Kewaunee Scientific Corporation — Form 10-Q Summary
Business context and reporting period
Quarterly period ended July 31, 2018, representing the first quarter of fiscal 2019. Kewaunee designs, manufactures, and installs laboratory, healthcare, and technical furniture and related infrastructure. Operations are reported in Domestic and International segments. The company is a smaller reporting company and had 2,741,179 common shares outstanding as of September 5, 2018.
Key financial metrics
| ($ in thousands, except per-share data) | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $42,152 | $33,881 | 24.4% |
| Gross profit | $7,474 | $6,821 | 9.6% |
| Gross margin | 17.7% | 20.1% | Down 2.4 pts |
| Operating earnings | $1,711 | $1,688 | 1.4% |
| Net earnings attributable to Kewaunee | $1,407 | $1,148 | 22.6% |
| Diluted EPS | $0.50 | $0.42 | 19.0% |
| Net cash from operating activities | $(2,829) | $530 | $(3,359) |
Domestic sales increased to $36.1 million from $22.1 million, reflecting strong demand across sales channels. International sales declined to $6.1 million from $11.7 million because a large Middle East order delivered in the prior-year quarter did not repeat.
Operating expenses were $5.8 million, or 13.7% of sales, compared with $5.1 million, or 15.2%, primarily due to higher professional fees and administration costs. The effective tax rate decreased to 20.6% from 33.7%, benefiting from the 21% federal statutory rate under the Tax Cuts and Jobs Act.
At July 31, 2018, cash and cash equivalents were $9.1 million, restricted cash was $1.0 million, working capital was $35.6 million, and the current ratio was 2.2-to-1.0. Short-term borrowings were $7.5 million, total bank borrowings and interest-rate swaps were $9.7 million, and $7.3 million remained available under the $20 million revolving credit facility. Standby letters of credit totaled $5.2 million.
Capital expenditures were $610,000. Financing activities provided $2.9 million, including a net increase in short-term borrowings of $3.6 million, while dividends paid totaled $465,000. Cash, cash equivalents, and restricted cash declined to $10.1 million from $11.0 million at the beginning of the period.
Material changes versus the prior comparable period
- Sales growth was driven by the Domestic segment, while International sales decreased materially because of the nonrecurrence of a large Middle East order.
- Gross margin contracted because higher material costs could not generally be passed through fixed-price construction contracts, together with a temporary increase in operating costs.
- Net earnings and diluted EPS increased despite only modest operating-earnings growth, primarily because of the lower effective tax rate and lower noncontrolling-interest expense.
- Operating cash flow turned negative due principally to a $3.3 million increase in receivables and a $2.2 million decrease in accounts payable and other accrued expenses.
- The company contributed $1.0 million to its pension plans during the quarter; no further fiscal 2019 contributions are planned.
- Accumulated other comprehensive loss increased by $384,000, primarily from a $388,000 unfavorable foreign-currency translation adjustment.
Guidance, outlook, risks, and unusual items
Management stated that it remains optimistic about fiscal 2019 because the backlog and market opportunities remain strong. Backlog was $102.1 million at July 31, 2018, compared with $116.3 million at April 30, 2018 and $111.2 million at July 31, 2017. The filing provides no quantitative earnings or revenue guidance.
Demand is difficult to forecast because the company is often a subcontractor or supplier to dealers and subcontractors, and depends on laboratory construction activity and customer delivery schedules. Key risks include raw-material and labor-cost inflation, fixed-price contracts, the ability to pass cost increases to customers, international operations and foreign-currency fluctuations, competitive and general economic conditions, and project delays.
The filing newly identifies U.S. trade policy and tariffs as a material risk. Tariffs or retaliatory measures could increase product and raw-material costs, require price increases that reduce demand, or compress margins.
The company adopted ASC 606 effective May 1, 2018 using the modified retrospective approach. The adoption increased retained earnings by $217,000, net of tax. For the quarter, reported revenue and diluted EPS were $1.2 million and $0.13 higher, respectively, than amounts that would have been reported without adoption. The company also adopted new cash-flow, pension-cost presentation, and stock-compensation standards without a significant reported impact.
Investor verification checklist
- Verify whether the $102.1 million backlog converts into revenue at expected margins, particularly after the quarter’s gross-margin decline.
- Assess receivables collection, working-capital needs, and reliance on revolving-credit borrowings given negative operating cash flow.
- Monitor material, labor, and tariff costs under fixed-price contracts and the company’s ability to obtain customer price relief.
- Separate ASC 606 timing effects from underlying revenue and earnings trends.
- Evaluate the sustainability of domestic demand and the effect of the nonrecurrence of the prior-year Middle East order on international results.
- Review foreign-currency exposure, pension obligations, interest-rate swaps, standby letters of credit, and other commitments.