Kewaunee Scientific Corporation — Form 10-Q Summary
Business context and reporting period
This filing reports the fiscal third quarter and nine months ended January 31, 2015, with comparisons to the corresponding periods ended January 31, 2014. Kewaunee manufactures laboratory, technical, and healthcare-related products through domestic and international operations. The interim financial statements are unaudited and were reviewed by Cherry Bekaert LLP.
Financial results and key metrics
| Metric | Three months ended Jan. 31, 2015 | Three months ended Jan. 31, 2014 | Nine months ended Jan. 31, 2015 | Nine months ended Jan. 31, 2014 |
|---|---|---|---|---|
| Net sales | $27.754 million | $26.013 million | $88.546 million | $84.114 million |
| Gross profit | $4.456 million | $4.711 million | $16.426 million | $16.180 million |
| Gross margin | 16.1% | 18.1% | 18.6% | 19.2% |
| Operating earnings | $0.584 million | $0.938 million | $4.256 million | $4.504 million |
| Net earnings attributable to Kewaunee | $0.484 million | $0.604 million | $2.920 million | $2.916 million |
| Diluted EPS | $0.18 | $0.22 | $1.10 | $1.11 |
Third-quarter sales increased 7%, while nine-month sales increased 5%. Domestic sales declined to $20.025 million in the quarter and $67.902 million for the nine-month period. International sales increased to $7.729 million in the quarter and $20.644 million for the nine-month period, benefiting from shipments of several large orders secured in earlier periods.
Operating expenses were $3.872 million, or 14.0% of sales, in the quarter and $12.170 million, or 13.7% of sales, for the nine-month period. The third-quarter effective tax rate was 17.4%, compared with 31.8% in the prior-year quarter, primarily reflecting the reinstated federal research and development tax credit. The nine-month effective tax rate was 31.2%, compared with 33.5%.
Cash provided by operating activities was $6.339 million for the nine months, down from $7.232 million in the prior-year period. Investing activities used $4.291 million, including $2.135 million of capital expenditures and a $2.156 million increase in restricted cash. Financing activities used $4.242 million, including debt repayments, dividends, and an $0.888 million payment related to the purchase of a subsidiary’s noncontrolling interest.
At January 31, 2015, cash and cash equivalents were $3.863 million, compared with $6.248 million at April 30, 2014. Restricted cash was $2.524 million, primarily supporting bank guarantees for a large international project. Working capital was $27.352 million, and the current ratio was 2.5-to-1.0.
Total bank borrowings were $5.333 million, compared with $7.763 million at April 30, 2014. Revolving credit-facility advances were $0.272 million, with $15.5 million available under the $20 million facility. Standby letters of credit totaled $4.210 million. Long-term debt was $3.876 million, excluding the current portion of $0.421 million.
Material changes versus the prior comparable period
- Sales growth was driven by international operations, while domestic sales continued to weaken because of challenging laboratory construction conditions, particularly educational projects.
- Third-quarter gross margin fell 200 basis points to 16.1%, primarily because of competitive domestic pricing and unfavorable product mix. Nine-month margin declined 60 basis points.
- Third-quarter operating earnings declined 38%, and net earnings attributable to Kewaunee declined 20%. Nine-month attributable earnings were broadly unchanged despite lower operating earnings, aided by lower tax expense and interest expense.
- International external sales increased 73% in the quarter and 54% year to date; domestic external sales decreased 7% in the quarter and 4% year to date.
- Order backlog was $78.0 million at January 31, 2015, down from $84.5 million at October 31, 2014 but up from $69.8 million at January 31, 2014.
- Cash declined by $2.385 million year to date, primarily due to capital expenditures, increased restricted cash, dividends, debt repayment, and the noncontrolling-interest purchase payment.
- Accounts payable and accrued expenses increased by $4.022 million, primarily because of the start-up of a large international project.
Guidance, outlook, risks, and unusual items
Management expects fourth-quarter sales and earnings to improve compared with the third quarter, but provides no specific numerical guidance. Management states that 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 project schedules.
Key risks include competitive pricing, raw-material costs for stainless steel, wood, and epoxy resin, the inability to pass cost increases through to customers under firm-price contracts, foreign-currency fluctuations, international execution, global economic conditions, changes in customer demand, legal and regulatory developments, and force majeure events.
The Company contributed $0.775 million to its defined-benefit pension plans during the first nine months and does not expect additional contributions during the remainder of the fiscal year. Restricted cash increased by $2.156 million to support bank guarantees for an international project. The filing states that disclosure controls were adequate and effective, with no significant change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $78.0 million backlog converts to revenue as expected and whether the large international project remains on schedule and within cost expectations.
- Whether domestic market weakness, competitive pricing, and unfavorable product mix continue to pressure gross margins.
- The availability and covenant requirements of the $20 million revolving credit facility, including the effect of $4.210 million of standby letters of credit.
- Cash requirements associated with restricted cash, capital expenditures, dividends, debt service, pension obligations, and remaining noncontrolling-interest purchase payments.
- The sustainability of the lower effective tax rate, including the impact of the reinstated R&D tax credit.
- Foreign-currency exposure and operating risks associated with the Company’s international operations.