Kewaunee Scientific Corporation — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three months ended July 31, 2014, compared with July 31, 2013. Kewaunee manufactures laboratory, healthcare, technical and educational furnishings, with domestic and international operations. The filing was reviewed, but not audited, by Cherry Bekaert LLP.
Financial Performance and Key Metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $30.534 million | $32.003 million | Down 4.6% |
| Gross profit | $6.148 million | $6.576 million | Down 6.5% |
| Gross margin | 20.1% | 20.5% | Down 0.4 percentage points |
| Operating earnings | $1.800 million | $2.432 million | Down 26.0% |
| Earnings before taxes | $1.845 million | $2.424 million | Down 23.9% |
| Net earnings attributable to Kewaunee | $1.234 million | $1.587 million | Down 22.2% |
| Diluted earnings per share | $0.47 | $0.61 | Down $0.14 |
| Cash flow from operations | $(0.195) million | $1.805 million | Declined $2.000 million |
- Domestic sales were $24.248 million, down from $27.073 million; international sales were $6.286 million, up from $4.930 million.
- Operating expenses increased to $4.348 million, or 14.2% of sales, from $4.144 million, or 12.9% of sales.
- Effective income tax rate declined to 31.7% from 33.3%.
- Backlog was $82.7 million at July 31, 2014, compared with $89.0 million at April 30, 2014 and $71.1 million at July 31, 2013.
- Working capital was $27.453 million, and the current ratio was 2.4-to-1.0.
- Cash and cash equivalents were $4.368 million, compared with $6.248 million at April 30, 2014. Restricted cash increased to $2.336 million from $0.368 million.
- Total bank borrowings increased to $9.722 million from $7.763 million. Revolving-credit-facility availability was $11.6 million under the $20 million facility.
- Capital expenditures were $0.541 million. The company paid $0.888 million toward the purchase of a noncontrolling interest, paid $0.288 million in dividends, and increased short-term borrowings by $2.064 million.
- Total stockholders’ equity increased to $34.986 million from $33.959 million at April 30, 2014.
Material Changes Versus the Prior Comparable Period
- Sales decreased primarily because the domestic laboratory-construction market remained challenging, particularly for projects requiring summer delivery.
- Lower sales reduced factory overhead absorption and contributed to the decline in gross margin.
- Sales and marketing expenses increased by $0.348 million, and international operating expenses increased by $0.196 million; corporate and administrative salaries and incentive compensation decreased by $0.273 million.
- Operating cash flow became negative, largely because receivables increased by $2.262 million and inventories increased by $0.275 million.
- Investing cash use increased to $2.509 million, mainly because $1.968 million of additional restricted cash was pledged by international subsidiaries to support customer-contract bank guarantees.
- Financing cash flow improved to $0.783 million provided, versus $2.383 million used in the prior-year quarter, principally because of increased short-term borrowings.
Guidance, Outlook, Risks, and Unusual Items
- Management expects fiscal 2015 to be profitable but states that demand is difficult to predict because the company is often a subcontractor or supplier to dealers and subcontractors.
- Key risks include project timing and delivery schedules, customer demand, pricing competition, raw-material and labor-cost inflation, firm-price quotations, international operations and foreign-currency fluctuations, general economic conditions, regulatory changes, and force majeure events.
- Management states that funds generated from operations, supplemented by the revolving credit facility, are expected to support ongoing requirements and capital expenditures.
- The company had no pension-plan contributions during the quarter and does not expect contributions during fiscal 2015.
- Management concluded that disclosure controls and procedures were adequate and effective as of July 31, 2014, with no significant change in internal control over financial reporting during the quarter.
- The filing reports no material change in market-risk disclosures from the 2014 Form 10-K.
Investor Verification Items
- Verify whether domestic-market weakness and the decline in backlog persist in subsequent quarters.
- Monitor receivables, restricted cash, operating cash flow and reliance on short-term borrowings.
- Review the terms and covenants of the amended $20 million revolving credit facility.
- Assess whether gross-margin pressure from lower factory utilization and raw-material costs continues.
- Evaluate international sales growth alongside currency, customer-guarantee and execution risks.
- Confirm the timing and remaining obligations associated with the purchase of the noncontrolling interest.
- Reconcile the fiscal 2015 profitability outlook with quarterly earnings volatility and the company’s stated demand uncertainty.