KEWAUNEE SCIENTIFIC CORP /DE/ - Quarter Report: 2004 July (Form 10-Q)

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended July 31, 2004

For the transition period from                      to                     

Commission file number 0-5286

KEWAUNEE SCIENTIFIC CORPORATION

(Exact name of registrant as specified in its charter)

(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. Yes x No ¨

As of September 10, 2004, the Registrant had outstanding 2,491,270 shares of Common Stock.

Pages: This report, excluding exhibits, contains 17 pages numbered sequentially from this cover page.

Table of Contents

KEWAUNEE SCIENTIFIC CORPORATION

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JULY 31, 2004

2

Table of Contents

Part 1. Financial Information

Kewaunee Scientific Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share data)

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

Kewaunee Scientific Corporation

Condensed Consolidated Balance Sheets

(in thousands)

See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

Kewaunee Scientific Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

See accompanying notes to condensed consolidated financial statements.

5

Table of Contents

Kewaunee Scientific Corporation

Notes to Condensed Financial Statements

(unaudited)

A. Financial Information

The unaudited interim condensed consolidated financial statements of Kewaunee Scientific Corporation (the “Company” or “Kewaunee”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These interim condensed 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. Inventories

Inventories consisted of the following (in thousands):

C. 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.

6

Table of Contents

D. Comprehensive Income

A reconciliation of net earnings and total comprehensive income for the three months ended July 31, 2004 and 2003 is as follows (in thousands):

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 July 31, 2004.

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.

7

Table of Contents

E. Stock Options

The Company accounts for stock options granted to employees and directors 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 and net earnings per share would have been reduced to the following pro forma amounts (in thousands, except per share data):

8

Table of Contents

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 ended July 31, 2004 with the comparable period of the prior fiscal year.

Results of Operations

The Company recorded sales of $20.3 million for the three months ended July 31, 2004, down 16.2% from sales of $24.2 million for the comparable period of the prior year. Sales of laboratory products to industrial research customers slowed and demand for technical products in the high-tech marketplace turned softer during the quarter. The order backlog was $39.6 million at July 31, 2004, as compared to $43.1 million at April 30, 2004 and $50.7 million at July 31, 2003.

The gross profit margin for the quarter ended July 31, 2004 was 16.6% of sales, as compared to 14.9% of sales in the same quarter of the prior year. The gross profit margin for the prior year was unfavorably impacted by manufacturing problems in the Company’s metal furniture operation, and to a lesser degree, an unfavorable product sales mix.

Operating expenses for the three months ended July 31, 2004 were $3.0 million, or 15.0% of sales, as compared to $3.0 million, or 12.4% of sales, in the same period of the prior year.

Operating earnings of $330,000 were recorded for the three months ended July 31, 2004. This compares to operating earnings of $602,000 for the comparable period of the prior year.

Interest expense was $86,000 for the three months ended July 31, 2004, compared to $78,000 for the same period of the prior year. The increase in interest expense for the current quarter resulted from higher levels of borrowings.

Other income was $49,000, in the three months ended July 31, 2004, compared to other income of $196,000 for the comparable period of the prior year. Other income for the three months ended July 31, 2003 included $295,000 resulting from the resolution of a disputed claim for laboratory furniture sold by the Company several years ago.

9

Table of Contents

Income tax expense of $100,000 was recorded for the three months ended July 31, 2004. This compares to income tax expense of $259,000 recorded for the three months ended July 31, 2003. The effective tax rate was approximately 34% for quarter ended July 31, 2004 and was 36% for the three months ended July 31, 2003.

Net earnings of $193,000, or $.08 per diluted share, were recorded for the three months ended July 31, 2004. This compares to net earnings of $461,000, or $.19 per diluted share, for the comparable period of the prior year. Net earnings for the three months ended July 31, 2003 included an after-tax gain of $189,000, or $.08 per diluted share, associated with the resolution of a disputed claim for laboratory furniture.

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.

The Company had working capital of $12.9 million at July 31, 2004, as compared to $12.6 million at April 30, 2004. The ratio of current assets to current liabilities was 1.7-to-1 at July 31, 2004, unchanged from April 30, 2004. At July 31, 2004, advances of $7,987,000 were outstanding under the Company’s revolving credit loan, leaving available credit under this line in the amount of $1,013,000.

The Company’s operations used cash of $438,000 during the three months ended July 31, 2004, primarily attributable to a significant decrease in accounts payable and other current liabilities, partially offset by the impact of net earnings and decreases in prepaid income taxes and inventories. The Company’s operations used cash of $5.4 million during the three months ended July 31, 2003. The cash was used primarily to fund the increase in accounts receivable resulting from the significantly higher sales volume during that quarter.

During the three months ended July 31, 2004, the Company used cash of $153,000 in investing activities, primarily for purchases of production equipment. This compares to the use of $1,066,000 for similar investing activities in the same period of the prior year.

10

Table of Contents

The Company’s financing activities provided cash of $549,000 during the three months ended July 31, 2004. This included $991,000 received from advances under the revolving credit loan, which was partially offset by long-term debt repayments of $279,000 and cash dividends paid of $175,000. Financing activities provided cash of $6,305,000 in the same period of the prior year, which included $5,503,000 received from advances under the revolving credit loan and $1,200,000 from long-term debt. For that period, cash was used for long-term debt repayments of $243,000 and cash dividends paid of $174,000.

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.

11

Table of Contents

REVIEW BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS

A review of the interim financial information included in this Quarterly Report on Form 10-Q for the three months ended July 31, 2004 has been performed by PricewaterhouseCoopers LLP, the Company’s independent auditors. Their report on the interim financial information follows.

12

Table of Contents

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 July 31, 2004 and April 30, 2004, and the related condensed consolidated statements of operations for each of the three-month periods ended July 31, 2004 and July 31, 2003 and the condensed consolidated statement of cash flows for the three-month periods ended July 31, 2004 and July 31, 2003. 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

August 25, 2004

13

Table of Contents

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.

(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 July 31, 2004. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that, as of July 31, 2004, 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 July 31, 2004. As no significant deficiencies or material weaknesses were found, no corrective actions were taken.

14

Table of Contents

PART II. OTHER INFORMATION

The Company’s Annual Meeting of Stockholders was held on August 25, 2004. Each of the nominees for Class III directors was re-elected. The votes cast for and withheld from each such director were as follows:

The following individuals also continue to serve on the Company’s Board of Directors:

Wiley N. Caldwell, John C. Campbell, Jr., Silas Keehn, James T. Rhind and William A. Shumaker

Consistent with Section 10A(I)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Public Company Accounting Reform and Investor Protection Act of 2002, the Company is responsible for disclosing the nature of non-audit services approved by its Audit Committee during each quarter to be performed by PricewaterhouseCoopers LLP, its independent auditors. Non-audit services are services other than those provided by PricewaterhouseCoopers LLP in connection with an audit or review of the Company’s financial statements. During the first quarter of fiscal year 2005, the Company’s Audit Committee approved non-audit services to be performed by PricewaterhouseCoopers LLP for fiscal year 2005 in the amount up to $34,000 for fees related to the preparation of the Company’s tax returns and tax advisory services.

15

Table of Contents

(a) Exhibits

(b) Reports on Form 8-K

A Form 8-K was filed on June 14, 2004, with the Commission which included as an exhibit the Company’s Press Release announcing the financial results for the fourth quarter and year-ended April 30, 2004.

16

Table of Contents

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.

17