Kewaunee Scientific Corporation: Q1 FY2022 Summary
Reporting period: Three months ended July 31, 2021, compared with the three months ended July 31, 2020. Kewaunee designs, manufactures, and installs laboratory and technical furniture and provides laboratory design, engineering, construction, and project-management services through Domestic and International segments.
Financial Performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $39.493 million | $36.423 million | +8.4% |
| Gross profit | $5.674 million | $5.881 million | -3.5% |
| Gross margin | 14.4% | 16.1% | -170 bps |
| Operating loss | $1.091 million | $0.276 million | Higher loss |
| Net loss attributable to Kewaunee | $1.345 million | $0.598 million | Higher loss |
| Diluted loss per share | $0.48 | $0.22 | Higher loss |
| Cash used in operating activities | $1.776 million | $3.268 million | Improved by $1.492 million |
- Domestic sales declined 1.3% to $29.663 million, while International sales increased 54.4% to $9.830 million.
- Cost of products sold increased 10.7% to $33.819 million. Management attributed the gross-margin decline primarily to COVID-19-related supplier constraints and other disruptions, including approximately $1.7 million of higher steel and epoxy-resin costs, net of surcharges.
- Operating expenses increased 9.9% to $6.765 million, or 17.1% of sales, driven mainly by higher International wages, travel, professional fees, and administrative and stock-based compensation costs.
- Pension income was $89,000 compared with pension expense of $288,000 in the prior-year quarter. Interest expense increased to $106,000 from $77,000.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $4.985 million at July 31, 2021; cash, cash equivalents, and restricted cash totaled $5.467 million, down from $5.731 million at April 30, 2021.
- Working capital was $25.709 million, compared with $26.276 million at April 30, 2021. The current ratio was 1.7-to-1.0, compared with 1.8-to-1.0.
- Short-term borrowings were $8.854 million, up from $6.828 million. The revolving credit facility had $5.6 million available under its $15.0 million commitment, versus $7.5 million at April 30, 2021.
- Standby letters of credit totaled $704,000. The Company was in compliance with all revolving-credit financial covenants at July 31, 2021.
- Capital expenditures were $484,000, funded alongside operations primarily through borrowings. Financing activities provided $2.021 million, principally from a net increase in short-term borrowings of $2.026 million.
- Receivables increased to $34.932 million and inventories increased to $17.852 million from $16.517 million at April 30, 2021.
Material Changes and Credit Amendment
- Order backlog increased to $120.6 million at July 31, 2021, from $114.5 million at April 30, 2021 and $101.2 million at July 31, 2020.
- On July 30, 2021, the Company amended its revolving credit agreement. The maturity date was extended from July 30, 2021 to April 30, 2022, and the minimum EBITDA covenant was removed.
- The amendment retained the $2.0 million minimum monthly liquidity requirement and added a supplemental liquidity covenant of $1.0 million from August through December 2021 and $1.5 million thereafter.
- The Company adopted ASU 2019-12, simplifying income-tax accounting, effective May 1, 2021; management reported no significant impact.
Outlook, Risks, and Unusual Items
- Management was optimistic about longer-term growth, citing economic reopening, expected acceleration in project awards and construction, operational modernization, and a lower operating-cost structure.
- Near-term earnings remain exposed to escalating raw-material prices, particularly because many contracts have fixed pricing. Surcharges on new orders are intended to offset higher steel, aluminum, hardwood, and resin costs, but their benefits may lag the immediate cost increases.
- COVID-19 continues to create uncertainty regarding supplier capacity, construction-site access, project closures, employee availability, government actions, and demand.
- Demand visibility is limited because the Company often serves as a subcontractor or supplier to dealers and subcontractors. Results also depend on laboratory construction activity and project pricing.
- The effective tax rate was negative 23.8%, compared with negative 3.6% in the prior-year quarter, primarily because increased international activity was taxed at different rates and no U.S. tax benefit was recognized due to the Company’s full valuation allowance.
- No material changes to previously disclosed market risks or risk factors were reported. Management concluded that disclosure controls and procedures were adequate and effective as of July 31, 2021.
Investor Verification Items
- Verify whether backlog converts into revenue as expected and whether International growth is sustainable after COVID-19-related comparisons normalize.
- Monitor gross-margin recovery, supplier constraints, commodity costs, and the effectiveness and timing of customer surcharges.
- Assess liquidity against the new monthly and supplemental liquidity covenants and the April 30, 2022 credit-facility maturity.
- Track operating cash flow, inventory and receivables growth, and reliance on short-term borrowings.
- Review the impact of the U.S. valuation allowance and the Company’s ability to generate future taxable income before relying on tax benefits.