Kewaunee Scientific Corporation 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended October 31, 2013, representing fiscal 2014 second quarter and year-to-date results. Kewaunee manufactures laboratory furniture and related products, serving domestic and international markets through dealer and project channels.
- Domestic sales are increasingly being placed through dealers that provide project management, installation, and related services.
- International operations are conducted primarily through Kewaunee Labway Asia and its Indian subsidiary.
- The company purchased the remaining 49% minority interest in Kewaunee Labway Asia on June 24, 2013, for $3.555 million.
Financial Results and Key Metrics
| ($ in thousands, except per-share data) | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Net sales | $26,098 | $31,185 | $58,101 | $57,868 |
| Gross profit | $4,893 | $5,227 | $11,469 | $10,470 |
| Gross margin | 18.7% | 16.8% | 19.7% | 18.1% |
| Operating earnings | $1,134 | $1,214 | $3,566 | $2,319 |
| Net earnings attributable to Kewaunee | $725 | $649 | $2,312 | $1,283 |
| Diluted EPS | $0.28 | $0.25 | $0.89 | $0.50 |
- Q2 sales declined 16%; six-month sales increased slightly by 0.4%.
- Q2 operating expenses were $3.759 million, or 14.4% of sales; six-month operating expenses were $7.903 million, or 13.6% of sales.
- Interest expense declined to $72,000 in Q2 and $160,000 year to date, primarily because of lower borrowing levels.
- Effective tax rates were 35.2% for Q2 and 33.9% year to date.
- Six-month operating cash flow was $6.196 million, compared with $2.254 million in the prior-year period.
- Capital expenditures were $1.188 million, resulting in net investing cash use of $1.100 million.
- Cash and cash equivalents were $5.284 million at October 31, 2013, compared with $5.811 million at April 30, 2013.
- Working capital was $25.047 million, and the current ratio was 2.5-to-1.0.
Material Changes Versus the Prior Comparable Period
- Q2 domestic sales decreased to $22.061 million from $25.683 million, partly reflecting the shift toward dealer-managed laboratory projects.
- Q2 international sales decreased to $4.037 million from $5.502 million because the prior-year quarter included shipments of several large projects.
- Six-month domestic sales rose to $49.134 million from $48.312 million, while international sales fell to $8.967 million from $9.556 million.
- Gross margins improved because of a more favorable product mix and lower manufacturing and overhead costs.
- Net earnings benefited from reduced earnings attributable to noncontrolling interests following the purchase of the minority interest.
- Receivables declined by $5.363 million during the six months, supporting operating cash flow; accounts payable and accrued expenses declined by $2.198 million.
- Total bank borrowings declined to $7.543 million from $10.464 million at April 30, 2013.
- The company replaced its prior financing with a new facility consisting of a $20 million revolving line and $5 million of term loans. Revolving borrowings were $2.475 million at October 31, 2013.
Guidance, Outlook, Risks, and Unusual Items
- Backlog was $69.5 million at October 31, 2013, down from $71.1 million at July 31, 2013 and $90.8 million at October 31, 2012.
- Management expects the domestic laboratory furniture market to remain challenging during the second half of fiscal 2014 because of economic uncertainty and softer demand.
- Management states that demand is difficult to predict because the company often supplies dealers or subcontractors and depends on laboratory construction activity and project timing.
- Key risks include raw-material cost inflation, fixed-price quotations, labor costs, foreign-currency fluctuations, international operations, customer delivery schedules, competition, regulatory changes, and general economic conditions.
- The new credit agreement contains debt-to-net-worth, fixed-charge-coverage, and asset-coverage covenants. The company reported compliance with all covenants at October 31, 2013.
- The defined-benefit pension plans are frozen. The company contributed $300,000 during the six months and did not expect additional contributions during the remainder of the fiscal year.
- The interim financial statements were reviewed, but not audited, by Cherry Bekaert LLP. The review report identified no material modifications required for conformity with U.S. GAAP.
Important Facts for Investors to Verify
- Whether domestic project demand and the order backlog stabilize or continue declining.
- Whether improved gross margins are sustainable as product mix, raw-material costs, and fixed-price contracts change.
- Progress on international sales and the effect of full ownership of Kewaunee Labway Asia.
- Compliance with credit-facility covenants and the company’s ability to manage variable-rate and long-term debt.
- Cash conversion, particularly whether receivable reductions and operating cash flow remain favorable.
- Future pension funding requirements, foreign-currency effects, and potential contingencies not quantified in the interim filing.