Kewaunee Scientific Corporation — Fiscal 2021 Form 10-K Summary
Business context and reporting period
The filing is an annual report for the fiscal year ended April 30, 2021; it is not a quarterly filing for “2020 Q4.” Kewaunee designs, manufactures, and installs laboratory, healthcare, and technical furniture and infrastructure products. Its customers include pharmaceutical, biotechnology, industrial, educational, healthcare, governmental, and manufacturing organizations. Operations are reported in Domestic and International segments.
The company had 838 full-time employees at year-end, including 543 domestic and 295 international employees. International sales represented approximately 26% of fiscal 2021 revenue. Three domestic dealers and the national stocking distributor collectively represented approximately 40% of sales.
Key financial metrics
| Metric | Fiscal 2021 | Fiscal 2020 |
|---|---|---|
| Net sales | $147.5 million | $147.5 million |
| Gross profit | $24.0 million | $23.4 million |
| Gross margin | 16.3% | 15.9% |
| Operating loss | $1.3 million | $2.3 million |
| Loss before income taxes | $2.6 million | $2.9 million |
| Net loss attributable to Kewaunee | $3.7 million | $4.7 million |
| Diluted loss per share | $1.33 | $1.70 |
| Cash provided by operating activities | $0.9 million | $4.2 million |
| Capital expenditures | $2.4 million | $2.5 million |
| Year-end cash and cash equivalents | $5.2 million | $4.4 million |
| Total borrowings and long-term debt | $16.1 million | $13.9 million |
| Stockholders’ equity attributable to Kewaunee | $41.2 million | $38.4 million |
Domestic sales declined 3.5% to $111.0 million, while International sales increased 12.3% to $36.4 million. The company’s order backlog increased to $114.5 million at April 30, 2021 from $100.9 million one year earlier; management estimated that at least 83% would ship during fiscal 2022.
Working capital was $26.3 million, compared with $27.2 million in fiscal 2020, and the current ratio was 1.8-to-1.0. The company had $6.8 million drawn and $704,000 of letters of credit outstanding under its secured $15 million revolving credit facility, leaving approximately $7.5 million available. The borrowing rate was 4.750% at year-end.
Material changes versus the prior comparable period
- Revenue was essentially flat, but the mix shifted toward higher International sales and lower Domestic sales.
- Gross margin improved by 40 basis points, primarily from improved Domestic manufacturing performance and favorable segment mix.
- Operating expenses decreased by approximately $463,000, aided by lower salaries and benefits, bad debt expense, and travel costs, partly offset by higher incentive compensation, stock compensation, repairs, COVID-related costs, and strategic initiative expenses.
- Pension expense increased to $1.2 million from $454,000 because of changes in actuarial valuation assumptions.
- Net loss attributable to Kewaunee improved by $1.0 million, although the company remained unprofitable.
- Operating cash flow declined by $3.2 million, largely because of working-capital movements, including higher receivables and inventories and lower accounts payable and accrued expenses.
- Short-term borrowings increased by $2.1 million, while total debt and borrowings increased by approximately $2.2 million.
- Accumulated other comprehensive loss improved by $6.0 million, principally from pension-related actuarial changes; this benefit did not reflect operating profitability.
- The company incurred $25,000 of international severance expense related to the closure of its China subsidiary. Administrative closure activities were expected to continue through fiscal 2022.
Guidance, outlook, commentary, and risks
Management expected approximately $2.0 million of fiscal 2022 capital expenditures, funded primarily by operating activities and supplemented by revolving-credit borrowings as needed. The company believed its available liquidity sources were sufficient to support ongoing requirements through fiscal 2022.
Management was optimistic about growth opportunities as the economy reopened, project awards accelerated, and construction activity increased. However, it expected near-term earnings pressure from escalating steel, aluminum, hardwood, resin, and other raw-material prices under fixed-price contracts. The company implemented surcharges on new orders, but stated that the benefit would lag the immediate cost increases.
- COVID-19 could continue to delay construction projects, close project sites, disrupt suppliers and operations, increase costs, and impair customer demand, collections, liquidity, or access to financing.
- Raw-material, labor, energy, tariff, freight, and supply-chain cost increases may reduce margins because many contracts are fixed price.
- Construction delays, customer rescheduling, weather, and changes in product specifications can shift revenue between quarters and delay revenue recognition.
- Customer concentration is material: approximately 40% of fiscal 2021 sales came from three domestic channel partners.
- The business is highly competitive and depends substantially on competitive bidding, pricing, product performance, customer service, and product specifications by architects and engineers.
- International operations expose the company to foreign-exchange, geopolitical, regulatory, political, tariff, and market risks.
- The company remained exposed to pension assumptions, self-insured healthcare claims, cybersecurity incidents, and potential impairment or realization issues related to deferred tax assets.
- The company had previously been out of compliance with certain credit-facility covenants at April 30, 2020; amendments and a waiver were obtained, and the company reported compliance at April 30, 2021. The revolving facility maturity was extended to July 30, 2021.
The company suspended its common-stock dividend in December 2019. No common-stock dividends were paid in fiscal 2021, and future dividends remained subject to board discretion and debt-agreement restrictions.
Most important facts for investors to verify
- Confirm the post-year-end status, maturity, availability, and covenant compliance of the revolving credit facility, including any refinancing or amendments after July 30, 2021.
- Assess whether the $114.5 million backlog converted to shipments and revenue as expected, particularly given construction delays and COVID-related disruptions.
- Monitor whether raw-material surcharges offset cost inflation and whether fixed-price contracts continue to pressure gross margins.
- Evaluate the sustainability of positive operating cash flow given the company’s recurring net losses and working-capital requirements.
- Review customer concentration and the collectability of receivables, including $6.9 million of unbilled receivables and project retainage.
- Review pension funding status, actuarial assumptions, and the $1.5 million underfunded pension obligation at April 30, 2021.
- Confirm the realizability of deferred tax assets, given the $2.7 million valuation allowance and continuing losses.
- Track the impact of the China subsidiary closure, the broader transformation program, and the company’s ability to return to sustained profitability.