Kewaunee Scientific Corporation — Form 10-Q Summary
Business context and reporting period
Kewaunee Scientific Corporation manufactures laboratory products and supplies laboratory construction projects through domestic and international dealer networks. This unaudited Form 10-Q covers the three months ended July 31, 2012, compared with the three months ended July 31, 2011. The filing was signed September 14, 2012.
Key financial metrics
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales | $26.683 million | $26.321 million |
| Gross profit | $5.243 million | $4.188 million |
| Gross margin | 19.6% | 15.9% |
| Operating earnings | $1.105 million | $0.233 million |
| Earnings before income taxes | $1.059 million | $0.137 million |
| Net earnings attributable to Kewaunee | $0.634 million | $0.022 million |
| Diluted earnings per share | $0.25 | $0.01 |
| Cash flow from operating activities | $2.730 million | $(0.887) million |
| Capital expenditures | $0.434 million | $0.304 million |
Operating expenses increased to $4.138 million from $3.955 million, primarily because of a $112,000 increase related to the frozen pension plans. Interest expense increased to $114,000 from $95,000. Income tax expense was $371,000, versus $29,000, and the effective tax rate increased to 35.0% from 21.2%.
Cash and cash equivalents were $7.720 million at July 31, 2012, compared with $6.188 million at April 30, 2012. Working capital was $24.037 million, and the current ratio was 2.2-to-1.0. Borrowings under the $15.0 million revolving credit facility totaled $6.501 million, compared with $6.816 million at April 30, 2012. Long-term debt was $3.417 million, excluding current maturities of $0.200 million.
Total assets were $65.190 million and total liabilities were $33.223 million at July 31, 2012. The company paid $258,000 in dividends during the quarter. Defined-benefit pension contributions were zero during the quarter; management expected approximately $1.0 million of contributions during fiscal 2013.
Material changes versus the prior comparable period
- Sales increased 1.4% overall. Domestic sales declined to $22.629 million from $23.396 million, while international sales increased to $4.054 million from $2.925 million.
- Management attributed the domestic sales decline to a strategy of selling more laboratory projects through an expanded dealer network. This increased manufactured-product sales but reduced project-management, installation, and other service revenue.
- Gross profit increased 25.2%, and gross margin expanded 370 basis points, primarily due to a more favorable product mix.
- Operating earnings increased substantially to $1.105 million from $0.233 million, while net earnings attributable to Kewaunee increased to $0.634 million from $0.022 million.
- Operating cash flow improved by $3.617 million, changing from an $887,000 use of cash to $2.730 million provided. Key contributors included a $677,000 decrease in receivables and a $768,000 increase in accounts payable and accrued expenses.
- Order backlog was $86.7 million at July 31, 2012, compared with $86.2 million at April 30, 2012 and $69.7 million at July 31, 2011.
Guidance, outlook, risks, and unusual items
The company did not provide specific quantitative earnings or revenue guidance. Management stated that it believes operating cash generation and available revolving-credit capacity will be sufficient for ongoing requirements, including capital expenditures, through the current fiscal year.
Demand is difficult to predict because Kewaunee often acts as a subcontractor or supplier to dealers and subcontractors. Demand depends on planned laboratory construction projects and the progress of projects already under construction. Key risks include raw-material cost increases, particularly for stainless steel, wood, and epoxy resin; the inability to pass those increases through to customers; firm-price quotations that expose the company to labor and material cost inflation; uncertain global economic recovery; customer changes to designs or delivery dates; competitive and governmental factors; and market, product, service, and energy-price changes.
The filing reported no material change in market-risk disclosures from the prior Form 10-K. Management stated that disclosure controls and procedures were adequate and effective as of July 31, 2012, with no significant change in internal control over financial reporting. The independent registered public accounting firm performed a review of the interim financial statements and reported no material modifications were necessary; the review was not an audit.
Important facts for investors to verify
- Whether the dealer-network strategy continues to improve product mix and gross margin while reducing lower-margin project services.
- Conversion of the $86.7 million backlog into revenue, including timing, cancellation risk, and expected margins.
- Availability and covenant terms of the revolving credit facility, including the August 3, 2012 loan-agreement amendment.
- Required fiscal 2013 pension contributions and the impact of frozen-plan expense on future earnings and cash flow.
- Exposure to raw-material and labor-cost inflation under firm-price contracts.
- The sustainability of the improved operating cash flow, given the contribution from working-capital movements in the quarter.