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KEWAUNEE SCIENTIFIC CORP /DE/ - Quarter Report: 2005 July (Form 10-Q)

Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

FORM 10-Q

 


 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended July 31, 2005

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from              to             

 

Commission file number 0-5286

 


 

KEWAUNEE SCIENTIFIC CORPORATION

(Exact name of registrant as specified in its charter)

 


 

Delaware   38-0715562

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2700 West Front Street

Statesville, North Carolina

  28677
(Address of principal executive offices)   (Zip Code)

 

(704) 873-7202

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

 

As of July 5, 2005, the Registrant had outstanding 2,492,270 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, 2005

 

          Page
Number


PART I. FINANCIAL INFORMATION

    

Item 1. Financial Statements

    
     Consolidated Statements of Operations - Three months months ended July 31, 2005 and 2004    3
     Consolidated Balance Sheets July 31, 2005 and April 30, 2005    4
     Consolidated Statements of Cash Flows - Three months ended July 31, 2005 and 2004    5
     Notes to Consolidated Financial Statements    6

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

   9
    

Review by Independent Registered Public Accounting Firm

   13
    

Report of Independent Registered Public Accounting Firm

   14

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   15

Item 4. Controls and Procedures

   15

PART II. OTHER INFORMATION

    

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

   16

Item 6. Exhibits

   16

SIGNATURE

   17

 

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Table of Contents

Part 1. Financial Information

 

Item 1. Financial Statements

 

Kewaunee Scientific Corporation

Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share data)

 

     Three months ended
July 31


 
     2005

    2004

 

Net sales

   $ 20,308     $ 20,288  

Costs of products sold

     16,922       16,912  
    


 


Gross profit

     3,386       3,376  

Operating expenses

     2,920       3,046  
    


 


Operating earnings

     466       330  

Other income

     879       46  

Interest expense

     (87 )     (86 )
    


 


Earnings before income taxes

     1,258       290  

Income tax expense

     457       100  
    


 


Earnings before minority interests

     801       190  

Minority interests

     38       (3 )
    


 


Net earnings

   $ 763     $ 193  
    


 


Net earnings per share

                

Basic

   $ 0.31     $ 0.08  

Diluted

   $ 0.31     $ 0.08  

Weighted average number of common shares outstanding (in thousands)

                

Basic

     2,492       2,490  

Diluted

     2,492       2,500  

 

See accompanying notes to consolidated financial statements.

 

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Kewaunee Scientific Corporation

Consolidated Balance Sheets

(in thousands)

 

     July 31
2005


   

April 30

2005


 
     (Unaudited)        

Assets

                

Current assets:

                

Cash and cash equivalents

   $ 646     $ 225  

Restricted cash

     373       379  

Receivables, less allowance

     21,231       21,683  

Inventories

     4,938       3,542  

Deferred income taxes

     467       456  

Prepaid income taxes

           94  

Prepaid expenses and other current assets

     770       401  
    


 


Total current assets

     28,425       26,780  

Property, plant and equipment, at cost

     35,349       34,467  

Accumulated depreciation

     (24,209 )     (23,737 )
    


 


Net property, plant and equipment

     11,140       10,730  

Prepaid pension cost

     4,791       4,731  

Property held for sale

           1,450  

Other

     2,537       2,521  
    


 


Total other assets

     7,328       8,702  

Total Assets

   $ 46,893     $ 46,212  
    


 


Liabilities and Stockholders’ Equity

                

Current liabilities:

                

Short-term borrowings

   $ 5,038     $ 3,778  

Current portion of long-term debt

     652       931  

Current obligations under capital leases

     114       111  

Accounts payable

     7,443       8,558  

Employee compensation and amounts withheld

     846       1,113  

Deferred Revenue

     1,257       1,261  

Other accrued expenses

     1,116       647  
    


 


Total current liabilities

     16,466       16,399  

Obligations under capital leases

     316       307  

Deferred income taxes

     384       391  

Accrued employee benefit plan costs

     2,517       2,524  

Other long-term liabilities

     1       2  

Minority interests

     634       600  
    


 


Total Liabilities

     20,318       20,223  

Stockholders’ equity:

                

Common stock

     6,550       6,550  

Additional paid-in-capital

     143       144  

Retained earnings

     20,619       20,031  

Accumulated other comprehensive income

     50       54  

Common stock in treasury, at cost

     (787 )     (790 )
    


 


Total stockholders’ equity

     26,575       25,989  
    


 


Total Liabilities and Stockholders’ Equity

   $ 46,893     $ 46,212  
    


 


 

See accompanying notes to consolidated financial statements.

 

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Kewaunee Scientific Corporation

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

     Three months ended
July 31


 
     2005

    2004

 
Cash flows from operating activities:                 

Net earnings

   $ 763     $ 193  

Adjustments to reconcile net earnings to net cash used in operating activities:

                

Depreciation

     472       510  

Provision for bad debts

     38       83  

Increase in deferred income tax expense

     (18 )      

Gain on sale of property held for sale

     (884 )      

Decrease in prepaid income taxes

     94       165  

Decrease (increase) in receivables

     414       460  

(Increase) decrease in inventories

     (1,396 )     418  

(Increase) decrease in prepaid pension cost

     (60 )     211  

Increase (decrease) in accounts payable and other current liabilities

     1,388       (1,990 )

(Decrease) in deferred revenue

     (4 )     (191 )

Other, net

     (529 )     (291 )
    


 


Net cash provided by (used in) operating activities

     278       (432 )
Cash flows from investing activities:                 

Capital expenditures

     (832 )     (153 )

Proceeds from sale of property held for sale

     2,500        

Decrease (increase) in restricted cash

     6       (3 )
    


 


Net cash provided by (used in) investing activities

     1,674       (156 )
Cash flows from financing activities:                 

Decrease in bank overdraft

     (2,301 )      

Increase in short-term borrowings

     1,260       991  

Payments on long-term debt

     (279 )     (279 )

Payments on capital leases

     (38 )      

Dividends paid

     (175 )     (175 )

Proceeds from exercise of stock options (including tax benefit)

     2       12  
    


 


Net cash (used in) provided by financing activities

     (1,531 )     549  
    


 


Increase (decrease) in cash and cash equivalents      421       (39 )
Cash and cash equivalents, beginning of period      225       805  
    


 


Cash and cash equivalents, end of period    $ 646     $ 766  
    


 


 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

Kewaunee Scientific Corporation

Notes to Consolidated Financial Statements

(unaudited)

 

A. Financial Information

 

The unaudited interim 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, although the Company believes that the disclosures are adequate to make the information presented not misleading.

 

These interim consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company’s 2005 Annual Report to Stockholders. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.

 

The preparation of the financial statements requires management to make certain estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates.

 

Certain prior period amounts have been reclassified to conform to current classifications. These reclassifications had no impact on the results of operations of the Company.

 

B. Inventories

 

Inventories consisted of the following (in thousands):

 

     July 31, 2005

   April 30, 2005

Finished products

   $ 2,139    $ 1,054

Work in process

     902      929

Raw materials

     1,897      1,559
    

  

     $ 4,938    $ 3,542
    

  

 

For interim reporting, LIFO inventories are computed based on year-to-date quantities and interim changes in price levels. Changes in quantities and price levels are reflected in the interim financial statements in the period in which they occur.

 

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C. Balance Sheet

 

The Company’s April 30, 2005 consolidated balance sheet as presented herein is derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles.

 

D. Comprehensive Income

 

A reconciliation of net earnings and total comprehensive income for the three months ended July 31, 2005 and 2004 is as follows (in thousands):

 

    Three months ended
July 31, 2005


    Three months ended
July 31, 2004


 

Net earnings

  $ 763     $ 193  

Change in fair value of cash flow hedge, net of income tax

    1       4  

Change in cumulative foreign currency translation adjustments

    (5 )     (18 )
   


 


Total comprehensive income

  $ 759     $ 179  

 

Statement and Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” requires that the Company record derivatives on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. The nature of the Company’s business activities involves the management of various financial and market risks, including those related to changes in interest rates. The Company may from time-to-time employ derivative financial instruments, such as interest rate swap contracts, to mitigate or eliminate certain of those risks. The Company does not enter into derivative instruments for speculative purposes. The Company had one interest rate swap agreement outstanding at July 31, 2005 that expires February 28, 2006.

 

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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E. Stock Options

 

The Company accounts for stock options using the intrinsic value method. Under this method no compensation expense is recorded since the exercise price of the stock options is equal to the market price of the underlying stock on the grant date. Had compensation expense for the stock options issued been determined consistent with Financial Accounting Standards Board (“FASB”) Statement No. 123R, “Accounting for Stock-Based Compensation,” net earnings and net earnings per share would have been reduced (increased) to the following pro forma amounts (in thousands, except per share data):

 

    Three months ended
July 31, 2005


    Three months ended
July 31, 2004


 

Net earnings as reported

  $ 763     $ 193  

Pro forma compensation cost

    (3 )     (8 )
   


 


Net earnings pro forma

    760       185  

Net earnings per share – Basic

               

As reported

  $ 0.31     $ 0.08  

Pro forma

    0.30       0.07  

Net earnings per share – Diluted

               

As reported

  $ 0.31     $ 0.08  

Pro forma

    0.30       0.07  

 

F. Defined Pension Plans

 

The Company has non-contributory defined benefit pension plans covering substantially all salaried and hourly employees. Effective April 30, 2005, no further benefits will be earned under the plans and no additional participants will be added to the plans. No contributions were paid to the plans during the three months ended July 31, 2005, and the Company does not expect any contributions to be paid to the plans during the remainder of the current year.

 

Pension expense (income) consisted of the following (in thousands):

 

    Three months ended
July 31, 2005


    Three months ended
July 31, 2004


 

Service Cost

  $ -0-     $ 129  

Interest Cost

    195       213  

Expected return on plan assets

    (311 )     (251 )

Amortization of prior service costs

    -0-       3  

Recognition of net loss

    60       59  
   


 


Net periodic pension cost (income)

  $ (56 )   $ 153  

 

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Table of Contents

Item 2. Management’s Discussion and Analysis

of Financial Condition and Results of Operations

 

The Company’s 2005 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, 2005. The following discussion and analysis describes material changes in the Company’s financial condition since April 30, 2005. The analysis of results of operations compares the three months ended July 31, 2005 with the comparable period of the prior fiscal year.

 

Results of Operations

 

Sales for the three months ended July 31, 2005 were $20,308,000, slightly above sales of $20,288,000 for the comparable period of the prior year. Domestic sales of laboratory furniture declined 6.5% during the quarter from the same period last year, while international sales of laboratory furniture increased to $1,644,000 from $585,000 in the same period last year. Sales of technical furniture were $1,365,000, as compared to $1,195,000 in the same period last year. The total order backlog was $40.7 million at July 31, 2005, as compared to $40.6 million at April 30, 2005 and $39.6 million at July 31, 2004.

 

The gross profit margin for the quarter ended July 31, 2005 was 16.7% of sales, as compared to 16.6% of sales in the same quarter of the prior year. The profit margin was relatively unchanged from the prior year period, as the favorable impact of activities to reduce raw material and operating costs substantially offset increases in prices of certain raw materials, most notably steel and resin.

 

Operating expenses for the three months ended July 31, 2005 were $2.9 million, or 14.4% of sales, as compared to $3.0 million, or 15.0% of sales, in the same period of the prior year. Operating expenses for the current year benefited from cost reduction activities, including headcount reductions in the second half of the prior year, and lower bad debt expense, which declined $45,000 from the same period last year.

 

Operating earnings of $466,000 were recorded for the three months ended July 31, 2005. This compares to operating earnings of $330,000 for the comparable period of the prior year.

 

Interest expense was $87,000 for the three months ended July 31, 2005, compared to $86,000 for the same period of the prior year. The slight increase in interest expense for the current quarter resulted from higher interest rates, which was substantially offset by lower levels of borrowings in the current year.

 

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Other income was $879,000, in the three months ended July 31, 2005, compared to other income of $46,000 for the comparable period of the prior year. Other income for the three months ended July 31, 2005 included $884,000 from the sale of the Company’s Lockhart, Texas property.

 

Income tax expense of $457,000 was recorded for the three months ended July 31, 2005. This compares to income tax expense of $100,000 recorded for the three months ended July 31, 2004. The effective tax rate was approximately 36% for quarter ended July 31, 2005 and was 34% for the three months ended July 31, 2004. The effective tax rate for each of these periods differs from the statutory rate due to earned state and federal tax credits.

 

Minority interest related to the Company’s two subsidiaries that are not 100% owned by the Company reduced net earnings by $38,000 for the three months ended July 31, 2005 and increased net earnings by $3,000 during the comparable period of the prior year.

 

Net earnings of $763,000, or $.31 per diluted share, were recorded for the three months ended July 31, 2005. This compares to net earnings of $193,000, or $.08 per diluted share, for the comparable period of the prior year. Net earnings for the three months ended July 31, 2005 included an after-tax gain of $540,000, or $.22 per diluted share, resulting from the sale of the Company’s former plant site in Lockhart, Texas.

 

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 under the Company’s revolving credit facility. Additionally, certain machinery and equipment are financed by non-cancelable operating leases or capital leases. The Company believes that these sources will be sufficient to support ongoing business requirements, including capital expenditures through the current fiscal year.

 

The Company had working capital of $12.0 million at July 31, 2005, as compared to $10.4 million at April 30, 2005. The ratio of current assets to current liabilities was 1.7-to-1 at July 31, 2005, as compared to 1.6-to-1 at April 30, 2005. At July 31, 2005, advances of $5,038,000 were outstanding under the Company’s revolving credit loan, leaving available credit under this line in the amount of $3,962,000.

 

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The Company’s operations provided cash of $278,000 during the three months ended July 31, 2005. Cash was provided primarily from an increase in accounts payable and other current liabilities, which was substantially offset by cash requirements resulting from an increase in inventories. The Company’s operations used cash of $432,000 during the three months ended July 31, 2004. The cash was used primarily to fund a decrease in accounts payable and other current liabilities, which was partially offset by the impact of lower levels of receivables and inventories.

 

During the three months ended July 31, 2005, net cash of $1,674,000 was provided by investing activities, primarily from the proceeds of the sale of the Company’s former plant site in Lockhart, Texas, reduced by $832,000 of capital expenditures. This compares to the use of $156,000 for investing activities in the same period of the prior year, primarily for capital expenditures.

 

The Company’s financing activities used cash of $1,531,000 during the three months ended July 31, 2005. Cash used included $2,301,000 to reduce bank overdrafts, $279,000 for scheduled repayments of long-term debt, and $175,000 for cash dividends. The impact of these items was partially offset by cash of $1,260,000 provided from advances under the revolving credit loan. Financing activities provided cash of $549,000 in the same period of the prior year, which included $991,000 received from advances under the revolving credit loan, partially offset by scheduled long-term debt repayments of $279,000 and cash dividends paid of $175,000.

 

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Outlook for Remainder of Fiscal Year 2006

 

In addition to general economic factors affecting the Company and its markets, demand for the Company’s products is also dependent upon the number of laboratory construction projects planned and/or current progress in projects already under construction. The Company’s ability to predict future demand is very limited given, among other general economic factors affecting the Company and its markets, the Company’s role as subcontractor or supplier to dealers of subcontractors.

 

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

 

Certain statements in this report constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could significantly impact results or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, economic, competitive, governmental, and technological factors affecting the Company’s operations, markets, products, services, and prices. The cautionary statements made pursuant to the Reform Act herein and elsewhere by the Company should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company prior to the effective date of the Reform Act. The Company cannot always predict what factors would cause actual results to differ materially from those indicated by the forward-looking statements. In addition, readers are urged to consider statements that include the terms “believes”, “belief”, “expects”, “plans”, “objectives”, “anticipates”, “intends” or the like to be uncertain and forward-looking.

 

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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, 2005 has been performed by Cherry, Bekaert & Holland LLP, the Company’s independent auditors. Their report on the interim financial information follows.

 

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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 consolidated balance sheets of Kewaunee Scientific Corporation and its subsidiaries (the “Company”) as of July 31, 2005, and the related consolidated statements of operations, stockholders’ equity and cash flows for the three-month period ended July 31, 2005. 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 (United States), 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 consolidated interim financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

 

Cherry, Bekaert & Holland LLP

Charlotte, North Carolina

August 24, 2005

 

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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, 2005.

 

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 July 31, 2005. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that, as of July 31, 2005, the Company’s disclosure controls and procedures were adequate and effective and designed to ensure that all material information required to be filed in this quarterly report is made known to them by others within the Company and its subsidiaries.

 

(b) Changes in internal controls

 

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to July 31, 2005. As no significant deficiencies or material weaknesses were found, no corrective actions were taken.

 

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PART II. OTHER INFORMATION

 

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

 

The Company’s Annual Meeting of Stockholders was held on August 24, 2005. Each of the nominees for Class I directors was re-elected for a three-year term. The votes cast for and withheld from each such director were as follows:

 

Director


   For

   Withheld

Wiley N. Caldwell

   2,060,502    122,434

Silas Keehn

   2,046,305    136,631

 

Item 6. Exhibits and Reports on Form 8-K

 

31.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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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.

 

   

KEWAUNEE SCIENTIFIC CORPORATION


                                (Registrant)

Date: September 12, 2005

  By  

/s/ D. Michael Parker


        D. Michael Parker
        Senior Vice President, Finance and
        Chief Financial Officer

 

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