The Company's 2022 Annual Report to Stockholders on Form 10-K contains
management's discussion and analysis of the Company's financial condition and
results of operations as of and for the year ended April 30, 2022. The following
discussion and analysis describes material changes in the Company's financial
condition since April 30, 2022. The analysis of results of operations compares
the three and six months ended October 31, 2022 with the comparable periods of
the prior year.
Results of Operations
Sales for the quarter were $54,564,000, an increase from sales of $39,031,000 in
the comparable period of the prior year. Domestic sales for the quarter were
$37,991,000, up 26.9% from sales of $29,934,000 in the comparable period of the
prior year. The increase in Domestic sales was predominantly from higher input
costs being rolled into product pricing. International sales for the quarter
were $16,573,000, up 82.2% from sales of $9,097,000 in the comparable period of
the prior year. International sales increased when compared to the prior year
period due to the commencement of delivery of large projects booked in the prior
fiscal year.
Sales for the six months ended October 31, 2022 were $104,687,000, an increase
from sales of $78,524,000 in the comparable period of the prior year. Domestic
sales for the quarter were $75,459,000, up 26.6% from sales of $59,597,000 in
the comparable period of the prior year. The increase in Domestic sales was
predominantly from higher input costs being rolled into product pricing.
International sales for the quarter were $29,228,000, up 54.4% from sales of
$18,927,000 in the comparable period of the prior year. International sales
increased when compared to the prior year period due to the commencement of
delivery of large projects booked in the prior fiscal year.
The Company's order backlog was $157.8 million at October 31, 2022, as compared
to $139.7 million at October 31, 2021, and $173.9 million at April 30, 2022.
The gross profit margin for the three months ended October 31, 2022 was 15.9% of
sales, as compared to 9.2% of sales in the comparable quarter of the prior year.
The gross profit margin for the six months ended October 31, 2022 was 14.2% of
sales, as compared to 11.8% of sales in the comparable quarter of the prior
year. The increase in gross profit margin percentage for the three and six
months ended October 31, 2022 is primarily due to higher input costs being
rolled into domestic pricing for the current fiscal year as compared to the
prior year comparable periods. During the three and six months ended October 31,
2021, the Company's gross profit margin percentage was unfavorably impacted by
increases in steel, wood, and epoxy resin raw material costs that could not be
added to existing fixed-price contracts of $2,112,000 and $3,763,000,
respectively.
Operating expenses for the three months ended October 31, 2022 were $7,946,000,
or 14.6% of sales, as compared to $6,487,000, or 16.6% of sales, in the
comparable period of the prior year. Operating expenses for the six months ended
October 31, 2022 were $14,538,000, or 13.9% of sales, as compared to
$13,252,000, or 16.9% of sales, in the comparable period of the prior year. The
increase in operating expenses for the three months ended October 31, 2022 was
primarily due to increases in
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consulting and professional fees of $278,000, and increases in international
operating expenses of $940,000, partially offset by reductions in administrative
wages, benefits, incentive and stock-based compensation of $70,000, marketing
expense of $62,000, and corporate governance expenses of $36,000. The increase
in operating expenses for the six months ended October 31, 2022 was primarily
due to increases in consulting and professional fees of $476,000, and increases
in international operating expenses of $1,308,000, partially offset by
reductions in administrative wages, benefits, incentive and stock-based
compensation of $700,000, marketing expense of $190,000, and corporate
governance expenses of $11,000. The increase in operating expenses for the three
and six months ended October 31, 2022 also included a one-time charge related to
the write-down of a prior year insurance claim in the amount of $260,000. The
increase in international operating expenses for the three and six months ended
October 31, 2022 is related to the continued sales growth in the International
operating segment.
Interest expense, net was $370,000 and $754,000 for the three and six months
ended October 31, 2022, as compared to $132,000 and $238,000 for the comparable
periods of the prior year. The changes in interest expense were primarily due to
changes in the levels of bank borrowings and the Sale-Leaseback financing
transaction.
The effective income tax rate for the three and six months ended October 31,
2022 was 125.0% and 818.1%, respectively, as compared to (6.8)% and (11.3)% for
the three and six months ended October 31, 2021, respectively. Income tax
expense of $570,000 and $195,000 was recorded for the three months ended
October 31, 2022 and 2021, respectively. Income tax expense of $949,000 and
$446,000 was recorded for the six months ended October 31, 2022 and 2021,
respectively.The change in the effective tax rate for the three and six months
ended October 31, 2022 reflects the impact of international operations which are
taxed at different rates, combined with no U.S. tax benefit being recorded for
the most recent quarter due to the Company's full valuation allowance position.
See Note K , Income Taxes, of the Notes to Condensed Consolidated Financial
Statements for additional information.
Non-controlling interests related to the Company's subsidiaries not 100% owned
by the Company increased net loss by $129,000 and $157,000 for the three and six
months ended October 31, 2022, compared to $18,000 and $56,000 for the
comparable periods of the prior year. The change in the net earnings
attributable to the non-controlling interest in the current period was due to
changes in earnings of the subsidiaries in the related period.
Net loss was $243,000, or $(0.09) per diluted share, for the three months ended
October 31, 2022, compared to $3,100,000, or $(1.11) per diluted share, in the
prior year period. Net loss was $990,000, or $(0.35) per diluted share, for the
six months ended October 31, 2022, compared to $4,445,000, or $(1.60) per
diluted share, in the prior year period.
Liquidity and Capital Resources
Our principal sources of liquidity have historically been funds generated from
operating activities. In addition, on March 24, 2022, we executed a
Sale-Leaseback financing transaction with respect to our manufacturing and
corporate facilities in Statesville, North Carolina to provide additional
liquidity. See Note G , Sale-Leaseback Financing Transaction for more
information. Additionally, certain machinery and equipment are financed by
non-cancellable operating leases. The Company believes that these sources will
be sufficient to support ongoing business requirements in the current fiscal
year, including capital expenditures.
The Company had working capital of $47,756,000 at October 31, 2022, compared to
$49,272,000 at April 30, 2022. The ratio of current assets to current
liabilities was 2.1-to-1.0 at October 31, 2022, compared to 2.2-to-1.0 at
April 30, 2022.
As previously reported in the Company's 2022 Annual Report on Form 10-K , the
Company was compliant at April 30, 2022 with all of the financial covenants
under the revolving credit facility. On June 27, 2022, the Company terminated
the Credit Agreement with Wells Fargo, National Bank. At the time of
termination, there were no borrowings under the Credit Agreement, and the
Company did not incur any material termination penalties as a result of the
termination. For additional information concerning our credit facility, see
Note F , Long-Term Debt and Other Credit Arrangements.
The Company used cash of $586,000 during the six months ended October 31, 2022,
primarily for decreases in accounts payable and other accrued expenses of $6.4
million and increases in prepaid expenses and other current assets of $2.2
million, partially offset by an increase in deferred revenue of $7.9 million.
The increase in deferred revenue is primarily related to advance payments
received for a large international order. During the six months ended October
31, 2022, the Company used net cash of $919,000 in investing activities, all of
which was used for capital expenditures. The Company's financing activities
provided cash of $11,525,000 during the six months ended October 31, 2022,
primarily from proceeds of the sale-leaseback financing transaction that was
previously recorded as a note receivable at April 30, 2022.
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Outlook
The Company's ability to predict future demand for its products continues to be
limited given its role as subcontractor or supplier to dealers for
subcontractors. Demand for the Company's products is also dependent upon the
number of laboratory construction projects planned and/or current progress in
projects already under construction. The Company's earnings are also impacted by
fluctuations in prevailing pricing for projects in the laboratory construction
marketplace and increased costs of raw materials, including steel, wood, and
epoxy resin, and whether the Company can increase product prices to customers in
amounts that correspond to such increases without materially and adversely
affecting sales. Additionally, since prices are normally quoted on a firm basis
in the industry, the Company bears the burden of possible increases in labor and
material costs between the quotation of an order and delivery of a product.
The Company continues to improve the quality of the order backlog by delivering
a portion of the lower margin direct sales orders and replacing those orders in
the backlog with higher margin product orders. This dynamic, as well as the
Company's ability to focus solely on supporting its dealers and distribution
channel partners domestically and the continued growth of its International
business, positions Kewaunee well as the Company moves through the balance of
the fiscal year.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Certain statements in this document constitute "forward-looking" statements
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). All statements other than statements of historical fact included
in this Quarterly Report, including statements regarding the Company's future
financial condition, results of operations, business operations and business
prospects, are forward-looking statements. Words such as "anticipate,"
"estimate," "expect," "project," "intend," "plan," "predict," "believe" and
similar words, expressions and variations of these words and expressions are
intended to identify forward-looking statements. Such forward-looking statements
are subject to known and unknown risks, uncertainties, assumptions, and other
important factors that could significantly impact results or achievements
expressed or implied by such forward-looking statements. Such factors, risks,
uncertainties and assumptions include, but are not limited to: competitive and
general economic conditions and the ongoing impact of the COVID-19 pandemic,
including disruptions from government mandates, both domestically and
internationally, as well as supplier constraints and other supply disruptions;
changes in customer demands; technological changes in our operations or in our
industry; dependence on customers' required delivery schedules; risks related to
fluctuations in the Company's operating results from quarter to quarter; risks
related to international operations, including foreign currency fluctuations;
changes in the legal and regulatory environment; changes in raw materials and
commodity costs; acts of terrorism, war, governmental action, and natural
disasters and other Force Majeure events. The cautionary statements made
pursuant to the Reform Act herein and elsewhere by us should not be construed as
exhaustive. We cannot always predict what factors would cause actual results to
differ materially from those indicated by the forward-looking statements. Over
time, our actual results, performance, or achievements will likely differ from
the anticipated results, performance or achievements that are expressed or
implied by our forward-looking statements, and such differences might be
significant and harmful to our stockholders' interest. Many important factors
that could cause such differences are described under the caption "Risk Factors"
in Item 1A in the Company's 2022 Annual Report on Form 10-K, which you
should review carefully. These forward-looking statements speak only as of the
date of this document. The Company assumes no obligation, and expressly
disclaims any obligation, to update any forward-looking statements, whether as a
result of new information, future events or otherwise.
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