investments in talent, strategic consulting, professional fees, and technology. Travel expenses declined.
- Receivables increased $5.691 million and inventories increased $794,000 from April 30, 2020, contributing to the operating cash outflow. Accounts payable and other accrued expenses increased $4.379 million.
- Order backlog was $96 million at October 31, 2020, compared with $92 million at October 31, 2019 and $101 million at April 30, 2020.
Guidance, outlook, risks, contingencies, and unusual items
- Management stated that liquidity sources, including operating cash flow and the revolving credit facility, are expected to support ongoing fiscal-year requirements and capital expenditures. No formal earnings or revenue guidance was provided.
- The company entered into a July 2020 amendment to its credit agreement that revised certain financial covenants and waived prior noncompliance. The company stated that it was in compliance with all covenants at October 31, 2020.
- COVID-19 remains the principal near-term uncertainty. Potential effects include further revenue and earnings declines, project-site closures, operating disruptions, supplier constraints, employee impacts, and reduced liquidity.
- Demand is difficult to forecast because the company often acts as a subcontractor or supplier to dealers and subcontractors. Results are sensitive to laboratory-construction activity, project timing, pricing, foreign currency movements, and raw-material costs.
- Firm project pricing may prevent the company from fully recovering increases in labor and material costs, including stainless steel, wood, and epoxy resin costs.
- The company expects to contribute approximately $30,000 to its frozen defined-benefit pension plans during the remainder of the fiscal year. Pension expense increased to $577,000 for the six-month period from $226,000 in the prior year.
- Future minimum operating lease payments totaled $10.776 million, and leases not yet commenced represented an additional $981,000 of future payments.
- The company reported that disclosure controls and procedures were adequate and effective as of October 31, 2020, with no significant change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether COVID-19-related delays, site-access restrictions, or supplier constraints cause further backlog conversion delays or margin pressure.
- The company’s ability to generate positive operating cash flow as receivables and inventories remain elevated.
- Compliance with amended revolving-credit covenants and the company’s dependence on short-term borrowings.
- Backlog quality, timing of project completion, cancellation exposure, and the decline from $101 million at April 30, 2020 to $96 million at October 31, 2020.
- Whether strategic investments and technology spending produce operating improvements sufficient to offset higher expenses.
- Exposure to raw-material inflation, firm-price contracts, foreign currency movements, international operating risks, and future tax withholding obligations.