Kewaunee Scientific Corporation — Fiscal 2020 Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2020. The filing is an annual report, not a quarterly filing; the supplied period label of “2019 Q4” appears inconsistent with the filing period.
Business Context
Kewaunee designs, manufactures, and installs laboratory, healthcare, and technical furniture and infrastructure, including laboratory casework, fume hoods, safety cabinets, workstations, worksurfaces, sinks, and related engineering and installation services. Fiscal 2020 included operations in the United States, India, Singapore, and China, with the China subsidiary substantially closed during the year.
- Domestic revenue was $115.1 million, down 1.3% year over year.
- International revenue was $32.4 million, up 8.3%, primarily from continued deliveries of a large Middle East order.
- International sales represented approximately 23% of total revenue.
- Order backlog was $100.9 million at April 30, 2020, versus $100.8 million a year earlier; management expected at least 90% to ship in fiscal 2021, subject to project and customer delays.
- Three domestic customers accounted for approximately 37% of fiscal 2020 sales, creating significant customer-concentration risk.
Financial Performance and Key Metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $147.5 million | $146.6 million | Up 0.7% |
| Gross profit | $23.4 million | $25.3 million | Down $1.9 million |
| Gross margin | 15.9% | 17.3% | Down 140 bps |
| Operating earnings | $(2.3) million | $2.1 million | Declined $4.5 million |
| Loss before income taxes | $(2.9) million | $2.1 million | Declined $5.0 million |
| Net loss attributable to Kewaunee | $(4.7) million | $1.5 million | Declined $6.2 million |
| Diluted loss per share | $(1.70) | $0.55 | Declined $2.25 |
| Cash flow from operations | $4.2 million | $2.5 million | Up $1.7 million |
| Capital expenditures | $2.5 million | $4.2 million | Down $1.7 million |
Management attributed the margin deterioration to several low-margin orders, including a strategically pursued Middle East order secured at below-normal margins, as well as COVID-19-related effects. Operating expenses increased to $25.8 million from $23.2 million, driven by personnel investments, incentive and stock compensation, restructuring, depreciation, bad-debt expense, China closure costs, and higher international expenses.
Income tax expense was $1.8 million despite the pretax loss. Key items included a $2.0 million tax charge related to repatriated foreign earnings and a $1.7 million increase in valuation allowances, partly offset by a $939,000 benefit from carrying net operating losses back to prior years under the CARES Act.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash, cash equivalents, and restricted cash decreased to $5.2 million from $11.2 million at April 30, 2019; unrestricted cash was $4.4 million.
- Operating cash flow was $4.2 million, supported by reductions in receivables and inventories.
- Financing activities used $7.5 million, including debt repayments and $1.0 million of shareholder dividends.
- Working capital was $27.2 million versus $32.6 million; the current ratio remained 2.0-to-1.0.
- Total borrowings were $13.9 million versus $10.9 million, although the balance sheet also reflected $9.1 million of operating lease liabilities following adoption of ASC 842.
- At April 30, 2020, the revolving credit facility had $4.7 million of advances and $512,000 of standby letters of credit outstanding, with $8.7 million of stated availability. The facility was secured by substantially all company assets.
- The company was not in compliance with all revolving-credit financial covenants at April 30, 2020. A July 20, 2020 amendment waived the reported noncompliance and modified certain covenants.
- Lease commitments totaled $11.0 million, including $10.8 million of operating lease payments.
- The defined-benefit pension plan was underfunded by $6.4 million at year-end, compared with $2.4 million in 2019.
Material Changes Versus Fiscal 2019
- Revenue was broadly flat, but profitability deteriorated sharply because of lower margins and higher operating expenses.
- The company moved from net income to a substantial net loss, while book value per share declined to $13.97 from $17.15.
- Domestic revenue declined while international revenue increased, principally from the Middle East project.
- The company initiated a restructuring in December 2019, including workforce reductions, information-technology leadership and modernization investments, and closure of the China subsidiary. Fiscal 2020 restructuring-related expenses included $380,000 domestically and $288,000 internationally.
- The board suspended the dividend on December 16, 2019. Fiscal 2020 dividends were $0.38 per share versus $0.74 in fiscal 2019; future dividends are subject to board discretion and debt restrictions.
- The company adopted ASC 842 lease accounting on May 1, 2019, recognizing right-of-use assets and lease liabilities.
- Research and development expense increased to $1.8 million from $1.6 million.
Guidance, Outlook, Risks, and Unusual Items
Management expressed optimism about growth in existing end markets and committed to a multi-year transformation focused on modernizing manufacturing capabilities and information technology. Fiscal 2021 capital expenditures were anticipated at approximately $2.0 million, funded primarily by operations and supplemented by revolving-credit borrowings as needed. Management believed available liquidity sources would support ongoing requirements through fiscal 2021, but did not provide formal revenue or earnings guidance.
- COVID-19 caused mandatory shutdowns and stay-at-home orders affecting domestic operations and subsidiaries in India and Singapore. Potential effects include lower customer activity, supply-chain disruptions, workforce constraints, delayed revenue recognition, higher operating costs, and reduced customer payment capacity.
- Certain key supplies are sourced solely from China, creating production and delivery risk.
- Firm-price contracts expose the company to increases in steel, wood, epoxy resin, labor, energy, tariffs, and freight costs.
- Construction delays, customer rescheduling, design changes, weather, and public-bidding volatility can shift revenue between periods.
- Customer concentration, international operations, foreign-exchange exposure, cybersecurity incidents, and limited trading liquidity may increase volatility.
- The company had a $6.4 million pension underfunding and significant accumulated other comprehensive loss of $9.6 million.
- The independent auditor issued an unmodified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the company noted a late Form 8-K filing caused by an administrative error and stated that remediation had been undertaken.
Investor Verification Checklist
- Verify the July 20, 2020 credit-facility amendment, covenant waiver, borrowing availability, and any subsequent financing developments.
- Assess whether the $100.9 million backlog converted to revenue at expected margins, particularly the large Middle East order.
- Monitor COVID-19 effects on construction projects, supply availability, customer collections, and fiscal 2021 revenue timing.
- Review the sustainability of liquidity given only $4.4 million of unrestricted cash, lease obligations, pension funding needs, and covenant requirements.
- Evaluate progress and costs of the restructuring, China closure, manufacturing modernization, and information-technology transformation.
- Confirm whether and when dividends may resume, considering the suspension and debt-agreement restrictions.