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

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended January 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 March 12, 2004, the Registrant had outstanding 2,488,270 shares of Common Stock.

Pages: This report, excluding exhibits, contains 18 pages numbered sequentially from this cover page.

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KEWAUNEE SCIENTIFIC CORPORATION

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2004

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Part 1. Financial Information

Item 1. Financial Statements

Kewaunee Scientific Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Kewaunee Scientific Corporation

Condensed Consolidated Balance Sheets

(in thousands)

See accompanying notes to condensed consolidated financial statements.

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Kewaunee Scientific Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands )

See accompanying notes to condensed consolidated financial statements.

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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 2003 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, 2003 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.

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D. Segment Information

The following table shows net sales and earnings (loss) before income taxes by business segment for three months and nine months ended January 31, 2004 and 2003 (in thousands):

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E. Comprehensive Income

A reconciliation of net earnings and total comprehensive income for the three months and nine months ended January 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 January 31, 2004. The Company pays a fixed rate of interest of 6.37% and receives payment based on a variable rate of interest (currently 2.893%) based on a notional amount of $815,000.

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.

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F. Commitments and Contingencies

The Company is involved in a legal dispute with Bernards Bros. Inc., a former customer of the Company. The dispute was the subject of lengthy arbitration proceedings completed in December 2000. In June 2003, a judgment was entered in the case against the Company and two other defendants identifying the responsibility for the payment of the Arbitrator’s award. The Company believes that its ultimate liability regarding this matter ranges from $100,000 to $250,000. At January 31, 2004, the Company had an accrual of $134,000 for final settlement of this matter, unchanged from April 30, 2003.

G. 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):

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

The Company’s 2003 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, 2003. The following discussion and analysis describes material changes in the Company’s financial condition since April 30, 2003. The analysis of results of operations compares the three months and nine months ended January 31, 2004 with the comparable periods of the prior fiscal year.

Results of Operations

The Company recorded sales of $21.5 million for the three months ended January 31, 2004, up 31.0% from sales of $16.4 million for the comparable period of the prior year. Sales for the nine months ended January 31, 2004 were $70.1 million, up 25.8% from sales of $55.7 million in the comparable period of the prior year. Sales for the three months and nine months of the current year benefited from a strong order backlog and increased activity in the marketplace for laboratory products. The order backlog was $42.5 million at January 31, 2004, as compared to $46.3 million at October 31, 2003 and $51.5 million at April 30, 2003.

Sales of laboratory products increased 33.4% and 27.5% during the three months and nine months ended January 31, 2004, respectively, over the same periods last year. Sales of technical products declined 6.4% and increased 3.9% during the three months and nine months ended January 31, 2004, respectively, as compared to the same periods last year.

The gross profit margin for the quarter ended January 31, 2004 was 17.3% of sales, as compared to 21.1% of sales in the same quarter of the prior year. The gross profit margin for the nine months ended January 31, 2004 was 16.3% of sales, as compared to 18.0% of sales in the same period of the prior year. The gross profit margin for the current quarter and nine months of the current year were adversely affected by continued aggressive pricing in the marketplace. The product sales mix for the fourth quarter of the current year is expected to be improved as compared to the third quarter, but remain unfavorable compared to the sales mix in the same period last year. The gross profit margin for the current quarter was also adversely affected by an unfavorable product sales mix. The gross profit margin for the nine months ended January 31, 2003 was adversely affected by $550,000 in charges associated with the relocation of the Company’s technical products business and write-down of related inventories.

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Operating expenses for the three months ended January 31, 2004 were $3.2 million, or 14.9% of sales, as compared to $3.4 million, or 20.5% of sales, in the same period of the prior year. Operating expenses for the nine months ended January 31, 2004 were $9.5 million, or 13.6% of sales, as compared to $9.6 million, or 17.3% of sales, in the same period of the prior year. Operating expenses for the three and nine month periods ended January 31, 2003 included charges of $262,000 and $441,000, respectively, associated with the relocation of the Company’s technical products business. The improved ratio of expenses to sales in the current year, after excluding the non-recurring charges in the prior year periods, occurred as the dollar levels of operating expenses remained relatively flat, while sales increased.

Operating earnings of $512,000 and $1.9 million were recorded for the three months and nine months ended January 31, 2004, respectively. This compares to operating earnings of $101,000 and $425,000 for the comparable periods of the prior year.

Interest expense was $71,000 and $232,000 for the three months and nine months ended January 31, 2004, respectively, compared to $35,000 and $117,000 for the same periods of the prior year. The increase in interest expense for the current quarter and year resulted from higher levels of borrowings.

Other income was $14,000 and $163,000, in the three months and nine months ended January 31, 2004, respectively, compared to other expense of $24,000 and other income of $44,000 for the comparable periods of the prior year. Other income for the nine months ended January 31, 2004 included $295,000 resulting from the resolution of a disputed claim for laboratory furniture sold by the Company several years ago.

Income tax expenses of $164,000 and $658,000 were recorded for the three months and nine months ended January 31, 2004. This compares to income tax expense of $-0- and $110,000 recorded for the three and nine months ended January 31, 2003, respectively. The effective tax rate was approximately 36.0% for quarter and nine months ended January 31, 2004 and was 31.3% for the nine months ended January 31, 2003.

Net earnings of $291,000 and $1,170,000, or $.12 per diluted share and $.47 per diluted share, were recorded for the three months and nine months ended January 31, 2004, respectively. This compares to net earnings of $42,000 and $242,000, or $.02 per diluted share and $.10 per diluted share, respectively, for the comparable periods of the prior year.

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New Accounting Pronouncements

In December 2003, the FASB issued a revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” The revised SFAS No. 132 revised employers’ disclosures about pension plans and other postretirement benefit plans. It did not change the measurement or recognition of those plans required by SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination on Benefits,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions.” The revised SFAS No. 132 retains the disclosure requirements contained in the original SFAS No. 132. It requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The adoption of this new standard did not have an impact on the Company’s financial position, results of operations or cash flows.

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 $13.4 million at January 31, 2004, as compared to $11.7 million at April 30, 2003. The ratio of current assets to current liabilities was 1.8–to–1 at January 31, 2004, as compared to 1.9–to–1 at April 30, 2003. At January 31, 2004, advances of $6,084,000 were outstanding under the Company’s revolving credit loan.

The Company’s operations used cash of $2,715,000 during the nine months ended January 31, 2004, primarily attributable to an increase in accounts receivable and a decrease in accounts payable, partially offset by the impact of decreases in prepaid income taxes and inventories. The Company’s operations provided cash of $416,000 during nine months ended January 31, 2003, primarily attributable to operating earnings before depreciation, partially offset by decreases in accounts payable and other current liabilities.

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During the nine months ended January 31, 2004, the Company used cash of $1,310,000 in investing activities, primarily for purchases of production equipment. This compares to the use of $2,846,000 for similar investing activities in the same period of the prior year.

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.

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REVIEW BY INDEPENDENT AUDITORS

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

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REPORT OF INDEPENDENT AUDITORS

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 January 31, 2004 and April 30, 2003, and the related condensed consolidated statements of operations for each of the three and nine-month periods ended January 31, 2004 and January 31, 2003 and the condensed consolidated statement of cash flows for the nine-month periods ended January 31, 2004 and January 31, 2003. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, 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 information for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of April 30, 2003, 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, 2003 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, 2003 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

February 23, 2004

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There are no material changes to the disclosures made on this matter in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2003.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures

An evaluation was performed under the supervision and the participation of the company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of January 31, 2004. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that, as of January 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 January 31, 2004. As no significant deficiencies or material weaknesses were found, no corrective actions were taken.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is involved in a legal dispute with Bernards Bros. Inc., a former customer of the Company. The dispute was the subject of lengthy arbitration proceedings completed in December 2000. In June 2003, a judgment was entered in the case against the Company and two other defendants identifying the responsibility for the payment of the Arbitrator’s award. The Company believes that its ultimate liability regarding this matter ranges from $100,000 to $250,000. At January 31, 2004, the Company had an accrual of $134,000 for final settlement of this matter, unchanged from April 30, 2003.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

(b) Reports on Form 8-K

A Form 8-K was filed on November 21, 2003, with the Commission which included as an exhibit the Company’s Press Release announcing the financial results for the three months and six months ended October 31, 2003.

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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.

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