Kewaunee Scientific Corporation — FY2015 Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2015. The filing also provides unaudited fourth-quarter data for the quarter ended April 30, 2015; the request’s “2014 Q4” designation does not match the filing period.
Business Context
Kewaunee designs, manufactures, and installs laboratory, healthcare, and technical furniture. Products are sold through dealers, commissioned agents, a national distributor, subsidiaries in Singapore, India, and China, and competitive bids. Operations are reported in Americas and International segments.
- Order backlog was $90.1 million at April 30, 2015, versus $89.0 million a year earlier; more than 70% was expected to ship in fiscal 2016.
- Americas sales were $93.1 million; International sales were $25.7 million.
- The national stocking distributor represented approximately 12% of sales, while two Americas dealers represented approximately 24% in aggregate.
Financial Performance and Liquidity
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net sales | $118.8 million | $111.2 million | +7% |
| Gross profit | $21.8 million | $22.0 million | Down slightly |
| Gross margin | 18.3% | 19.8% | Down 150 bps |
| Operating earnings | $5.2 million | $6.0 million | Down 12% |
| Net earnings attributable to Kewaunee | $3.5 million | $3.9 million | Down 9% |
| Diluted EPS | $1.33 | $1.48 | Down 10% |
| Operating cash flow | $2.3 million | $8.1 million | Down $5.8 million |
| Capital expenditures | $2.6 million | $2.0 million | Up $0.5 million |
International sales increased 33%, primarily from shipments of several large prior-year orders. Americas sales increased 1%, driven by strong incoming orders in the fourth quarter. Gross margin declined primarily because of competitive pricing, especially on large higher-education projects. Operating expenses increased to $16.5 million, mainly from International growth.
At April 30, 2015, cash and cash equivalents were $3.0 million, restricted cash was $2.3 million, working capital was $27.7 million, and the current ratio was 2.3-to-1.0. Total borrowings were $9.1 million, including $4.6 million drawn under a $20 million revolving facility and $4.2 million of standby letters of credit. The company stated that $11.2 million remained available under the line of credit and that it was in compliance with financial covenants.
Cash declined by $3.2 million during the year, primarily because operating cash flow and financing sources did not cover capital expenditures, restricted-cash increases, dividends, debt repayment, and the noncontrolling-interest payment. The company paid $0.47 per share in dividends, compared with $0.44 in FY2014.
Fourth-Quarter Information
| Metric | Q4 FY2015 | Q4 FY2014 |
|---|---|---|
| Net sales | $30.3 million | $27.1 million |
| Gross profit | $5.3 million | $5.9 million |
| Net earnings | $0.6 million | $1.0 million |
| Net earnings attributable to Kewaunee | $0.6 million | $1.0 million |
| Diluted EPS | $0.23 | $0.37 |
Material Changes Versus the Prior Comparable Period
- Sales improved, but profitability weakened because gross margin compressed and operating expenses increased.
- International sales growth was strong, while Americas growth was modest.
- Operating cash generation fell sharply because receivables increased by $5.6 million and inventories increased by $0.8 million.
- Debt increased primarily through higher short-term borrowings, while long-term debt declined by $0.4 million.
- The pension deficit increased to $5.3 million from $3.6 million, and accumulated other comprehensive loss increased to $7.9 million from $6.3 million.
- The final $0.9 million installment for the purchase of the remaining interest in Kewaunee Labway Asia was paid in June 2015.
- On June 3, 2015, the revolving credit facility maturity was extended from May 1, 2016, to May 1, 2018.
Outlook, Risks, and Unusual Items
Management did not provide specific revenue or earnings guidance. It stated that demand is difficult to predict because the company often operates as a subcontractor or dealer supplier, and sales depend on laboratory construction activity, project timing, pricing, and raw-material costs. Fiscal 2016 capital expenditures were expected to be approximately $2.5 million, primarily for manufacturing equipment, funded mainly through operations and supplemented by borrowings as needed.
- Fixed-price contracts expose the company to labor, steel, wood, epoxy-resin, energy, and other cost increases before shipment.
- Construction delays, customer rescheduling, weather, and design changes can shift revenue between quarters.
- Competitive bidding and pricing pressure may reduce margins.
- Three major customers accounted for approximately 36% of FY2015 sales, creating customer-concentration risk.
- The company had $5.1 million of future operating-lease payments, $4.2 million of long-term debt obligations, and $0.9 million due for the noncontrolling-interest purchase as of April 30, 2015.
- The defined-benefit pension plans were underfunded by $5.3 million; expected FY2016 pension contributions were $60,000, compared with $775,000 contributed in FY2015.
- Management reported effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion on the consolidated financial statements.
Important Facts for Investors to Verify
- Whether backlog converts to shipments and cash as scheduled, particularly the portion expected in FY2016.
- Whether Americas pricing pressure continues to depress gross margin.
- Receivables, retainage, and inventory levels, given the significant decline in operating cash flow.
- Availability and covenant compliance under the amended revolving credit facility.
- Customer concentration and the financial condition of the national distributor and two major Americas dealers.
- The effect of pension funding requirements, actuarial assumptions, and future market returns.
- The impact, if any, of adopting the new revenue-recognition standard in fiscal 2019; the filing states that the effect had not yet been determined.