Kewaunee Scientific Corporation — Form 10-K Summary
Business Context and Reporting Period
The filing is an annual report for the fiscal year ended April 30, 2018, not a calendar 2017 fourth-quarter filing. Kewaunee designs, manufactures, and installs laboratory, healthcare, and technical furniture and infrastructure, serving pharmaceutical, biotechnology, industrial, educational, healthcare, governmental, and manufacturing customers. Operations comprise Domestic and International segments.
Fiscal fourth-quarter 2018 revenue was $44.5 million, gross profit was $8.9 million, and net earnings attributable to Kewaunee were $1.4 million, or $0.52 diluted earnings per share.
Financial Performance and Position
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $158.1 million | $138.6 million | 14% increase |
| Gross profit | $32.0 million | $26.6 million | 20% increase |
| Gross margin | 20.3% | 19.2% | 110 basis-point increase |
| Operating earnings | $9.1 million | $6.5 million | 39% increase |
| Operating margin | 5.8% | 4.7% | Improved |
| Net earnings attributable to Kewaunee | $5.2 million | $4.5 million | 15% increase |
| Diluted EPS | $1.87 | $1.66 | 13% increase |
| Cash flow from operations | $3.2 million | $11.7 million | Significant decrease |
| Capital expenditures | $3.4 million | $2.6 million | Increase |
- International sales increased 71% to $43.5 million, primarily reflecting continued strength in Middle Eastern, Indian, and Asian markets. Domestic sales were relatively flat at $114.6 million.
- Net margin attributable to Kewaunee was approximately 3.3%, compared with approximately 3.3% in fiscal 2017.
- Cash and cash equivalents were $9.7 million at April 30, 2018, down from $12.5 million. Restricted cash was $1.2 million.
- Working capital increased to $35.9 million from $32.9 million, with a current ratio of 2.3-to-1.0.
- Total borrowings were approximately $6.3 million, compared with $6.9 million in the prior year. The company had $3.8 million drawn and $5.2 million of letters of credit outstanding under its $20 million revolving facility, leaving $11.0 million available.
- Total assets were $84.4 million and Kewaunee stockholders’ equity was $47.1 million at year-end.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven predominantly by the International segment; Domestic revenue increased only modestly.
- Gross margin improved due to higher manufacturing activity, better fixed-cost absorption, plant productivity improvements, and cost-saving initiatives.
- Operating expenses increased to $22.9 million from $20.1 million, including higher incentive compensation, governance costs, professional services, wages and benefits, bad-debt expense, and International operating costs.
- Operating cash flow fell to $3.2 million, primarily because of increases in receivables and inventories and the reduction in deferred revenue. Fiscal 2017 operating cash flow benefited from a $4.4 million customer advance related to a large international order.
- The order backlog increased to $116.3 million from $113.5 million; management expected more than 90% of the backlog to ship during fiscal 2019, subject to project and customer delays.
- The annual dividend increased to $0.66 per share from $0.58 per share.
Guidance, Outlook, Risks, and Unusual Items
- Management was optimistic that fiscal 2019 would produce sales and earnings growth, supported by the order backlog and market opportunities, but stated that demand remains difficult to forecast.
- Fiscal 2019 capital expenditures were expected to be approximately $6 million, primarily for manufacturing equipment and facility improvements, funded mainly through operations and, if needed, revolving-credit borrowings.
- The company anticipated a $1.0 million pension contribution in fiscal 2019 versus $0.6 million in fiscal 2018.
- The company recorded $680,000 of tax expense from remeasurement of deferred tax assets following the Tax Cuts and Jobs Act and $649,000 of provisional transition tax on unrepatriated foreign earnings. The effective tax rate increased to 43.4% from 31.5%.
- On December 7, 2017, a criminal network cyberattack disrupted domestic manufacturing, engineering, administration, and sales operations; domestic operations were restored by December 12. Management reported that the related logical-access-control material weakness had been remediated by April 30, 2018. The company recorded a $255,000 insurance claim receivable for attack-related expenses.
- A prior material weakness involving multi-element and percentage-of-completion revenue recognition was reported as remediated during fiscal 2018.
- Revenue recognition under the new customer-contract standard was expected to increase opening retained earnings by less than $500,000 after tax as of May 1, 2018, with no material expected effect on the primary financial statements.
- Principal risks include competitive pricing, raw-material and energy-cost inflation under fixed-price contracts, construction and customer scheduling delays, customer concentration, international operations and foreign exchange, cybersecurity, healthcare costs, pension obligations, and the need to generate sufficient operating cash flow.
- Three domestic dealers accounted for approximately 33% of fiscal 2018 sales, and two domestic customers represented approximately 31% of year-end accounts receivable.
- The company reported no material pending litigation, no off-balance-sheet arrangements, and compliance with its credit-facility financial covenants.
Most Important Facts to Verify
- Confirm that the relevant reporting period is the fiscal year ended April 30, 2018 and distinguish it from the fiscal fourth-quarter results.
- Reconcile strong earnings and margin growth with the substantial decline in operating cash flow and increases in receivables and inventories.
- Assess whether International sales growth and the $116.3 million backlog are sustainable and convert to cash as scheduled.
- Review available borrowing capacity, letters of credit, debt maturities, covenant compliance, and planned fiscal 2019 capital expenditures.
- Evaluate the final accounting effects of the Tax Cuts and Jobs Act and the transition to the new revenue-recognition standard.
- Monitor remediation and recurrence risks related to the cyberattack and previously reported revenue-recognition and IT-access control weaknesses.
- Assess exposure to dealer and customer concentration, fixed-price contracts, raw-material inflation, construction delays, pension funding, and foreign-market volatility.