UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended OctoberJanuary 31, 20042005
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number 0-5286
KEWAUNEE SCIENTIFIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 38-0715562 | |
(State or other jurisdiction of incorporation or organization) | ( Identification No.) | |
2700 West Front Street | ||
Statesville, North Carolina | 28677 | |
(Address of principal executive offices) | (Zip Code) |
(704) 873-7202
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨
As of December 10, 2004,March 1, 2005, the Registrant had outstanding 2,491,770 shares of Common Stock.
Pages: This report, excluding exhibits, contains 1921 pages numbered sequentially from this cover page.
KEWAUNEE SCIENTIFIC CORPORATION
FOR THE QUARTERLY PERIOD ENDED OCTOBERJANUARY 31, 20042005
Page Number | ||||
FINANCIAL INFORMATION | ||||
Item 1. | Financial Statements | |||
3 | ||||
Condensed Consolidated Balance Sheets | 4 | |||
5 | ||||
6 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |||
Item 4. | Controls and Procedures | |||
OTHER INFORMATION | ||||
| ||||
Item 6. | Exhibits and Reports on Form 8-K | |||
Kewaunee Scientific Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
($ in thousands, except per share data)
Three months ended January 31 | Nine months ended January 31 | |||||||||||||||||||||||||||||||
Three months ended October 31 | Six months ended October 31 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | ($ in thousands, except per share data) | ||||||||||||||||||||||||||||
Net sales | $ | 18,365 | $ | 24,384 | $ | 38,653 | $ | 48,597 | $ | 15,623 | $ | 21,454 | $ | 54,276 | $ | 70,051 | ||||||||||||||||
Cost of products sold | 14,812 | 20,280 | 31,724 | 40,890 | 13,586 | 17,736 | 45,310 | 58,626 | ||||||||||||||||||||||||
Gross profit | 3,553 | 4,104 | 6,929 | 7,707 | 2,037 | 3,718 | 8,966 | 11,425 | ||||||||||||||||||||||||
Operating expenses | 3,260 | 3,321 | 6,306 | 6,322 | 3,030 | 3,206 | 9,336 | 9,528 | ||||||||||||||||||||||||
Operating earnings | 293 | 783 | 623 | 1,385 | ||||||||||||||||||||||||||||
Operating earnings (loss) | (993 | ) | 512 | (370 | ) | 1,897 | ||||||||||||||||||||||||||
Interest expense | (84 | ) | (83 | ) | (170 | ) | (161 | ) | (84 | ) | (71 | ) | (254 | ) | (232 | ) | ||||||||||||||||
Other (expense) income | (46 | ) | (47 | ) | 3 | 149 | (47 | ) | 14 | (44 | ) | 163 | ||||||||||||||||||||
Earnings before income taxes | 163 | 653 | 456 | 1,373 | ||||||||||||||||||||||||||||
Income tax expense | 55 | 235 | 155 | 494 | ||||||||||||||||||||||||||||
Earnings (loss) before income taxes | (1,124 | ) | 455 | (668 | ) | 1,828 | ||||||||||||||||||||||||||
Income tax expense (benefit) | (382 | ) | 164 | (227 | ) | 658 | ||||||||||||||||||||||||||
Net earnings | $ | 108 | $ | 418 | $ | 301 | $ | 879 | ||||||||||||||||||||||||
Net earnings (loss) | $ | (742 | ) | $ | 291 | $ | (441 | ) | $ | 1,170 | ||||||||||||||||||||||
Net earnings per share- | ||||||||||||||||||||||||||||||||
Net earnings (loss) per share- | ||||||||||||||||||||||||||||||||
Basic | $ | 0.04 | $ | 0.17 | $ | 0.12 | $ | 0.35 | $ | (0.30 | ) | $ | 0.12 | $ | (0.18 | ) | $ | 0.47 | ||||||||||||||
Diluted | $ | 0.04 | $ | 0.17 | $ | 0.12 | $ | 0.35 | $ | (0.30 | ) | $ | 0.12 | $ | (0.18 | ) | $ | 0.47 | ||||||||||||||
Weighted average number of common shares outstanding (in thousands)- | ||||||||||||||||||||||||||||||||
Basic | 2,492 | 2,486 | 2,491 | 2,485 | 2,492 | 2,486 | 2,491 | 2,485 | ||||||||||||||||||||||||
Diluted | 2,494 | 2,491 | 2,497 | 2,490 | 2,493 | 2,499 | 2,495 | 2,493 |
See accompanying notes to condensed consolidated financial statements.
Kewaunee Scientific Corporation
Condensed Consolidated Balance Sheets
(in thousands)
October 31 2004 | April 30 2004 | January 31 2005 | April 30 2004 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 817 | $ | 1,167 | $ | 1,128 | $ | 1,167 | ||||||||
Receivables, less allowance | 23,539 | 24,987 | 18,756 | 24,987 | ||||||||||||
Inventories | 4,004 | 4,285 | 3,953 | 4,285 | ||||||||||||
Deferred income taxes | 501 | 517 | 517 | 517 | ||||||||||||
Prepaid income taxes | — | 165 | 251 | 165 | ||||||||||||
Prepaid expenses and other current assets | 611 | 415 | 523 | 415 | ||||||||||||
Total current assets | 29,472 | 31,536 | 25,128 | 31,536 | ||||||||||||
Property, plant and equipment, at cost | 33,663 | 33,246 | 34,144 | 33,246 | ||||||||||||
Accumulated depreciation | (22,921 | ) | (21,884 | ) | (23,415 | ) | (21,884 | ) | ||||||||
Net property, plant and equipment | 10,742 | 11,362 | 10,729 | 11,362 | ||||||||||||
Other assets | 6,411 | 7,563 | 6,513 | 7,563 | ||||||||||||
Total Assets | $ | 46,625 | $ | 50,461 | $ | 42,370 | $ | 50,461 | ||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Short-term borrowings | $ | 6,079 | $ | 6,996 | $ | 3,263 | $ | 6,996 | ||||||||
Current portion of long-term debt | 1,118 | 1,118 | 1,118 | 1,118 | ||||||||||||
Current obligations under capital leases | 51 | 0 | ||||||||||||||
Accounts payable | 5,087 | 6,924 | 5,189 | 6,924 | ||||||||||||
Employee compensation and amounts withheld | 984 | 1,507 | 623 | 1,507 | ||||||||||||
Deferred Revenue | 986 | 1,152 | 1,230 | 1,152 | ||||||||||||
Other accrued expenses | 1,356 | 1,222 | 682 | 1,222 | ||||||||||||
Total current liabilities | 15,610 | 18,919 | 12,156 | 18,919 | ||||||||||||
Long-term debt | 372 | 931 | 93 | 931 | ||||||||||||
Obligations under capital leases | 164 | 0 | ||||||||||||||
Deferred income taxes | 1,013 | 1,013 | 1,013 | 1,013 | ||||||||||||
Accrued employee benefit plan costs | 2,328 | 2,325 | 2,603 | 2,325 | ||||||||||||
Other long-term liabilities | 515 | 482 | 537 | 482 | ||||||||||||
Total Liabilities | 19,838 | 23,670 | 16,566 | 23,670 | ||||||||||||
Stockholders’ equity: | ||||||||||||||||
Common stock | 6,550 | 6,550 | 6,550 | 6,550 | ||||||||||||
Additional paid-in-capital | 132 | 141 | 132 | 141 | ||||||||||||
Retained earnings | 20,828 | 20,876 | 19,912 | 20,876 | ||||||||||||
Accumulated other comprehensive income | 67 | 36 | 0 | 36 | ||||||||||||
Common stock in treasury, at cost | (790 | ) | (812 | ) | (790 | ) | (812 | ) | ||||||||
Total stockholders’ equity | 26,787 | 26,791 | 25,804 | 26,791 | ||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 46,625 | $ | 50,461 | $ | 42,370 | $ | 50,461 | ||||||||
See accompanying notes to condensed consolidated financial statements.
Kewaunee Scientific Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Unaudited)
(in thousands)
Six months ended October 31 | Nine months ended January 31 | |||||||||||||||
2004 | 2003 | 2005 | 2004 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net earnings | $ | 301 | $ | 879 | ||||||||||||
Adjustments to reconcile net earnings to net cash used in operating activities: | ||||||||||||||||
Net earnings (loss) | $ | (441 | ) | $ | 1,170 | |||||||||||
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||
Depreciation | 1,037 | 1,041 | 1,531 | 1,543 | ||||||||||||
Provision for bad debts | 321 | 6 | 516 | 62 | ||||||||||||
Decrease in prepaid income taxes | 165 | 1,077 | ||||||||||||||
(Increase) decrease in prepaid income taxes | (86 | ) | 1,133 | |||||||||||||
Decrease (increase) in receivables | 1,127 | (5,798 | ) | 5,715 | (6,581 | ) | ||||||||||
Decrease in inventories | 281 | 1,218 | 332 | 1,373 | ||||||||||||
Decrease in accounts payable and other current liabilities | (2,226 | ) | (1,974 | ) | (3,159 | ) | (3,150 | ) | ||||||||
(Decrease) increase in deferred revenue | (166 | ) | 884 | |||||||||||||
Increase in deferred revenue | 78 | 882 | ||||||||||||||
Other, net | 1,039 | 481 | 1,239 | 853 | ||||||||||||
Net cash provided by (used in) operating activities | 1,879 | (2,186 | ) | 5,725 | (2,715 | ) | ||||||||||
Cash flows from investing activities: | ||||||||||||||||
Capital expenditures | (417 | ) | (1,215 | ) | (674 | ) | (1,310 | ) | ||||||||
Net cash used in investing activities | (417 | ) | (1,215 | ) | (674 | ) | (1,310 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
(Decrease) increase in short-term borrowings | (917 | ) | 3,324 | (3,733 | ) | 4,668 | ||||||||||
Proceeds from long-term debt | — | 1,200 | 0 | 1,200 | ||||||||||||
Payments on long-term debt | (559 | ) | (522 | ) | ||||||||||||
Payments of long-term debt | (838 | ) | (801 | ) | ||||||||||||
Payments of capital leases | (9 | ) | 0 | |||||||||||||
Dividends paid | (349 | ) | (348 | ) | (523 | ) | (522 | ) | ||||||||
Proceeds from exercise of stock options (including tax benefit) | 13 | 23 | ||||||||||||||
Proceeds from exercise of stock option | 13 | 23 | ||||||||||||||
Net cash (used in) provided by financing activities | (1,812 | ) | 3,677 | (5,090 | ) | 4,568 | ||||||||||
(Decrease) increase in cash and cash equivalents | (350 | ) | 276 | (39 | ) | 543 | ||||||||||
Cash and cash equivalents, beginning of period | 1,167 | 520 | 1,167 | 520 | ||||||||||||
Cash and cash equivalents, end of period | $ | 817 | $ | 796 | $ | 1,128 | $ | 1,063 | ||||||||
See accompanying notes to condensed consolidated financial statements.
Kewaunee Scientific Corporation
Notes to Condensed Financial Statements
(unaudited)
A.Financial Information
The unaudited interim condensed consolidated financial statements of Kewaunee Scientific Corporation (the “Company” or “Kewaunee”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These interim condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company’s 2004 Annual Report to Stockholders.
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates.
In the opinion of management, the interim condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.
B.Revenue Recognition
Product sales are generally recognized at the date of shipment, or when customers have purchased and accepted title ofto the goods, but because of construction delays, have requested the Company to temporarily store the finished goods on the customer’s behalf. Deferred revenue consists of customer deposits and advance billings of the Company’s products where sales have not yet been recognized. Service revenue for installation of product sold is recognized as the installation services are performed.
Product Sales for Fixed-Price Construction Contracts.Product sales for fixed-price construction contracts involve a signed contract for a fixed price to provide the Company’s laboratory furniture and fume hoods for a construction project. The Company usually is in the role as a subcontractor, but in some cases may enter into a contract directly with the end-user of the products. Product sales for fixed-price construction contracts are generated from multiple-element arrangements that require separate units of accounting and estimates regarding the fair value of individual elements.
The Company determined that its multiple-element arrangements are generally comprised of the following elements that would qualify as separate units of accounting: product sales and installation services. Each of these elements represent individual units of accounting as the delivered item has value to a customer on a stand-alone basis, objective and reliable evidence of fair value exists for undelivered items, and arrangements normally do not contain a general right of return relative to the delivered item. The Company determines fair value based on the price of the deliverable when it is sold separately or based on third-party evidence. In accordance with the guidance in EITF 00-21, the Company uses the residual method to allocate the arrangement consideration when it does not have fair value of the product sale. Under the residual method, the amount of consideration allocated to the delivered item equals the total arrangement consideration less the aggregate fair value of the undelivered items. Assuming all other criteria for revenue recognition have been met, the Company recognizes revenue for product sales at the date of shipment.
Product Sales for Purchase Orders.Product sales for purchase orders involve a purchase order received by the Company from its dealers and its stocking distributor. This category includes product sales for standard products, as well as products which require some customization. These sales are recognized under the terms of the purchase order which generally are freight on board (“FOB”) shipping point and do not include rights of return. Accordingly, sales are recognized at the time of shipment.
C.Principles of Consolidation
The Company’s consolidated financial statements include the accounts of Kewaunee Scientific Corporation and its three subsidiaries. A brief description of each subsidiary, along with the amount of the Company’s controlling financial interests, is as follows:
(1) Kewaunee Labway Asia Pte. Ltd., a dealer for the Company’s products in Singapore, is 51% owned by the Company; (2) Labway Scientific India Pvt. Ltd., a dealer for the Company’s products in Bangalore, India, is 95% owned by Kewaunee Labway Asia; and (3) Kewaunee Scientific Corporation India Pvt. Ltd. in Bangalore, India, an assembly operation, is 100% owned by the Company. All intercompany balances, transactions, and profits have been eliminated.
D.Inventories
Inventories consisted of the following (in thousands):
October 31, 2004 | April 30, 2004 | January 31, 2005 | April 30, 2004 | |||||||||
Finished products | $ | 1,205 | $ | 1,364 | $ | 1,062 | $ | 1,364 | ||||
Work in process | 1,129 | 1,373 | 1,046 | 1,373 | ||||||||
Raw materials | 1,670 | 1,548 | 1,845 | 1,548 | ||||||||
$ | 4,004 | $ | 4,285 | $ | 3,953 | $ | 4,285 | |||||
E.Balance Sheet
The Company’s April 30, 2004 condensed consolidated balance sheet as presented herein is derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles.
F.Long-Term Debt
At January 31, 2005, long-term debt of the Company included $1,211,000 of obligations under a bank note, of which $1,118,000 was due within one year and classified as a current liability in the balance sheet. The note includes certain covenants as to tangible net worth, funds flow coverage, current ratio and ratio of liabilities to tangible net worth. At January 31, 2005, the Company’s funds flow coverage ratio fell below the minimum required under the financial covenant at the beginning of the quarter because of the net loss reported by the Company in the third quarter. The bank has waived the funds flow coverage ratio requirement for the period ended January 31, 2005 and amended the ratio calculation for the period ending April 30, 2005 to lower the required ratio for that period. The Company expects to be in compliance with all covenants, as amended, under the note in future periods.
G.Comprehensive Income (Loss)
A reconciliation of net earnings (loss) and total comprehensive income (loss) for the three months and sixnine months ended OctoberJanuary 31, 20042005 and 20032004 is as follows (in thousands):
Three months ended October 31, 2004 | Three months ended October 31, 2003 | |||||
Net earnings | $ | 108 | $ | 418 | ||
Change in fair value of cash flow hedge, net of income tax | 3 | 3 | ||||
Change in cumulative foreign currency translation adjustments | 42 | 16 | ||||
Total comprehensive income | $ | 153 | $ | 437 |
Six months ended October 31, 2004 | Six months ended October 31, 2003 | Three months ended January 31, 2005 | Three months ended January 31, 2004 | |||||||||||
Net earnings | $ | 301 | $ | 879 | ||||||||||
Net earnings (loss) | $ | (742 | ) | $ | 291 | |||||||||
Change in fair value of cash flow hedge, net of income tax | 7 | 9 | 3 | (12 | ) | |||||||||
Change in cumulative foreign currency translation adjustments | 24 | 33 | (70 | ) | 12 | |||||||||
Total comprehensive income | $ | 332 | $ | 921 | ||||||||||
Total comprehensive income (loss) | $ | (809 | ) | $ | 291 | |||||||||
Nine months ended January 31, 2005 | Nine months ended January 31, 2004 | |||||||||||||
Net earnings (loss) | $ | (441 | ) | $ | 1,170 | |||||||||
Change in fair value of cash flow hedge, net of income tax | 10 | (3 | ) | |||||||||||
Change in cumulative foreign currency translation adjustments | (46 | ) | 45 | |||||||||||
Total comprehensive income (loss) | $ | (477 | ) | $ | 1,212 |
Statement and Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” requires that the Company record derivatives on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. The nature of the Company’s business activities involves the management of various financial and market risks, including those related to changes in interest rates. The Company may from time-to-time employ derivative financial instruments, such as interest rate swap contracts, to mitigate or eliminate certain of those risks. The Company does not enter into derivative instruments for speculative purposes. The Company had one interest rate swap agreement outstanding at OctoberJanuary 31, 2004.2005.
For the Company’s foreign subsidiaries, assets and liabilities are translated at exchange rates prevailing on the balance sheet date. Revenues and expenses are translated at weighted average exchange rates prevailing during the period and any resulting translation adjustments are reported separately in shareholders’ equity.
H.Stock Options
The Company has not granted stock options to employees or directors since fiscal year 2003.2004. The Company accounts for stock options using the intrinsic value method. Under this method no compensation expense is recorded since the exercise price of the stock options is equal to the market price of the underlying stock on the grant date. Had compensation expense for the stock options issued been determined consistent with Financial Accounting Standards Board (“FASB”) Statement No. 123, “Accounting for Stock-Based Compensation,” net earnings (loss) and net earnings (loss) per share would have been reduced (increased) to the following pro forma amounts (in thousands, except per share data):
Three months ended October 31, 2004 | Three months ended October 31, 2003 | Three months ended January 31, 2005 | Three months ended January 31, 2004 | |||||||||||||
Net earnings as reported | $ | 108 | $ | 418 | ||||||||||||
Net earnings (loss)as reported | $ | (742 | ) | $ | 291 | |||||||||||
Pro forma compensation cost | (9 | ) | (20 | ) | (9 | ) | (20 | ) | ||||||||
Net earnings pro forma | 99 | 398 | ||||||||||||||
Net earnings (loss) pro forma | (751 | ) | 271 | |||||||||||||
Net earnings per share – Basic | ||||||||||||||||
Net earnings (loss) per share – Basic | ||||||||||||||||
As reported | $ | 0.04 | $ | 0.17 | $ | (0.30 | ) | $ | 0.12 | |||||||
Pro forma | 0.04 | 0.16 | (0.30 | ) | 0.11 | |||||||||||
Net earnings per share – Diluted | ||||||||||||||||
Net earnings (loss) per share – Diluted | ||||||||||||||||
As reported | $ | 0.04 | $ | 0.17 | $ | (0.30 | ) | $ | 0.12 | |||||||
Pro forma | 0.04 | 0.16 | (0.30 | ) | 0.11 | |||||||||||
Six months ended October 31, 2004 | Six months ended October 31, 2003 | Nine months ended January 31, 2005 | Nine months ended January 31, 2004 | |||||||||||||
Net earnings as reported | $ | 301 | $ | 879 | ||||||||||||
Net earnings (loss) as reported | $ | (441 | ) | $ | 1,170 | |||||||||||
Pro forma compensation cost | (17 | ) | (40 | ) | (26 | ) | (60 | ) | ||||||||
Net earnings pro forma | 284 | 839 | ||||||||||||||
Net earnings (loss) pro forma | (467 | ) | 1,110 | |||||||||||||
Net earnings per share – Basic | ||||||||||||||||
Net earnings (loss) per share – Basic | ||||||||||||||||
As reported | $ | 0.12 | $ | 0.35 | $ | (0.18 | ) | $ | 0.47 | |||||||
Pro forma | 0.11 | 0.34 | (0.19 | ) | 0.45 | |||||||||||
Net earnings per share – Diluted | ||||||||||||||||
Net earnings (loss) per share – Diluted | ||||||||||||||||
As reported | $ | 0.12 | $ | 0.35 | $ | (0.18 | ) | $ | 0.47 | |||||||
Pro forma | 0.11 | 0.34 | (0.19 | ) | 0.45 |
I.Pension Plans
The Company has non-contributory defined benefit pension plans covering substantially all salaried and hourly employees. Pension expense consisted of the following (in thousands):
Three months ended January 31, 2005 | Three months ended January 31, 2004 | |||||||
Service Cost | $ | 129 | $ | 121 | ||||
Interest Cost | 213 | 200 | ||||||
Expected return on plan assets | (251 | ) | (207 | ) | ||||
Amortization of prior service costs | 3 | 3 | ||||||
Recognition of net loss | 59 | 80 | ||||||
Net periodic cost | $ | 153 | $ | 197 | ||||
Nine months ended January 31, 2005 | Nine months ended January 31, 2004 | |||||||
Service Cost | $ | 386 | $ | 362 | ||||
Interest Cost | 639 | 599 | ||||||
Expected return on plan assets | (753 | ) | (621 | ) | ||||
Amortization of prior service costs | 8 | 8 | ||||||
Recognition of net loss | 178 | 241 | ||||||
Net periodic cost | $ | 458 | $ | 589 |
No contributions were paid to the plan during the nine months ended January 31, 2005. Contributions of approximately $1 million are expected to be paid to the plans in the fourth quarter of the current year.
At the Company’s Board of Directors meeting of February 22, 2005, the Board approved amendments to the Company’s two defined benefit pension plans to suspend (“freeze”) benefits earned under each of the plans, effective April 30, 2005. The amendments to suspend benefits under the plans will result in an expense of approximately $28,000, all of which will be recorded in the fourth quarter of the current year.
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The Company’s 2004 Annual Report to Stockholders contains management’s discussion and analysis of financial condition and results of operations at and for the year ended April 30, 2004. The following discussion and analysis describes material changes in the Company’s financial condition since April 30, 2004. The analysis of results of operations compares the three months and sixnine months ended OctoberJanuary 31, 20042005 with the comparable period of the prior fiscal year.
Results of Operations
The Company recorded sales of $18.4 millionSales for the three months ended October 31, 2004,quarter were $15,623,000, a declinedecrease of 24.7%27% from sales of $24.4 million for$21,454,000 in the comparablesame period of the priorlast year. Sales for the sixnine months ended OctoberJanuary 31, 20042005 were $38.7 million,$54,276,000, a declinedecrease of 20.5%23% from sales of $48.6 million$70,051,000 in the comparable period of the priorlast year. The order backlog was $38.6 million at October 31, 2004. This compares to order backlogs of $39.6 million at July 31, 2004 and $46.3 million at October 31, 2003.
Several issuesSales for the quarter were adversely affected theby a continuing soft marketplace for laboratory furniture marketplace during the quarter. Uncertainties surrounding the presidential election and its potential impact on the price of prescription drugsfurniture. Spending for new research projects by pharmaceutical companies continued to impactbe below levels of recent years. Additionally, the willingnessnumber of pharmaceutical companies to investprojects generally available in new research projects. Additionally, the marketplace was affectedreduced, or construction was delayed, by the significant increases in the cost of construction materials particularly steel. The resulting higher-than-planned construction costs delayedover the award date of many projects, as some customers were forced to reduce the scope of their projects to remain within budget. Reduced state budgets also adversely affected fundingpast year. Funding available for education construction projects. An increase inprojects also continued to be affected by reduced state spending budgets. However, order activity resultingfor the quarter increased over the two previous quarters, as activity in the marketplace showed some improvement after the Presidential election in November 2004. The order backlog at January 31, 2005 was $41.7 million, up from the resolution of the uncertainty surrounding the presidential election is not expected to begin to improve sales before the Company’s fourth quarter.$38.6 million at October 31, 2004.
The gross profit margin for the three months ended OctoberJanuary 31, 20042005 was 19.3%13.0% of sales, as compared to 16.8%17.3% of sales in the comparable quarter of the prior year. The gross profit margin for the sixnine months ended OctoberJanuary 31, 20042005 was 17.9%16.5%, as compared to 15.9%16.3% in the comparable period of the prior year. The improvedgross profit margin for the current quarter was adversely affected by manufacturing inefficiencies resulting from the low sales and cost overruns on several completed projects. Additionally, gross profit margins for the three and six monthseach of the current year resulted from improvements in manufacturing costs and efficiencies, partially offsetperiods were adversely affected by higher costs in the
current year for raw materials, particularly steel as well as higher energy costs.
To further reduce costs, significant reductions in the Statesville workforce were made during the quarter, in both the hourly and administrative areasepoxy resin. The impact of the Company. The reductions, which involved approximately 18% of the Statesville workforce, included 58 permanent employees and 42 temporary employees. Annual savings associated with the reductions are estimated at $3.6 million, of which $774,000 relates to operating expenses. All associated termination benefits, which totaled $31,488, were expensed during the current quarter. Additionally, a number ofabove items was partially offset by continuing cost cutting initiatives were implemented during the quarter that are expected to further reduce manufacturing and raw material costs.reduction activities.
Operating expenses for the three months ended OctoberJanuary 31, 20042005 were $3.3$3.0 million, or 17.8%19.4% of sales, as compared to $3.3$3.2 million, or 13.6%14.9% of sales, in the comparable period of the prior year. Operating expenses for the sixnine months ended OctoberJanuary 31, 20042005 were $6.3$9.3 million, or 16.3%17.2% of sales, as compared to $6.3$9.5 million, or 13.0%13.6% of sales, in the comparable period of the prior year.
Operating expenses for the current year reflect a decline in sales commissions of $196,000 and $458,000 for the three and nine months ended January 31, 2005, respectively, as compared to the same periods last year. The decline in sales commissions was primarily attributable to the lower sales volumes. Operating expenses also benefited from continuing cost reduction activities, including reduced salaries and benefits of $269,000 and $361,000 for the three and nine months ended January 31, 2005, respectively, resulting from the workforce reduction made during the second quarter of the current year. These expense reductions were partially offset by increases in bad debt expense over the prior year comparable periods of $139,000 and $454,000 for the three and nine months ended January 31, 2005, respectively. The increase in operating expenses as a percent of sales for each of the current year periods resulted as operating expense levels remained relatively flat as sales declined. As comparedexpenses were not reduced in proportion to the prior year periods, operating expenses included increasesdecline in bad debt expense of $199,000 and $315,000 for the three months and six months ended October 31, 2004, respectively.sales.
Operating earningslosses of $293,000$993,000 and $623,000$370,000 were recorded for the three months and sixnine months ended OctoberJanuary 31, 2004,2005, respectively, compared to $783,000operating earnings of $512,000 and $1.4 million$1,897,000 recorded for the comparable periodperiods of the prior year.
Interest expense was $84,000, and $170,000$254,000 for the three months and sixnine months ended OctoberJanuary 31, 2004,2005, respectively, compared to $83,000$71,000 and $161,000$232,000 for the same periods of the prior year. The impacts of increased borrowing rates for each of the three and six monthsperiods of the current year were substantially offset by lower levels of borrowings.
Other expense was $46,000$47,000 and other income was $3,000$44,000 in the three months and sixnine months ended OctoberJanuary 31, 2004,2005, respectively, compared to other expenseincome of $47,000$14,000 and other income of $149,000$163,000 for the comparable periods of the prior year. Other income for the nine months of the prior year was increased by $295,000 in the first quarter of the prior yearfrom a payment received from the resolution of a
disputed claim for laboratory furniture sold by the Company several years earlier.
Income tax expensesbenefits of $55,000$382,000 and $155,000$227,000 were recorded for the three months and sixnine months ended OctoberJanuary 31, 2004,2005, respectively, as compared to an income tax expense of $235,000$164,000 and $494,000$658,000 recorded for the comparable periods of the prior year. The effective tax rate was approximately 34.0% for the three and sixnine months ended OctoberJanuary 31, 20042005, and 36.0% for the three and sixnine months period ended OctoberJanuary 31, 2003.2004.
NetA net loss of $742,000, or $0.30 per diluted share, was reported for the three months ended January 31, 2005. A net loss of $441,000, or $0.18 per diluted share, was reported for the nine months ended January 31, 2005. This compares to net earnings of $108,000 and $301,000,$291,000, or $.04$0.12 per diluted share, and $.12net earnings of $1,170,000, or $.47 per diluted share, were recorded for the three months and six months ended October 31, 2004, respectively, as compared to net earnings of $418,000 and $879,000, or $.17 per diluted share and $.35 per diluted share for the comparable periods of the prior year.
Liquidity and Capital Resources
Historically, the Company’s principal sources of liquidity have been funds generated from operations, supplemented as needed by short-term borrowings. The Company believes that these sources, will be sufficient to support ongoing business levels, including capital expenditures, through the current fiscal year.year and fiscal year 2006.
The Company had working capital of $13.9$13.0 million at OctoberJanuary 31, 2004,2005, as compared to $12.6 million at April 30, 2004. The ratio of current assets to current liabilities was 1.9-to-1.02.1-to-1.0 at OctoberJanuary 31, 2004,2005, as compared to 1.7-to-1.0 at April 30, 2004. At OctoberJanuary 31, 2004,2005, advances of $6,079,000$3,263,000 were outstanding under the Company’s revolving credit bank loan, leaving available creditadvances under this line in the amount of $2,921,000. During the quarter, the$5,737,000. The term of this loan was extended tois through December 31, 2006.
At January 31, 2005, long-term debt of the Company included $1,211,000 of obligations under a bank note, of which $1,118,000 was due within one year and classified as a current liability in the balance sheet. The note includes certain covenants as to tangible net worth, funds flow coverage, current ratio and ratio of liabilities to tangible net worth. At January 31, 2005, the Company’s funds flow coverage ratio fell below the minimum required under the financial covenant at the beginning of the quarter because of the net loss reported by the Company in the third quarter. The bank has waived the funds flow coverage ratio requirement for the period ended January 31, 2005 and amended the ratio calculation for the period ending April 30, 2005 to lower the required ratio for that period. The Company expects to be in compliance with all covenants, as amended, under the note in future periods.
The Company’s operations provided cash of $1.9$5.7 million during the sixnine months ended OctoberJanuary 31, 2004,2005. The cash provided was primarily attributable to a $5.7 million decrease in receivables, which benefited from the lower sales volumes, and depreciation expense of $1.5 million. Cash was used by a $3.2 million reduction in accounts payable and other current liabilities, and the $441,000 net loss after taxes.
The Company’s operations used cash of $2.7 million during the nine months ended January 31, 2005, primarily due to a $6.6 million increase in accounts receivable and a decrease in accounts receivable. Cash of $890,000 was also received during the quarter from the cancellation of life insurance policies covering all salaried employees when these policies were replaced with a group term insurance plan. The favorable impact of these items was partially offset by the impact of a$3.2 million decrease in accounts payable and other current liabilities. The Company’s operations usedimpact of these items was partially offset by cash provided from net earnings after taxes of $2.2$1.2 million, during the six months ended October 31, 2003, primarily resulting fromdepreciation expense of $1.5 million, a significant increasedecrease in accounts receivableinventories of $1.4 million, and a decrease in accounts payable.
During the sixnine months ended OctoberJanuary 31, 2004,2005, the Company used cash of $417,000$674,000 in investing activities, primarily for purchases of production equipment. This compares to the use of $1.2 million$1,310,000 for similar investing activities in the same period of the prior year.
The Company’s financing activities used cash of $1.8$5.1 million during the sixnine months ended OctoberJanuary 31, 2004. This included $917,0002005, with $3.7 million of this amount for the repayment of advances under the revolving credit loan,short-term borrowings. Additionally, $838,000 was used for long-term debt repayments and $523,000 was used for the payment of $559,000, and cash dividends paid of $349,000.dividends. Financing activities provided cash of $3.7$4.6 million in the same period of the prior year, whichyear. This included $3.3cash of $4.7 million receivedprovided from advances under the revolving credit loanshort-term borrowings and $1.2 million provided from an increase in long-term debt. For thatIn the prior year period, cash$801,000 was used for long-term debt repayments and $522,000 was used for the payment of $522,000 and cash dividends paid of $348,000.dividends.
In the third quarter of the current year, the Company began a project to upgrade its enterprise resource planning (ERP) software at an estimated project cost of $1.8 million. The Company has entered into a lease arrangement to fund the majority of the expected costs of the project, as such costs are incurred. Costs of $375,000 were incurred and funded under the lease arrangement during the third quarter ended January 31, 2005. The project is expected to be completed during the second quarter of fiscal year 2006.
Outlook for Remainder of Fiscal Year 2005
In addition to general economic factors affecting the Company and its markets, demand for the Company’s products is also dependent upon the number of laboratory construction projects planned and/or current progress in projects already under construction. The Company’s ability to predict future demand is very limited given, among other general economic factors affecting the Company and its markets, the Company’s role as subcontractor or supplier to dealers of subcontractors.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Certain statements in this report constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could significantly impact results or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, economic, competitive, governmental, and technological factors affecting the Company’s operations, markets, products, services, and prices. The cautionary statements made pursuant to the Reform Act herein and elsewhere by the Company should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company prior to the effective date of the Reform Act. The Company cannot always predict what factors would cause actual results to differ materially from those indicated by the forward-looking statements. In addition, readers are urged to consider statements that include the terms “believes”, “belief”, “expects”, “plans”, “objectives”, “anticipates”, “intends” or the like to be uncertain and forward-looking.
REVIEW BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
A review of the interim financial information included in this Quarterly Report on Form 10-Q for the three months and sixnine months ended OctoberJanuary 31, 20042005 has been performed by PricewaterhouseCoopers LLP, the Company’s independent auditors. Their report on the interim financial information follows.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Kewaunee Scientific Corporation
Statesville, North Carolina
We have reviewed the accompanying condensed consolidated balance sheet of Kewaunee Scientific Corporation as of OctoberJanuary 31, 20042005 and April 30, 2004, and the related condensed consolidated statements of operations for each of the three and six-monthnine-month periods ended OctoberJanuary 31, 20042005 and OctoberJanuary 31, 20032004 and the condensed consolidated statement of cash flows for the six-monthnine-month periods ended OctoberJanuary 31, 20042005 and OctoberJanuary 31, 2003.2004. These interim financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements information for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of April 30, 2004, and the related consolidated statements of operations, of stockholder’s equity, and of cash flows for the year then ended (not presented herein), and in our report dated June 4, 2004 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of April 30, 2004, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Charlotte, North Carolina
NovemberFebruary 22, 20042005
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There are no material changes to the disclosures made on this matter in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2004.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
An evaluation was performed under the supervision and the participation of the company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of OctoberJanuary 31, 2004.2005. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that, as of OctoberJanuary 31, 2004,2005, the Company’s disclosure controls and procedures were adequate and effective and designed to ensure that all material information required to be filed in this quarterly report is made known to them by others within the Company and its subsidiaries.
(b) Changes in internal controls
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to OctoberJanuary 31, 2004.2005. As no significant deficiencies or material weaknesses were found, no corrective actions were taken.
The Company’s Annual Meeting of Stockholders was held on August 25, 2004. Information regarding the results of this meeting are incorporated by reference from the Company’s Report on Form 10-Q for the three months ended July 31, 2004.
(a) Exhibits
(a) | Exhibits |
10.1A | First Amendment to the Re-Established Retirement Plan for Salaried Employees of Kewaunee Scientific Corporation. | |
10.2B | Second Amendment to the Re-Established Retirement Plan for Hourly Employees of Kewaunee Scientific Corporation. | |
10.21 | Kewaunee Scientific Corporation 401Plus Executive Deferred Compensation Plan (Restated effective January 1, 2005) | |
31.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(b) Reports on Form 8-K
(b) | Reports on Form 8-K |
A Form 8-K was filed on August 26,November 24, 2004 with the Commission which included as an exhibit the Company’s Press Release announcing the financial results for the firstsecond quarter ended JulyOctober 31, 2004.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
KEWAUNEE SCIENTIFIC CORPORATION | ||||||||
(Registrant) | ||||||||
Date: March 15, 2005 | By | /s/ D. Michael Parker | ||||||
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Chief Financial Officer |
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