Kewaunee Scientific (KEQU) - 2020 Q4 - Annual Report

Part I Business Kewaunee Scientific designs, manufactures, and installs laboratory and technical furniture for diverse sectors, facing competition and customer concentration with stable order backlog - The company's principal business involves the design, manufacture, and installation of laboratory, healthcare, and technical furniture products, including steel, wood, laminate furniture, fume hoods, and epoxy resin worksurfaces[11] - Key markets served include pharmaceutical, biotechnology, industrial, chemical research labs, educational institutions, healthcare facilities, and governmental entities[12] - Sales from two domestic dealers and a national stocking distributor constituted approximately 37% of total sales in fiscal year 2020, highlighting significant customer concentration[16] - The order backlog stood at $100.9 million as of April 30, 2020, a slight increase from $100.8 million at April 30, 2019[17] Research & Development and Employee Count | Metric | FY 2020 | FY 2019 | | :--- | :--- | :--- | | R&D Expenditure | $1,816,000 | $1,550,000 | | Full-time Employees (Domestic) | 623 | N/A | | Full-time Employees (International) | 289 | N/A | Risk Factors The company faces significant risks from intense competition, customer concentration, volatile raw material costs, international geopolitical and currency exposures, cybersecurity threats, trade policy changes, and the COVID-19 pandemic - Substantial sales to two dealers and a national stocking distributor, representing approximately 37% of fiscal year 2020 sales, pose a material revenue risk if any are lost[31] - Increases in raw material costs (steel, wood, epoxy resin) and energy prices on fixed-price contracts could negatively impact profitability[32] - Changes in U.S. trade policy, including tariffs, could increase costs, reduce demand, and adversely affect business operations[43][44] - The COVID-19 pandemic presents significant risks, including business shutdowns, supply chain disruptions, destabilized financial markets, and increased operating expenses from safety measures[46][47][49] - Cybersecurity incidents pose a critical risk, potentially resulting in data loss, reputational damage, and financial liability[39][40] Properties Kewaunee owns three manufacturing facilities in Statesville, NC, totaling 413,000 square feet, and leases additional domestic and international warehouse, distribution, and office spaces - The company owns three adjacent manufacturing facilities in Statesville, NC, totaling 413,000 square feet on 20 acres[52] - Leased properties include 391,000 square feet of distribution and warehouse facilities in Statesville, NC, along with sales offices in Illinois and New Jersey[52] - Internationally, the company leases an 83,000 square foot manufacturing facility and a 17,000 square foot office in Bangalore, India, in addition to a sales office in Singapore[52] Legal Proceedings The company is engaged in routine legal disputes and audits, which management anticipates will not materially impact its financial condition or operations - The company states that pending legal matters and disputes are not expected to have a material adverse effect on its results of operations or financial condition[53] Mine Safety Disclosures This section is not applicable to the company's operations - Not Applicable[54] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock, KEQU, saw a significant price decline in fiscal year 2020, with cash dividends reduced to $0.38 per share and subsequently suspended in December 2019 - The company's common stock is traded on the NASDAQ Global Market under the symbol KEQU[56] Quarterly Stock Prices (High/Low) | Fiscal Year | Quarter | High | Low | | :--- | :--- | :--- | :--- | | 2020 | Q1 | $23.00 | $16.18 | | | Q2 | $18.20 | $15.06 | | | Q3 | $19.57 | $12.30 | | | Q4 | $12.80 | $6.96 | | 2019 | Q1 | $38.80 | $30.50 | | | Q2 | $35.05 | $25.97 | | | Q3 | $34.84 | $22.00 | | | Q4 | $32.70 | $20.21 | - Cash dividends paid per share were $0.38 in fiscal year 2020, a decrease from $0.74 in 2019, with the Board of Directors suspending the dividend on December 16, 2019[58] Selected Financial Data In fiscal year 2020, Kewaunee reported $147.5 million in net sales, but reversed to an operating loss of $2.3 million and a net loss of $4.7 million, with declines in total assets and stockholders' equity Selected Operating Statement Data (in thousands) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net sales | $147,540 | $146,550 | | Gross profit | $23,427 | $25,319 | | Operating earnings (loss) | $(2,345) | $2,112 | | Net earnings (loss) attributable to Kewaunee | $(4,687) | $1,529 | | Diluted EPS | $(1.70) | $0.55 | Selected Balance Sheet & Other Data (in thousands) | Metric | As of April 30, 2020 | As of April 30, 2019 | | :--- | :--- | :--- | | Net working capital | $27,171 | $32,624 | | Total assets | $83,929 | $87,223 | | Total borrowings/long-term debt | $13,913 | $10,926 | | Kewaunee Stockholders' equity | $38,415 | $47,100 | | Capital expenditures | $2,465 | $4,213 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 0.7% sales increase in FY2020 to international growth offsetting domestic decline, while a shift to net loss resulted from lower gross profit margins and increased operating expenses due to strategic orders, pandemic impacts, and restructuring, leading to reduced working capital and dividend suspension Sales Performance by Segment (FY2020 vs FY2019) | Segment | FY2020 Sales | FY2019 Sales | Change | | :--- | :--- | :--- | :--- | | Domestic | $115.1 million | $116.6 million | -1.3% | | International | $32.4 million | $30.0 million | +8.3% | | Total | $147.5 million | $146.6 million | +0.7% | - Gross profit margin decreased from 17.3% in FY2019 to 15.9% in FY2020, primarily due to low-margin strategic orders, including a large Middle East order, and profitability impacts from the coronavirus pandemic[78] - Operating expenses increased to $25.8 million from $23.2 million, driven by higher personnel expenses ($798,000), incentive compensation ($385,000), restructuring expenses ($312,000), and bad debt expense ($299,000) from the China subsidiary closure[79] - The company reported a net loss of $4.7 million ($1.70 per share) in FY2020, a reversal from net earnings of $1.5 million ($0.55 per share) in FY2019[84] - Working capital decreased to $27.2 million as of April 30, 2020, from $32.6 million a year prior, primarily due to lower cash and accounts receivable[94] - Capital expenditures for FY2021 are anticipated to be approximately $2.0 million, primarily focused on modernizing manufacturing capabilities and IT platforms[93] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include interest rate fluctuations on its $4.7 million floating-rate debt and foreign currency exchange rate volatility, as 23% of fiscal year 2020 net sales were in non-U.S. dollar currencies - The company is exposed to interest rate risk on its floating-rate bank line of credit, with $4.7 million in advances outstanding as of April 30, 2020[108] - Foreign currency exchange rate risk is significant, as 23% of net sales in fiscal year 2020 were in non-U.S. dollar currencies, and the company held $5.2 million in foreign currency cash at year-end[109][111] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for fiscal years 2020 and 2019, highlighting a $4.7 million net loss in 2020, the adoption of ASC 842, the China subsidiary restructuring, and CARES Act tax impacts Consolidated Statement of Operations Highlights (in thousands) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net sales | $147,540 | $146,550 | | Gross profit | $23,427 | $25,319 | | Operating loss | $(2,345) | $2,112 | | Net loss attributable to Kewaunee | $(4,687) | $1,529 | Consolidated Balance Sheet Highlights (in thousands) | Metric | April 30, 2020 | April 30, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $4,365 | $10,647 | | Total Current Assets | $54,231 | $65,357 | | Total Assets | $83,929 | $87,223 | | Total Liabilities | $45,226 | $39,520 | | Total Stockholders' Equity | $38,703 | $47,703 | - In December 2019, the company initiated a restructuring, including closing its China subsidiary, incurring total FY2020 restructuring expenses of $668,000, comprising $380,000 in domestic severance and hiring costs and $288,000 in international costs, primarily bad debt[230][231] - The company adopted the new lease accounting standard ASU 2016-02 (ASC 842) on May 1, 2019, leading to the recognition of $9.3 million in Right-of-Use (ROU) assets on the balance sheet[211][212] - The CARES Act, enacted in March 2020, enables the company to carry back its fiscal year 2020 net operating loss (NOL) to prior years with higher tax rates, generating a tax benefit[191] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no disagreements with its accountants regarding accounting principles, financial disclosure, or auditing scope - None reported[236] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of April 30, 2020, despite a noted administrative error in Form 8-K filing that has been remediated - Management concluded that disclosure controls and procedures are effective, despite an administrative error causing a late Form 8-K filing, for which remediation has occurred[236] - Based on an evaluation using the COSO framework, management concluded the company maintained effective internal control over financial reporting as of April 30, 2020[237] Other Information No other information was reported for this period - None[241] Part III Directors, Executive Officers and Corporate Governance This section provides biographical information for executive officers and incorporates director and audit committee details by reference from the proxy statement, with the code of ethics available online - This section lists the names, ages, positions, and business experience of nine executive officers, including Thomas D. Hull III (President and CEO) and Donald T. Gardner III (CFO)[244][245] - Information concerning the Board of Directors and the Audit Committee is incorporated by reference from the company's proxy statement[243][255] Executive Compensation All executive compensation information, including discussion, tables, and agreements, is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the Proxy Statement[257] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates security ownership information by reference from the proxy statement and details securities authorized for issuance under equity compensation plans as of April 30, 2020 Equity Compensation Plan Information (as of April 30, 2020) | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price | Securities available for future issuance | | :--- | :--- | :--- | :--- | | Approved by Security Holders | | | | | 2008 Key Employee Stock Option Plan | 88,000 | $18.45 | — | | 2017 Omnibus Incentive Plan | 52,850 | — | 251,288 | | Not Approved by Security Holders | — | — | — | | Total | 140,850 | | 251,288 | Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related party transactions, and director independence is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the Proxy Statement[259] Principal Accountant Fees and Services Details regarding fees paid to Ernst & Young LLP for audit and non-audit services are incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the Proxy Statement[260] Part IV Exhibits and Financial Statement Schedules This section lists documents filed as part of the Form 10-K, including consolidated financial statements and a detailed exhibit index of contracts, governance documents, and certifications - This section lists the consolidated financial statements and the consent of the independent registered public accounting firm, Ernst & Young LLP, filed with the report[263] - A detailed Exhibit Index is provided, listing material contracts, articles of incorporation, bylaws, credit agreements, employee compensation plans, and certifications by the CEO and CFO[266][267][268]