Kewaunee Scientific Corporation — Form 10-Q Summary
Business Context and Reporting Period
Filed December 9, 2022, for the quarter and six months ended October 31, 2022, Kewaunee Scientific designs, manufactures and installs laboratory and technical furniture. Operations comprise Domestic and International segments. The filing is unaudited and should be read with the fiscal 2022 Form 10-K.
Financial Results and Key Metrics
| Metric | Three Months Ended Oct. 31, 2022 | Three Months Ended Oct. 31, 2021 | Six Months Ended Oct. 31, 2022 | Six Months Ended Oct. 31, 2021 |
|---|---|---|---|---|
| Net sales | $54.6 million | $39.0 million | $104.7 million | $78.5 million |
| Gross profit | $8.7 million | $3.6 million | $14.9 million | $9.3 million |
| Gross margin | 15.9% | 9.2% | 14.2% | 11.8% |
| Operating profit (loss) | $0.8 million | $(2.9) million | $0.4 million | $(4.0) million |
| Net loss attributable to Kewaunee | $(0.2) million | $(3.1) million | $(1.0) million | $(4.4) million |
| Diluted loss per share | $(0.09) | $(1.11) | $(0.35) | $(1.60) |
- Domestic sales increased 26.9% to $38.0 million in the quarter and 26.6% to $75.5 million year to date, primarily reflecting higher input costs incorporated into pricing.
- International sales increased 82.2% to $16.6 million in the quarter and 54.4% to $29.2 million year to date, driven by deliveries under large projects booked in the prior fiscal year.
- Operating expenses were $7.9 million for the quarter and $14.5 million year to date. Expense increases included consulting and professional fees, international operating costs, and a $0.3 million one-time write-down of a prior-year insurance claim.
- Interest expense increased to $0.4 million for the quarter and $0.8 million year to date, principally due to borrowings and the sale-leaseback financing transaction.
- Income tax expense was $0.6 million for the quarter and $0.9 million year to date. Effective tax rates were unusually high at 125.0% and 818.1%, respectively, because the Company recorded no U.S. tax benefit while subject to a full valuation allowance and also had differing foreign tax rates.
Cash Flow, Liquidity, Debt and Balance Sheet
- Cash used in operating activities was $0.6 million for the six months ended October 31, 2022, an improvement from $6.1 million used in the prior-year period.
- Capital expenditures were $0.9 million, compared with $0.9 million in the prior-year period.
- Financing activities provided $11.5 million, including $13.5 million of proceeds from the sale-leaseback financing transaction, partially offset by borrowings repayments and lease-related payments.
- Cash, cash equivalents and restricted cash totaled $16.3 million at October 31, 2022, compared with $6.9 million at April 30, 2022. Cash and cash equivalents alone were $9.4 million.
- Working capital was $47.8 million, compared with $49.3 million at April 30, 2022; the current ratio was 2.1-to-1.0.
- The Company terminated its Wells Fargo revolving credit agreement on June 27, 2022. There were no borrowings outstanding at termination and no material termination penalties.
- The sale-leaseback was accounted for as a financing transaction rather than a sale. The related financing liability was $29.1 million at October 31, 2022, with a 20-year arrangement and initial rent of approximately $158,000 per month, subject to annual increases of approximately 2%.
- Deferred revenue increased to $11.4 million from $3.5 million at April 30, 2022, primarily reflecting advance payments for a large international order.
Material Changes and Management Commentary
- Revenue growth and improved pricing helped increase gross margins and substantially reduce operating losses compared with the prior year.
- Prior-year margins were adversely affected by $2.1 million of material-cost increases in the quarter and $3.8 million year to date that could not be passed through on fixed-price contracts.
- Order backlog was $157.8 million at October 31, 2022, compared with $139.7 million a year earlier and $173.9 million at April 30, 2022.
- Management stated that it is replacing lower-margin direct-sales orders with higher-margin product orders and expects continued support of domestic dealers and continued International growth to support the balance of the fiscal year.
- Management believes available liquidity sources are sufficient for ongoing requirements and planned capital expenditures during the current fiscal year.
Outlook, Risks and Unusual Items
- Demand visibility is limited because the Company commonly acts as a subcontractor or supplier to dealers and depends on laboratory construction activity and project schedules.
- Key exposures include raw-material and labor inflation, firm-price contracts, supply disruptions, customer demand changes, international operations and foreign-currency fluctuations, competitive and general economic conditions, COVID-19 effects, and force majeure events.
- The filing provides no formal numerical revenue or earnings guidance.
- The Company reports no material changes to the risk factors in its fiscal 2022 Form 10-K and no material changes in market-risk disclosures.
- The Company’s disclosure controls and procedures were considered adequate and effective as of October 31, 2022, with no significant changes to internal control over financial reporting.
Investor Verification Items
- Verify whether backlog converts to revenue at expected margins, particularly given the decline from April 30, 2022.
- Monitor whether pricing continues to offset steel, wood, epoxy resin, labor and other input-cost inflation.
- Assess the sustainability of positive operating income after the one-time insurance-claim charge and continued increases in International operating expenses.
- Review cash generation, deferred-revenue recognition and the Company’s ability to fund the approximately $29.1 million sale-leaseback financing obligation and related lease payments.
- Evaluate the unusually high effective tax rate and the continuing U.S. valuation allowance.
- Track international project execution, foreign-currency effects, customer delivery schedules and supply-chain disruptions.