Kewaunee Scientific Corporation — Form 10-Q Summary
Business context and reporting period
Kewaunee Scientific Corporation designs, manufactures, and installs laboratory and technical furniture, equipment, and related services through Domestic and International operations. This filing covers the quarter and six months ended October 31, 2021, the second quarter of fiscal 2022. The interim financial statements are unaudited.
Financial performance and liquidity
| Metric | Three months ended October 31, 2021 | Three months ended October 31, 2020 | Six months ended October 31, 2021 | Six months ended October 31, 2020 |
|---|---|---|---|---|
| Net sales | $39.0 million | $39.0 million | $78.5 million | $75.4 million |
| Gross profit | $3.6 million | $6.4 million | $9.3 million | $12.3 million |
| Gross margin | 9.2% | 16.4% | 11.8% | 16.3% |
| Operating loss | $(2.9) million | $(0.01) million | $(4.0) million | $(0.3) million |
| Net loss attributable to Kewaunee | $(3.1) million | $(0.2) million | $(4.4) million | $(0.8) million |
| Diluted loss per share | $(1.11) | $(0.07) | $(1.60) | $(0.28) |
Quarterly operating margin was approximately negative 7.4%, versus approximately breakeven in the prior-year quarter. Six-month operating margin was approximately negative 5.1%, versus negative 0.4% in the prior-year period. Quarterly net margin was approximately negative 7.9%; six-month net margin was approximately negative 5.7%.
- Domestic quarterly sales increased 4.0% to $29.9 million, including $1.2 million of raw-material surcharges. International sales declined 11.1% to $9.1 million because of delayed site clearances and billings.
- Six-month domestic sales increased 1.3% to $59.6 million, including $1.6 million of surcharges. International sales increased 14.1% to $18.9 million.
- Cost inflation and supply-chain disruptions increased steel, wood, and epoxy-resin costs by approximately $2.1 million in the quarter and $3.8 million for the six-month period, net of surcharges.
- Operating expenses increased to $6.5 million in the quarter and $13.3 million for six months, primarily because of higher wages, benefits, incentive compensation, and stock-based compensation.
- Cash, cash equivalents, and restricted cash totaled $5.5 million at October 31, 2021, compared with $5.7 million at April 30, 2021. Unrestricted cash and cash equivalents were $4.7 million.
- Six-month operating cash flow was $(6.1) million, compared with $(0.5) million in the prior-year period. Investing cash flow was $(0.9) million, all for capital expenditures.
- Financing activities provided $6.9 million, primarily through net short-term borrowings, partially offsetting operating and investing cash use.
- Working capital was $23.0 million, down from $26.3 million at April 30, 2021; the current ratio declined to 1.5-to-1.0 from 1.8-to-1.0.
- Short-term borrowings were $13.7 million at October 31, 2021, compared with $6.8 million at April 30, 2021. Revolver advances were $12.5 million, with $2.5 million available under the $15.0 million facility. Standby letters of credit totaled $0.7 million.
- The revolving credit facility maturity was extended to April 30, 2022. The minimum EBITDA covenant was removed, while minimum monthly liquidity and supplemental liquidity requirements were added. The Company reported compliance with all financial covenants.
Material changes versus the prior comparable period
- Revenue was essentially flat in the quarter but increased 4.1% for the six-month period.
- Gross profit declined 43.8% in the quarter and 24.5% for six months, primarily because of supply constraints and material-cost inflation that could not be fully passed through under fixed-price contracts.
- The Company shifted from a $0.2 million quarterly loss attributable to Kewaunee to a $3.1 million loss, and from a $0.8 million six-month loss to a $4.4 million loss.
- Receivables increased to $37.1 million from $32.9 million at April 30, 2021, while inventories increased to $18.1 million from $16.5 million.
- Order backlog reached a record $139.7 million at October 31, 2021, up from $96.0 million a year earlier and $114.5 million at April 30, 2021. The increase was driven substantially by a large greenfield project in India.
- Domestic earnings before taxes declined to a $2.1 million loss for the quarter and a $2.3 million loss for six months, while International operations remained profitable at $0.6 million and $1.2 million, respectively.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects improved financial performance in the second half of fiscal 2022 and into fiscal 2023, supported by reopening economies, accelerating project awards, increased construction activity, restored manufacturing capacity, and surcharges on new orders.
- Management cautions that the timing and level of future demand remain difficult to predict because the Company often acts as a subcontractor or supplier and depends on laboratory construction activity and project progress.
- COVID-19 remains a risk to project-site access, supplier capacity, operations, employee availability, revenue, liquidity, and results.
- On November 5, 2021, after the reporting date, the Company experienced a criminal network cyberattack that disrupted domestic manufacturing, engineering, administration, and sales. Operations were substantially restored by November 15, 2021.
- The cyberattack investigation was ongoing. Based on information available at filing, the Company did not believe confidential or sensitive data had been exfiltrated, but it had not determined whether internal controls were affected.
- Cyberattack-related costs and losses could exceed insurance coverage; management stated that the event was likely to exhaust existing cyber insurance. The total potential cost could not be estimated.
- Income tax expense was recorded despite pretax losses because the Company had a full U.S. valuation allowance and received no U.S. tax benefit. Effective tax rates were negative 6.8% for the quarter and negative 11.3% for six months.
Important facts for investors to verify
- Whether raw-material inflation, supply-chain constraints, and fixed-price contracts continue to pressure gross margins.
- Whether the record backlog converts to revenue and cash flow on the expected schedule, particularly the India greenfield project.
- The Company’s ability to fund operations while operating cash flow is negative and revolver availability is limited to $2.5 million.
- The April 30, 2022 credit-facility maturity, ongoing liquidity covenants, and future borrowing capacity.
- The ultimate financial, operational, insurance, and internal-control consequences of the November 2021 cyberattack.
- Whether announced surcharges and manufacturing-capacity restoration produce the projected improvement in the second half of fiscal 2022 and fiscal 2023.