Kewaunee Scientific Corporation — Form 10-Q Summary
Reporting period: Three and six months ended October 31, 2019. The filing was signed December 16, 2019. Kewaunee designs, manufactures, and installs laboratory and technical furniture through Domestic and International operations.
Financial performance and position
| Metric | Three months ended October 31, 2019 | Three months ended October 31, 2018 | Six months ended October 31, 2019 | Six months ended October 31, 2018 |
|---|---|---|---|---|
| Net sales | $39.7 million | $37.3 million | $79.1 million | $79.4 million |
| Gross profit | $6.3 million | $7.7 million | $13.3 million | $15.2 million |
| Gross margin | 15.9% | 20.6% | 16.8% | 19.2% |
| Operating earnings (loss) | $(39,000) | $1.7 million | $737,000 | $3.5 million |
| Net earnings (loss) attributable to Kewaunee | $(2.2) million | $1.3 million | $(1.7) million | $2.8 million |
| Diluted earnings (loss) per share | $(0.79) | $0.48 | $(0.62) | $1.01 |
| Cash flow from operations | Not separately provided | Not separately provided | $4.5 million | $2.3 million |
- Second-quarter sales increased 6.6%, driven by a 3.1% increase in Domestic sales and a 22.3% increase in International sales. Six-month sales declined 0.5%, as an 8.7% Domestic decline offset a 42.8% International increase.
- Operating expenses increased to $6.4 million in the quarter and $12.5 million for six months, primarily reflecting higher International operating costs and investments in India capabilities.
- Income tax expense was $2.0 million in the quarter and $2.2 million for six months. Reported effective tax rates were unusually high at 1,267.7% and 428.4%, respectively, largely because of foreign tax matters, GILTI, and changes in the treatment of unremitted foreign earnings.
- At October 31, 2019, cash and cash equivalents were $7.6 million and restricted cash was $2.0 million. Working capital was $30.8 million, with a current ratio of approximately 2.0-to-1.0.
- Net cash used in financing activities was $5.2 million, including $2.8 million of net short-term borrowing repayments, $1.0 million of dividends to stockholders, $89,000 of dividends to noncontrolling interest holders, and $1.3 million of debt and lease repayments.
- Capital expenditures were $715,000 for the six months. Total stockholders’ equity was $45.0 million at October 31, 2019, compared with $47.7 million at April 30, 2019.
Debt, liquidity, and accounting changes
- Revolving-credit borrowings were $6.8 million at October 31, 2019, compared with $9.5 million at April 30, 2019. Availability under the $20 million facility was $12.9 million, compared with $5.3 million at April 30.
- The Company paid off its term loan and terminated related interest-rate swaps in September 2019. Standby letters of credit declined to $344,000 from $5.2 million at April 30, 2019.
- The Company had previously violated financial covenants at April 30, 2019, received a lender waiver, granted security interests in substantially all assets, and amended its credit agreement. It stated that it was compliant with applicable covenants at October 31, 2019.
- After the quarter, on December 13, 2019, the credit facility was amended to an asset-based lending arrangement. Availability was capped at $20 million through January 31, 2020 and reduced to $15 million thereafter, with new minimum liquidity and EBITDA requirements, foreign-cash repatriation requirements, and dividend restrictions.
- The Company adopted the lease standard effective May 1, 2019, recognizing $10.1 million of right-of-use assets and $9.9 million of operating lease liabilities at October 31, 2019. The adoption did not materially affect reported earnings.
Material changes, outlook, and risks
- Gross margins fell materially because the Company pursued and secured several low-margin orders, including a strategic Middle East order. Management expects this pressure to continue while those orders are delivered.
- Backlog was $92 million at October 31, 2019, down from $101 million at both October 31, 2018 and April 30, 2019. Management reported a strong volume of outstanding quotations but stated that demand remains difficult to predict.
- The third quarter is typically the most challenging because of holidays and slower year-end construction activity. Management’s objective is to fill the fourth-quarter production schedule and improve manufacturing efficiency and profitability.
- Key operating risks include project timing, dealer and subcontractor dependence, competitive pricing, raw-material and labor-cost inflation, firm-price contracts, foreign-currency movements, international operations, and general economic conditions.
- In December 2019, the Company initiated a restructuring involving information-systems modernization, domestic workforce reductions, and a planned closure of its China commercial subsidiary. It expected to record a $385,000 to $535,000 charge in the third quarter of fiscal 2020, primarily for hiring, relocation, severance, and benefits.
- Management stated that operating cash flow and the revolving credit facility should support ongoing requirements and capital expenditures, but the subsequent credit amendment introduces tighter liquidity, EBITDA, cash-repatriation, and dividend constraints.
Important facts for investors to verify
- Whether the new asset-based credit facility’s reduced availability and minimum liquidity and EBITDA covenants constrain operations or dividends.
- Progress on restoring gross margins as low-margin Domestic and Middle East projects are completed.
- Conversion of the $92 million backlog and outstanding quotations into profitable revenue.
- The actual amount and timing of restructuring charges and savings related to the China closure and workforce reduction.
- The cash impact of the $1.7 million deferred tax liability and $353,000 dividend-distribution tax associated with previously unremitted foreign earnings.
- International execution, foreign-currency exposure, and the sustainability of the recent International sales growth.