Kewaunee Scientific Corporation — Form 10-Q Summary
Business context and reporting period
This report covers the three months ended July 31, 2023, the first quarter of fiscal 2024, compared with the three months ended July 31, 2022. Kewaunee designs, manufactures, and installs laboratory furniture and related systems through Domestic and International segments. The company is a smaller reporting company and its common stock trades on Nasdaq under KEQU.
Financial results and liquidity
- Net sales: $49.839 million, down 0.6% from $50.123 million.
- Gross profit: $11.914 million versus $6.196 million; gross margin increased to 23.9% from 12.4%.
- Operating profit: $3.808 million versus an operating loss of $0.396 million; operating margin was approximately 7.6% versus negative 0.8%.
- Net earnings attributable to Kewaunee: $2.474 million, or $0.86 diluted EPS, versus a net loss of $0.747 million, or $(0.27) diluted EPS.
- Income taxes: $0.897 million, reflecting a 26.3% effective tax rate, versus $0.379 million and a negative 111.5% effective rate in the prior-year quarter.
- Operating expenses: $8.106 million, or 16.3% of sales, compared with $6.592 million, or 13.2%.
- Operating cash flow: $8.172 million versus $3.685 million. Capital expenditures were $1.654 million, producing net investing cash use of $1.654 million.
- Cash and restricted cash: $21.568 million at July 31, 2023, including $12.699 million of cash and cash equivalents and $8.869 million of restricted cash, compared with $13.815 million at April 30, 2023.
- Liquidity: Working capital was $49.291 million and the current ratio was 2.1-to-1.0, compared with $47.867 million and 2.2-to-1.0 at April 30, 2023.
- Borrowings: $5.0 million was outstanding under the revolving credit facility at a 9.33% borrowing rate, with $8.3 million of remaining capacity. The company also reported $54,000 of international short-term borrowings and was in compliance with its financial covenants.
- Financing liability: The sale-leaseback financing liability was $28.617 million, including $0.659 million current and $27.958 million long-term.
Material changes versus the prior comparable period
- Domestic sales declined 5.5% to $35.420 million, primarily because the company discontinued direct sales to end users, which commonly included installation services.
- International sales increased 13.9% to $14.419 million, driven by delivery of several large projects booked in the prior fiscal year.
- Management attributed the gross-margin improvement primarily to Domestic operations, including pricing of new orders to reflect higher raw-material costs. In the prior-year quarter, approximately 25% of Domestic revenue came from direct orders delivered at a loss.
- Operating expenses increased $1.514 million, mainly from higher SG&A wages, benefits, incentive and stock-based compensation; bad debt expense related primarily to a single job dispute; travel and entertainment; and higher international operating expenses.
- Order backlog was $140.8 million at July 31, 2023, down from $174.0 million at July 31, 2022 and $147.9 million at April 30, 2023.
- Deferred revenue increased to $7.067 million from $4.097 million at April 30, 2023. Approximately 100% of the contract-liability balance at July 31, 2023 was expected to be recognized within the succeeding 12 months.
- Financing activities provided $1.306 million, primarily from a net increase in revolving-credit borrowings, compared with $11.670 million in the prior-year quarter, which included $13.456 million of sale-leaseback financing proceeds.
Guidance, outlook, risks, and unusual items
The company did not provide quantified financial guidance. Management stated that demand is difficult to predict because Kewaunee primarily supplies dealers and subcontractors, and depends on laboratory construction activity and project schedules. Management cited improved organizational focus, manufacturing capabilities, a global management team, backlog, and continued investment in laboratory-related end markets as positive factors.
Key risks include project and customer demand variability, pricing pressure, raw-material costs for steel, wood, and epoxy resin, supplier constraints, international operations and foreign-currency fluctuations, general economic conditions, legal and regulatory changes, and force majeure events. The company stated that there were no material changes to the risk factors disclosed in its fiscal 2023 Form 10-K.
The sale-leaseback of the Statesville headquarters and manufacturing facilities is accounted for as a financing transaction rather than a sale. The arrangement has a 20-year term, initial basic rent of approximately $158,000 per month, and remaining minimum financing-liability payments of $43.435 million, including $14.818 million of imputed interest. A new program adopted August 31, 2023, effective September 1, 2023, authorizes repurchases of up to 100,000 shares without a specified expiration date; repurchases are discretionary.
Important facts for investors to verify
- Whether the improved gross margin is sustainable as backlog converts to revenue and raw-material and labor costs change.
- The quality, timing, and customer concentration of the $140.8 million backlog, particularly following its year-over-year decline.
- The outcome and collectibility of the receivable associated with the single job dispute and the related bad-debt expense.
- Revolving-credit availability, interest rates, covenant compliance, and the company’s ability to fund capital expenditures and lease obligations.
- The effect of discontinuing direct domestic sales, including the impact on revenue, installation services, margins, and working capital.
- Execution and profitability of international projects, including foreign-currency exposure and project-delivery risks.
- The timing and actual amount of any share repurchases under the new authorization.