Kewaunee Scientific Corporation — Form 10-Q Summary
Business context and reporting period
This quarterly report covers the three and six months ended October 31, 2015, representing the second quarter and first six months of fiscal 2016. Kewaunee supplies laboratory products and operates through Domestic Operations and International Operations. Demand is linked to laboratory construction projects, with the Company often serving as a subcontractor or supplier to dealers and subcontractors.
Financial performance and financial position
| Metric | Three months ended Oct. 31, 2015 | Three months ended Oct. 31, 2014 | Six months ended Oct. 31, 2015 | Six months ended Oct. 31, 2014 |
|---|---|---|---|---|
| Net sales | $31.0 million | $30.3 million | $62.1 million | $60.8 million |
| Gross profit | $5.5 million | $5.8 million | $11.4 million | $12.0 million |
| Gross margin | 17.8% | 19.2% | 18.3% | 19.7% |
| Operating earnings | $1.1 million | $1.9 million | $2.7 million | $3.7 million |
| Net earnings attributable to Kewaunee | $0.7 million | $1.2 million | $1.6 million | $2.4 million |
| Diluted EPS | $0.26 | $0.45 | $0.61 | $0.92 |
Domestic sales increased 11.2% in the quarter and 5.7% year to date, while International sales decreased 28.2% and 10.7%, respectively. Backlog was $92.4 million at October 31, 2015, compared with $86.7 million at July 31, 2015 and $84.5 million at October 31, 2014.
Six-month operating cash flow was $1.9 million, compared with $6.8 million in the prior-year period. Capital expenditures were $1.3 million, and investing activities used $0.7 million. Financing activities used $0.8 million, including $0.7 million of common dividends and the final $0.9 million payment for the purchase of a noncontrolling interest, partly offset by increased short-term borrowings.
At October 31, 2015, cash and cash equivalents were $3.3 million, restricted cash was $1.7 million, working capital was $29.0 million, and the current ratio was 2.4-to-1. Total bank borrowings were $9.5 million, including $4.5 million outstanding under the revolving facility and $0.9 million of foreign-bank short-term debt. Availability under the $20 million revolving facility was $11.3 million; standby letters of credit totaled $4.2 million.
Material changes versus the prior comparable period
- Revenue grew modestly, but gross margin declined by 140 basis points for the quarter and 140 basis points for the six-month period, primarily because of competitive pricing conditions.
- Operating expenses increased to $4.4 million in the quarter and $8.7 million year to date. The increases included non-recurring executive retirement and replacement costs of $413,000 for the quarter and $524,000 year to date, higher pension expense, and higher bad-debt expense.
- Lower operating earnings, higher effective tax rates, and weaker international results reduced diluted EPS from $0.45 to $0.26 for the quarter and from $0.92 to $0.61 year to date.
- Operating cash flow declined substantially, primarily because the prior-year period benefited from a $3.9 million increase in accounts payable and accrued expenses associated with the start-up of a large international project.
- Borrowings increased modestly from April 30, 2015, while cash increased by $0.2 million to $3.3 million. Inventories rose from $12.7 million to $13.7 million.
Guidance, outlook, risks, contingencies, and unusual items
Management expects fiscal 2016 to be profitable but states that demand is difficult to predict because it depends on laboratory construction activity, project timing, and customer delivery schedules. The Company expects liquidity from operations and its revolving credit facility to support ongoing requirements and capital expenditures during the fiscal year.
Key risks include competitive pricing, raw-material and labor-cost inflation, firm-price quotations that expose the Company to cost increases before delivery, foreign-currency fluctuations, international operations, customer demand changes, economic conditions, regulatory developments, and force majeure events. Results may fluctuate materially from quarter to quarter.
The quarter included non-recurring executive transition expenses. Pension plans are frozen to new benefit accruals; the Company contributed $64,000 during the six months and did not expect additional contributions during the remainder of the fiscal year. The interim financial statements were reviewed, but not audited, by Cherry Bekaert LLP. Management concluded that disclosure controls were adequate and effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether backlog converts into revenue at expected margins, particularly given the 2015 margin compression.
- Whether domestic growth offsets continued weakness or volatility in international sales.
- The recurring versus non-recurring portion of higher operating expenses following the executive transition.
- Inventory growth, operating cash conversion, and reliance on short-term borrowings.
- Exposure to raw-material costs, firm-price contracts, foreign exchange, and laboratory construction project timing.
- The assumptions supporting management’s expectation that fiscal 2016 will be profitable.