Kewaunee Scientific Corporation — Form 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarter and nine-month period ended January 31, 2017, representing fiscal 2017 third-quarter results. Kewaunee manufactures laboratory, technical, and related products through Domestic and International Operations. The filing was submitted March 13, 2017.
Key Financial Metrics
| Metric | Three Months Ended January 31 | Nine Months Ended January 31 |
|---|---|---|
| Net sales | $30.4 million, versus $32.4 million | $104.0 million, versus $94.5 million |
| Gross profit | $5.0 million; 16.6% margin | $19.3 million; 18.5% margin |
| Operating earnings | $0.4 million, versus $1.0 million | $4.8 million, versus $3.7 million |
| Net earnings attributable to Kewaunee | $0.3 million, or $0.13 diluted EPS | $3.1 million, or $1.15 diluted EPS |
| Cash flow from operations | Not separately provided | $5.9 million, versus $3.1 million |
At January 31, 2017, cash and cash equivalents were $8.3 million, restricted cash was $1.4 million, and working capital was $31.8 million. The current ratio was 2.6-to-1. Total bank borrowings were $8.1 million, including $4.5 million outstanding under the revolving credit facility. The company had $11.3 million available under its $20 million revolving facility and $4.2 million of standby letters of credit outstanding.
Capital expenditures were $2.2 million during the nine-month period. Cash dividends paid were $1.2 million, and the company paid $0.43 per share in dividends during the period. Stockholders’ equity attributable to Kewaunee was $40.3 million at January 31, 2017.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 6.3%, primarily because International Operations did not repeat a large prior-year order. Domestic sales were essentially unchanged, while International sales declined 27.6%.
- Nine-month sales increased 10.0%; Domestic sales rose 9.4% and International sales rose 12.4%.
- Third-quarter gross margin decreased to 16.6% from 16.9%, reflecting lower volume and unfavorable overhead absorption. Nine-month gross margin improved to 18.5% from 17.8%, primarily due to operating leverage from higher first-half production volumes.
- Third-quarter operating expenses increased to $4.6 million from $4.4 million, causing operating earnings to decline 58%. Nine-month operating expenses increased to $14.5 million, although they remained 13.9% of sales.
- Nine-month net earnings attributable to Kewaunee increased 27% to $3.1 million, while third-quarter net earnings declined 59% to $0.3 million.
- Operating cash flow improved by $2.7 million year over year, supported principally by earnings and a $2.1 million decrease in receivables.
- Order backlog increased to $106.9 million at January 31, 2017, versus $101.1 million at October 31, 2016 and $95.2 million at January 31, 2016.
Guidance, Outlook, Risks, and Unusual Items
Management stated that it was optimistic that sales and earnings improvement would continue through the balance of fiscal 2017, citing the strong order backlog and marketplace opportunities. No specific quantitative revenue or earnings guidance was provided.
- Demand is difficult to predict because the company operates as a subcontractor or supplier to dealers and subcontractors and depends on laboratory construction activity and project schedules.
- Fixed-price quotations expose the company to increases in labor and raw-material costs, including stainless steel, wood, and epoxy resin, unless price increases can be passed to customers.
- International operations expose results to foreign-currency fluctuations and other international risks.
- Results may fluctuate by quarter due to customer delivery schedules, project timing, economic conditions, competition, and changes in customer demand.
- The company contributed $555,000 to defined-benefit pension plans during the first nine months and did not expect additional contributions during the remainder of the fiscal year.
- The company adopted the debt issuance cost presentation standard effective May 1, 2016 without a significant financial statement impact. Revenue recognition guidance under Topic 606 was expected to be adopted in fiscal 2019; the effect had not yet been determined.
- Management concluded that disclosure controls were adequate and effective as of January 31, 2017, with no significant change in internal control over financial reporting during the quarter.
Investor Verification Items
- Verify whether backlog conversion and the strong nine-month sales trend support management’s expectation for continued fiscal 2017 improvement.
- Monitor International Operations for recovery after the nonrecurring prior-year order and assess foreign-currency effects.
- Evaluate whether gross-margin pressure from lower volume and overhead absorption persists.
- Review exposure to raw-material and labor-cost inflation under fixed-price contracts.
- Reconcile liquidity and borrowing availability, including the $4.2 million of standby letters of credit and revolving-credit covenants.
- Assess pension obligations, future funding requirements, and the effect of pension expense on operating results.
- Confirm the eventual impact and implementation approach for the adoption of Topic 606 revenue recognition guidance.