Kewaunee Scientific Corporation — Form 10-Q Summary
Business context and reporting period
This quarterly report covers the three and six months ended October 31, 2016, Kewaunee Scientific’s fiscal 2017 second quarter and year-to-date period. The company operates through Domestic Operations and International Operations and supplies laboratory products and related projects. The filing was signed December 9, 2016.
Key financial metrics
| Metric | Three months ended Oct. 31, 2016 | Three months ended Oct. 31, 2015 | Six months ended Oct. 31, 2016 | Six months ended Oct. 31, 2015 |
|---|---|---|---|---|
| Net sales | $36.329 million | $31.037 million | $73.608 million | $62.126 million |
| Gross profit | $7.104 million | $5.532 million | $14.243 million | $11.375 million |
| Gross margin | 19.6% | 17.8% | 19.3% | 18.3% |
| Operating earnings | $2.288 million | $1.129 million | $4.349 million | $2.653 million |
| Net earnings attributable to Kewaunee | $1.486 million | $0.695 million | $2.786 million | $1.635 million |
| Diluted EPS | $0.54 | $0.26 | $1.02 | $0.61 |
| Net cash provided by operating activities | Not reported for quarter | Not reported for quarter | $2.206 million | $1.861 million |
Second-quarter operating margin was approximately 6.3%, compared with 3.6% in the prior-year quarter. Six-month operating margin was approximately 5.9%, compared with 4.3%. Net margin attributable to Kewaunee was approximately 4.1% in the quarter and 3.8% year to date.
At October 31, 2016, cash and cash equivalents were $7.579 million, restricted cash was $1.649 million, working capital was $31.440 million, and the current ratio was 2.3-to-1. Total bank borrowings were $10.282 million, including $6.521 million outstanding under the revolving credit facility. Of the $20 million revolving facility, $9.3 million was available. Standby letters of credit totaled $4.210 million.
Year-to-date capital expenditures were $1.762 million, dividends paid were $0.757 million, and cash increased by $2.357 million to $7.579 million. Inventory increased to $16.789 million from $15.626 million at April 30, 2016, while receivables increased to $29.040 million from $27.835 million.
Material changes versus the prior comparable period
- Second-quarter sales increased 17.1%; six-month sales increased 18.5%.
- Domestic sales increased 7.4% in the quarter and 14.3% year to date. International sales increased 70.6% in the quarter and 36.7% year to date, primarily from completion of multi-year laboratory projects in Kuwait and India.
- Gross margin expanded by 1.8 percentage points in the quarter and 1.0 percentage point year to date, primarily due to operating leverage from higher production volumes.
- Operating expenses increased in dollars but declined as a percentage of sales to 13.3% from 14.2% in the quarter and to 13.4% from 14.0% year to date. Expense increases included wages, incentive compensation, pension expense, professional services, and international operations, partly offset by lower non-recurring expenses.
- Net earnings attributable to Kewaunee more than doubled in the quarter and increased 70.4% year to date. The effective tax rate declined to 34.0% from 38.7% in the quarter and to 35.3% from 37.8% year to date, primarily due to research and development tax credits.
- Year-to-date operating cash flow increased to $2.206 million from $1.861 million, despite higher uses of cash for receivables and inventory.
- Short-term borrowings increased, with total bank borrowings rising by $2.694 million from April 30, 2016. Capital expenditures also increased by $0.501 million year to date.
Guidance, outlook, risks, contingencies, and unusual items
Management stated that it is optimistic that the current fiscal year will be strong and cited new opportunities worldwide. The order backlog was $101.1 million at October 31, 2016, compared with $86.2 million at July 31, 2016 and $92.4 million at October 31, 2015.
The company cautioned that demand is difficult to predict because it serves as a subcontractor or supplier to dealers and subcontractors and depends on laboratory construction activity and project schedules. Firm-price quotations expose the company to labor and material cost increases, particularly for stainless steel, wood, and epoxy resin, unless prices can be increased without harming sales. Other disclosed risks include competition, general economic conditions, customer demand and delivery requirements, international operations and foreign currency fluctuations, regulatory changes, commodity costs, and force majeure events.
The company believes operating cash flow and its revolving credit facility will be sufficient for current-year requirements, including capital expenditures. Pension contributions totaled $0.555 million during the first six months, and no additional contributions were expected during the remainder of the fiscal year. The company reported no material changes in market risk disclosures, and management concluded that disclosure controls were adequate and effective.
Important facts for investors to verify
- Whether the $101.1 million backlog converts into sales and cash flow on the expected timing and margins.
- The sustainability of international project activity, particularly after completion of the Kuwait and India projects.
- Availability and borrowing capacity under the revolving credit facility, including covenant compliance and standby letters of credit.
- Working-capital requirements as receivables and inventories grow relative to sales.
- Exposure to firm-price contracts and changes in labor, stainless steel, wood, and epoxy resin costs.
- The effect of foreign currency movements and other international operating risks on reported results.