Kewaunee Scientific Corporation — Form 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the three and nine months ended January 31, 2022, representing the company’s fiscal third quarter and year-to-date period. Kewaunee designs, manufactures, and installs laboratory and scientific furniture and provides international laboratory design, engineering, construction, and project-management services. Operations are reported through Domestic and International segments.
Financial Performance and Position
| Metric | Three Months Ended January 31, 2022 | Three Months Ended January 31, 2021 | Nine Months Ended January 31, 2022 | Nine Months Ended January 31, 2021 |
|---|---|---|---|---|
| Net sales | $40.6 million | $33.3 million | $119.2 million | $108.8 million |
| Gross profit | $5.6 million | $5.7 million | $14.9 million | $17.9 million |
| Gross margin | 13.8% | 17.0% | 12.5% | 16.5% |
| Operating income (loss) | $(0.9) million | $(0.4) million | $(4.8) million | $(0.7) million |
| Net income (loss) attributable to Kewaunee | $(1.3) million | $0.1 million | $(5.8) million | $(0.7) million |
| Diluted earnings (loss) per share | $(0.47) | $0.03 | $(2.07) | $(0.25) |
Domestic sales increased 17.8% in the quarter and 6.2% year to date; International sales increased 34.2% and 20.8%, respectively. The company reported an order backlog of $138.1 million at January 31, 2022, compared with $103.0 million a year earlier and $114.5 million at April 30, 2021.
Operating expenses were $6.5 million in the quarter and $19.7 million year to date. Interest expense was $158,000 in the quarter and $396,000 year to date. Income tax expense was $399,000 in the quarter and $845,000 year to date; the company maintained a full U.S. valuation allowance and recorded no U.S. tax benefit for the current period.
Net cash used in operating activities was $1.1 million for the nine months, compared with $3.1 million of cash provided in the prior-year period. Capital expenditures were $1.2 million. Financing activities provided $2.1 million, primarily from net increases in short-term borrowings. Cash, cash equivalents, and restricted cash totaled $5.5 million at January 31, 2022.
At January 31, 2022, current assets were $68.9 million and current liabilities were $47.5 million, producing working capital of $21.4 million and a current ratio of 1.5 to 1.0. Short-term borrowings were $9.0 million, including $8.4 million outstanding under the revolving credit facility. Available revolving-credit capacity was $4.1 million, and standby letters of credit totaled $704,000.
Material Changes Versus Prior Comparable Period
- Sales rose 21.9% in the quarter and 9.6% year to date, but profitability deteriorated because material-cost inflation and operational disruption exceeded surcharge recovery.
- Gross profit margin declined by 3.2 percentage points in the quarter and 4.0 percentage points year to date.
- Supplier constraints and supply-chain disruption increased steel, wood, and epoxy-resin costs by approximately $424,000 in the quarter and $4.2 million year to date in excess of implemented surcharges.
- A November 5, 2021 cyber attack disrupted domestic manufacturing, engineering, administration, and sales operations. Management estimated a $1.1 million margin loss from production disruption, lost sales, and unabsorbed fixed overhead.
- Year-to-date net loss attributable to Kewaunee increased to $5.8 million from $0.7 million, while operating cash flow changed from a $3.1 million inflow to a $1.1 million outflow.
- Accounts payable and accrued expenses increased substantially, contributing $10.7 million to operating cash flow, while receivables and inventories increased by $2.2 million and $3.4 million, respectively.
- The company entered into a July 2021 credit agreement amendment extending facility maturity to April 30, 2022, removing the minimum EBITDA covenant, and adding supplemental-liquidity requirements.
Guidance, Outlook, Risks, and Unusual Items
Management expects improved financial performance through the remainder of the fiscal year and into fiscal 2023. The company is restoring and expanding manufacturing capacity, implementing surcharges on new orders, and anticipating stronger project awards and construction activity as economic conditions normalize.
During the quarter, supplemental liquidity fell below the required threshold for one reporting period. The company obtained a waiver and subsequently returned to compliance. Liquidity remains sensitive to raw-material costs, fixed-price contracts, working-capital requirements, and the April 30, 2022 credit-facility maturity.
The cyber attack materially affected the current period. Existing cyber insurance coverage was exhausted by related expenses and losses, and management stated that future comparable insurance may not be available. The forensic investigation identified a deficiency in logical access controls; remediation is ongoing. Management stated that, based on the investigation to date, it does not believe confidential or sensitive data was exfiltrated.
The company has signed an agreement to sell and lease back its Statesville, North Carolina facilities. Closing remains subject to satisfactory purchaser due diligence, which was ongoing at the filing date. The filing text does not provide a clear expected closing date or transaction value.
Additional risks include COVID-19 effects, supplier and project-site disruptions, labor and material-cost inflation, inability to recover costs through pricing, fluctuations in laboratory construction demand, and the company’s limited visibility into end-market demand.
Important Facts for Investors to Verify
- Whether the sale-leaseback transaction closes and the resulting effect on liquidity, leverage, and occupancy costs.
- Whether the revolving credit facility is renewed or replaced before its April 30, 2022 maturity date.
- Compliance with minimum monthly and supplemental liquidity covenants after the reported waiver.
- The extent to which raw-material surcharges offset continuing steel, wood, resin, and other input-cost inflation.
- Whether cyber-related losses remain within available coverage and whether identified access-control deficiencies are fully remediated.
- Conversion of the $138.1 million backlog into revenue and the related gross margins.
- Whether restoring manufacturing capacity and improving project-site activity produce the expected recovery in fiscal 2023.