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, 2016, Kewaunee Scientific Corporation’s fiscal third quarter and first nine months of fiscal 2016. The company supplies laboratory furniture and casework through domestic and international operations. The interim financial statements are unaudited and were reviewed, but not audited, by Cherry Bekaert LLP.
Key financial metrics
| Metric | Three months ended January 31, 2016 | Three months ended January 31, 2015 | Nine months ended January 31, 2016 | Nine months ended January 31, 2015 |
|---|---|---|---|---|
| Net sales | $32.410 million | $27.754 million | $94.536 million | $88.546 million |
| Gross profit | $5.488 million | $4.456 million | $16.863 million | $16.426 million |
| Gross margin | 16.9% | 16.1% | 17.8% | 18.6% |
| Operating earnings | $1.047 million | $0.584 million | $3.700 million | $4.256 million |
| Net earnings attributable to Kewaunee | $0.830 million | $0.484 million | $2.465 million | $2.920 million |
| Diluted EPS | $0.31 | $0.18 | $0.92 | $1.10 |
| Cash provided by operating activities | Not provided for the quarter | Not provided for the quarter | $3.136 million | $6.339 million |
At January 31, 2016, cash and cash equivalents were $3.709 million, restricted cash was $1.444 million, and working capital was $29.541 million. Current assets exceeded current liabilities by approximately 2.3 times. Total bank borrowings were $9.414 million, including $4.808 million outstanding under the revolving credit facility. Of the company’s $20 million revolving facility, $11.0 million was available; standby letters of credit totaled $4.210 million.
For the nine months, capital expenditures were $1.708 million, dividends paid to common stockholders were $1.012 million, and the company made its final $0.888 million payment toward acquiring the noncontrolling interest in a foreign subsidiary. Ending stockholders’ equity attributable to Kewaunee was $36.510 million.
Material changes versus the prior comparable period
- Third-quarter sales increased 17%, primarily because of stronger-than-typical domestic laboratory furniture and casework opportunities. Nine-month sales increased 7%.
- Domestic sales increased to $25.423 million in the quarter and $76.017 million for nine months. International sales declined to $6.987 million and $18.519 million, respectively, partly because a large prior-year international order did not recur.
- Third-quarter gross margin improved to 16.9% from 16.1% because of favorable product mix. Nine-month gross margin declined to 17.8% from 18.6%.
- Third-quarter operating expenses included $154,000 of nonrecurring costs related to the retirement and replacement of a key executive, $247,000 of additional incentive compensation, and $94,000 of higher pension expense. Nine-month operating expenses included $678,000 of nonrecurring executive-transition costs and $202,000 of higher pension expense.
- Quarterly net earnings attributable to Kewaunee increased 72%, while nine-month net earnings declined 16% because operating expenses rose faster than sales for the year-to-date period.
- Operating cash flow declined to $3.136 million from $6.339 million, primarily reflecting a $3.409 million inventory increase and less favorable working-capital contributions than in the prior year.
- Cash and cash equivalents increased by $0.665 million during the nine months, compared with a $2.385 million decrease in the prior-year period. Restricted cash declined by $0.832 million.
Guidance, outlook, risks, contingencies, and unusual items
Management expects fiscal 2016 to be profitable but does not provide specific revenue or earnings guidance. Backlog was $95.2 million at January 31, 2016, up from $92.4 million at October 31, 2015 and $78.0 million at January 31, 2015.
Management states that demand is difficult to predict because the company frequently acts as a subcontractor or supplier to dealers and subcontractors. Results depend on laboratory construction activity, customer delivery schedules, project pricing, raw-material costs, and the company’s ability to pass cost increases through to customers under typically firm project quotations.
- Key risks include competitive and general economic conditions, changes in customer demand, quarter-to-quarter operating volatility, international operations and foreign-currency fluctuations, regulatory changes, raw-material and commodity costs, and force majeure events.
- Effective January 1, 2016, the company moved from a fully insured health-care program to a self-insured program, supported by specific stop-loss insurance. Estimated claims are accrued using actuarial assumptions.
- The company has frozen defined-benefit pension plans. It contributed $64,000 during the first nine months of fiscal 2016 and did not expect additional contributions during the remainder of the fiscal year.
- The filing identifies commitments and contingencies on the balance sheet, but the provided text does not give a separate quantified description beyond the disclosed debt, lease, pension, and letter-of-credit information.
- Management reported that disclosure controls were effective as of January 31, 2016 and that no significant change in internal control over financial reporting occurred during the quarter.
Most important facts for investors to verify
- Whether the $95.2 million backlog converts into revenue on the expected timing and at expected margins.
- Whether the year-to-date gross-margin decline and higher operating expenses are temporary or indicate sustained profitability pressure.
- The effect of the $678,000 executive-transition costs, higher pension expense, and the new self-insured health-care program on future expenses.
- Inventory growth, operating cash-flow conversion, and continued reliance on the revolving credit facility.
- Exposure to international sales, foreign-currency movements, raw-material costs, and fixed-price project commitments.
- The assumptions and limitations underlying management’s expectation that fiscal 2016 will be profitable; the filing does not provide a more specific earnings forecast.