Kewaunee Scientific Corporation — Form 10-Q Summary
Business Context and Reporting Period
This quarterly report covers the three and nine months ended January 31, 2023, Kewaunee’s fiscal third quarter and first nine months of fiscal 2023. The company designs, manufactures, and installs laboratory and technical furniture domestically and provides laboratory design, engineering, construction, and project-management services internationally.
Key Financial Metrics
| Metric | Q3 FY2023 | Q3 FY2022 | 9M FY2023 | 9M FY2022 |
|---|---|---|---|---|
| Net sales | $60.8 million | $40.6 million | $165.5 million | $119.2 million |
| Gross profit | $10.3 million | $5.6 million | $25.2 million | $14.9 million |
| Gross margin | 17.0% | 13.8% | 15.2% | 12.5% |
| Operating profit (loss) | $2.3 million | $(0.9) million | $2.7 million | $(4.8) million |
| Net earnings (loss) attributable to Kewaunee | $0.7 million | $(1.3) million | $(0.3) million | $(5.8) million |
| Diluted EPS | $0.25 | $(0.47) | $(0.09) | $(2.07) |
| Operating cash flow | Not separately provided | Not separately provided | $(3.5) million | $(1.1) million |
At January 31, 2023, cash and cash equivalents were $13.0 million and restricted cash was $5.4 million. Working capital was $47.3 million, with a current ratio of 2.1-to-1.0. The company had $5.8 million of short-term borrowings, including $3.0 million outstanding under its new revolving credit facility and $2.8 million of international short-term borrowings. Remaining borrowing capacity under the revolving facility was $11.3 million.
The company reported total liabilities of $85.4 million and total stockholders’ equity of $36.3 million. The sale-leaseback financing liability was $28.9 million, including $0.6 million classified as current. Capital expenditures were $1.6 million during the first nine months.
Material Changes Versus the Prior Comparable Period
- Quarterly sales increased 49.7%; nine-month sales increased 38.9%. Domestic sales rose 22.4% in the quarter and 25.2% year to date, primarily from passing higher input costs through to customers. International sales rose 122.4% in the quarter and 79.5% year to date, driven by delivery of large projects booked in the prior fiscal year.
- Gross margin improved to 17.0% from 13.8% in the quarter and to 15.2% from 12.5% year to date. Prior-year margins were adversely affected by $0.4 million of quarterly and $4.2 million of nine-month raw-material cost increases that could not be added to existing fixed-price contracts.
- The company returned to quarterly profitability, but remained slightly unprofitable for the first nine months. Higher interest expense, international operating costs, and a high effective tax rate continued to weigh on results.
- Interest expense increased to $0.4 million for the quarter and $1.2 million year to date, compared with $0.2 million and $0.4 million, respectively, in the prior-year periods.
- Operating cash flow was negative $3.5 million year to date, primarily reflecting lower accounts payable and accrued expenses, higher receivables, and increases in prepaid and other assets.
- On December 19, 2022, the company entered into a new secured revolving credit facility of initially up to $15.0 million, maturing December 19, 2025. The facility bears interest at Term SOFR plus 4.10%, subject to its terms and borrowing base.
Guidance, Outlook, Risks, and Unusual Items
No quantitative earnings or revenue guidance was provided. Management stated that demand remains difficult to predict because the company is often a subcontractor or supplier to dealers and subcontractors. Demand depends on laboratory construction activity and project schedules.
Management cited raw-material, labor, and commodity-cost inflation, particularly for steel, wood, and epoxy resin, as key risks because projects are generally quoted at fixed prices. The company is seeking to replace lower-margin direct-sales orders with higher-margin product orders and expects continued support from its domestic dealer channel and international growth.
- Order backlog was $153.2 million at January 31, 2023, compared with $138.1 million at January 31, 2022 and $173.9 million at April 30, 2022.
- The nine-month results included a one-time $0.3 million operating-expense charge related to the write-down of a prior-year insurance claim.
- The nine-month effective tax rate was 87.8%, partly because the company’s U.S. valuation allowance prevented recognition of a U.S. tax benefit and because international operations are taxed at different rates.
- The company accounted for its headquarters sale-leaseback as a financing transaction rather than a sale. The arrangement requires approximately $158,000 of initial monthly rent, with annual increases of approximately 2%, over an initial 20-year term.
- Principal risks include economic and competitive conditions, supplier and supply-chain disruptions, customer demand and delivery schedules, raw-material costs, international operations and foreign-currency movements, regulatory changes, and force majeure events.
- Management reported compliance with all credit-facility covenants as of January 31, 2023. Disclosure controls were assessed as adequate and effective, with no significant change in internal control over financial reporting.
Investor Verification Points
- Verify whether improved gross margins are sustainable as fixed-price backlog is delivered and new projects are booked.
- Monitor conversion of the $153.2 million backlog into revenue, cash flow, and acceptable margins.
- Assess liquidity and covenant headroom in light of negative operating cash flow, short-term borrowings, and rising interest expense.
- Review the terms, borrowing-base availability, and interest-rate exposure of the new revolving credit facility.
- Evaluate the long-term cash obligations and accounting implications of the $28.9 million sale-leaseback financing liability.
- Track the effect of the U.S. valuation allowance and elevated effective tax rate on future earnings and cash taxes.