Kewaunee Scientific Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended January 31, 2019; filed March 15, 2019. The company designs, manufactures, and installs laboratory, healthcare, and technical furniture and related infrastructure through Domestic and International segments.
Financial performance and position
| Metric | Three months ended Jan. 31, 2019 | Three months ended Jan. 31, 2018 | Nine months ended Jan. 31, 2019 | Nine months ended Jan. 31, 2018 |
|---|---|---|---|---|
| Net sales | $32.4 million | $38.2 million | $111.8 million | $113.5 million |
| Gross profit | $5.2 million | $8.4 million | $20.5 million | $23.1 million |
| Gross margin | 16.2% | 22.0% | 18.3% | 20.4% |
| Operating earnings | $(0.1) million | $2.4 million | $3.4 million | $6.8 million |
| Net earnings attributable to Kewaunee | $(22,000) | $913,000 | $2.8 million | $3.8 million |
| Diluted EPS | $(0.01) | $0.32 | $1.00 | $1.36 |
Cash flow and liquidity: Operating activities provided $4.5 million during the first nine months, versus $0.6 million used in the prior-year period. Capital expenditures were $2.3 million, dividends paid were $1.5 million, and total cash, cash equivalents, and restricted cash increased to $11.4 million from $11.0 million at the beginning of the fiscal year.
At January 31, 2019, working capital was $36.1 million and the current ratio was 2.5-to-1.0. Cash and cash equivalents were $10.8 million, total assets were $79.6 million, and total stockholders’ equity was $49.5 million. Total borrowings and interest-rate swaps were $6.8 million, including $5.1 million outstanding under the revolving credit facility. Of the $20 million facility, $9.7 million was available; standby letters of credit totaled $5.2 million.
Material changes versus the prior comparable period
- Third-quarter sales declined 15.2%, with Domestic sales down 15.2% and International sales down 15.4%. Management attributed the decline to a dramatic slowdown in marketplace activity and delayed customer projects.
- Nine-month sales declined 1.5%. Domestic sales increased to $91.9 million from $80.4 million, while International sales fell to $19.9 million from $33.1 million, primarily because the prior-year period benefited from a large Middle East order.
- Third-quarter gross margin fell to 16.2% from 22.0% because delayed orders reduced facility utilization and steel and resin costs were substantially higher. For the nine-month period, increased steel and resin costs adversely affected results by approximately $1.7 million.
- Operating expenses decreased in the quarter, primarily from lower incentive compensation and pension expense, but increased for the nine-month period because of higher professional, consulting, and International operating expenses.
- The company’s order backlog was $96 million at January 31, 2019, compared with $116 million a year earlier and $101 million at October 31, 2018.
- The company changed Domestic inventory accounting from LIFO to FIFO effective August 1, 2018 and retrospectively adjusted presented prior periods. The change increased January 31, 2019 inventory by $1.0 million versus the former LIFO method and increased reported nine-month earnings attributable to Kewaunee by $114,000.
- The company adopted ASC 606 using the modified retrospective method. The adoption increased retained earnings by $217,000, net of tax, and accelerated recognition of certain customized-product revenue. For the nine-month period, reported revenue was $111.8 million versus $110.1 million without ASC 606, while reported net earnings attributable to Kewaunee were $2.8 million versus $2.4 million without adoption.
Guidance, outlook, risks, and unusual items
- Management stated that demand remains difficult to predict because the company often serves as a subcontractor or supplier to dealers and subcontractors. Economic and geopolitical uncertainty has caused customers to postpone project awards and starts.
- Management expects these trends to continue through the remainder of the fiscal year and is making adjustments with the goal of returning to profitability in the fourth quarter. This is a forward-looking objective, not a formal quantified earnings forecast.
- Key risks include project timing and customer delivery schedules, competitive and general economic conditions, international operations and foreign-currency movements, raw-material and freight costs, firm-price quotations, labor costs, regulatory changes, and force majeure events.
- Defined-benefit pension contributions totaled $1.0 million during the first nine months; management did not expect additional contributions during the remainder of the fiscal year.
- Income-tax expense declined materially because of the lower 21% federal statutory rate under the 2017 Tax Act. The nine-month effective tax rate was 21.8%, compared with 44.8% in the prior-year period.
- Management reported that disclosure controls and procedures were effective as of January 31, 2019, with no significant change in internal control over financial reporting during the quarter.
Investor verification points
- Verify whether backlog conversion, delayed project awards, and fourth-quarter production utilization support management’s stated goal of returning to profitability.
- Track steel, resin, freight, and labor costs and the company’s ability to recover those costs through pricing.
- Reconcile reported results under ASC 606 and FIFO with comparable periods and assess the effect of revenue timing and inventory valuation on margins and earnings.
- Monitor International sales, Middle East and Asian demand, and Indian rupee movements.
- Review revolver availability, borrowing levels, standby letters of credit, covenant compliance, and liquidity if operating performance remains weak.
- Assess the sustainability of dividends and capital expenditures relative to operating cash flow.