Kewaunee Scientific Corporation: Q1 FY2016 Form 10-Q Summary
Business context and reporting period
This quarterly report covers the three months ended July 31, 2015, compared with the three months ended July 31, 2014. Kewaunee supplies laboratory furniture and scientific equipment through its Americas and International operations. The interim financial statements are unaudited and were reviewed, but not audited, by Cherry Bekaert LLP.
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $31.089 million | $30.534 million |
| Gross profit | $5.843 million | $6.148 million |
| Operating earnings | $1.524 million | $1.800 million |
| Net earnings attributable to Kewaunee | $0.940 million | $1.234 million |
| Diluted earnings per share | $0.35 | $0.47 |
| Operating cash flow | $1.521 million | $(0.195) million |
Financial performance and liquidity
- Sales increased 1.8% year over year to $31.089 million. Americas sales rose to $24.315 million from $24.248 million, while International sales increased to $6.774 million from $6.286 million, helped by shipments of several large orders.
- Gross margin declined to 18.8% from 20.1%, primarily because the quarter included shipments from older backlog orders bid at extremely competitive prices. Operating margin was approximately 4.9%, compared with 5.9%.
- Operating expenses decreased to $4.319 million from $4.348 million, reflecting lower Americas sales and marketing and incentive compensation costs, partly offset by higher international operating costs, pension expense, and employee separation costs.
- Net earnings attributable to Kewaunee decreased 23.8% to $0.940 million. The effective tax rate increased to 37.2% from 31.7%, primarily due to a greater proportion of earnings from jurisdictions with higher tax rates and favorable tax credits in the prior-year period.
- Cash and cash equivalents were $2.899 million at July 31, 2015, with restricted cash of $1.964 million. Working capital was $28.523 million and the current ratio was 2.4-to-1.0.
- Total bank borrowings and interest rate swaps were $8.987 million, compared with $9.147 million at April 30, 2015. The company had $4.292 million outstanding under its revolving credit facility, $426,000 of short-term foreign-bank debt, and $4.210 million of standby letters of credit. Availability under the $20 million revolving facility was $11.5 million.
- Operating activities generated $1.521 million of cash, compared with cash usage of $195,000 in the prior-year quarter. Capital expenditures were $472,000, and financing activities used $1.439 million, including dividends and the final $888,000 payment to purchase a noncontrolling interest.
Material changes versus the prior comparable period
- Revenue increased modestly, but gross profit fell $305,000 and operating earnings fell $276,000 because of lower project margins.
- Net earnings attributable to Kewaunee fell $294,000, and diluted EPS declined from $0.47 to $0.35.
- Cash flow from operations improved by $1.716 million, primarily due to a $989,000 decrease in receivables versus a $2.262 million increase in the prior-year period.
- Investing cash usage declined to $160,000 from $2.509 million, largely because the prior-year period included a $1.968 million increase in restricted cash.
- The order backlog was $86.7 million at July 31, 2015, down from $90.1 million at April 30, 2015 but up from $82.7 million at July 31, 2014.
Outlook, risks, contingencies, and unusual items
Management expects fiscal 2016 to be profitable but provides no specific revenue or earnings guidance. Demand is difficult to predict because the company is often a subcontractor or supplier to dealers and subcontractors and depends on laboratory construction activity and customer delivery schedules.
- Key risks include competitive and general economic conditions, project timing, quarter-to-quarter volatility, international operations and foreign currency fluctuations, raw-material and commodity costs, firm-price quotations, regulatory changes, force majeure events, and the ability to pass cost increases to customers.
- The company expects to contribute $60,000 to its defined-benefit pension plans during fiscal 2016. The plans are frozen to new benefits and participants; no contributions were made during the quarter.
- Reported unusual or nonrecurring items included the final $888,000 payment for a noncontrolling interest, $75,000 of dividends to noncontrolling-interest holders, and $55,000 of increased employee separation costs. The filing includes a July 15, 2015 separation agreement with D. Michael Parker.
- Management concluded that disclosure controls and procedures were adequate and effective as of July 31, 2015, with no significant change in internal control over financial reporting.
Important facts for investors to verify
- Whether gross margins recover after the remaining competitively priced backlog orders are completed.
- The conversion of the $86.7 million backlog into sales and cash, including the impact of project timing and pricing.
- Revolving-credit availability, standby letters of credit, interest-rate swaps, and compliance with the amended credit agreement.
- Exposure to raw-material costs, foreign currency movements, and international project execution.
- The assumptions supporting management’s expectation that fiscal 2016 will be profitable.
- The effects of the separation agreement, pension obligations, restricted cash, and remaining commitments and contingencies.