Business Context and Reporting Period
Kewaunee Scientific Corporation filed this unaudited Form 10-Q for the three and nine months ended January 31, 2012, its fiscal 2012 third quarter. The company manufactures laboratory and technical furniture and operates through domestic and international segments. The filing was reviewed, but not audited, by the independent registered public accounting firm.
Financial Performance and Position
| Metric | Three Months Ended Jan. 31, 2012 | Three Months Ended Jan. 31, 2011 | Nine Months Ended Jan. 31, 2012 | Nine Months Ended Jan. 31, 2011 |
|---|---|---|---|---|
| Net sales | $21.574 million | $22.568 million | $73.857 million | $73.051 million |
| Gross profit | $3.771 million | $4.163 million | $11.804 million | $14.579 million |
| Gross margin | 17.5% | 18.4% | 16.0% | 20.0% |
| Operating earnings (loss) | $(0.219) million | $0.156 million | $(0.146) million | $2.626 million |
| Net earnings (loss) attributable to Kewaunee stockholders | $(0.122) million | $0.086 million | $(0.225) million | $1.598 million |
| Diluted earnings (loss) per share | $(0.05) | $0.03 | $(0.09) | $0.62 |
| Cash provided by operating activities | Not provided for the quarter | Not provided for the quarter | $4.309 million | $6.135 million |
- Third-quarter domestic sales declined to $17.142 million from $19.108 million, primarily because of weaker publicly funded K-12 education projects and lower technical furniture sales.
- International sales increased to $4.432 million from $3.460 million, benefiting from initial shipments on a large project. Approximately $0.720 million of manufactured products was not recognized as revenue because the customer did not secure shipping containers or take delivery.
- At January 31, 2012, backlog was $77.1 million, compared with $65.7 million at April 30, 2011 and $68.2 million at January 31, 2011.
- Gross margin contracted because of lower selling prices and higher steel and epoxy resin costs. Operating expenses were broadly flat year over year.
- Other income included $156,000 from a property insurance settlement in both the quarter and year-to-date period.
- Income tax benefits were $170,000 for the quarter and $237,000 year to date. Reported effective tax rates were unusually high because of tax credits and net losses.
- Net earnings attributable to noncontrolling interests were $156,000 for the quarter and $211,000 year to date.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $3.929 million at January 31, 2012, up from $2.402 million at April 30, 2011. Restricted cash was $0.649 million.
- Working capital was $21.487 million, compared with $22.115 million at April 30, 2011. The current ratio was 2.2-to-1.0 versus 2.1-to-1.0.
- Operating activities generated $4.309 million of cash year to date, driven primarily by a $7.255 million decrease in receivables, partly offset by higher inventories and lower accounts payable and accrued expenses.
- Investing activities used $1.326 million, primarily for capital expenditures, versus $4.698 million in the prior-year period.
- Financing activities used $1.171 million, including $0.773 million of dividends, $0.187 million of short-term borrowing repayments, and $0.150 million of long-term debt repayments.
- Revolving credit borrowings were $6.401 million at January 31, 2012, compared with $6.588 million at April 30, 2011. Total bank borrowings and capital lease obligations were $10.176 million versus $10.574 million.
- Total liabilities were $26.549 million and total equity was $31.872 million at January 31, 2012. Inventories increased to $11.762 million from $10.466 million at April 30, 2011.
Material Changes, Outlook, and Risks
Year-to-date profitability deteriorated materially despite a 1.1% increase in sales, primarily because gross margin fell four percentage points and operating earnings turned negative. Management expects the U.S. economic slowdown to continue pressuring domestic demand, particularly for wood furniture, while international laboratory opportunities are expected to improve. Recent headcount reductions and cost-saving initiatives are expected to lower operating costs.
Demand visibility remains limited because the company often supplies dealers or subcontractors and depends on laboratory construction activity. Customer design and delivery-date changes can delay production and revenue recognition and increase manufacturing costs. A large international project has experienced a lengthy construction delay. Management also cited uncertainty regarding higher oil prices, transportation costs, and petroleum-based raw-material prices.
The company stated that operating cash flow, supplemented by its revolving credit facility, should be sufficient for ongoing requirements and capital expenditures through the current fiscal year. No material changes to previously disclosed market-risk information were reported. Management concluded that disclosure controls and procedures were adequate and effective, with no significant change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the $77.1 million backlog converts to revenue as expected, particularly the delayed large international project.
- Whether domestic K-12 demand continues to decline and whether international growth offsets it.
- Progress in restoring gross margins amid raw-material costs and pricing pressure.
- The timing and collectability of customer receivables and the sustainability of operating cash generation.
- Availability and terms of the revolving credit facility, along with future debt and capital-expenditure requirements.
- Potential effects of oil, transportation, steel, and epoxy resin price increases.
- The impact of the $156,000 insurance settlement and unusually high effective tax benefits on period-over-period comparability.