Kewaunee Scientific Corporation — Form 10-Q Summary
Reporting period: Three and six months ended October 31, 2014, compared with the corresponding periods ended October 31, 2013. The company designs and supplies laboratory products and serves domestic and international laboratory construction markets. Financial statements are unaudited; the interim information was reviewed, not audited, by Cherry Bekaert LLP.
Financial performance
| Metric | Three months 2014 | Three months 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $30.258 million | $26.098 million | $60.792 million | $58.101 million |
| Gross profit | $5.822 million | $4.893 million | $11.970 million | $11.469 million |
| Gross margin | 19.2% | 18.7% | 19.7% | 19.7% |
| Operating earnings | $1.872 million | $1.134 million | $3.672 million | $3.566 million |
| Net earnings attributable to Kewaunee | $1.202 million | $0.725 million | $2.436 million | $2.312 million |
| Diluted earnings per share | $0.45 | $0.28 | $0.92 | $0.89 |
- Second-quarter sales increased 16%; six-month sales increased 5% year over year.
- Approximate net margin was 4.0% for the quarter and 4.0% for the six-month period, compared with 2.8% and 4.0%, respectively, in the prior-year periods.
- Operating expense was $3.950 million, or 13.1% of sales, in the quarter and $8.298 million, or 13.6% of sales, for six months.
- Interest expense increased to $102,000 for the quarter and $183,000 for six months, primarily because of higher borrowing levels.
- The effective tax rate was 35.2% for the quarter and 33.5% for six months.
Cash flow, liquidity, debt, and balance sheet
- Cash provided by operating activities was $6.762 million for the six months, versus $6.196 million in the prior-year period.
- Cash and cash equivalents were $4.863 million at October 31, 2014, compared with $6.248 million at April 30, 2014. Restricted cash increased to $2.869 million from $368,000.
- Investing activities used $4.127 million, including $1.626 million of capital expenditures and a $2.501 million increase in restricted cash.
- Financing activities used $3.916 million, including $2.209 million of short-term debt repayment, $888,000 paid toward the purchase of a subsidiary interest, $603,000 of dividends, and $210,000 of long-term debt repayment.
- Working capital was $27.887 million, with a current ratio of 2.6-to-1.0.
- Total bank borrowings were $5.102 million, down from $7.763 million at April 30, 2014. Revolver advances were $699,000, and $15.1 million remained available under the $20 million revolving credit facility.
- Standby letters of credit totaled $4.210 million. Total liabilities were $29.737 million, compared with total equity of $36.092 million.
Material changes and operating trends
- Domestic second-quarter sales rose to $23.629 million from $22.061 million, while international sales increased to $6.629 million from $4.037 million. For the six-month period, domestic sales declined to $47.877 million from $49.134 million, while international sales rose 44% to $12.915 million.
- The order backlog was $84.5 million at October 31, 2014, versus $82.7 million at July 31, 2014 and $69.5 million at October 31, 2013.
- Second-quarter gross margin improved because of cost-reduction activities, partly offset by unfavorable international product mix. Six-month gross margin was unchanged.
- Quarterly operating expenses reflected higher sales and marketing costs and incentive compensation, partly offset by lower pension and bad-debt expense.
- Accounts payable and accrued expenses increased by $3.931 million, primarily due to the start-up of a large international project.
- The company pledged cash to support bank guarantees for that project, producing the $2.501 million increase in restricted cash.
- The company paid no pension contributions during the first six months but expected to contribute $775,000 in December 2014 for fiscal 2015. Accrued pension and deferred compensation costs were $7.769 million.
Outlook, risks, and unusual items
- Management expects the second half of fiscal 2015 to be profitable, but did not provide specific revenue or earnings guidance.
- Demand is difficult to forecast because the company operates primarily as a subcontractor or supplier to dealers and subcontractors and depends on laboratory construction activity and project schedules.
- Key risks include project pricing pressure, raw-material inflation involving stainless steel, wood, and epoxy resin, labor and material cost increases under firm-price contracts, international operations and foreign-currency fluctuations, customer demand changes, economic conditions, and force majeure events.
- The filing states that liquidity sources, including operating cash flow and the revolving credit facility, are expected to support ongoing requirements and capital expenditures during the fiscal year.
- Management reported effective disclosure controls and procedures and no significant change in internal control over financial reporting.
Investor verification points
- Verify conversion of the $84.5 million backlog into revenue, margins, and cash flow, particularly for the large international project.
- Monitor restricted cash, bank guarantees, revolver availability, and future working-capital requirements.
- Assess whether international growth offsets domestic sales variability and foreign-currency exposure.
- Evaluate sensitivity to raw-material, labor, and project-cost inflation under firm-price contracts.
- Confirm the timing and funding of the expected $775,000 pension contribution and the remaining obligations related to the subsidiary interest purchase.
- Reconcile management’s expectation of second-half profitability with project timing, backlog execution, and quarterly operating volatility.