Kewaunee Scientific Corporation — Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2013. The source identifies this as an annual Form 10-K, not a calendar 2012 fourth-quarter filing. Fourth-quarter fiscal 2013 results are also disclosed.
Business Context
Kewaunee designs, manufactures, and installs laboratory, healthcare, and technical furniture. Products are sold primarily through dealers, commissioned agents, a national distributor, and competitive bids. Operations comprise Domestic Operations and International Operations, including manufacturing and distribution activities in India and Singapore.
- Fiscal 2013 backlog was $80.2 million, compared with $86.2 million at April 30, 2012; more than 80% was expected to ship during fiscal 2014.
- VWR International represented approximately 11% of fiscal 2013 sales.
- Fiscal 2013 sales were 80% domestic and 20% international, approximately.
Financial Highlights
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $117.1 million | $102.8 million | +13.9% |
| Gross profit | $22.3 million | $19.2 million | +16.2% |
| Gross margin | 19.0% | 18.6% | +40 basis points |
| Operating earnings | $5.3 million | $2.7 million | +94.5% |
| Earnings before taxes | $5.2 million | $2.5 million | +105.7% |
| Net earnings attributable to Kewaunee | $3.0 million | $1.0 million | +195.2% |
| Diluted EPS | $1.17 | $0.40 | +192.5% |
| Operating cash flow | $3.8 million | $6.9 million | Down $3.1 million |
| Capital expenditures | $2.4 million | $1.4 million | Up $1.0 million |
International sales increased 25% to $23.6 million, while domestic sales increased 11.4% to $93.5 million. Management attributed the sales increase to mid-sized and large domestic projects and several large international orders. Gross margin benefited from cost savings and product mix.
Operating expenses increased to $17.0 million from $16.4 million, primarily due to higher pension expense and performance-based compensation, partly offset by lower bad-debt and sales and marketing expenses. The effective tax rate was 29.5%, compared with 29.1% in fiscal 2012.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $5.8 million at April 30, 2013, compared with $6.2 million a year earlier; restricted cash was $0.7 million.
- Working capital was $25.1 million, with a current ratio of 2.1-to-1.0.
- Total borrowings were approximately $10.5 million, including $6.7 million drawn under the revolving credit facility and $3.5 million of term debt.
- The existing $15 million unsecured revolving facility matured July 31, 2014 and had $2.1 million of standby letters of credit and bank guarantees outstanding.
- The Statesville real property and equipment secured the term loan. The company complied with its credit-facility financial covenants.
- Operating lease commitments totaled $7.3 million, and total contractual cash obligations were $10.8 million.
- The pension plan was underfunded by $5.3 million; the company contributed $1.0 million in fiscal 2013 and expected to contribute approximately $0.4 million in fiscal 2014.
Material Changes Versus the Prior Period
- Revenue growth accelerated, led by both domestic and international operations.
- Gross margin improved from 18.6% to 19.0%, reversing the prior-year pressure from competition and higher steel and epoxy resin costs.
- Operating earnings nearly doubled, while diluted EPS increased from $0.40 to $1.17.
- Operating cash flow declined despite higher earnings because receivables and inventories increased; accounts receivable rose to $25.9 million and inventories to $13.2 million.
- Backlog declined $6.0 million year over year, although it remained above the April 30, 2011 level.
- Fiscal fourth-quarter sales were $31.8 million, gross profit was $6.8 million, and net earnings attributable to Kewaunee were $1.2 million, or $0.46 diluted EPS, compared with $29.0 million, $7.4 million, $1.3 million, and $0.49, respectively, in the prior-year quarter.
Outlook, Risks, and Unusual Items
Management stated that demand visibility is limited because the company often acts as a subcontractor or supplier to dealers and because sales depend on laboratory construction activity and project timing. No formal revenue or earnings guidance was provided. Fiscal 2014 capital expenditures were expected to be approximately $3.0 million, primarily for manufacturing equipment, funded mainly by operations and supplemented by borrowings as needed.
- Key risks include construction delays, customer rescheduling, competitive bidding and pricing pressure, raw-material and energy inflation, and the inability to pass higher costs through to customers under fixed-price contracts.
- International operations add exposure to foreign exchange, political and regulatory conditions, tariffs, freight costs, and market acceptance.
- The company relies on a significant distributor, VWR International, and loss of a substantial portion of that business could materially affect results.
- Pension expense increased to $0.8 million from $0.4 million, and the pension deficit remained material.
- A $273,000 LIFO liquidation benefit reduced fiscal 2013 cost of sales.
- On May 6, 2013, the company refinanced existing debt with a $20 million revolving facility and two term loans totaling $5.0 million, generally extending maturities to 2020.
- On June 24, 2013, the company agreed to purchase the remaining 49% of Kewaunee Labway Asia for $3.55 million, payable in three installments through June 2015.
- Management reported effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion on the consolidated financial statements.
Investor Verification Checklist
- Verify the fiscal-year reporting date and distinguish fiscal 2013 results from the requested 2012 Q4 period.
- Assess conversion of the $80.2 million backlog into fiscal 2014 shipments and cash collections.
- Monitor working-capital intensity, particularly receivables, retainage, and inventories, relative to operating cash flow.
- Review the refinancing terms, variable-rate exposure, financial covenants, and standby letters of credit.
- Evaluate sustainability of the 19.0% gross margin amid fixed-price contracts and raw-material volatility.
- Assess the effect of the Labway Asia minority-interest acquisition on cash, ownership, earnings attribution, and international growth.
- Review pension funding requirements and sensitivity to discount rates and asset returns.