Kewaunee Scientific Corporation: Form 10-Q Summary
Business context and reporting period
Kewaunee Scientific Corporation supplies products to dealers and subcontractors involved in laboratory construction. This Form 10-Q covers the three and six months ended October 31, 2012, the second quarter and first six months of fiscal 2013. The interim financial statements are unaudited and were reviewed, but not audited, by the independent registered public accounting firm.
Key financial metrics
| Metric | Three months ended October 31, 2012 | Three months ended October 31, 2011 | Six months ended October 31, 2012 | Six months ended October 31, 2011 |
|---|---|---|---|---|
| Net sales | $31.185 million | $25.962 million | $57.868 million | $52.283 million |
| Gross profit | $5.227 million | $3.845 million | $10.470 million | $8.033 million |
| Gross margin | 16.8% | 14.8% | 18.1% | 15.4% |
| Operating earnings (loss) | $1.214 million | ($0.160) million | $2.319 million | $0.073 million |
| Net earnings (loss) attributable to Kewaunee | $0.649 million | ($0.125) million | $1.283 million | ($0.103) million |
| Diluted earnings (loss) per share | $0.25 | ($0.05) | $0.50 | ($0.04) |
| Operating cash flow | Not separately reported | Not separately reported | $2.254 million | $1.926 million |
Operating expenses were $4.013 million, or 12.9% of sales, in the quarter and $8.151 million, or 14.1% of sales, for the six months. Interest expense was $101,000 and $215,000, respectively. Effective tax rates were 33.9% for the quarter and 34.4% for the six-month period.
At October 31, 2012, cash and cash equivalents were $5.878 million, restricted cash was $639,000, and working capital was approximately $24.2 million. The current ratio was 2.1-to-1.0. Short-term borrowings were $5.694 million, current long-term debt was $200,000, and long-term debt was $3.367 million. Total bank borrowings and capital lease obligations were $9.261 million.
Six-month investing cash use was $664,000, including $729,000 of capital expenditures. Financing activities used $1.847 million, including $1.122 million of short-term debt repayment, $517,000 of dividends to stockholders, and $139,000 of dividends to minority interest holders. Cash declined by $310,000 during the six months to $5.878 million.
Material changes versus the prior comparable period
- Quarterly sales increased 20%, while six-month sales increased 11%.
- Domestic quarterly sales rose to $25.683 million from $23.826 million; international sales rose to $5.502 million from $2.136 million. For six months, domestic sales increased to $48.312 million and international sales increased to $9.556 million.
- Management attributed sales growth to a strengthened dealer network, large direct contracts, the order backlog, and several large international projects.
- Gross margin expanded by 200 basis points for the quarter and 270 basis points for the six-month period, primarily due to favorable product mix and lower manufacturing and overhead costs.
- The company returned to profitability. Quarterly net earnings attributable to Kewaunee improved from a $125,000 loss to $649,000 of earnings; six-month results improved from a $103,000 loss to $1.283 million of earnings.
- The order backlog was $90.8 million at October 31, 2012, compared with $86.2 million at April 30, 2012 and $78.0 million at October 31, 2011.
- Cash provided by operations increased to $2.254 million from $1.926 million, although receivables and inventories increased by $1.647 million and $664,000, respectively.
- Short-term borrowings declined by $1.122 million from April 30, 2012, while accounts payable increased by $2.378 million from that date.
- Pension contributions were $1.0 million in the first six months, compared with $402,000 in the prior-year period. Pension expense increased by $109,000 for the quarter and $221,000 for the six months.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide specific numerical earnings or revenue guidance. It stated that demand is difficult to predict because the company operates as a subcontractor or supplier to dealers and subcontractors, and depends on laboratory construction activity and project timing.
- Raw-material costs, including stainless steel, wood, and epoxy resin, could pressure earnings. Firm-price quotations may expose the company to labor and material cost increases before delivery.
- The timing and strength of the global economic recovery remain uncertain and could affect demand and competitive conditions.
- Other forward-looking risks include economic, competitive, governmental, technological, customer design or delivery-date changes, and energy prices.
- The company believes operating cash flow and its revolving credit facility will be sufficient to support current-year requirements, including capital expenditures.
- Defined benefit pension plans are frozen to additional benefit accruals and participant additions. Management did not expect further pension contributions during the remainder of the fiscal year.
- The filing states there were no material changes in market-risk disclosures from the 2012 Form 10-K.
- Management concluded that disclosure controls and procedures were adequate and effective as of October 31, 2012, with no significant change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $90.8 million backlog converts into revenue on the expected schedule and at the reported margin levels.
- Whether international project activity remains elevated after the shipment of several large projects.
- Trends in raw-material, labor, and overhead costs and the company’s ability to recover increases through pricing.
- Receivables, inventory, and accounts-payable movements, including their effect on operating cash flow and borrowing needs.
- Availability, terms, and covenant compliance of the revolving credit facility and other debt.
- Future pension funding requirements and the impact of pension expense on operating results.
- The sustainability of the improved gross margins and profitability, given the company’s limited ability to forecast construction demand.
- The effect of noncontrolling interests, foreign currency movements, and project timing on earnings attributable to Kewaunee stockholders.