Kewaunee Scientific Corporation — Form 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the three and nine months ended January 31, 2021, Kewaunee Scientific Corporation’s fiscal 2021 third quarter and year-to-date period. The company designs, manufactures, and installs laboratory and scientific furniture and provides international laboratory design, engineering, construction, and project-management services. Operations are classified as Domestic and International.
Financial Results and Key Metrics
| ($ in thousands, except per-share data) | Q3 FY2021 | Q3 FY2020 | 9M FY2021 | 9M FY2020 |
|---|---|---|---|---|
| Net sales | $33,339 | $34,225 | $108,762 | $113,283 |
| Gross profit | $5,654 | $5,278 | $17,930 | $18,540 |
| Gross margin | 17.0% | 15.4% | 16.5% | 16.4% |
| Operating income (loss) | $(376) | $(2,072) | $(663) | $(1,335) |
| Net earnings (loss) attributable to Kewaunee | $81 | $(1,918) | $(697) | $(3,625) |
| Diluted earnings (loss) per share | $0.03 | $(0.70) | $(0.25) | $(1.32) |
| Cash flow from operations | Not provided | Not provided | $3,107 | $4,611 |
- Revenue: Third-quarter sales declined 2.6% year over year. Domestic sales fell 6.1% to $25.1 million, while International sales increased 9.9% to $8.3 million. Nine-month sales declined 4.0%.
- Profitability: Third-quarter gross margin improved 160 basis points, primarily from better Domestic operating performance and lower unfavorable manufacturing and material variances. Operating expenses declined 17.9% year over year to $6.0 million, or 18.1% of sales.
- Taxes and unusual items: The company recorded an income tax benefit of $813,000 in the quarter and $989,000 year to date, including benefits associated with domestic tax-loss carrybacks under the CARES Act. The effective tax rate was 113.2% for the quarter and 59.3% year to date. Pension expense increased to $288,000 in the quarter and $865,000 year to date, compared with $113,000 and $339,000, respectively.
- Cash and liquidity: Cash and cash equivalents were $5.6 million at January 31, 2021, with total cash, cash equivalents, and restricted cash of $6.1 million. Working capital was $28.5 million, and the current ratio was 1.9-to-1.0.
- Debt: Revolving-credit borrowings were $4.5 million, with $8.6 million available under the $15 million facility. Standby letters of credit totaled $512,000. The company also reported operating and capital lease liabilities.
- Capital expenditures: Nine-month capital expenditures were $1.9 million, compared with $1.4 million in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue decreased $886,000, but gross profit increased $376,000 because of the higher gross margin.
- Operating loss narrowed by $1.7 million, reflecting lower operating expenses and improved gross profit.
- The company moved from a quarterly attributable loss of $1.9 million to attributable earnings of $81,000.
- Nine-month attributable loss improved by $2.9 million, although the company remained unprofitable year to date.
- Operating cash flow declined $1.5 million year over year, primarily because receivables, inventories, and income-tax receivables used cash, partly offset by higher accounts payable and accrued expenses.
- Order backlog increased to $103 million at January 31, 2021, compared with $93 million one year earlier and $101 million at April 30, 2020.
- Total assets increased to $89.6 million from $83.9 million at April 30, 2020, while total liabilities increased to $51.3 million from $45.2 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management did not provide specific quantitative earnings or revenue guidance. It expects project awards and construction activity to accelerate as economies reopen and anticipates continued improvement from a reduced cost structure and modernization investments.
- Management remains optimistic about growth opportunities but expects near-term industry earnings pressure from rapidly escalating raw-material costs. Firm project pricing may prevent the company from fully passing through higher labor and material costs.
- COVID-19 remains a material uncertainty, including potential project-site closures, supply-chain disruption, employee impacts, operational restrictions, and adverse effects on revenue, earnings, liquidity, and capital levels.
- The revolving-credit facility maturity was extended from February 1, 2021 to May 3, 2021. The January 28, 2021 amendment established a minimum $1.0 million EBITDA covenant for the four quarters ending April 30, 2021 and revised projection-delivery requirements. The company was in compliance with all covenants at January 31, 2021.
- The company had previously breached certain credit-facility covenants at April 30, 2020; a July 2020 amendment modified the covenants and waived the prior noncompliance.
- Other risks include uncertain demand because the company often serves as a subcontractor or dealer supplier, project timing, competition, foreign-currency exposure, international operations, commodity prices, and regulatory or force-majeure events.
- Management concluded that disclosure controls and procedures were adequate and effective as of January 31, 2021, with no significant change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the company can satisfy the $1.0 million minimum EBITDA covenant for the four-quarter period ending April 30, 2021 and obtain continued credit availability beyond the May 3, 2021 maturity.
- The sustainability of the improved gross margin and lower operating-expense base after COVID-related disruptions and cost reductions normalize.
- Whether the $103 million backlog converts to revenue on the expected schedule and whether project delays continue.
- The effect of rapidly increasing stainless steel, wood, epoxy-resin, labor, and other input costs on fixed-price projects.
- The timing and collectability of the $4.2 million income-tax receivable and the company’s ongoing cash-generation needs.
- The extent to which quarterly earnings benefited from tax-loss carrybacks and other tax items rather than recurring operating performance.