Kewaunee Scientific Corporation — Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended July 31, 2020, the first quarter of fiscal 2021. Kewaunee designs, manufactures, and installs laboratory and technical furniture and provides laboratory design, engineering, construction, and project-management services through Domestic and International segments. The filing reflects ongoing COVID-19 effects, particularly on international construction activity.
Key financial metrics
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $36.423 million | $39.336 million |
| Gross profit / margin | $5.881 million / 16.1% | $6.946 million / 17.7% |
| Operating earnings (loss) | $(0.276) million | $0.776 million |
| Net earnings (loss) | $(0.608) million | $0.496 million |
| Net earnings (loss) attributable to Kewaunee | $(0.598) million | $0.471 million |
| Diluted earnings (loss) per share | $(0.22) | $0.17 |
| Cash flow from operations | $(3.268) million | $(0.407) million |
| Capital expenditures | $0.922 million | $1.183 million |
Domestic sales increased 2.6% to $30.058 million, while International sales decreased 36.7% to $6.365 million. The gross-margin decline reflected lower sales and an unfavorable segment and product mix. Operating expenses were substantially flat at $6.157 million, but increased to 16.9% of sales from 15.7%.
At July 31, 2020, cash and cash equivalents were $3.990 million, restricted cash was $0.835 million, and total cash, cash equivalents, and restricted cash were $4.825 million. Working capital was $27.818 million, with a current ratio of 1.9-to-1.0. Accounts receivable were $30.897 million and inventories were $16.458 million.
Short-term borrowings were $8.524 million, compared with $4.719 million at April 30, 2020. The company had $6.0 million available under its $15 million revolving credit facility and $0.512 million of standby letters of credit outstanding. Total liabilities were $48.997 million and total stockholders’ equity was $38.181 million.
Material changes versus the prior comparable period
- Sales declined 7.4%, primarily because International sales fell following reduced construction-site access and government-mandated shutdowns in India.
- Gross profit decreased $1.065 million, and the gross margin contracted by 160 basis points.
- The company moved from operating earnings of $0.776 million to an operating loss of $0.276 million.
- The company reported a net loss attributable to Kewaunee of $0.598 million versus net earnings of $0.471 million.
- Operating cash use increased to $3.268 million, driven principally by increases in receivables and inventories and a decrease in deferred revenue.
- Financing activities provided $3.785 million, primarily from a $3.805 million net increase in short-term borrowings.
- No dividend was paid in the current quarter; $0.522 million was paid in the prior-year quarter.
- Order backlog was approximately $101 million at July 31, 2020, compared with $102 million a year earlier and $101 million at April 30, 2020.
Guidance, outlook, risks, contingencies, and unusual items
- Management did not provide quantitative earnings or revenue guidance. It stated that it remains optimistic about growth opportunities in existing end-markets and intends to invest in and modernize capabilities.
- COVID-19 creates material uncertainty concerning demand, project-site closures, operating disruptions, supplier support, employee availability, government actions, liquidity, and financial results.
- Future demand is difficult to predict because the company frequently acts as a subcontractor or supplier to dealers and subcontractors. Results also depend on laboratory construction activity and project timing.
- Firm-price quotations expose the company to labor and raw-material cost increases, including stainless steel, wood, and epoxy resin, unless those costs can be passed through to customers.
- At April 30, 2020, the company was not in compliance with all revolving-credit financial covenants. A July 20, 2020 amendment changed certain covenants and waived the prior non-compliance; the company reported compliance at July 31, 2020. The amendment did not increase credit availability.
- Pension expense increased to $0.288 million from $0.113 million, primarily due to higher recognition of net pension losses. The company expects to contribute $0.030 million to the plans during the remainder of the fiscal year.
- The company recorded a valuation allowance against a U.S. deferred tax asset, eliminating a current-quarter tax benefit and contributing to a reported effective tax rate of negative 3.6%.
- Management stated that disclosure controls and procedures were adequate and effective as of July 31, 2020, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Verify the continuing availability and covenant requirements of the revolving credit facility, including the effect of the July 2020 amendment and the remaining $6.0 million availability.
- Monitor COVID-19 effects on International operations, especially India, construction-site access, project timing, and supplier capacity.
- Assess whether the approximately $101 million backlog converts into revenue and cash flow at expected margins.
- Review working-capital trends, particularly receivables, inventories, deferred revenue, and operating cash burn.
- Evaluate exposure to raw-material and labor-cost inflation under firm-price contracts.
- Review the company’s liquidity relative to short-term borrowings, lease obligations, pension obligations, standby letters of credit, and capital expenditures.