Kewaunee Scientific Corporation — Form 10-Q Summary
Business context and reporting period
This quarterly report covers the three and nine months ended January 31, 2014, within fiscal 2014. Kewaunee designs and manufactures laboratory furniture, casework, and related products, with Domestic and International Operations. The interim financial statements are unaudited and were reviewed, but not audited, by Cherry Bekaert LLP.
Financial performance and position
Amounts below are in thousands, except per-share data.
| Metric | Three months ended Jan. 31, 2014 | Three months ended Jan. 31, 2013 | Nine months ended Jan. 31, 2014 | Nine months ended Jan. 31, 2013 |
|---|---|---|---|---|
| Net sales | $26,013 | $27,450 | $84,114 | $85,318 |
| Gross profit | $4,711 | $5,009 | $16,180 | $15,479 |
| Gross margin | 18.1% | 18.2% | 19.2% | 18.1% |
| Operating earnings | $938 | $955 | $4,504 | $3,274 |
| Net earnings attributable to Kewaunee | $604 | $544 | $2,916 | $1,827 |
| Diluted EPS | $0.22 | $0.21 | $1.11 | $0.71 |
| Cash flow from operations | Not provided | Not provided | $7,232 | $5,328 |
- Third-quarter sales declined 5.2%; nine-month sales declined 1.4%.
- Third-quarter operating expenses decreased to $3,773, or 14.5% of sales, from $4,054, or 14.8%. Nine-month operating expenses decreased to $11,676, or 13.9% of sales, from $12,205, or 14.3%.
- Effective tax rates were 31.8% for the quarter and 33.5% for the nine months, compared with 18.5% and 29.7%, respectively, in the prior-year periods.
- Cash and cash equivalents were $6,658 at January 31, 2014, versus $5,811 at April 30, 2013. Working capital was $25,472, and the current ratio was 2.4-to-1.0.
- Total bank borrowings were $8,888 at January 31, 2014, versus $10,464 at April 30, 2013. Revolver advances were $3,938, with $20 million of total revolving capacity under the new facility.
- Net cash used in investing activities was $1,600, primarily for $1,614 of capital expenditures. Financing activities used $4,169, including dividends, debt repayment, and the purchase of a subsidiary interest.
- Stockholders’ equity attributable to Kewaunee was $31,633; total equity was $31,853.
Material changes versus the prior comparable period
- Domestic third-quarter sales increased to $21,544 from $20,445, supported by shipments of several large prior-period orders. International sales decreased to $4,469 from $7,005, following unusually strong international sales in the prior year.
- For the nine-month period, Domestic sales increased to $70,678 from $68,757, while International sales decreased to $13,436 from $16,561.
- Nine-month gross margin improved by 110 basis points, primarily from more favorable product mix and lower manufacturing and overhead costs. Quarterly gross margin was essentially stable.
- Nine-month net earnings attributable to Kewaunee increased 59.7%, and diluted EPS increased to $1.11 from $0.71. The improvement included lower operating expenses and reduced noncontrolling-interest expense.
- On June 24, 2013, the Company acquired the remaining 49% interest in Kewaunee Labway Asia Pte. Ltd. for $3.555 million. It paid $1.780 million in cash and recorded the balance as accrued liabilities. The transaction reduced noncontrolling-interest expense by $120,000 in the quarter and $351,000 for the nine months.
- Backlog was $69.8 million at January 31, 2014, compared with $69.5 million at October 31, 2013 and $84.5 million at January 31, 2013. International orders increased during the quarter while domestic orders declined.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects fourth-quarter fiscal 2014 financial results to be generally in line with the past several quarters, with the domestic laboratory furniture market remaining challenging.
- Demand is difficult to predict because the Company operates largely as a subcontractor or supplier to dealers and depends on laboratory construction projects and customer delivery schedules.
- Key risks include raw-material inflation for stainless steel, wood, and epoxy resin; firm-price quotations that expose the Company to cost increases; competitive and general economic conditions; international operations and foreign-currency fluctuations; regulatory changes; and force majeure events.
- The new May 6, 2013 credit agreement includes a $20 million revolving facility, $5 million of term loans, and up to $4.7 million of letters of credit. The Company was in compliance with all financial covenants at January 31, 2014.
- Accrued pension and deferred compensation costs were $9,973. Pension plans are frozen. The Company contributed $300,000 during the nine months and expected no additional contributions for the remainder of the fiscal year.
- Foreign-currency translation produced a $566,000 year-to-date reduction in other comprehensive income. The filing states that there were no material changes in market-risk disclosures from the prior Form 10-K.
Investor verification items
- Verify the sustainability and timing of the $69.8 million backlog, particularly the mix between domestic and international orders.
- Assess whether the improved nine-month gross margin and lower operating expenses are recurring or reflect temporary product mix and cost conditions.
- Monitor international demand, foreign-currency effects, and the continuing weakness in the domestic laboratory construction market.
- Review the terms, interest-rate exposure, maturities, and covenant requirements of the new credit facilities.
- Evaluate liquidity after capital expenditures, dividends, debt service, and remaining payments related to the subsidiary-interest acquisition.
- Consider the higher effective tax rate and the expiration or variability of prior-year tax credits in forecasting earnings.