Kewaunee Scientific Corporation — Q1 FY2014 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended July 31, 2013, compared with July 31, 2012. Kewaunee manufactures laboratory, healthcare, technical and related products through domestic and international operations. The interim financial statements are unaudited and were reviewed, but not audited, by Cherry Bekaert LLP.
Key financial metrics
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $32.003 million | $26.683 million | +19.9% |
| Gross profit | $6.576 million | $5.243 million | +25.4% |
| Gross margin | 20.5% | 19.6% | +0.9 percentage points |
| Operating earnings | $2.432 million | $1.105 million | +120.1% |
| Net earnings | $1.617 million | $0.688 million | +135.9% |
| Net earnings attributable to Kewaunee | $1.587 million | $0.634 million | +150.3% |
| Diluted EPS | $0.61 | $0.25 | + $0.36 |
| Operating cash flow | $1.805 million | $2.730 million | Down $0.925 million |
Operating expenses were $4.144 million, or 12.9% of sales, versus $4.138 million, or 15.5%, in the prior-year quarter. Interest expense declined to $88,000 from $114,000. The effective tax rate was 33.3%, compared with 35.0%.
At July 31, 2013, cash and cash equivalents were $4.408 million, restricted cash was $619,000, working capital was $24.773 million, and the current ratio was 2.3-to-1.0. Reported current liabilities included $5.101 million of short-term borrowings and interest rate swap obligations and $455,000 of current long-term debt. Long-term debt was $4.508 million. The company had $4.862 million outstanding under its $20 million revolving credit facility and was in compliance with its financial covenants.
Cash used in investing activities was $456,000, primarily for $528,000 of capital expenditures. Financing activities used $2.383 million, including $1.780 million paid toward the purchase of a subsidiary minority interest, $1.896 million of short-term borrowing repayments, and $260,000 of dividends. Cash declined by $1.403 million during the quarter, from $5.811 million to $4.408 million.
Material changes versus the prior comparable period
- Sales increased $5.320 million, supported by higher domestic dealer activity, a strong shipment backlog, increased international opportunities and favorable project timing.
- Domestic sales increased to $27.073 million from $22.629 million; international sales increased to $4.930 million from $4.054 million.
- Higher manufacturing volumes, lower operating costs and improved efficiencies expanded gross margin and operating leverage.
- Operating cash flow decreased despite higher earnings, primarily because accounts payable and other accrued expenses decreased by $2.105 million, compared with an increase of $768,000 in the prior-year quarter.
- The company entered into a new credit agreement on May 6, 2013, including a $20 million revolving facility and $5 million of term loans, refinancing prior indebtedness and providing working capital capacity.
- The company purchased the remaining 49% minority interest in Kewaunee Labway Asia Pte. Ltd. for a total purchase price of $3.555 million. It paid $1.780 million in cash and recorded $1.775 million of additional liabilities. Management stated that the transaction favorably affected quarterly net earnings by $140,000.
- Order backlog declined to $71.1 million from $80.2 million at April 30, 2013 and $86.7 million at July 31, 2012, partly because of shipment of a large international project and shorter-duration dealer orders.
Outlook, risks, contingencies and unusual items
The filing provides no specific numerical revenue or earnings guidance. Management stated that demand is difficult to predict because the company supplies dealers and subcontractors and depends on laboratory construction activity and project timing. The company believes operating cash generation and its revolving facility will be sufficient for ongoing requirements, including capital expenditures through the current fiscal year.
- Key risks include raw-material cost inflation for stainless steel, wood and epoxy resin; labor-cost increases; and the company’s ability to raise prices under generally firm-price contracts.
- Demand is affected by the global economic recovery, construction schedules, customer design changes and delivery-date changes.
- The new credit facility contains debt-to-net-worth, fixed-charge-coverage and asset-coverage covenants. The company reported compliance at July 31, 2013.
- The company expects to contribute $300,000 to its defined-benefit pension plans during fiscal 2014; no contributions were made during the quarter.
- Foreign-currency translation produced a $524,000 after-tax loss in other comprehensive income.
- Management reported effective disclosure controls and procedures and no significant change in internal control over financial reporting.
Facts investors should verify
- Whether backlog conversion and the shift toward shorter-duration dealer orders support continued sales growth despite the year-over-year backlog decline.
- Whether the improved 20.5% gross margin is sustainable as raw-material and labor costs change.
- Cash generation, working-capital movements and continued reliance on the revolving credit facility.
- Terms, outstanding balances and covenant headroom under the new credit agreement.
- The cash and liability funding requirements associated with the $3.555 million purchase of the minority interest.
- Potential effects of foreign-exchange movements, pension funding and project timing on future earnings and liquidity.
- The filing’s warning that quarterly results are not necessarily indicative of full-year results.