Kewaunee Scientific Corporation — Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2022, compared with fiscal year ended April 30, 2021. The request metadata references “2021 Q4,” but the filing is an annual report for fiscal 2022.
Business Context
Kewaunee designs, manufactures, and installs laboratory, healthcare, and technical furniture and infrastructure, including laboratory casework, fume hoods, workstations, sinks, and related engineering and installation services. The Company operates through Domestic and International segments, with manufacturing in the United States and India. International sales represented approximately 26% of fiscal 2022 revenue.
The Company serves pharmaceutical, biotechnology, industrial, educational, healthcare, governmental, and manufacturing customers, primarily through dealers, subsidiaries, and a national distributor. Three domestic channel partners accounted for approximately 38% of fiscal 2022 sales.
Financial Performance and Metrics
| Metric | Fiscal 2022 | Fiscal 2021 |
|---|---|---|
| Net sales | $168.9 million | $147.5 million |
| Gross profit | $24.2 million | $24.0 million |
| Gross margin | 14.3% | 16.3% |
| Operating loss | $2.6 million | $1.3 million |
| Loss before income taxes | $2.5 million | $2.6 million |
| Income tax expense | $3.5 million | $1.0 million |
| Net loss attributable to Kewaunee | $6.1 million | $3.7 million |
| Diluted loss per share | $2.20 | $1.33 |
| Cash flow from operating activities | $(7.9) million | $0.9 million |
| Capital expenditures | $1.9 million | $2.4 million |
Domestic sales increased 14.2% to $126.9 million, while International sales increased 15.3% to $42.0 million. Operating expenses increased to $26.8 million from $25.3 million, but declined as a percentage of sales to 15.9% from 17.2%. Pension income was $355,000 in 2022 versus pension expense of $1.2 million in 2021.
At April 30, 2022, cash and cash equivalents were $4.4 million, restricted cash was $2.5 million, receivables were $41.3 million, inventories were $23.8 million, and working capital was $49.3 million. Current assets exceeded current liabilities by approximately 2.2 to 1.0.
Short-term borrowings were $1.6 million, and the Company had $716,000 of outstanding letters of credit under its revolving credit facility. The facility had approximately $2.4 million of availability at April 30, 2022. The Company terminated the credit agreement on June 27, 2022 after repaying all outstanding amounts.
Material Changes Versus Prior Period
- Revenue increased 14.5%, reflecting higher Domestic and International volumes, price increases, and recovery from prior-year COVID-19-related restrictions in India.
- Gross margin declined by 200 basis points. Supplier constraints and supply-chain disruptions increased steel, wood, and epoxy resin costs by $4.6 million in excess of recorded surcharges.
- The November 5, 2021 cyber attack disrupted domestic manufacturing, engineering, administration, and sales operations. Operations were substantially restored by November 15, 2021, but the disruption reduced margin by approximately $1.1 million.
- Operating cash flow declined from a $0.9 million inflow to a $7.9 million outflow, primarily due to increases in receivables of $8.5 million and inventories of $7.3 million.
- The Company completed a March 2022 sale-leaseback arrangement involving its Statesville headquarters and manufacturing facilities. The transaction was accounted for as a financing transaction, resulting in a $29.4 million financing liability and a $13.5 million note receivable at year-end.
- Income tax expense rose substantially, primarily because of a $4.2 million increase in the valuation allowance against deferred tax assets, including tax effects associated with the sale-leaseback transaction.
- Order backlog reached a record $173.9 million at April 30, 2022, compared with $114.5 million at April 30, 2021. Management estimated that at least 86% would ship during fiscal 2023, subject to customer and construction delays.
Outlook, Risks, and Unusual Items
Management described the outlook as favorable based on the record backlog, improved operating performance, changes in go-to-market strategy, and continued investment in manufacturing. However, demand remains difficult to forecast because the Company often acts as a subcontractor or supplier whose shipments depend on laboratory and healthcare construction schedules. Fiscal 2023 capital expenditures were anticipated at approximately $3.5 million.
- Inflation, labor shortages, potential recession, construction delays, and customer rescheduling could delay shipments and revenue recognition.
- Fixed-price contracts expose the Company to increases in steel, epoxy resin, wood, energy, labor, transportation, and other costs. During fiscal 2022, steel and epoxy resin prices increased 149% and 162%, respectively.
- Customer concentration is significant: three domestic channel partners generated approximately 38% of fiscal 2022 sales.
- The Company experienced a criminal cyber attack and incurred losses exceeding its cyber insurance coverage. As of April 30, 2022, it did not have active cyber insurance coverage.
- The sale-leaseback financing requires approximately $45.8 million of future minimum payments, including $35.96 million after five years, with initial monthly rent of approximately $158,000 and annual increases of approximately 2%.
- COVID-19, supply-chain disruptions, tariffs, foreign-exchange movements, international political and economic conditions, and future cybersecurity incidents remain material risks.
- The Company reported no material pending litigation, no off-balance-sheet arrangements, and no critical audit matters. Management concluded that disclosure controls and internal control over financial reporting were effective as of April 30, 2022.
Important Facts for Investors to Verify
- Whether the record backlog converts into fiscal 2023 revenue and cash flow without substantial construction, customer, labor, or supply-chain delays.
- Whether pricing actions and surcharges can offset continuing raw-material and labor inflation and restore gross margins.
- The Company’s liquidity after termination of the Wells Fargo facility, including replacement financing, cash requirements, and compliance with contractual obligations.
- The collectability and timing of the $13.5 million note receivable related to the sale-leaseback; the filing states that it was fully redeemed and converted to cash by June 22, 2022.
- The ongoing financial and operational effects of the November 2021 cyber attack and the adequacy and cost of replacement cyber insurance.
- The impact of the $6.9 million deferred-tax-asset valuation allowance on future tax expense and cash taxes.
- Customer concentration, international exposure, foreign-currency movements, and the Company’s ability to maintain positive operating cash flow.