Kewaunee Scientific Corporation — Q1 FY2020 Form 10-Q Summary
Reporting period: Three months ended July 31, 2019, compared with the three months ended July 31, 2018. Kewaunee designs, manufactures, and installs laboratory furniture and infrastructure through Domestic and International segments.
Key Financial Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $39.336 million | $42.152 million | Down 6.7% |
| Gross profit | $6.946 million | $7.583 million | Down 8.4% |
| Gross margin | 17.7% | 18.0% | Down 30 basis points |
| Operating earnings | $0.776 million | $1.820 million | Down 57.4% |
| Net earnings attributable to Kewaunee | $0.471 million | $1.489 million | Down 68.4% |
| Diluted earnings per share | $0.17 | $0.53 | Down $0.36 |
| Net cash used in operating activities | $0.407 million | $2.829 million | Improved by $2.422 million |
Domestic sales were $29.287 million, down 18.8%, primarily due to lower dealer sales. International sales were $10.049 million, up 65.2%, driven by a large new-customer order and continued strength in India. Operating expenses increased to $6.170 million, or 15.7% of sales, from $5.763 million, or 13.7%.
Interest expense increased to $167,000 from $91,000 due primarily to higher borrowing levels. The effective tax rate increased to 25.4% from 20.9%, reflecting the mix of foreign operations and an additional U.S. GILTI inclusion.
Liquidity, Debt, and Cash Flow
- Cash and cash equivalents were $11.653 million at July 31, 2019, compared with $10.647 million at April 30, 2019. Cash, cash equivalents, and restricted cash totaled $12.581 million at quarter-end.
- Working capital was $30.970 million, versus $32.624 million at April 30, 2019. The current ratio was 1.8-to-1.0, compared with 2.0-to-1.0.
- Borrowings and interest-rate swaps totaled $14.269 million, compared with $10.926 million at April 30, 2019. Revolver advances were $13.3 million under a $20 million facility, leaving $6.5 million available.
- The Company used $0.407 million in operating cash and $1.183 million for capital expenditures. Financing activities provided $2.934 million, principally from a $3.766 million net increase in short-term borrowings, partly offset by $522,000 of dividends.
- At July 31, 2019, the Company was compliant with all revolving-credit financial covenants. It had received a June 19, 2019 waiver for prior covenant noncompliance, granted a security interest in substantially all assets, and amended the credit agreement on July 9, 2019.
Material Changes and Unusual Items
- Order backlog was approximately $102 million at July 31, 2019, unchanged from July 31, 2018 and up from $101 million at April 30, 2019.
- Profitability declined despite the international sales increase because of lower overall volume, unfavorable product mix, competitive International pricing, and higher International operating costs.
- The Company adopted the new lease standard on May 1, 2019, recognizing $6.785 million of right-of-use assets and corresponding lease liabilities. A warehouse expansion expected to be completed in late calendar 2019 is expected to add approximately $2 million of right-of-use assets and lease liabilities.
- No pension contributions were made in the quarter, and none were expected for the remainder of the fiscal year, compared with $1 million contributed in the prior-year quarter.
- The Company changed Domestic inventory accounting from LIFO to FIFO and reclassified prior-period amounts for presentation comparability.
Outlook, Risks, and Management Commentary
Management stated that demand remains difficult to predict because the Company often serves as a subcontractor or supplier to dealers and subcontractors. The Company is seeking to recover from the prior decline in Domestic volume, investing in its leadership team and commercial focus, and expanding capabilities in India. Management believes the laboratory furniture and infrastructure market remains healthy and that the Company is well positioned.
Key risks include project timing and customer delivery requirements, quarter-to-quarter volatility, competitive pricing, raw-material and labor-cost inflation, firm-price quotations, foreign-currency fluctuations, international operations, general economic conditions, regulatory changes, and force majeure events. The filing provides no quantitative earnings or revenue guidance.
Investor Verification Checklist
- Verify the amended credit facility, covenant waiver, security agreement, borrowing availability, and compliance status.
- Assess whether the $102 million backlog converts to revenue and cash flow as expected, particularly in the Domestic segment.
- Monitor recovery in Domestic dealer sales and sustainability of the International growth, including India-related activity.
- Evaluate margin pressure from product mix, competitive pricing, and raw-material and labor costs.
- Reconcile lease liabilities, the planned warehouse expansion, and related future cash commitments.
- Review working-capital needs, receivables growth, reliance on short-term borrowings, and the Company’s ability to fund capital expenditures and dividends.