Kewaunee Scientific Corporation — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended October 31, 2011, representing the second quarter and first six months of fiscal 2012. Kewaunee supplies laboratory products and projects through domestic and international operations. The interim financial statements are unaudited; the independent accounting firm performed a review and reported no material modifications.
Financial Results and Position
| Metric | Three Months Ended October 31, 2011 | Six Months Ended October 31, 2011 |
|---|---|---|
| Net sales | $26.0 million | $52.3 million |
| Gross profit | $3.8 million | $8.0 million |
| Gross margin | 14.8% | 15.4% |
| Operating earnings (loss) | $(0.2) million | $0.1 million |
| Net earnings (loss) attributable to Kewaunee | $(0.1) million | $(0.1) million |
| Diluted earnings (loss) per share | $(0.05) | $(0.04) |
- Operating expenses were $4.0 million for the quarter and $8.0 million year to date, broadly flat in dollars versus the prior-year periods.
- Interest expense increased to $128,000 for the quarter and $223,000 year to date, primarily due to debt used to expand the Statesville facilities.
- Cash provided by operating activities was $1.9 million year to date, compared with $0.5 million in the prior-year period.
- Investing activities used $1.1 million, including $751,000 of capital expenditures. Financing activities provided $82,000.
- Cash and cash equivalents were $3.2 million at October 31, 2011, compared with $2.4 million at April 30, 2011. Restricted cash was $876,000.
- Working capital was $21.5 million, and the current ratio was 2.2-to-1.0.
- Short-term borrowings were $7.3 million, while long-term debt was $3.6 million and total bank borrowings and capital lease obligations were $11.2 million.
- Total assets were $60.1 million and total equity was $32.2 million at October 31, 2011.
Material Changes Versus Prior Comparable Period
- Quarterly sales increased 1.3% and year-to-date sales increased 3.6%, driven by stronger domestic sales. International sales declined because construction delays affected projects in the backlog.
- Gross margin fell from 21.1% to 14.8% for the quarter and from 20.6% to 15.4% year to date. Management attributed the decline to highly competitive pricing and higher steel and epoxy resin costs.
- The company moved from quarterly net earnings of $855,000 to a net loss attributable to Kewaunee of $125,000; year-to-date results declined from earnings of $1.5 million to a loss of $103,000.
- The order backlog increased to $78.0 million at October 31, 2011, from $65.7 million at April 30, 2011 and $66.0 million at October 31, 2010.
- Operating cash flow improved, primarily because receivables decreased by $3.9 million. Capital spending was substantially below the prior-year period, which included significant Statesville facility expansion expenditures.
- Short-term borrowings increased by approximately $738,000 from April 30, 2011, while total bank borrowings and capital lease obligations increased by approximately $598,000.
- Comprehensive loss was $443,000 for the quarter and $432,000 year to date, reflecting foreign-currency translation losses and cash-flow hedge valuation changes.
Guidance, Outlook, Risks, and Unusual Items
Management expected fiscal 2012 sales and earnings to improve modestly over fiscal 2011, supported by scheduled international backlog shipments, cost-saving initiatives, a strengthened dealer network, and new product lines. The filing provides no specific quantitative revenue or earnings guidance.
Demand is difficult to predict because the company serves as a subcontractor or supplier and depends on laboratory construction activity. Customer design and delivery-date changes may delay production and revenue recognition and increase manufacturing costs. Principal risks include economic and competitive conditions, raw-material and energy prices, customer project changes, and foreign-currency effects.
The company stated that operating cash generation, its revolving credit facility, and leasing arrangements should be sufficient for ongoing requirements and planned capital expenditures through the fiscal year. Defined-benefit pension plans were frozen; the company contributed $402,000 during the first six months and expected no further contributions during the remainder of the fiscal year.
Management concluded that disclosure controls and procedures were adequate and effective as of October 31, 2011, with no material change in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify whether backlog converts into shipments and earnings as scheduled, particularly delayed international projects.
- Monitor gross-margin recovery and the effects of competitive pricing and steel and epoxy resin costs.
- Assess liquidity, revolving-credit availability, borrowing costs, and compliance with loan-agreement terms.
- Review cash conversion, receivable collections, and capital-expenditure requirements.
- Evaluate whether the expected modest fiscal 2012 improvement is supported by dealer expansion, cost savings, and new products.
- Review foreign-currency exposure, cash-flow hedge changes, pension obligations, and other commitments or contingencies.