UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


FORM 10-Q


 

xQuarterly 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)

 

(I.R.S.EmployerI.R.S. Employer

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

 

INDEX TO FORM 10-Q

 

FOR THE QUARTERLY PERIOD ENDED OCTOBERJANUARY 31, 20042005

 

   

Page

Number


PART I.

FINANCIAL INFORMATION

   

Item 1.

Financial Statements

   

Condensed Consolidated Statements of Operations -
Three months and sixnine months ended OctoberJanuary 31, 20042005 and 20032004

  3

Condensed Consolidated Balance Sheets October
January 31, 20042005 and April 30, 2004

  4

Condensed Consolidated Statements of Cash Flows - Six
Nine months ended OctoberJanuary 31, 20042005 and 20032004

  5

Notes to Condensed Consolidated Financial Statements

  6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  1112

Review by Independent Registered Public Accounting Firm

  1517

Report of Independent Registered Public Accounting Firm

  1618

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

  1719

Item 4.

Controls and Procedures

  1719

PART II.

OTHER INFORMATION

   

Item 4.

Submission of matters to a Vote of Security Holders18

Item 6.

Exhibits and Reports on Form 8-K

  1820

SIGNATURE

  1921


Part 1. Financial Information

Item 1.Financial Statements

 

Item 1. Financial Statements

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

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

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

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

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

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.Comprehensive Income

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.

G.Stock Options

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 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

prepaid income taxes of $1.1 million.

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

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

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.

PART II. OTHER INFORMATION

Item 4.Submission of Matters to a Vote of Security Holders

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.

Item 6.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

 

(a)Exhibits
10.1AFirst Amendment to the Re-Established Retirement Plan for Salaried Employees of Kewaunee Scientific Corporation.
10.2BSecond Amendment to the Re-Established Retirement Plan for Hourly Employees of Kewaunee Scientific Corporation.
10.21Kewaunee 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.

SIGNATURE

 

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


    

KEWAUNEE SCIENTIFIC CORPORATIOND. Michael Parker

    

(Registrant)Senior Vice President, Finance and

Date:

December 13, 2004

By/s/    D. MICHAEL PARKER
    D. Michael Parker
Senior Vice President,
Finance and

Chief Financial Officer

 

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