Exhibit 13
[PHOTO DEPICTING LABORATORY]
FUME HOODS
STEEL CABINETRY
LABORATORY FURNITURE
MOBILE CARTS
MODULAR FURNITURE
WOOD CABINETRY
COMPUTER ENCLOSURES
WORKSURFACES
LAN WORKSTATIONS
[LOGO]KEWAUNEE
Scientific Corporation
2002 ANNUAL REPORT
Exhibit 13
CORPORATE PROFILE
Kewaunee Scientific Corporation is a recognized leader in the design,
manufacture, and installation of scientific and technical furniture. The
Company's Corporate headquarters are located in Statesville, North Carolina. The
manufacturing facilities located in Statesville, produce steel and wood
laboratory furniture, fume hoods, network storage systems, and worksurfaces. The
manufacturing facility located in Lockhart, Texas, produces technical furniture,
including workstations, workbenches, computer enclosures, and related
accessories, all to support local area computer networks and for the storage and
assembly of computers and light electronics.
[PHOTO DEPICTING LABORATORY]
[PHOTO DEPICTING WORKSTATION]
[PHOTO DEPICTING WORKSTATION]
2
TABLE OF CONTENTS
4 Letter to Stockholders
6 Company Products
10 Forward-Looking Statement Disclosure
10 Management's Discussion and Analysis
14 Consolidated Financial Statements and Notes
26 Reports of Independent Accountants
and Management
27 Summary of Selected Financial Data
28 Quarterly Financial Data
29 Corporate Information
FINANCIAL HIGHLIGHTS
KEWAUNEE SCIENTIFIC CORPORATION
$ in thousands, except per share data 2002 2001 Percent Change
- --------------------------------------------------------------------------------
OPERATING DATA:
Net sales $84,849 $77,059 +10.1
- --------------------------------------------------------------------------------
Gross profit $14,706 $14,516 +1.3
- --------------------------------------------------------------------------------
Operating expenses $11,801 $12,156 -2.9
- --------------------------------------------------------------------------------
Operating earnings $ 2,905 $ 2,360 +23.1
- --------------------------------------------------------------------------------
Net earnings $ 1,900 $ 1,277 +48.8
- --------------------------------------------------------------------------------
Net earnings per share
Basic $ 0.77 $ 0.52 +48.1
Diluted $ 0.77 $ 0.51 +51.0
- --------------------------------------------------------------------------------
Return on average equity 7.2% 5.0% --
- --------------------------------------------------------------------------------
Cash dividends per share $ 0.28 $ 0.28 --
================================================================================
YEAR-END DATA:
Cash and cash equivalents $ 1,747 $ 488 +258.0
- --------------------------------------------------------------------------------
Net working capital $14,817 $14,685 +0.9
- --------------------------------------------------------------------------------
Total borrowings/long-term debt $ 2,611 $ 2,997 -12.9
- --------------------------------------------------------------------------------
Stockholders' equity $26,912 $25,761 +4.5
- --------------------------------------------------------------------------------
Book value per share $ 10.90 $ 10.42 +4.6
- --------------------------------------------------------------------------------
Closing market price per share $ 10.60 $ 8.65 +22.5
================================================================================
3
LETTER TO STOCKHOLDERS
Fiscal year 2002 was a year of progress for Kewaunee Scientific in a number of
important areas, despite an extremely challenging economy and business
environment. We experienced improved earnings, healthy volume growth, and
improved financial strength. Net earnings increased 49% to $1,900,000, or $.77
per diluted share, while sales increased 10% to $84,849,000.
We were pleased with the improved financial results of our laboratory products
business. This business rebounded strongly from the prior year, with earnings
more than tripling, while sales increased 27% to $78.7 million. Continuing cost
improvement activities and improved manufacturing efficiencies allowed us to
improve gross profit margins and earnings on these products. Sales for the year
benefited from strong demand from our industrial research customers, as they
continued to fund new research and development projects, and from our
educational customers, as spending for new school construction continued at a
healthy pace.
Our technical products business, after making significant contributions to sales
and earnings in the two previous years, had a very disappointing year. Sales for
the year declined 59% from the prior year, resulting in an operating loss, as a
recovery of capital spending by customers in the high-tech electronics industry
failed to materialize. The loss for this business was in sharp contrast to
operating earnings of $1.6 million and $1.5 million in the two previous years,
respectively. During the year, we continued to position this business for a
recovery of the high-tech marketplace. We strengthened our relationships with a
number of key customers and initiated several changes in our sales organization
to better provide representation in key market areas.
Following the continuing success of our joint-venture sales company in
Singapore, during the year, we began operation of a joint-venture sales company
in Bangalore, India. Sales and profits of this new business have both exceeded
our expectations, and we are excited about future growth opportunities in this
market. To address the demand in this market, current and projected, we recently
established Kewaunee Scientific Corporation India Pvt Ltd, a wholly-owned
subsidiary of Kewaunee Scientific Corporation. This operation will allow us to
provide locally-made Kewaunee products at a more competitive price.
We continue to emphasize the development of new products. Several new and
innovative products for the laboratory market were introduced at our industry
conference in New Orleans in March 2002. These included a full line of mobile
adjustable workstations with modular utility manifolds. This increased
flexibility concept is rapidly gaining global acceptance in research and
development designs. We also introduced our new SturdiKwik bench system during
the year. This product is designed to allow easy installation by the customer's
maintenance group, therefore avoiding professional installation costs.
The Company's financial position continues to strengthen. Cash on hand increased
to $1.7 million at year-end, while total debt was reduced to $2.6 million. We
finished the year with no borrowings outstanding under our $6 million credit
facility. Stockholders' equity increased to $26.9 million, resulting in a book
value per share of $10.90. Cash flow provided by operating activities increased
to $4.5 million for the year, assisted by reduced inventory levels and improved
collections of receivables.
OUTLOOK
We are very optimistic about Kewaunee's future. The long-term market for our
laboratory products looks bright, as capital spending by industrial customers
for new research and development projects is projected to continue. In addition,
federal funding for research and development is also expected to increase
beginning in late calendar year 2002. Spending for new school construction is
also projected to continue at a healthy pace for many years. Our successes
to-date through joint ventures in Singapore and India, have made us aware of
potential significant growth opportunities for our products and services in
countries outside the United States. We are currently implementing several
strategies and actions to pursue these opportunities.
4
[PHOTO OF CORPORATE OFFICERS]
Corporate Officers (left to right):
(Front Row) Roger L. Eggena, Eli Manchester, Jr.,
William A. Shumaker, James J. Rossi
(Back Row) D. Michael Parker, Kurt P. Rindoks, Kenneth E. Sparks
The high-tech industry has been the driving force behind the huge productivity
gains experienced in the United States, and we expect this trend to continue. As
a result, we continue to consider the long-term opportunities in the technical
furniture market excellent. However, our short-term outlook is for a gradual
recovery of the business beginning in late calendar year 2002.
We regret to report the resignation of Kingman Douglass as a director of the
Company due to health reasons, effective April 30, 2002. His association with
Kewaunee dates back to 1968, when he participated as an underwriter in
Kewaunee's initial public offering. He was elected a director in 1986 and has
been a stalwart, steady, and knowledgeable member of the Board for the past 15
years. His thoughtful counsel and advice on financial and business matters has
been of great value. We wish him good health and happiness in the years ahead.
We are very pleased to report that Silas Keehn has accepted the position of
Chairman of the Company's Audit Committee, left vacant as a result of Mr.
Douglass' retirement. Mr. Keehn's extensive financial background, including his
experience as President of the Federal Reserve Bank of Chicago, makes him an
excellent choice for this position.
Our success during the year would not have been possible without the continued
support of our stockholders; our associates; our network of agencies and
representatives; our national stocking distributor, VWR International; and our
customers. To each and all of these groups, we are especially grateful.
Sincerely,
/s/ Eli Manchester, Jr. /s/ William A. Shumaker
Eli Manchester, Jr. William A. Shumaker
Chairman of the Board President,
Chief Executive Officer
July 2002
5
LABORATORY PRODUCTS
[PHOTO DEPICTING LABORATORY]
6
THE LABORATORY
"...a workplace...in which containers used for reactions, transfers, and other
handling of substances are designed to be easily and safely manipulated...and
protective laboratory practices and equipment are available and in common use to
minimize the potential for employee exposure to hazardous chemicals."
(OSHA Laboratory Standard 1910.1450)
Kewaunee Scientific Corporation's Laboratory Products Group provides products
designed to allow lab personnel to pursue discovery safely in the modern
laboratory, including:
.. Furniture systems that go beyond mere cabinetry and storage.
.. Fume hoods designed to contain both the slightest odors from a counter top
analyzer, and contaminates from a two-story distillation apparatus.
.. Worksurfaces that are equally at home in the wet laboratory or the support
area.
.. Plumbing and electrical service distribution systems that provide
accessibility and flexibility.
Kewaunee engineers solutions for all aspects of the laboratory.
ENGINEERING SOLUTIONS
The sophistication of today's laboratory construction market requires a
different approach than simply selecting part numbers from a catalog. Kewaunee
and our distribution network become intimately involved in all aspects of
laboratory planning, design, fabrication, and installation. Active participation
with architects, designers, engineers, and contractors, in conjunction with the
lab users, defines the process used today.
DOMESTIC
Our largest sales volume comes from a national group of dealers/agents with an
average of over 15 years experience representing Kewaunee Scientific
Corporation. This dedicated group provides full laboratory planning services,
budgeting and estimating, project management, and installation. With offices
located in all major US markets, the Kewaunee dealer organization is the finest
in the industry.
[PHOTO OF LABORATORY PRODUCTS]
VWR International is our national stocking distributor. They stock thousands of
Kewaunee units to provide the market with readily available product. Their 400+
sales people and 17 lab furniture specialists work closely with end users to
configure products into workable laboratories. While the quick turn marketplace
is VWR's forte, they also utilize their in-house designers and project managers
to solve the design requirements of larger projects.
[PHOTO OF LABORATORY PRODUCTS]
In addition to independent sales representation, Kewaunee has an in-house team
to manage large complex lab projects directly. The sales management group,
designers, engineers, estimators, and project managers excel at the challenges
presented by our most sophisticated customers. Our product engineers and
manufacturing capabilities are second to none. Industry-wide recognition of
these capabilities places us at the top of full service laboratory product and
construction providers.
[PHOTO OF LABORATORY PRODUCTS]
INTERNATIONAL
In 1998, Kewaunee formed a joint-venture sales company in Singapore, Kewaunee
Labway Asia Pte Ltd. The company was established to better serve the
international marketplace, with an emphasis on Asia. This strategy has now
expanded to India, with the formation of a new joint-venture company in
Bangalore. These two locations have first class capabilities in all aspects of
lab design and construction. Their expertise with specialty gas and plumbing
systems, and full service installation capabilities, make them unique in the
international marketplace, providing a growth market opportunity for Kewaunee.
7
TECHNICAL FURNITURE
[PHOTO DEPICTING WORKSTATION]
8
THE HIGH-TECH WORK ENVIRONMENT
These workplaces have a need for unusually configured or unique attributes, such
as electrostatic dissipative (ESD) qualities and/or the ability to facilitate
the use of a variety of tools, components or equipment.
Typical environments include engineering workstations or laboratories for
development and testing of sensitive mechanical or electrical componentry and
equipment, production and assembly of high-tech electronics such as computers or
electronic equipment, and environments commonly known as network operation
centers or data centers where large quantities of computers, networking, and
telecommunications equipment are housed and maintained for today's business
infrastructure.
Kewaunee Scientific Corporation's Technical Furniture Group provides products
designed to meet the rapid and continually evolving high-tech electronics
industry. From storage intensive R&D labs, to the high-tech electronic
production floor, to network and computer operations centers, the Technical
Furniture Group excels in creating highly productive work environments that
expertly meet each customer's unique needs.
INGENUITY @ WORK
Today's business climate requires continual improvements in productivity to keep
a company competitive, and this has never been truer in the high-tech
electronics industry. Simple assembly operations have moved to increasingly
higher levels of sophistication, requiring their work areas to maximize storage,
reduce square footage, interface with automation, and, at the same time, improve
ergonomics. The Technical Furniture Group uses two different distribution
networks to meet the needs of our varied customer base.
TECHNICAL FURNITURE
Kewaunee's Technical Furniture customers have vast and often complex
requirements that are defined by industrial and process engineers, safety
managers, ergonomics consultants, contractors, and the workers themselves.
Kewaunee's sales representatives and nationwide dealer network respond to
customer needs through collaboration with the Technical Furniture Group product
development engineers. Dealers have in-house design, account management, project
management, and installation services that provide customers a turn-key solution
using the Sturdilite, Evolution, SturdiKwik, or Adjustabench product lines.
[PHOTO DEPICTING WORKSTATIONS]
NETWORK STORAGE
Kewaunee's relatively new product lines of Enclosures and TekRak, along with the
well established Evolution for LANs furniture line, are supported by the efforts
of a specialized group of sales representatives who work with a nationwide
network of value added resellers, regional distributors and dealers. This
distribution network focuses on the unique equipment storage needs of public and
private sector network managers and administrators who grapple with rapidly
changing technology and the inevitable overload of wires and cables associated
with those networks.
[PHOTO DEPICTING WORKSTATIONS]
Kewaunee's ability to handle complex requirements and provide ingenious
solutions was demonstrated during the year with Dell Computer Corporation.
Kewaunee worked closely with Dell engineers, automation experts, and conveyor
and controls suppliers in the design of the factory at Dell's Topfer
Manufacturing Center, which includes technical furniture throughout manufactured
and installed by Kewaunee. This facility was awarded Industry Week magazine's
coveted Best Plant Award in 2001 (see opposite page photo).
[PHOTO DEPICTING WORKSTATIONS]
9
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this annual report, including the Letter to Stockholders,
narrative text, captions, and Management's Discussion and Analysis of Financial
Condition and Results of Operations, 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. 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
CRITICAL ACCOUNTING POLICIES
In the ordinary course of business, the Company has made a number of estimates
and assumptions relating to the reporting of results of operations and financial
position in the preparation of its financial statements in conformity with
generally accepted accounting principles. Actual results could differ
significantly from those estimates under different assumptions and conditions.
The Company believes that the following discussion addresses the Company's most
critical accounting policies, which are those that are most important to the
portrayal of the Company's financial condition and results of operations and
require management's most difficult, subjective and complex judgments, often as
a result of the need to make estimates about the effect of matters that are
inherently uncertain.
PRINCIPLES OF CONSOLIDATION
In fiscal 2002, the Company increased its ownership to 51% in Kewaunee Labway
Asia Pte Ltd, a joint-venture company serving as a dealer for the Company's
laboratory products in Southeast Asia region. The consolidated financial
statements for fiscal year 2002 include the results of this joint venture. All
intercompany balances and transactions have been eliminated in consolidation. In
fiscal years 2001 and 2000, the operating results of the joint venture were not
material to the financial statements and were reported in accordance with the
equity method of accounting. The Company's investment in the joint venture was
reported in other assets with related net earnings reported in other income for
the percentage of the joint venture owned by the Company at the end of each
fiscal year.
REVENUE RECOGNITION
The Company generally recognizes product sales at the date of the shipment of
its products, or when customers have purchased and accepted title goods, but
requested the Company to store the finished goods on the customer's behalf.
Product sales for fixed-price construction contracts are recognized under the
percentage-of-completion method of accounting, with product sales revenue
allocated based on costs incurred for products completed and shipped to the
customer. A provision for losses expected to be incurred on a fixed-price
contract is made in the period such loss becomes known. A high degree of
management judgment is required with respect to periodic estimates of profit
and product costs on these contracts. Revenue for installation services is
generally recognized as the service is performed.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company evaluates the collectibility of its trade accounts receivable based
on a number of factors. In circumstances where management is aware of a
customer's inability to meets its financial obligations to the Company, a
specific reserve for bad debts is estimated and recorded which reduces the
recognized receivable to the estimated amount the Company believes will
ultimately be collected. In addition to specific customer identification of
potential bad debts, a general reserve for bad debts is estimated and recorded
based on the Company's recent past loss history and an overall assessment of
past due trade accounts receivable amounts outstanding.
PENSION BENEFITS
The Company sponsors pension plans covering all employees who meet eligibility
requirements. Several statistical and other factors, which attempt to anticipate
future events, are used in calculating the expense and liability related to
these plans. These factors include assumptions about the discount rate, expected
return on plan assets, and rate of future compensation increases as determined
by the Company, within certain guidelines. The actuarial assumptions used by the
Company may differ materially from actual results due to changing market and
economic conditions, higher or lower withdrawal rates, or longer or shorter life
spans of participants. These differences may significantly affect the amount of
pension expense recorded by the Company in future periods.
RESULTS OF OPERATIONS
Sales for fiscal year 2002 were $84.8 million, up 10.1% from fiscal year 2001
sales of $77.1 million. Sales of laboratory products increased 27.0% to $78.7
million, as spending for industrial research and new school construction
remained robust during the year. Sales of technical products were adversely
affected by the significant slowdown in capital spending by customers in the
high-tech industry, declining 59.1% from the prior year.
Sales for fiscal year 2001 increased 3.0% from fiscal year 2000 sales of $74.8
million. The sales increase for the 2001 fiscal year resulted from record sales
of technical furniture products. Sales of laboratory products were relatively
unchanged from the prior year. The Company's unfilled sales order backlog was
$34.2 million at April 30, 2002, as compared to $35.5 million at April 30, 2001,
and $31.5 million at April 30, 2000.
Gross profit represented 17.3%, 18.8%, and 22.8% of sales in fiscal years 2002,
2001, and 2000, respectively. The decline in gross profit margin in fiscal year
2002 was due to an unfavorable sales mix resulting from the significant decline
in sales of higher margin technical products during the year. As compared to
fiscal year 2000, the gross profit margin in fiscal year 2001 was adversely
affected by lower selling process of laboratory products and an unfavorable
sales mix between higher margin industrial research projects and lower margin
educational projects. Margins for fiscal year 2001 were also impacted by higher
energy and healthcare costs.
Operating expenses were $11.8 million, $12.2 million, and $12.4 million in
fiscal years 2002, 2001, and 2000, respectively, and 13.9%, 15.8%, and 16.6% of
sales, respectively. In fiscal year 2002, the decrease in operating expenses as
a percentage of sales resulted primarily from lower sales commission expenses
due to changes in product sales mix and the continuation of cost reduction
activities, which assisted in maintaining marketing and administrative expenses
at relatively flat levels with the prior year. The decrease in operating
expenses as a percentage of sales in fiscal year 2001 was primarily attributable
to the impact of cost reduction activities implemented during the year.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
Net other expense was $6,000 and $276,000 in fiscal years 2002 and 2001,
respectively, compared to net other income of $326,000 in fiscal year 2000.
Other expense for fiscal year 2001 included a charge of $391,000 associated with
the estimated settlement of an old dispute between the Company and a general
contractor. Interest expense was $206,000, $246,000, and $169,000 in fiscal
years 2002, 2001, and 2000, respectively. The change in interest expense for
fiscal year 2002 resulted primarily from changes in the levels of borrowing and
lower interest rates. The change in interest expense for fiscal years 2001 and
2000 resulted primarily from changes in the levels of borrowings during each
year.
The Company recorded income tax expense of $793,000, $561,000, and $1.3 million
in fiscal years 2002, 2001, and 2000, respectively. The effective rates were
29.4%, 30.5%, and 26.0% of pretax earnings in fiscal years 2002, 2001, and 2000,
respectively. The effective rates for each year were reduced by state income tax
credits available from investments in certain qualifying machinery and
equipment, and, to a lesser degree, income tax credits for research and
development activities.
Net earnings increased to $1.9 million, or $0.77 per diluted share, in fiscal
year 2002, from $1.3 million, or $.51 per diluted share, in fiscal year 2001.
Net earnings were $3.6 million, or $1.44 per diluted share, in fiscal year 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity have been funds generated from
operating activities, supplemented as needed by the Company's credit facility.
The Company believes that these sources will be sufficient to support ongoing
business levels, including capital expenditures. At April 30, 2002, the Company
had no advances outstanding under its $6 million revolving credit loan.
The Company has entered into a bank note collateralized by certain machinery and
equipment. The loan is repayable in equal monthly installments plus interest.
The note includes certain financial covenants as to tangible net worth, funds
flow coverage, current ratio, and ratio of liabilities to tangible net worth.
The Company has entered into an interest rate swap agreement whereby a
substantial portion of the outstanding principal amount of the bank note
effectively converts to a fixed rate on May 1, 2002. The notional amount of this
cash flow hedge is reduced in the same proportion as the principal balance of
the bank note over the remaining term of the bank note. The Company also has
entered into various operating lease agreements for machinery and equipment.
Most leases provide the Company with certain early cancellation rights, as well
as renewal and purchase options. The following table summarizes the obligated
cash payments for these commitments:
PAYMENTS DUE BY PERIOD
Contractual Obligations Total 1 Year 2-3 Years 4-5 Years After 5 Years
- --------------------------------------------------------------------------------------------------
Long-term Debt
(principal only) $2,611,000 $ 681,000 $1,362,000 $ 568,000 $ --
- --------------------------------------------------------------------------------------------------
Operating Leases 1,947,000 506,000 844,000 511,000 86,000
- --------------------------------------------------------------------------------------------------
Total Contractual
Cash Obligations $4,558,000 $1,187,000 $2,206,000 $1,079,000 $86,000
12
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
Operating activities provided cash of $4.5 million, $2.4 million, and $2.2
million in fiscal years 2002, 2001, and 2000, respectively, primarily from
earnings in each of these years. Working capital increased to $14.8 million at
April 30, 2002, from $14.7 million at April 30, 2001, and the ratio of current
assets to current liabilities decreased to 2.4-to-1 at April 30, 2002, from
2.5-to-1 at April 30, 2001.
Capital expenditures of $2.1 million, $1.7 million, and $3.4 million in fiscal
years 2002, 2001, and 2000, respectively, were funded by cash primarily from
operating activities and $3.1 million borrowed in fiscal year 2001 under a
five-year bank note. Fiscal year 2003 capital expenditures are anticipated to be
approximately $3 million and are expected to be funded primarily by operating
activities.
The Company paid cash dividends of $.28 per share, $.28 per share, and $.26 per
share in fiscal years 2002, 2001, and 2000, respectively. The Company expects to
pay dividends in the future in line with the Company's actual and anticipated
future operating results.
RECENT ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141")
and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires the
purchase method of accounting for business combinations initiated after June 30,
2001 and eliminated the pooling-of-interests method for business combinations.
SFAS 142 requires that goodwill and certain intangibles will not be amortized,
but instead be reviewed for impairment and written down to fair value. SFAS 142
is effective for fiscal years beginning after December 15, 2001. The Company
does not expect the adoption of SFAS 141 and SFAS 142 to have a material effect
on its financial condition or results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets" and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 143
establishes accounting standards for the recognition and measurement of an asset
retirement obligation and its associated retirement cost. SFAS 143 is effective
for fiscal years beginning after June 15, 2002, with early adoption permitted.
The Company plans to adopt SFAS 143 effective May 1, 2003. SFAS 144 establishes
a single accounting model for the impairment of long-lived assets. SFAS 144
supersedes SFAS 121, but retains the fundamental provisions for (a) measurement
of impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sales. SFAS 144 is effective for fiscal
years beginning after December 15, 2001. The Company does not expect the
adoption of SFAS 143 and SFAS 144 to have a material effect on its financial
condition or results of operations.
13
CONSOLIDATED STATEMENTS OF OPERATION
YEARS ENDED APRIL 30 KEWAUNEE SCIENTIFIC CORPORATION
$ and shares in thousands, except per share amounts 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------
Net sales $84,849 $77,059 $74,798
Cost of products sold 70,143 62,543 57,715
--------------------------------------------------------------------------------------------------------------------
Gross profit 14,706 14,516 17,083
Operating expenses 11,801 12,156 12,429
--------------------------------------------------------------------------------------------------------------------
Operating earnings 2,905 2,360 4,654
Other (expense) income (6) (276) 326
Interest expense (206) (246) (169)
--------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 2,693 1,838 4,811
Income tax expense 793 561 1,250
--------------------------------------------------------------------------------------------------------------------
Net earnings $ 1,900 $ 1,277 $ 3,561
====================================================================================================================
Net earnings per share
Basic $ 0.77 $ 0.52 $ 1.45
Diluted $ 0.77 $ 0.51 $ 1.44
====================================================================================================================
Weighted average number of
common shares outstanding
Basic 2,468 2,467 2,456
Diluted 2,481 2,490 2,478
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEAR ENDED APRIL 30 KEWAUNEE SCIENTIFIC CORPORATION
$ in thousands, Common Additional Retained Treasury Total Stockholders'
except per share amounts Stock Paid-in-Capital Earnings Stock Equity
--------------------------------------------------------------------------------------------------------------------
Balance at April 30, 1999 $ 6,550 $148 $16,429 $(1,095) $22,032
Net earnings -- -- 3,561 -- 3,561
Cash dividends declared, $.26 per share -- -- (639) -- (639)
Stock options exercised, 29,875 shares -- 6 -- 178 184
Purchase of treasury stock, 300 shares -- -- -- (3) (3)
--------------------------------------------------------------------------------------------------------------------
Balance at April 30, 2000 6,550 154 19,351 (920) 25,135
====================================================================================================================
Net earnings -- -- 1,277 -- 1,277
Cash dividends declared,$.28 per share -- -- (690) -- (690)
Stock options exercised, 7,501 shares -- (4) -- 44 40
Purchase of treasury stock, 130 shares -- -- -- (1) (1)
--------------------------------------------------------------------------------------------------------------------
Balance at April 30, 2001 6,550 150 19,938 (877) 25,761
====================================================================================================================
Net earnings -- -- 1,900 -- 1,900
Cash dividends declared, $.28 per share -- -- (692) -- (692)
Stock options exercised, 8,750 shares -- (4) -- 54 50
Purchase of treasury stock, 12,966 shares -- -- -- (107) (107)
--------------------------------------------------------------------------------------------------------------------
Balance at April 30, 2002 $6,550 $146 $21,146 $ (930) $26,912
====================================================================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements
14
CONSOLIDATED BALANCE SHEETS
APRIL 30 KEWAUNEE SCIENTIFIC CORPORATION
$ and shares in thousands, except per share amounts 2002 2001
- --------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,747 $ 488
Receivables, less allowance: $597 (2002); $389 (2001) 18,979 17,629
Inventories 3,309 4,370
Deferred income taxes 581 915
Prepaid income taxes 296 758
Prepaid expenses and other current assets 514 498
- --------------------------------------------------------------------------------------------------------
Total Current Assets 25,426 24,658
- --------------------------------------------------------------------------------------------------------
Property, Plant Equipment
Land 454 98
Buildings and improvements 14,197 13,857
Machinery and equipment 22,040 20,789
- --------------------------------------------------------------------------------------------------------
Property, plant and equipment 36,691 34,744
Accumulated depreciation (23,880) (21,825)
- --------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 12,811 12,919
- --------------------------------------------------------------------------------------------------------
Other Assets 3,953 3,292
- --------------------------------------------------------------------------------------------------------
Total Assets $ 42,190 $ 40,869
========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 681 $ 620
Accounts payable 6,648 5,334
Employee compensation and amounts withheld 1,932 1,446
Deferred revenue 481 1,024
Other accrued expenses 867 1,549
- --------------------------------------------------------------------------------------------------------
Total Current Liabilities 10,609 9,973
- --------------------------------------------------------------------------------------------------------
Long-term Debt 1,930 2,377
Deferred Income Taxes 925 1,063
Accrued Employee Benefit Plan Costs 1,583 1,695
Other Long-term Liabilities 231 --
- --------------------------------------------------------------------------------------------------------
Total Liabilities 15,278 15,108
- --------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 7)
Stockholders' Equity
Common stock, $2.50 par value
Authorized-5,000 shares; Issued-2,620 shares 6,550 6,550
Additional paid-in-capital 146 150
Retained earnings 21,146 19,938
Common stock in treasury, at cost: 151 shares (2002); 147 (2001) (930) (877)
- --------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 26,912 25,761
- --------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 42,190 $ 40,869
========================================================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements
15
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30 KEWAUNEE SCIENTIFIC CORPORATION
$ in thousands 2002 2001 2000
- ------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net earnings $ 1,900 $ 1,277 $ 3,561
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 2,173 2,168 1,968
Bad debt provision 155 144 123
Deferred income tax expense (benefit) 196 355 (255)
Decrease (increase) in prepaid income taxes 462 (758) --
(Increase) decrease in receivables (1,505) 220 (885)
Decrease (increase) in inventories 1,061 (871) (559)
(Increase) decrease in prepaid pension cost (896) (387) 162
Increase (decrease) in accounts payables
and accrued expenses 1,118 (168) (1,728)
(Decrease) increase in deferred revenue (543) 516 (62)
Other, net 338 (130) (130)
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,459 2,366 2,195
- ------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures (2,065) (1,678) (3,352)
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,065) (1,678) (3,352)
- ------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Dividends paid (692) (690) (639)
Net (decrease) increase in short-term borrowings -- (2,555) 1,616
Proceeds from long-term debt 250 3,100 --
Payments on long-term debt (636) (103) --
Proceeds from exercise of stock options
(including tax benefit) 50 40 184
Purchase of treasury stock (107) (1) (3)
- ------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (1,135) (209) 1,158
- ------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 1,259 479 1
Cash and Cash Equivalents at Beginning of Year 488 9 8
- ------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 1,747 $ 488 $ 9
================================================================================================
Supplemental Disclosure of Cash Flow Information
Interest paid $ 205 $ 266 $ 159
Income taxes paid $ 115 $ 1,196 $ 1,080
================================================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements
16
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Kewaunee Scientific Corporation (the "Company") is a manufacturer of scientific
and technical furniture, including steel and wood laboratory furniture, fume
hoods, network storage systems, worksurfaces, workstations, workbenches,
computer enclosures, and other related accessories. Sales are made through
purchase orders and contracts submitted by customers, the Company's dealers and
agents, a national stocking distributor, and competitive bids submitted
by the Company. The majority of the Company's products are sold to customers
located in North America, primarily within the United States. The Company's
laboratory products are used in chemistry, physics, biology, and other general
science laboratories in the pharmaceutical, biotechnology, industrial, chemical,
commercial, educational, government, and health care markets. Technical products
are used in manufacturing facilities of computers and light electronics, and by
users of computer and networking furniture.
Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand
and highly liquid investments with original maturities of three months or less.
Inventories Inventories are valued at the lower of cost or market. Cost has
been determined using the last-in, first-out (LIFO) method for all inventories.
Property, Plant and Equipment Property, plant and equipment are stated at cost
less accumulated depreciation. Depreciation is determined for financial
reporting purposes, principally on the straight-line method over the estimated
useful lives of the individual assets or, for leaseholds, over the terms of the
related leases, if shorter. Straight-line and accelerated methods of
depreciation have been used for income tax purposes. The lives, by category,
generally are as follows: buildings and improvements, 10-40 years; leasehold
improvements, 10 years; furniture, fixtures, and office equipment, 3-5 years;
computer equipment, 3-5 years; factory machinery and vehicles, 5-10 years.
Management reviews the carrying value of property, plant and equipment for
impairment whenever changes in circumstances or events indicate that such
carrying value may not be recoverable.
Use of Estimates The presentation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
these estimates. Significant estimates impacting the accompanying financial
statements include the allowance for uncollectible accounts receivable,
inventory valuation, and pension liabilities.
Fair Value of Financial Instruments The Company's financial instruments
include cash and cash equivalents, cash surrender value of life insurance
policies, long-term debt, and short-term borrowings. Management believes the
carrying value of these assets and liabilities approximate fair value.
Sales Recognition Product sales are generally recognized at the date of
shipment, or when customers have purchased and accepted title of the goods, but
requested the Company to store the finished goods on the customer's behalf.
Product sales for fixed-price construction contracts are recognized under the
percentage-of-completion method of accounting, with sales revenue allocated
based on costs incurred for products completed and shipped to the customer.
Service revenue for installation of product sold is recognized as the work is
performed. Accounts receivable includes retainage in the amounts of $2,411,000
and $1,796,000 at April 30, 2002 and April 30, 2001, respectively, on certain
sales made under contractual agreements. Warranty costs are expensed as
incurred.
Credit Concentration The Company's credit risk is generally not concentrated
with any one customer or industry, although the Company does enter into large
contracts with individual customers from time to time. The Company performs
credit evaluations of its customers.
17
Income Taxes Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Advertising Costs The Company expenses advertising costs as incurred,
including trade shows, training materials, sales samples, catalogs, and other
related expenses. Advertising costs for the years ended April 30, 2002, 2001,
and 2000 were $410,000, $705,000, and $714,000, respectively.
Earnings Per Share Basic earnings per share is based on the weighted average
number of common shares outstanding during the year. Diluted earnings per share
reflects the assumed exercise and conversion of outstanding options under the
Company's stock option plans, except when options have an antidilutive effect.
Reclassifications Certain prior year accounts have been reclassified to
conform with current year presentation.
Derivative Financial Instruments The Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," effective January 1, 2001.
SFAS No. 133 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 employs derivative financial instruments,
such as interest rate swap contracts, to mitigate certain of those risks. The
Company does not enter into derivative instruments for speculative purposes.
Recent Accounting Standards In June 2001, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminated the
pooling-of-interests method for business combinations. SFAS 142 requires that
goodwill and certain intangibles will not be amortized, but instead be reviewed
for impairment and written down to fair value. SFAS 142 is effective for fiscal
years beginning after December 15, 2001. The Company does not expect the
adoption of SFAS 141 and SFAS 142 to have a material effect on its financial
condition or results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets" and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 143
establishes accounting standards for the recognition and measurement of an asset
retirement obligation and its associated retirement cost. SFAS 143 is effective
for fiscal years beginning after June 15, 2002, with early adoption permitted.
The Company plans to adopt SFAS 143 effective May 1, 2003. SFAS 144 establishes
a single accounting model for the impairment of long-lived assets. SFAS 144
supersedes SFAS 121, but retains the fundamental provisions for (a) measurement
of impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sales. SFAS 144 is effective for fiscal
years beginning after December 15, 2001. The Company does not expect the
adoption of SFAS 143 and SFAS 144 to have a material effect on its financial
condition or results of operations.
NOTE 2--BUSINESS COMBINATIONS
In the first quarter of fiscal year 2002, the Company increased its ownership to
51% in Kewaunee Labway Asia Pte Ltd, a joint-venture company serving as a dealer
for the Company's laboratory products in the Southeast Asia region. The
consolidated financial statements for fiscal year 2002 include the operating
results for this joint venture. All intercompany balances and transactions have
been eliminated in consolidation. In fiscal years 2001 and 2000, the operating
results of the joint venture are reported in the consolidated financial
statements in accordance with the equity method of accounting. Proforma results
for fiscal years 2001 and 2000 have not been presented because the operating
results for this business were not material to the consolidated financial
statements on either an individual or an aggregate basis.
18
NOTE 3--INVENTORIES
The Company's inventories at April 30 consisted of:
$ in thousands 2002 2001
-------------------------------------------------------------
Finished goods $ 671 $1,023
Work-in-process 1,007 1,455
Materials and components 1,631 1,892
-------------------------------------------------------------
Total inventories $ 3,309 $4,370
=============================================================
If inventories had been determined using the first-in, first-out (FIFO) method
at April 30, 2002 and 2001, reported inventories would have been $2.2 million
and $2.3 million greater, respectively.
NOTE 4--LONG-TERM DEBT AND OTHER CREDIT ARRANGEMENTS
Long-term debt consisted of the following at April 30:
$ in thousands 2002 2001
-------------------------------------------------------------
Notes payable, bank $ 2,611 $2,997
-------------------------------------------------------------
Less - payable within 1 year 681 620
-------------------------------------------------------------
Long-term portion $ 1,930 $2,377
=============================================================
In February 2001, the Company borrowed $3.1 million under a bank note
collateralized by certain machinery and equipment. The loan is repayable in 60
equal monthly installments plus interest. In February 2002, the Company added
$250,000 to the bank note repayable in equal monthly installments over the
remainder of the original term of the bank note. The note includes certain
financial covenants as to tangible net worth, funds flow coverage, current
ratio, and ratio of liabilities to tangible net worth.
The Company entered into an interest rate swap agreement in fiscal year 2002,
whereby $1.5 million of the outstanding principal amount of the bank note
effectively converts to a fixed rate of 6.37%, beginning May 1, 2002. The
notional amount of this interest rate hedge is reduced in the same proportion as
the principal balance of the bank note over the remaining term of the bank note.
The fair value of this cash flow hedge was not significant to the Company's
consolidated financial statements as of April 30, 2002. The Company entered into
this interest rate swap to mitigate future increases in interest rates. The
Company does not enter into derivative instruments for speculative purposes.
Monthly interest payments are payable under the bank note and revolving credit
loan calculated at the lower of (1) the LIBOR Market Index Rate plus 1.75%, or
(2) the lender's Prime Rate minus .75%. The borrowing rate was 3.59% at April
30, 2002.
The Company has an unsecured revolving credit facility for borrowings of up to
$6 million that matures in December 2002. There were no advances outstanding
under this facility as of April 30, 2002.
19
NOTES 5--INCOME TAXES
The income tax expense consisted of the following:
$ in thousands 2002 2001 2000
-------------------------------------------------------------------------------
Current tax expense:
Federal $ 585 $ 188 $ 1,320
State and local 54 18 185
Foreign tax credit (42) -- --
-------------------------------------------------------------------------------
Total current tax expense 597 206 1,505
-------------------------------------------------------------------------------
Deferred tax expense (benefit):
Federal 173 310 42
State and Local 23 45 (297)
-------------------------------------------------------------------------------
Total deferred tax expense (benefit) 196 355 (255)
-------------------------------------------------------------------------------
Net income tax expense $ 793 $ 561 $ 1,250
===============================================================================
The reasons for the differences between the above net income tax expense and the
amounts computed by applying the statutory federal income tax rates to earnings
before income taxes are as follows:
$ in thousands 2002 2001 2000
-------------------------------------------------------------------------------
Income tax expense at statutory rate $ 923 $ 625 $ 1,636
State and local taxes, net of federal
income tax benefit 125 85 221
Tax credits (301) (232) (654)
Other items, net 46 83 47
-------------------------------------------------------------------------------
Net income tax expense $ 793 $ 561 $ 1,250
-------------------------------------------------------------------------------
Significant items comprising the Company's deferred tax assets and liabilities
as of April 30 were as follows:
$ in thousands 2002 2001
-------------------------------------------------------------------------------
Deferred tax assets:
Accrued employee benefit expenses $ 192 $ 658
Allowance for doubtful accounts 203 160
Inventory reserves and capitalized costs 117 70
Other 69 27
-------------------------------------------------------------------------------
Total deferred tax assets 581 915
-------------------------------------------------------------------------------
Deferred tax liabilities:
Book basis in excess of tax basis
of property, plant and equipment (918) (1,063)
Other (7) --
-------------------------------------------------------------------------------
Total deferred tax liabilities (925) (1,063)
--------------------------------------------------------------------------------
Net deferred tax liabilities $(344) $ (148)
--------------------------------------------------------------------------------
20
NOTE 6 -- STOCK OPTIONS
During fiscal year 1992, stockholders approved the 1991 Key Employee Stock
Option Plan, and the plan was subsequently amended to increase the number of
shares available for options under the plan to 230,000. Options were granted at
not less than the fair market value at the date of grant. Options are
exercisable in such installments, for such terms (up to 10 years), and at such
times, as the Board of Directors may determine at the time of the grant. At
April 30, 2002, no shares were available for future grants under the plan.
During fiscal year 1994, the stockholders approved the 1993 Stock Option Plan
for Directors. This plan allowed the Company to grant options on on 40,000
shares of the Company's common stock. Each non-employee director of the Company
received an option to purchase 5,000 shares of the Compnay's common stock on the
effective date of the plan or on the date of commencement of service as a
director. Options are exercisable in four equal, annual installments and expire
five years from the date of grant. Options were granted at the fiar market value
of the date of grant. At April 30, 2002, no shares were available for future
grants under the plan.
During fiscal year 2001, stockholders approved the 2000 Key Employee Stock
Option Plan. This plan allows the Company to grant options on 100,000 shares of
the Company's common stock. Options are granted at not less than the fair market
value at the date of grant. Options are exercisable in such installments, for
such terms (up to 10 years), and at such times, as the Board of Directors may
determine at the time of the grant. At April 30, 2002, there were 59,250 shares
available for future grants under the plan.
The Company utilized treasury stock to satisfy the stock options exercised
during fiscal years 2002, 2001, and 2000. Stock option activity and weighted
average exercise price is summarized as follows:
2002 2001 2001
------------------------------------------------------------------
Options Price Options Price Options Price
- ---------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 152,024 $ 9.04 115,775 $ 8.28 124,500 $ 6.85
Granted 45,750 9.59 43,750 10.13 28,150 10.38
Canceled (2,200) 10.16 -- -- (7,000) 10.34
Exercised (8,750) 3.48 (7,501) 3.50 (29,875) 3.82
- ---------------------------------------------------------------------------------------------------------
Outstanding at end of year 186,824 $ 9.43 152,024 $ 9.04 115,775 $ 8.28
=========================================================================================================
Exercisable at end of year 88,385 $ 8.71 66,420 $ 7.27 47,568 $ 5.80
=========================================================================================================
The optins outstanding and weighted average exercise price within the following
price ranges at April 30, 2002 are as follows:
Exercise price range $2.75-$3.87 $4.25-$4.62 $8.13-$12.00
- ------------------------------------------------------------------------------------------------------
Options outstanding 13,625 8,999 164,200
Weighted average exercise price $ 3.70 $ 4.42 $ 10.17
Weighted average remaining contractual life (years) 4.1 1.5 7.6
======================================================================================================
The options exercisable and weighted average exercise price within the following
price ranges at April 30, 2002 are as follows:
Exercise price range $2.75-$3.87 $4.25-$4.62 $8.13-$12.00
- ------------------------------------------------------------------------------------------------------
Options exercisable 13,625 8,999 65,761
Weighted average exercise price $ 3.70 $ 4.42 $ 10.34
======================================================================================================
21
Fair Value Disclosures The Company applies APB Opinion No. 25 and its related
interpretations in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized for these plans. Had compensation cost for
these plans been determined based on the fair value at the grant dates for
awards under the plans consistent with the method of SFAS No. 123, the Company's
net earnings and net earnings per share for fiscal years 2002, 2001, and 2000
would have been reduced to the pro forma amounts indicated as follows:
2002 2001 2000
--------------------------------------------------------------------
Net earnings (in thousands)
As reported $1,900 $1,277 $3,561
Pro forma 1,789 1,212 3,488
====================================================================
Net earnings per share - Basic
As reported $ .77 $ .52 $ 1.45
Pro forma .72 .49 1.42
====================================================================
Net earnings per share - Diluted
As reported $ .77 $ .51 $ 1.44
Pro forma .72 .49 1.41
====================================================================
The estimated weighted average fair value of options granted under the Company's
stock option plans was $3.91 in 2002, $4.70 in 2001, and $4.74 in 2000. The
options were valued using the Black-Scholes option-pricing model with the
following assumptions used for 2002, 2001, and 2000: dividend yield of 3.0%,
2.5%, and 2.5%; expected volatility of 48%, 50%, and 49%; risk-free interest of
4.95%, 5.80%, and 5.81%; and an expected life of 7.25 years.
NOTE 7--COMMITMENTS AND CONTINGENCIES
The Company has entered into various operating lease agreements for machinery
and equipment. Most leases provide the Company with certain early cancellation
rights, as well as renewal and purchase options. Rent expense for these leases
was $459,000, $561,000, and $578,000 in fiscal years 2002, 2001, and 2000,
respectively.
Under the terms of these agreements, future minimum lease payments for the years
ended April 30 are as follows:
$ in thousands Amount
------------------------------------------------------
2003 $ 506
2004 490
2005 354
2006 322
2007 189
Thereafter 86
------------------------------------------------------
Total minimum lease payments $ 1,947
======================================================
The Company is involved in a legal dispute with Bernards Bros. Inc., a former
customer of the Company. The dispute is the subject of lengthy arbitration
proceedings completed in December 2000. In fiscal year 2001, the Company
recorded a charge of $391,000, including an estimated liability of $134,000 for
final settlement of the matter, based on its interpretation of the Arbitrator's
award. In fiscal year 2002, pursuant to a Petition to Confirm Arbitration Award
in Los Angeles Superior Court, a judgment was issued against the Company in this
matter for approximately $1.3 million. The Company believes that the judgment
entered by the trial court is inconsistent with the Arbitrator's award, and the
Company intends to vigorously contest such judgment. The Company has filed an
appeal with the Court of Appeals of the State of California (Bernards Bros. v.
Kewaunee Scientific, et. al. Appellate Case No. B 152623) regarding this
judgment. If appeal efforts are unsuccessful, the Company could be contingently
liable up to the amount of the judgment issued.
22
The Company is involved in certain other claims and legal proceedings in the
normal course of business which management believes will not have a material
adverse effect on the financial condition or results of operations of the
Company.
NOTE 8--RETIREMENT BENEFITS
The Company has non-contributory defined benefit pension plans covering
substantially all salaried and hourly employees. The defined benefit plan for
salaried employees provides pension benefits that are based on each employee's
years of service and average annual compensation during the last 10 consecutive
calendar years of employment. The benefit plan for hourly employees provides
benefits at stated amounts based on years of service. The Company's funding
policy is to make regular contributions to fund the plans during the
participant's working lifetime, which have met ERISA's funding requirements.
Plan assets consist primarily of mutual funds. The change in projected benefit
obligations and the change in fair value of plan assets for the non-contributory
defined pension plans for each of the years ended April 30 are summarized as
follows:
$ in thousands 2002 2001
------------------------------------------------------------------------------------
Accumulated Benefit Obligation, April 30 $ 7,868 $ 7,070
====================================================================================
Change in Projected Benefit Obligations
Projected benefit obligations, beginning of year $ 8,593 $ 7,585
Service cost 378 324
Interest cost 641 581
Actuarial loss 480 439
Actual benefits paid (377) (336)
------------------------------------------------------------------------------------
Projected Benefit obligations, end of year $ 9,715 $ 8,593
====================================================================================
Change in Plan Assets
Fair value of plan assets, beginning of year $ 7,176 $ 7,084
Actual loss on plan assets (122) (259)
Actual company contributions 1,353 687
Actual benefits paid (376) (336)
------------------------------------------------------------------------------------
Fair value of plan assets, end of year $ 8,031 $ 7,176
====================================================================================
Funded Status and Prepaid (Accrued)
Funded status of plans $(1,684) $(1,417)
Unrecognized net transition obligation -- --
Unrecognized prior service cost 62 73
Unrecognized net loss 2,955 1,781
------------------------------------------------------------------------------------
Prepaid pension cost $ 1,333 $ 437
====================================================================================
Amounts Recognized in the
Statement of Financial Position
Prepaid pension cost $ 1,333 $ 437
------------------------------------------------------------------------------------
Weighted-Average Assumptions
Discount rate, end of year 7.25% 7.50%
Expected return on plan assets 9.00% 9.00%
Rate of compensation increase 5.00% 5.00%
====================================================================================
23
The components of the net periodic pension costs for each of the three years
ended April 30 are as follows:
$ in thousands 2002 2001 2000
----------------------------------------------------------------------------------------
Service cost $ 378 $ 324 $ 349
Interest cost 641 581 558
Expected return on plan assets (642) (640) (623)
Amortization of transition asset -- -- (32)
Amortization of prior service cost 11 11 11
Recognition of net loss 69 23 24
----------------------------------------------------------------------------------------
Net periodic pension cost $ 457 $ 299 $ 287
----------------------------------------------------------------------------------------
The Company has a defined contribution plan covering substantially all salaried
and hourly employees. The plan provides benefits to all employees who have
attained age 21, completed six months of service, and who elect to participate.
The Company makes matching contributions equal to 50% of the qualifying employee
contribution, up to a maximum employer contribution of 2% of the participant's
compensation. Contributions by the Company in fiscal years 2002, 2001 and 2000
were $277,000, $267,000, and $239,000, respectively.
24
NOTE 9-- SEGMENT INFORMATION
The Company's operations are classified into two business segments: laboratory
products and technical products. The laboratory products segment principally
designs, manufactures, and installs steel and wood laboratory furniture,
worksurfaces, and fume hoods. The technical products segment principally
manufactures and sells technical furniture including network storage systems,
workstations, workbenches, computer enclosures, and related accessories. Sales
to individual foreign countries did not exceed 2.6% of any segment sales.
Profits by business segment represent net revenues, less costs associated with
goods sold and operating expenses. Intersegment transactions are recorded at
normal profit margins with appropriate eliminations of intercompany profits.
Portions of corporate expenses are included in each in segment. Unallocated
corporate expenses are included in the corporate column below. Corporate assets
include LIFO inventory reserve, fixed assets, prepaid and deferred tax assets,
prepaid expenses, and cash surrender value of life insurance policies.
The following table shows net sales, profits, and other financial information by
business segment for the fiscal years ended April 30, 2002, 2001, and 2000:
Laboratory Technical
$ in thousands Products Products Corporate Total
- --------------------------------------------------------------------------------------------------------
Fiscal Year Ended April 30, 2002:
Revenues from external customers $78,676 $ 6,173 $ -- $84,849
Intersegment revenues 809 -- (809) --
Depreciation 1,917 254 2 2,173
Segment profit 3,959 (613) (653) 2,693
Segment assets 34,011 3,295 4,884 42,190
Expenditures for segment fixed assets 1,397 304 364 2,065
Net sales to customers in foreign countries 3,324 362 -- 3,686
========================================================================================================
Fiscal Year Ended April 30, 2001:
Revenues from external customers $61,964 $15,095 $ -- $77,059
Intersegment revenues -- 262 (262) --
Depreciation 1,896 268 4 2,168
Segment profit 1,160 1,598 (920) 1,838
Segment assets 32,695 4,756 3,418 40,869
Expenditures for segment fixed assets 1,608 68 2 1,678
Net sales to customers in foreign countries 1,790 498 -- 2,288
========================================================================================================
Fiscal Year Ended April 30, 2000:
Revenues from external customers $61,678 $13,120 $ -- $74,798
Intersegment revenues -- 319 (319) --
Depreciation 1,699 263 6 1,968
Segment profit 3,541 1,451 (181) 4,811
Segment assets 30,867 6,320 2,129 39,316
Expenditures for segment fixed assets 3,210 139 3 3,352
Net sales to customers in foreign countries 2,399 277 -- 2,676
========================================================================================================
Revenues from one customer of the Company represented 12%, 13%, and 11% of the
Company's total sales in fiscal years 2002, 2001, and 2000, respectively.
25
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
OF KEWAUNEE SCIENTIFIC CORPORATION
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Kewaunee
Scientific Corporation and its subsidiaries (the "Company") at April 30, 2002
and 2001 and the results of its operations and its cash flows for each of the
three years in the period ended April 30, 2002, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Charlotte, North Carolina
June 3, 2002
MANAGEMENT'S REPORT OF
CONSOLIDATED FINANCIAL STATEMENTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
OF KEWAUNEE SCIENTIFIC CORPORATION
The consolidated financial statements and accompanying notes were prepared by
management, which is responsible for their integrity and objectivity. Management
believes the financial statements, which include amounts based on judgments and
estimates, fairly reflect the Company's financial position and operating
results, in accordance with generally accepted accounting principles. All
financial information in this annual report is consistent with the financial
statements.
Management maintains internal accounting control systems and related policies
and procedures designed to provide reasonable assurance that assets are
safeguarded, that transactions are properly recorded and executed in accordance
with management's authorization, and that accounting records may be relied upon
for the preparation of financial statements and other financial information. The
design, monitoring, and revision of internal accounting control systems involve,
among other things, management's judgment with respect to the relative cost and
expected benefits of specific control measures.
The Company's consolidated financial statements have been audited by independent
accountants who have expressed their opinion with respect to the fairness of
those statements. Their audits included consideration of the Company's internal
accounting control systems and related policies and procedures. They advise
management and the Audit Committee of significant matters resulting from their
audits.
D. Michael Parker
Senior Vice President, Finance
Chief Financial Officer
26
SUMMARY OF SELECTED FINANCIAL DATA
KEWAUNEE SCIENTIFIC CORPORATION
$ and shares in thousands,
except per share amounts 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
OPERATING STATEMENT DATA:
Net sales $ 84,849 $ 77,059 $ 74,798 $ 77,478 $ 73,037
Costs of products sold 70,143 62,543 57,715 59,782 55,600
- -------------------------------------------------------------------------------------------------------------------------
Gross profit 14,706 14,516 17,083 17,696 17,437
Operating expenses 11,801 12,156 12,429 12,315 13,096
- -------------------------------------------------------------------------------------------------------------------------
Operating earnings 2,905 2,360 4,654 5,381 4,341
Other (expense) income (6) (276) 326 325 45
Interest expense (206) (246) (169) (96) (149)
- -------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 2,693 1,838 4,811 5,610 4,237
Income tax expense 793 561 1,250 2,214 1,674
- -------------------------------------------------------------------------------------------------------------------------
Net earnings $ 1,900 $ 1,277 $ 3,561 $ 3,396 $ 2,563
- -------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic 2,468 2,467 2,456 2,432 2,386
Diluted 2,481 2,490 2,478 2,464 2,423
- -------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Net earnings:
Basic $ 0.77 $ 0.52 $ 1.45 $ 1.40 $ 1.07
Diluted 0.77 0.51 1.44 1.38 1.06
Cash dividends 0.28 0.28 0.26 0.22 0.18
Year-end book value 10.90 10.42 10.19 9.04 7.89
- -------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Current assets $ 25,426 $ 24,658 $ 23,032 $ 21,831 $ 20,853
Current liabilities 10,609 9,973 11,560 11,672 11,287
Net working capital 14,817 14,685 11,472 10,159 9,566
Net property, plant and equipment 12,811 12,919 13,506 12,125 10,034
Total assets 42,190 40,869 39,316 36,035 31,866
Total borrowings/long-term debt 2,611 2,997 2,555 939 --
Stockholders' equity 26,912 25,761 25,135 22,032 19,039
- -------------------------------------------------------------------------------------------------------------------------
OTHER DATA:
Capital expenditures $ 2,065 $ 1,678 $ 3,352 $ 3,678 $ 1,520
Year-end stockholders of record 289 322 334 349 365
Year-end employees 609 593 606 643 619
- -------------------------------------------------------------------------------------------------------------------------
27
QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for fiscal years 2002 and 2001 were as
follows:
$ in thousands, First Second Third Fourth
except per share amounts Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------
2002
Net sales $19,740 $22,525 $20,798 $21,786
Gross profit 3,207 3,934 3,685 3,880
Net earnings 293 638 416 553
Net earnings per share
Basic 0.12 0.26 0.17 0.22
Diluted 0.12 0.26 0.17 0.22
Cash dividends per share 0.07 0.07 0.07 0.07
===================================================================================================
2001
Net sales $19,370 $21,416 $17,632 $18,641
Gross profit 3,678 4,316 3,005 3,517
Net earnings (loss) 214 782 (198) 479
Net earnings (loss) per share
Basic 0.09 0.32 (0.08) 0.19
Diluted 0.09 0.31 (0.08) 0.19
Cash dividends per share 0.07 0.07 0.07 0.07
===================================================================================================
RANGE OF MARKET PRICES
Kewaunee's common stock is traded in the NASDAQ National Market System, under
the symbol KEQU. The following table sets forth the quarterly high and low
prices reported on the NASDAQ Market System.
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------
2002
High $10.17 $ 9.95 $ 9.66 $11.00
Low $ 8.90 $ 7.00 $ 7.81 $ 9.55
Close $ 9.65 $ 8.00 $ 9.66 $10.60
=====================================================================================================
2001
High $15.50 $15.00 $13.31 $10.50
Low $11.13 $ 9.50 $10.00 $ 7.75
Close $12.75 $11.06 $10.50 $ 8.65
=====================================================================================================
28
CORPORATE INFORMATION
BOARD OF DIRECTORS EXECUTIVE OFFICES
Margaret Barr Bruemmer (1)(3)(4) William A. Shumaker
Attorney President,
Milwaukee, WI Chief Executive Officier
Wiley N. Caldwell (3)(4) D. Michael Parker
Retired President Senior Vice President, Finance,
W. W. Grainger, Inc. Chief Financial Officer,
Kenilworth, IL Treasurer, Secretary
John C. Campbell, Jr. (1)(2) Roger L. Eggena
Private Consultant Vice President, Manufacturing
Arlington, TX
Kurt P. Rindoks
Silas Keehn (2)(3)(4) Vice President, Engineering
Retired President and Product Development
Federal Reserve Bank of Chicago
Winnetka, IL
James J. Rossi
Vice President, Human Resources
Eli Manchester, Jr. (1)(3)
Chairman of the Board Kenneth E. Sparks
Kewaunee Scientific Corporation Vice President, General Manager
Statesville, NC Technical Furniture Group
James T, Rhind (1)(2)(4)
Counsel to Bell, Boyd & Lloyd LLC CORPORATE OFFICES
Attorneys 2700 West Front Street
Chicago, IL Statesville, NC 28677-2927
P.O. Box 1842, Statesville, NC 28687-1842
Telephone: 704-873-7202
Facsimile: 704-873-1275
William A. Shumaker (1)(3)
Resident/CEO
Kewaunee Scientific Corporation
Statesville, NC
(1) Executive Committee EMPLOYMENT OPPORTUNITIES
(2) Audit Committee Individuals interested in employment with
(3) Financial/Planning Committee Kewaunee Scientific Corporation should contact
(4) Compensation Committee the Vice President of Human Resources, Kewaunee
Scientific Corporation, P.O. Box 1842, Statesville,
[LOGO] NC 28687-1842. Employment opportunities are also
KEQU listed on the Internet at http://www.kewaunee.com.
- ------ Kewaunee Scientific Corporation is an equal
NASDAQ opportunity employer.
LISTED
29
STOCKHOLDER INFORMATION
FINANCIAL INFORMATION
The Company's Form 10-K financial report, filed annually with the Securities and
Exchange Commission, may be obtained by stockholders without charge by writing
the Secretary of the Company, Kewaunee Scientific Corporation, P.O. Box 1842,
Statesville, NC 28687-1842.
Recent financial information is available on the Internet at
http://www.kewaunee.com.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Charlotte, NC
NOTICE OF ANNUAL MEETING
The Annual Meeting of Stockholders of Kewaunee Scientific Corporation will be
held in the 37th floor Annual Meeting Room at Harris Trust & Savings Bank,
Chicago, IL on August 28, 2002 at 10:00 a.m. Central Daylight Time.
TRANSFER AGENT AND REGISTRAR
All stockholder inquiries, including transfer-related matters, should be
directed to:
Mellon Investor Services, LLC
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
Telephone: 800-288-9541
Internet at http://www.melloninvestor.com
PRODUCT INFORMATION
Kewaunee Scientific Corporation products are available through a network of
sales representatives and a national stocking distributor.
For more information on the Company's laboratory furniture, contact the
Marketing Services Department in Statesville, NC; telephone: 704-873-7202; on
the Internet at http://www.kewaunee.com;
e-mail: marketing@kewaunee.com.
For more information on the Company's technical furniture, contact the Customer
Service Department in Lockhart, TX; telephone: 512-398-5292; on the Internet at
http://www.kewaunee.com;
e-mail: marketing-tfg@kewaunee.com.
TRADEMARKS
ADJUSTABENCH, Advantage, Alpha, BasikBench, CFHS, Discovery, Evolution,
Explorer, FlexTech, Kemresin, Kemrock, Kemshield, Kewaunee, Research Collection,
Signature, Silhouette, Sturdilite, SturdiKwik, Supreme Air, TechStat, Trademark,
Versalab, and Visionaire are registered trademarks of Kewaunee Scientific
Corporation.
30
[PHOTO DEPICTING LABORATORY]
[PHOTO DEPICTING LABORATORY]
[PHOTO DEPICTING WORKSTATIONS]
[LOGO] KEWAUNEE
Scientific Corporation