Kewaunee Scientific Corporation — Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2017. The filing also provides unaudited fourth-quarter fiscal 2017 data. The filing date was July 21, 2017.
Business Context
Kewaunee designs, manufactures, and installs laboratory, healthcare, and technical furniture, including cabinetry, fume hoods, workstations, worksurfaces, and related design and installation services. Sales are concentrated in construction-related projects serving pharmaceutical, biotechnology, industrial, educational, healthcare, governmental, and research customers. Operations are reported in Domestic and International segments.
Three domestic dealers represented approximately 38% of fiscal 2017 sales. Order backlog increased to $113.5 million at April 30, 2017, from $100.5 million a year earlier; management expected more than 80% of the backlog to ship in fiscal 2018, subject to customer and construction delays.
Financial Performance and Position
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Net sales | $138.6 million | $128.6 million | +8% |
| Gross profit | $26.6 million | $23.7 million | +12% |
| Gross margin | 19.2% | 18.4% | +0.8 percentage points |
| Operating earnings | $6.5 million | $5.7 million | +15% |
| Net earnings attributable to Kewaunee | $4.5 million | $3.8 million | +19% |
| Diluted earnings per share | $1.66 | $1.42 | +17% |
| Operating cash flow | $11.7 million | $7.3 million | +$4.4 million |
| Capital expenditures | $2.6 million | $2.2 million | +$0.4 million |
Domestic sales increased 9.7% to $113.1 million, while International sales were essentially unchanged at $25.5 million. Operating expenses rose to $20.1 million, or 14.5% of sales, from $18.0 million, or 14.0% of sales. The effective income tax rate was 31.5%, compared with 32.4% in fiscal 2016.
At April 30, 2017, cash and cash equivalents were $12.5 million, restricted cash was $1.4 million, working capital was $32.9 million, and the current ratio was 2.2-to-1. Total borrowings were approximately $6.9 million, consisting of $3.5 million drawn on the revolving facility and term debt. Stockholders’ equity attributable to Kewaunee was $42.9 million.
Material Changes Versus the Prior Period
- Sales growth was driven primarily by higher Domestic activity across dealer, distribution, and end-user channels; International sales were flat.
- Gross margin improved due to higher production volumes and manufacturing productivity.
- Operating expense growth reflected higher wages and benefits, incentive compensation, pension expense, professional services, sales and marketing costs, and International operating expenses. Fiscal 2016 also included approximately $678,000 of non-recurring expenses related principally to a key executive’s retirement and replacement.
- Operating cash flow strengthened substantially, aided by lower inventory, increased accounts payable and accrued expenses, and a $4.4 million customer advance related to a large international order. Receivables increased by $2.1 million.
- Cash increased by $7.3 million during the year despite $2.1 million of financing cash outflows, including $1.6 million of dividends and debt repayments.
- The annual dividend increased to $0.58 per share from $0.51 per share.
Liquidity, Debt, and Outlook
Management stated that operating cash flow, supplemented as needed by the revolving credit facility, should be sufficient to fund ongoing requirements and capital expenditures through fiscal 2018. The $20 million revolving facility had $3.5 million of advances and $4.2 million of letters of credit outstanding at year-end, leaving approximately $12.3 million available. The Company was in compliance with its financial covenants.
Fiscal 2018 capital expenditures were expected to be approximately $3.3 million, primarily for manufacturing equipment and facility improvements. Management expected to contribute approximately $600,000 to the pension plans in fiscal 2018, compared with $555,000 in fiscal 2017.
The filing provides no formal revenue or earnings guidance. Management cautioned that demand is difficult to predict because the Company is frequently a subcontractor or dealer supplier, and results depend on laboratory construction activity, project timing, pricing, raw-material costs, and the ability to recover cost increases through pricing.
Risks, Contingencies, and Unusual Items
- Material weakness: Management concluded that internal control over financial reporting was not effective at April 30, 2017. The weakness involved the absence of a global revenue-recognition policy and inadequate monitoring of multi-element and percentage-of-completion accounting. Management stated that it did not cause a material misstatement in fiscal 2017, but could result in future material misstatements. Remediation included policy improvements, personnel training, and enhanced monitoring.
- Customer and dealer concentration is significant; three domestic dealers accounted for approximately 38% of fiscal 2017 sales, and two customers represented approximately 25% of accounts receivable.
- Construction delays, customer rescheduling, project design changes, weather, and shipment timing can shift revenue between periods.
- Firm-price contracts expose the Company to increases in steel, stainless steel, wood, epoxy resin, labor, energy, freight, and other costs.
- The defined benefit pension plans were underfunded by approximately $4.1 million at year-end. The plans are closed to additional benefit accruals and participants.
- Self-insured healthcare and workers’ compensation reserves depend on estimates of incurred but unreported claims; stop-loss insurance provides limited protection.
- Legal claims and proceedings arise in the ordinary course of business; management did not expect them to have a material adverse effect.
- The Company expects ASU 2014-09 revenue guidance and other listed accounting standards to have no material impact, based on its preliminary assessments. Revenue recognition remains an area requiring investor attention given the material weakness.
Most Important Facts to Verify
- Whether the identified revenue-recognition material weakness was fully remediated and whether later filings report any restatements or control deficiencies.
- The quality and timing of the $113.5 million backlog, including the proportion dependent on delayed construction projects or customer acceptance.
- Whether the $4.4 million international customer advance is representative of recurring cash generation or a one-time working-capital benefit.
- Customer and dealer concentration, receivable collectability, and retention amounts of $2.8 million at year-end.
- Compliance with revolving-credit and term-loan covenants, facility availability, and scheduled debt repayments of $918,000 in fiscal 2018.
- Progress toward the anticipated $3.3 million fiscal 2018 capital program and the expected $600,000 pension contribution.
- Exposure to raw-material inflation, construction-market weakness, foreign exchange movements, and International operating performance.