Kewaunee Scientific Corporation — Form 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the three and nine months ended January 31, 2013, Kewaunee’s fiscal 2013 third quarter and year-to-date period. The company supplies laboratory products and related systems through domestic and international dealer networks, primarily as a subcontractor or supplier to dealers and subcontractors. Results include Domestic Operations, International Operations, and Corporate activities.
Financial Performance and Position
| Metric | Three Months Ended Jan. 31, 2013 | Three Months Ended Jan. 31, 2012 | Nine Months Ended Jan. 31, 2013 | Nine Months Ended Jan. 31, 2012 |
|---|---|---|---|---|
| Net sales | $27.450 million | $21.574 million | $85.318 million | $73.857 million |
| Gross profit | $5.009 million | $3.771 million | $15.479 million | $11.804 million |
| Gross margin | 18.2% | 17.5% | 18.1% | 16.0% |
| Operating earnings (loss) | $0.955 million | $(0.219) million | $3.274 million | $(0.146) million |
| Net earnings attributable to Kewaunee | $0.544 million | $(0.122) million | $1.827 million | $(0.225) million |
| Diluted EPS | $0.21 | $(0.05) | $0.71 | $(0.09) |
- Sales increased 27% for the quarter and 16% year to date. Domestic sales increased to $20.445 million for the quarter and $68.757 million year to date; international sales increased to $7.005 million and $16.561 million, respectively.
- Operating expenses were $4.054 million, or 14.8% of quarterly sales, and $12.205 million, or 14.3% of year-to-date sales, versus 18.5% and 16.2% in the comparable periods.
- Net cash provided by operating activities was $5.328 million for the nine months ended January 31, 2013, compared with $4.309 million in the prior-year period. Capital expenditures were $1.538 million.
- Cash and cash equivalents were $4.202 million at January 31, 2013, compared with $6.188 million at April 30, 2012. Working capital was $24.286 million, and the current ratio was 2.5-to-1.0.
- Short-term borrowings were $2.707 million, compared with $6.816 million at April 30, 2012. Total bank borrowings and capital lease obligations were $6.224 million, compared with $10.519 million at April 30, 2012.
- Total assets were $60.623 million and total liabilities were $27.924 million at January 31, 2013. The company’s stockholders’ equity was $30.854 million, with $1.845 million of noncontrolling interest.
Material Changes Versus the Prior Comparable Period
- The company moved from an operating loss and net loss to operating and net profitability in both the quarter and first nine months.
- Improved gross margins reflected higher manufacturing volumes, a more favorable product mix, and lower manufacturing and overhead costs.
- Cost-reduction actions initiated in the second half of the prior year helped offset higher sales-related expenses and increased pension expense.
- Interest expense declined to $80,000 for the quarter and $295,000 year to date, primarily because of lower borrowing levels.
- Financing activities used $5.729 million year to date, including $4.109 million of short-term debt repayments, $784,000 of dividends to stockholders, and $744,000 of dividends to minority interest holders.
- The order backlog was $84.5 million at January 31, 2013, below $86.2 million at April 30, 2012 but above $77.1 million at January 31, 2012.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that it could not reliably predict future demand because the company depends on dealer and subcontractor activity and the timing of laboratory construction projects.
- Privately funded domestic projects remained relatively resilient, while publicly funded wood educational projects remained below pre-recession levels because of lower government capital-project funding.
- Management cited increased sales opportunities in Asian and Middle Eastern laboratory markets and benefits from strengthened domestic and international dealer networks.
- Key risks include raw-material costs, particularly stainless steel, wood, and epoxy resin; fixed-price quotations that expose the company to labor and material cost increases; economic and competitive conditions; customer design or delivery changes; and uncertainty regarding the global economic recovery.
- The company recorded $1.000 million of pension-plan contributions during the nine-month period and did not expect additional contributions during the remainder of the fiscal year. Year-to-date pension expense increased to $596,000 from $264,000.
- Income tax expense was $177,000 for the quarter and $962,000 year to date. Results benefited from international tax rates, state and federal credits, and the retroactive reinstatement of the federal research and development tax credit.
- The interim financial statements were reviewed, not audited, by Cherry Bekaert LLP. The reviewer reported that it was not aware of material modifications needed for conformity with U.S. GAAP.
Important Facts for Investors to Verify
- Whether the $84.5 million backlog converts to revenue at expected margins and on the expected schedule.
- Whether recent gross-margin improvement is sustainable after considering raw-material inflation, fixed-price contracts, product mix, and manufacturing volumes.
- The availability and terms of the revolving credit facility and the company’s ability to maintain liquidity after dividends, capital expenditures, and debt repayments.
- The future level of pension contributions and pension expense, including potential effects from plan asset performance and interest-rate changes.
- The sustainability of recent domestic and international demand, particularly publicly funded educational projects and Asian and Middle Eastern laboratory markets.
- The effect of tax credits and international tax rates on future effective tax rates; the filing does not provide a clear recurring normalized tax rate.
- Contingencies and commitments disclosed in the company’s full annual report, as the interim filing provides condensed disclosures.