Kewaunee Scientific Corporation: Q1 Fiscal 2017 Form 10-Q Summary
Business context and reporting period
Form 10-Q for the three months ended July 31, 2016, compared with the three months ended July 31, 2015. Kewaunee supplies laboratory furniture and scientific equipment through domestic and international markets, primarily as a subcontractor or dealer supplier. The company is a smaller reporting company.
Key financial metrics
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $37.279 million | $31.089 million |
| Gross profit / margin | $7.139 million / 19.2% | $5.843 million / 18.8% |
| Operating earnings | $2.061 million | $1.524 million |
| Earnings before taxes | $2.100 million | $1.534 million |
| Net earnings attributable to Kewaunee | $1.300 million | $0.940 million |
| Diluted earnings per share | $0.48 | $0.35 |
| Operating cash flow | $(0.180) million | $1.521 million |
| Capital expenditures | $1.056 million | $0.472 million |
Net sales increased 19.9%. Domestic sales were $29.637 million, up from $24.315 million, while international sales were $7.642 million, up from $6.774 million. Management attributed the domestic increase to improved laboratory-furniture and scientific-equipment demand and the international increase partly to shipments of a large Middle East order.
Operating expenses were $5.078 million, or 13.6% of sales, versus $4.319 million, or 13.9%. The effective tax rate was 36.7%, compared with 37.2%. Interest expense declined to $80,000 from $92,000.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $6.711 million at July 31, 2016, versus $5.222 million at April 30, 2016.
- Working capital was $30.815 million, compared with $30.007 million; the current ratio was 2.2-to-1.0 versus 2.4-to-1.0.
- Short-term borrowings and interest-rate swaps were $6.958 million, compared with $3.818 million. Total bank borrowings and interest-rate swaps were $10.623 million, versus $7.588 million.
- Long-term debt was $3.244 million, plus a current portion of $421,000.
- Availability under the $20 million revolving credit facility was $9.1 million, compared with $12.2 million. Standby letters of credit totaled $4.210 million.
- Total assets were $78.408 million and total liabilities were $38.749 million at July 31, 2016.
Material changes versus the prior comparable period
- Gross profit increased $1.296 million, with margin improving 40 basis points, primarily from operating leverage on higher production volumes.
- Operating earnings increased $537,000, while operating expenses increased $759,000, driven principally by higher sales and marketing costs, wages, incentive compensation, health insurance, pension expense and professional services.
- Net earnings attributable to Kewaunee increased $360,000, or approximately 38%, and diluted EPS increased from $0.35 to $0.48.
- Operating cash flow declined from $1.521 million provided to $180,000 used, primarily because receivables increased $2.697 million and inventories increased $1.159 million.
- Financing activities provided $2.788 million, principally from a $3.140 million increase in short-term borrowings and interest-rate swaps. The prior-year period used $1.439 million, including an $888,000 payment to purchase a noncontrolling interest.
- Order backlog was $86.2 million at July 31, 2016, down from $100.5 million at April 30, 2016 and slightly below $86.7 million at July 31, 2015.
Outlook, risks and unusual items
Management stated that recent sales and earnings improvement is expected to be sustained during the balance of fiscal 2017, citing a strong backlog and marketplace opportunities. No quantitative earnings or revenue guidance was provided.
- Demand is difficult to predict because the company depends on laboratory construction projects, dealer schedules and subcontractor activity.
- Firm project pricing exposes the company to labor and raw-material cost increases, including stainless steel, wood and epoxy resin, without assurance that price increases can be passed to customers.
- Other disclosed risks include competition, general economic conditions, customer demand and delivery requirements, international operations and foreign-currency fluctuations, legal and regulatory changes, force majeure events and quarter-to-quarter volatility.
- The company expects to contribute $555,000 to its defined-benefit pension plans during fiscal 2017; no contributions were made in the quarter.
- The company early adopted the deferred-tax balance-sheet classification guidance and adopted the debt-issuance-cost presentation guidance effective May 1, 2016; neither adoption had a significant reported impact.
- Management concluded that disclosure controls were adequate and effective, with no significant changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the large Middle East order and broader domestic demand translate into sustained sales after the quarter.
- Whether backlog conversion, which declined from April, supports management’s fiscal 2017 outlook.
- Receivables and inventory levels, given the quarter’s negative operating cash flow.
- Revolving-credit availability and borrowing levels, including the impact of standby letters of credit and interest-rate swaps.
- Exposure to raw-material and labor inflation under fixed-price project commitments.
- The timing and funding of the expected $555,000 fiscal-year pension contribution.