Kewaunee Scientific Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended April 30, 2019. The filing also provides unaudited fourth-quarter data; the supplied request’s “2018 Q4” label does not match the filing period.
Business Context
Kewaunee designs, manufactures, and installs laboratory, healthcare, and technical furniture and infrastructure, including laboratory casework, fume hoods, workstations, biological safety cabinets, worksurfaces, and related design and installation services. Operations are reported in Domestic and International segments, with manufacturing in the United States and India and sales operations in Asia.
- Three domestic dealers represented approximately 34% of fiscal 2019 sales.
- Order backlog was $100.8 million at April 30, 2019, down from $116.3 million in 2018; management expected at least 90% to ship in fiscal 2020, subject to customer and construction delays.
- The company had 593 domestic and 263 international full-time employees at year-end.
Financial Performance and Metrics
| Metric | FY2019 | FY2018, adjusted | Change |
|---|---|---|---|
| Net sales | $146.6 million | $158.1 million | Down 7.3% |
| Gross profit | $25.3 million | $32.2 million | Down $6.8 million |
| Gross margin | 17.3% | 20.4% | Down 310 basis points |
| Operating earnings | $2.1 million | $9.9 million | Down $7.8 million |
| Earnings before taxes | $2.1 million | $9.6 million | Down $7.5 million |
| Net earnings attributable to Kewaunee | $1.5 million | $5.3 million | Down 71.1% |
| Diluted earnings per share | $0.55 | $1.90 | Down $1.35 |
| Operating cash flow | $2.5 million | $3.2 million | Down $0.7 million |
| Capital expenditures | $4.2 million | $3.4 million | Up $0.8 million |
Domestic sales increased 1.7% to $116.6 million, while International sales declined 31.0% to $30.0 million, primarily because of lower Middle East sales and the absence of the unusually large Kuwait University order delivered during fiscal 2018.
Profitability deteriorated because of unfavorable product mix, lower volumes, higher steel and resin costs, freight inflation, and the inability to fully pass cost increases to customers. The company estimated the unfavorable impact from steel and resin increases at approximately $2.1 million.
Operating expenses rose to $23.2 million from $22.2 million, including $502,000 of management separation expenses, $637,000 of audit and tax services, and $893,000 of additional International operating expense, partly offset by a $1.2 million reduction in incentive compensation.
The effective tax rate was 20.9%, compared with 43.3% in the prior year. Fiscal 2018 included a $649,000 one-time transition tax associated with the 2017 Tax Act. Fiscal 2019 included $265,000 of GILTI-related tax expense.
Fourth-Quarter Information
| Metric | Q4 FY2019 | Q4 FY2018, adjusted |
|---|---|---|
| Net sales | $34.7 million | $44.5 million |
| Gross profit | $4.8 million | $9.1 million |
| Net earnings attributable to Kewaunee | $(1.3) million | $1.6 million |
| Diluted earnings per share | $(0.46) | $0.56 |
The fourth quarter reflected the sharpest deterioration in the year, with lower sales and gross profit and a net loss attributable to Kewaunee.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $10.6 million; cash, cash equivalents, and restricted cash totaled $11.2 million.
- Working capital was $32.6 million, compared with $36.8 million in 2018; the current ratio was 2.0-to-1.0 versus 2.3-to-1.0.
- Total borrowings and long-term debt were $10.9 million, compared with $6.3 million in 2018.
- At year-end, the company had $9.5 million drawn under its $20 million revolving credit facility and $5.2 million of standby letters of credit, leaving approximately $5.3 million of borrowing availability.
- Contractual cash obligations totaled $7.0 million, including $5.6 million of operating lease payments and $1.4 million of long-term debt and capital lease obligations.
- Stockholders’ equity attributable to Kewaunee was $47.1 million, compared with $47.7 million in 2018.
- Fiscal 2019 financing activities provided $2.3 million, primarily through increased short-term borrowings, while the company paid $2.0 million in dividends to shareholders.
Material Changes and Unusual Items
- Domestic inventory accounting changed from LIFO to FIFO effective August 1, 2018. Prior periods were adjusted; the change increased fiscal 2018 net earnings attributable to Kewaunee by $93,000.
- The company adopted ASC 606 using the modified retrospective method. The adoption increased retained earnings by $217,000 and accelerated recognition of certain customized-product revenue. Fiscal 2019 reported sales were $1.2 million higher than they would have been without adoption.
- Domestic and International operations experienced lower volumes and margin pressure, while fixed costs could not be reduced quickly enough to offset the decline.
- Management changes resulted in one-time separation and related costs. The former CEO entered into a separation agreement, and Thomas D. Hull became President and CEO in March 2019; Donald T. Gardner became CFO in April 2019.
- The company was not in compliance with all financial covenants under its credit agreement at April 30, 2019. The lender waived the noncompliance on June 19, 2019; the company pledged substantially all assets as security and amended the financial covenants on July 9, 2019.
- Management concluded that disclosure controls and internal control over financial reporting were effective. However, the company reported a late Form 8-K filing caused by an administrative error and stated that remediation had been undertaken.
Outlook and Risks
Management stated that demand is difficult to forecast because the company often acts as a subcontractor or supplier and depends on laboratory construction schedules. Management was optimistic that it could secure sufficient volume to return to profitability and that fiscal 2020 would produce sales and earnings growth.
Fiscal 2020 capital expenditures were expected to be approximately $2.5 million, primarily for manufacturing equipment and facility improvements. Management stated that operating cash flow, supplemented by revolving-credit borrowings, should fund ongoing requirements through fiscal 2020.
- Key risks include construction delays, customer order rescheduling, competitive bidding, customer concentration, raw-material and energy inflation, and inability to pass through cost increases.
- International results are exposed to foreign-exchange movements, geopolitical conditions, tariffs, trade restrictions, and regional economic weakness.
- Liquidity risk is heightened by increased revolver usage, covenant noncompliance at year-end, letters of credit, lease obligations, and project-related retention receivables.
- The company had $4.6 million of unbilled receivables and $1.8 million of retainage at April 30, 2019, which may delay cash collection.
- The defined-benefit pension plan was underfunded by $2.4 million, although no fiscal 2020 contribution was expected.
- Pending ordinary-course litigation was not expected to have a material adverse effect, and no material environmental compliance impact was anticipated.
Investor Verification Priorities
- Verify the lender waiver, security agreement, and July 2019 covenant amendment, including current borrowing availability and covenant compliance.
- Assess whether fiscal 2020 sales and earnings growth materialized against the $100.8 million backlog and management’s outlook.
- Monitor gross-margin recovery, especially steel, resin, freight, labor, and product-mix effects.
- Review International segment demand, particularly Middle East activity and Indian-rupee exposure.
- Evaluate customer concentration and the collectability and timing of unbilled receivables and retainage.
- Consider the effect of ASC 606 and the LIFO-to-FIFO change when comparing results with earlier periods.
- Confirm the company’s ability to maintain dividends while funding capital expenditures, debt repayments, pension obligations, and working capital.