Kewaunee Scientific (KEQU) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Kewaunee Scientific Corporation reported a $3.6 million net loss for the nine months ended January 31, 2020, due to declining gross margins and rising operating expenses Condensed Consolidated Statements of Operations Net sales increased to $34.2 million (Q3) and $113.3 million (9M), but rising operating expenses led to net losses of $1.9 million and $3.6 million respectively Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended Jan 31, 2020 | Three Months Ended Jan 31, 2019 | Nine Months Ended Jan 31, 2020 | Nine Months Ended Jan 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $34,225 | $32,372 | $113,283 | $111,802 | | Gross Profit | $5,278 | $5,230 | $18,540 | $20,477 | | Operating Earnings (Loss) | $(2,072) | $(2) | $(1,335) | $3,667 | | Net Earnings (Loss) Attributable to Kewaunee | $(1,918) | $(22) | $(3,625) | $2,799 | | Diluted EPS | $(0.70) | $(0.01) | $(1.32) | $1.00 | Condensed Consolidated Statements of Comprehensive Income Comprehensive loss was $1.9 million for Q3 and $3.6 million for the nine-month period, reversing prior year comprehensive income Comprehensive Income (Loss) (in thousands) | Metric | Three Months Ended Jan 31, 2020 | Three Months Ended Jan 31, 2019 | Nine Months Ended Jan 31, 2020 | Nine Months Ended Jan 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Earnings (Loss) | $(1,901) | $15 | $(3,566) | $2,885 | | Other Comprehensive Income (Loss) | $(26) | $495 | $(8) | $(613) | | Comprehensive Income (Loss) Attributable to Kewaunee | $(1,944) | $473 | $(3,633) | $2,186 | Condensed Consolidated Balance Sheets Total assets decreased to $84.4 million, liabilities increased to $41.4 million, and stockholders' equity declined to $42.9 million Balance Sheet Comparison (in thousands) | Account | Jan 31, 2020 (Unaudited) | April 30, 2019 | | :--- | :--- | :--- | | Total Current Assets | $53,221 | $65,357 | | Total Assets | $84,361 | $87,223 | | Total Current Liabilities | $25,496 | $32,733 | | Total Liabilities | $41,412 | $39,520 | | Total Stockholders' Equity | $42,949 | $47,703 | Condensed Consolidated Statements of Cash Flows Operating activities provided $4.6 million cash, while financing activities used $8.2 million, leading to a $5.1 million decrease in cash Cash Flow Summary (Nine Months Ended Jan 31, in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $4,611 | $4,534 | | Net cash used in investing activities | $(1,371) | $(2,290) | | Net cash used in financing activities | $(8,156) | $(1,234) | | Increase (decrease) in cash | $(5,093) | $419 | Notes to Condensed Consolidated Financial Statements Notes detail lease standard adoption, credit facility amendment, foreign earnings reinvestment change, and a $628,000 restructuring cost - The company adopted the new lease standard (ASU 2016-02) on May 1, 2019, recognizing Right-of-Use (ROU) assets of $11.1 million as of January 31, 2020[45][46] - In December 2019, the company amended its loan agreement to an asset-based lending arrangement with new financial covenants, including minimum liquidity and EBITDA requirements[44][81] - Effective August 1, 2019, the company amended its assertion on the indefinite reinvestment of foreign unremitted earnings for its Singapore, China, and India subsidiaries[52] - A restructuring initiated in December 2019 incurred expenses of $628,000 for the quarter, consisting of domestic severance and costs related to the closure of the China subsidiary[64][65] Disaggregated Revenue (Nine Months Ended Jan 31, 2020, in thousands) | Revenue Type | Domestic | International | Total | | :--- | :--- | :--- | :--- | | Over Time | $83,292 | $25,713 | $109,005 | | Point in Time | $4,278 | $— | $4,278 | | Total | $87,570 | $25,713 | $113,283 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses sales growth, declining gross margins, surging operating expenses from restructuring, and plans for profitability improvement Results of Operations Q3 sales rose to $34.2 million, 9-month sales to $113.3 million, but gross margin declined and operating expenses increased due to restructuring Sales Performance (in thousands) | Period | Total Sales | YoY Change | Domestic Sales | International Sales | | :--- | :--- | :--- | :--- | :--- | | Q3 FY20 | $34,225 | +5.7% | $26,699 | $7,526 | | 9M FY20 | $113,283 | +1.3% | $87,570 | $25,713 | - Gross profit margin decreased in Q3 to 15.4% from 16.2% YoY, and for the nine-month period to 16.4% from 18.3% YoY, due to aggressively priced low-margin orders[70] - Q3 operating expenses rose to $7.4 million (21.5% of sales) from $5.2 million (16.2% of sales) YoY, primarily due to $559,000 in restructuring costs, increased marketing, and higher administrative wages[71] - The company initiated a restructuring plan in December 2019, which is expected to generate annual cost savings between $1.0 million and $1.3 million[73] Liquidity and Capital Resources Working capital decreased to $27.7 million, credit facility availability was $10.2 million, and financing activities used $8.2 million for debt reduction Liquidity Position (in thousands) | Metric | Jan 31, 2020 | April 30, 2019 | | :--- | :--- | :--- | | Working Capital | $27,725 | $32,624 | | Current Ratio | 2.1-to-1.0 | 2.0-to-1.0 | | Credit Facility Availability | $10,200 | $5,300 | | Outstanding Advances | $4,000 | $9,500 | - In December 2019, the company amended its credit facility to an asset-based lending arrangement, which replaced prior financial covenants with new ones, including minimum monthly liquidity and EBITDA requirements[81] - For the nine months ended Jan 31, 2020, financing activities used $8.2 million, mainly for a $5.5 million reduction in short-term borrowings, $1.0 million in dividends to stockholders, and $1.3 million in long-term debt repayments[82] Outlook Outlook emphasizes improving profitability via restructuring and investments, acknowledging challenges like demand visibility and rising raw material costs - The company is focused on improving profitability through short-term restructuring and a multi-year plan to invest in manufacturing and IT to improve competitiveness[83] - Key challenges include limited demand visibility, fluctuations in project pricing, and managing increases in raw material costs[83] 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 fiscal year ended April 30, 2019 - There are no material changes to the disclosures on market risk from the Annual Report on Form 10-K for the fiscal year ended April 30, 2019[85] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no significant changes in internal control over financial reporting - Management, including the CEO and CFO, concluded that as of January 31, 2020, the Company's disclosure controls and procedures were adequate and effective[87] - No significant changes occurred in the Company's internal control over financial reporting during the most recent fiscal quarter[88] PART II. OTHER INFORMATION Risk Factors No material changes to risk factors, except for new risks related to the coronavirus outbreak impacting manufacturing, project schedules, and supply chain - A new risk factor has been identified concerning the coronavirus outbreak, which could disrupt manufacturing, project schedules, and labor availability[91] - The company sources key supplies from China, and the coronavirus outbreak could lead to shortages and production delays if alternative sources are not found[92] Exhibits This section lists key exhibits filed with the Form 10-Q, including credit agreement amendments and CEO/CFO certifications - Key exhibits filed include the Eighth Amendment to the Credit and Security Agreement, CEO/CFO certifications, and XBRL data files[93]