Kewaunee Scientific (KEQU) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents financial statements, management's analysis of operations and liquidity, market risk, and internal controls Financial Statements Q1 FY20 financial statements reflect decreased sales and earnings, asset/liability growth from new lease accounting, and negative operating cash flow Condensed Consolidated Statements of Operations Net sales decreased 6.7% to $39.3 million, leading to a significant drop in operating and net earnings Consolidated Statements of Operations Highlights (Unaudited) | Metric | Three Months Ended July 31, 2019 (USD) | Three Months Ended July 31, 2018 (USD) | | :--- | :--- | :--- | | Net sales | $39,336,000 | $42,152,000 | | Gross profit | $6,946,000 | $7,583,000 | | Operating earnings | $776,000 | $1,820,000 | | Net earnings attributable to Kewaunee | $471,000 | $1,489,000 | | Diluted EPS | $0.17 | $0.53 | Condensed Consolidated Statements of Comprehensive Income Comprehensive income decreased to $666 thousand due to lower net earnings, partially offset by positive foreign currency translation Comprehensive Income (Unaudited, in thousands) | Metric | Three Months Ended July 31, 2019 | Three Months Ended July 31, 2018 | | :--- | :--- | :--- | | Net earnings | $496 | $1,498 | | Other comprehensive income (loss) | $195 | $(384) | | Comprehensive income attributable to Kewaunee | $666 | $1,105 | Condensed Consolidated Statement of Stockholders' Equity Stockholders' equity slightly increased to $47.3 million due to net earnings and other comprehensive income, partially offset by cash dividends - Cash dividends of $0.19 per share, totaling $522 thousand, were paid during the three months ended July 31, 2019[15] Change in Stockholders' Equity (in thousands) | Description | Amount | | :--- | :--- | | Balance at April 30, 2019 | $47,100 | | Net earnings | $471 | | Other comprehensive income | $195 | | Cash dividends paid | $(522) | | Stock based compensation | $60 | | Balance at July 31, 2019 | $47,304 | Condensed Consolidated Balance Sheets Total assets increased to $98.5 million and liabilities to $50.6 million, driven by new lease accounting standard adoption Balance Sheet Comparison (in thousands) | Metric | July 31, 2019 (Unaudited) | April 30, 2019 | | :--- | :--- | :--- | | Total Current Assets | $69,002 | $65,357 | | Total Assets | $98,541 | $87,223 | | Total Current Liabilities | $38,032 | $32,733 | | Total Liabilities | $50,604 | $39,520 | | Total Stockholders' Equity | $47,937 | $47,703 | - The company adopted a new lease standard, resulting in the recognition of $6.8 million in Right of Use assets and corresponding operating lease liabilities on the balance sheet as of July 31, 2019[18][35] Condensed Consolidated Statements of Cash Flows Operating activities used $407 thousand in cash, offset by $2.9 million provided by financing activities from increased borrowings Cash Flow Summary (Unaudited, in thousands) | Cash Flow Activity | Three Months Ended July 31, 2019 | Three Months Ended July 31, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(407) | $(2,829) | | Net cash used in investing activities | $(1,183) | $(610) | | Net cash provided by financing activities | $2,934 | $2,856 | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, revenue disaggregation, new lease standard adoption, credit facility waiver, segment performance, and increased tax rate - The company adopted the new lease standard ASU 2016-02 on May 1, 2019, recognizing Right-of-Use (ROU) assets of $6.8 million and corresponding lease liabilities[35][36] - The company received a waiver for noncompliance with financial covenants on its credit facility on June 19, 2019, and subsequently amended the covenants[34] - The effective tax rate increased to 25.4% from 20.9% in the prior year, primarily due to increased foreign operations and GILTI tax[43] Disaggregated Revenue by Segment (Q1 FY20, in thousands) | Revenue Type | Domestic | International | Total | | :--- | :--- | :--- | :--- | | Over Time | $28,235 | $10,049 | $38,284 | | Point in Time | $1,052 | $— | $1,052 | | Total | $29,287 | $10,049 | $39,336 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 6.7% sales decline, stable backlog, and liquidity management, with a cautious outlook focused on India expansion Results of Operations Quarterly sales fell 6.7% to $39.3 million due to 18.8% Domestic sales decline, offset by 65.2% International surge, with slight gross profit margin decrease Sales Performance by Segment (Q1 FY20 vs Q1 FY19) | Segment | Q1 FY20 Sales (USD) | Q1 FY19 Sales (USD) | % Change | | :--- | :--- | :--- | :--- | | Domestic | $29,287,000 | $36,070,000 | -18.8% | | International | $10,049,000 | $6,082,000 | +65.2% | | Total | $39,336,000 | $42,152,000 | -6.7% | - The company's order backlog was $102 million at July 31, 2019, consistent with the prior year and slightly up from $101 million at April 30, 2019[56] - Gross profit margin decreased from 18.0% to 17.7% year-over-year, primarily due to lower sales volume, unfavorable product mix, and competitive international pricing[57] Liquidity and Capital Resources Working capital decreased to $31.0 million, with $407 thousand cash used in operations, while liquidity was maintained by increasing revolving credit facility borrowings to $13.3 million Liquidity Metrics (in thousands) | Metric | July 31, 2019 | April 30, 2019 | | :--- | :--- | :--- | | Working Capital | $30,970,000 | $32,624,000 | | Current Ratio | 1.8-to-1.0 | 2.0-to-1.0 | | Revolver Advances Outstanding | $13,300,000 | $9,500,000 | - Operations used $407 thousand in cash, while financing activities provided $2.9 million, primarily from a net increase in short-term borrowings of $3.8 million[65][66] Outlook Management's outlook is cautious due to demand unpredictability and earnings risks, but the company is investing in leadership and India capabilities for market opportunities - The company is recovering from a decline in Domestic volume and is investing in its leadership team and commercial focus[67] - Strategic initiatives include increasing capabilities in India to better serve customers in a market perceived as healthy[67] Quantitative and Qualitative Disclosures About Market Risk No material changes to market risk disclosures have occurred since the Annual Report on Form 10-K for the fiscal year ended April 30, 2019 - There are no material changes to the disclosures regarding market risk from the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2019[70] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of July 31, 2019, with no significant changes to internal controls over financial reporting - The CEO and CFO concluded that as of July 31, 2019, the company's disclosure controls and procedures were adequate and effective[71] - No significant changes occurred in the company's internal control over financial reporting during the most recent fiscal quarter[72] PART II. OTHER INFORMATION This section lists all exhibits filed with the Form 10-Q, including credit agreement amendments and required certifications Exhibits This section lists the exhibits filed with the Form 10-Q, including credit agreement amendments, a default waiver, and CEO/CFO certifications - Exhibits filed include amendments to the Credit and Security Agreement, a Default Waiver Letter, and a new Security Agreement with Wells Fargo Bank[74] - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 were filed[74] Signatures The report was signed on September 6, 2019, by Donald T. Gardner III, Vice President, Finance and Chief Financial Officer - The report was signed on September 6, 2019, by Donald T. Gardner III, in his capacity as Vice President, Finance and Chief Financial Officer[77]