UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2016
or
| ☐ | 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) |
(IRS Employer Identification No.) | |
| 2700 West Front Street Statesville, North Carolina |
28677-2927 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (704) 873-7202
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ☒ | |||
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of December 5, 2016, the registrant had outstanding 2,711,309 shares of Common Stock.
KEWAUNEE SCIENTIFIC CORPORATION
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2016
i
| Item 1. | Financial Statements |
Kewaunee Scientific Corporation
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
| Three months ended October 31 |
Six months ended October 31 |
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| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Net sales |
$ | 36,329 | $ | 31,037 | $ | 73,608 | $ | 62,126 | ||||||||
| Costs of products sold |
29,225 | 25,505 | 59,365 | 50,751 | ||||||||||||
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| Gross profit |
7,104 | 5,532 | 14,243 | 11,375 | ||||||||||||
| Operating expenses |
4,816 | 4,403 | 9,894 | 8,722 | ||||||||||||
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| Operating earnings |
2,288 | 1,129 | 4,349 | 2,653 | ||||||||||||
| Other income |
119 | 85 | 238 | 187 | ||||||||||||
| Interest expense |
(78 | ) | (61 | ) | (158 | ) | (153 | ) | ||||||||
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| Earnings before income taxes |
2,329 | 1,153 | 4,429 | 2,687 | ||||||||||||
| Income tax expense |
792 | 446 | 1,562 | 1,017 | ||||||||||||
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| Net earnings |
1,537 | 707 | 2,867 | 1,670 | ||||||||||||
| Less: net earnings attributable to the noncontrolling interest |
51 | 12 | 81 | 35 | ||||||||||||
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| Net earnings attributable to Kewaunee Scientific Corporation |
$ | 1,486 | $ | 695 | $ | 2,786 | $ | 1,635 | ||||||||
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| Net earnings per share attributable to Kewaunee Scientific Corporation stockholders |
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| Basic |
$ | 0.55 | $ | 0.26 | $ | 1.03 | $ | 0.62 | ||||||||
| Diluted |
$ | 0.54 | $ | 0.26 | $ | 1.02 | $ | 0.61 | ||||||||
| Weighted average number of common shares outstanding |
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| Basic |
2,706 | 2,671 | 2,699 | 2,650 | ||||||||||||
| Diluted |
2,729 | 2,690 | 2,718 | 2,674 | ||||||||||||
See accompanying notes to consolidated financial statements.
1
Kewaunee Scientific Corporation
Consolidated Statements of Comprehensive Income
(Unaudited)
(in thousands)
| Three months ended October 31 |
Six months ended October 31 |
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| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Net earnings |
$ | 1,537 | $ | 707 | $ | 2,867 | $ | 1,670 | ||||||||
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| Other comprehensive income (loss), net of tax: |
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| Foreign currency translation adjustments |
(143 | ) | (195 | ) | (169 | ) | (214 | ) | ||||||||
| Change in fair value of cash flow hedge |
14 | (1 | ) | 18 | 11 | |||||||||||
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| Other comprehensive income (loss) |
(129 | ) | (196 | ) | (151 | ) | (203 | ) | ||||||||
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| Comprehensive income, net of tax |
1,408 | 511 | 2,716 | 1,467 | ||||||||||||
| Less: comprehensive income attributable to the noncontrolling interest |
51 | 12 | 81 | 35 | ||||||||||||
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| Comprehensive income attributable to Kewaunee Scientific Corporation |
$ | 1,357 | $ | 499 | $ | 2,635 | $ | 1,432 | ||||||||
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See accompanying notes to consolidated financial statements.
2
Kewaunee Scientific Corporation
Consolidated Statement of Stockholders’ Equity
(Unaudited)
(in thousands, except shares and per share data)
| $ in thousands, except per share amounts |
Common Stock |
Additional Paid-in Capital |
Treasury Stock |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Total Stockholders’ Equity |
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| Balance at April 30, 2016 |
$ | 6,720 | $ | 2,375 | $ | (53 | ) | $ | 36,826 | $ | (7,626 | ) | $ | 38,242 | ||||||||||
| Net earnings attributable to Kewaunee Scientific Corporation |
— | — | — | 2,786 | — | 2,786 | ||||||||||||||||||
| Other comprehensive loss |
— | — | — | — | (151 | ) | (151 | ) | ||||||||||||||||
| Cash dividends paid, $0.28 per share |
— | — | — | (757 | ) | — | (757 | ) | ||||||||||||||||
| Stock options exercised, 45,200 shares |
63 | 78 | — | — | — | 141 | ||||||||||||||||||
| Stock based compensation |
— | 98 | — | — | — | 98 | ||||||||||||||||||
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| Balance at October 31, 2016 |
$ | 6,783 | $ | 2,551 | $ | (53 | ) | $ | 38,855 | $ | (7,777 | ) | $ | 40,359 | ||||||||||
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See accompanying notes to consolidated financial statements.
3
Kewaunee Scientific Corporation
Consolidated Balance Sheets
(in thousands, except per share data)
| October 31, 2016 |
April 30, 2016 |
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| (Unaudited) | ||||||||
| Assets |
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| Current Assets: |
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| Cash and cash equivalents |
$ | 7,579 | $ | 5,222 | ||||
| Restricted cash |
1,649 | 1,567 | ||||||
| Receivables, less allowance: $225, $202, on each respective date |
29,040 | 27,835 | ||||||
| Inventories |
16,789 | 15,626 | ||||||
| Prepaid expenses and other current assets |
1,023 | 707 | ||||||
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| Total Current Assets |
56,080 | 50,957 | ||||||
| Property, plant and equipment, at cost |
51,630 | 49,928 | ||||||
| Accumulated depreciation |
(37,051 | ) | (35,810 | ) | ||||
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| Net Property, Plant and Equipment |
14,579 | 14,118 | ||||||
| Deferred income taxes |
3,436 | 3,392 | ||||||
| Other |
3,459 | 3,938 | ||||||
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| Total Other Assets |
6,895 | 7,330 | ||||||
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| Total Assets |
$ | 77,554 | $ | 72,405 | ||||
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| Liabilities and Equity |
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| Current Liabilities: |
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| Short-term borrowings and interest rate swaps |
$ | 6,722 | $ | 3,818 | ||||
| Current portion of long-term debt |
421 | 421 | ||||||
| Accounts payable |
10,821 | 11,722 | ||||||
| Employee compensation and amounts withheld |
2,605 | 2,333 | ||||||
| Deferred revenue |
1,115 | 785 | ||||||
| Other accrued expenses |
2,956 | 1,871 | ||||||
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| Total Current Liabilities |
24,640 | 20,950 | ||||||
| Long-term debt |
3,139 | 3,349 | ||||||
| Accrued pension and deferred compensation costs |
9,026 | 9,554 | ||||||
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| Total Liabilities |
36,805 | 33,853 | ||||||
| Commitments and Contingencies |
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| Stockholders’ Equity: |
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| Common Stock, $2.50 par value, Authorized – 5,000 shares; Issued – 2,713; 2,688
shares; |
6,783 | 6,720 | ||||||
| Additional paid-in-capital |
2,551 | 2,375 | ||||||
| Retained earnings |
38,855 | 36,826 | ||||||
| Accumulated other comprehensive loss |
(7,777 | ) | (7,626 | ) | ||||
| Common stock in treasury, at cost, 3 shares, on each date |
(53 | ) | (53 | ) | ||||
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| Total Kewaunee Scientific Corporation Stockholders’ Equity |
40,359 | 38,242 | ||||||
| Noncontrolling interest |
390 | 310 | ||||||
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| Total Equity |
40,749 | 38,552 | ||||||
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| Total Liabilities and Equity |
$ | 77,554 | $ | 72,405 | ||||
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See accompanying notes to consolidated financial statements.
4
Kewaunee Scientific Corporation
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
| Six months ended October 31 |
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| 2016 | 2015 | |||||||
| Cash flows from operating activities: |
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| Net earnings |
$ | 2,867 | $ | 1,670 | ||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: |
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| Depreciation |
1,301 | 1,227 | ||||||
| Bad debt provision |
23 | 24 | ||||||
| Stock based compensation expense |
98 | 96 | ||||||
| Benefit for deferred income tax expense |
(44 | ) | (20 | ) | ||||
| Change in assets and liabilities: |
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| (Increase) decrease in receivables |
(1,228 | ) | 510 | |||||
| (Increase) in inventories |
(1,163 | ) | (995 | ) | ||||
| Increase (decrease) in accounts payable and other accrued expenses |
456 | (817 | ) | |||||
| Increase in deferred revenue |
330 | 477 | ||||||
| Other, net |
(434 | ) | (311 | ) | ||||
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| Net cash provided by operating activities |
2,206 | 1,861 | ||||||
| Cash flows from investing activities: |
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| Capital expenditures |
(1,762 | ) | (1,261 | ) | ||||
| (Increase) decrease in restricted cash |
(82 | ) | 597 | |||||
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| Net cash used in investing activities |
(1,844 | ) | (664 | ) | ||||
| Cash flows from financing activities: |
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| Dividends paid |
(757 | ) | (664 | ) | ||||
| Dividends paid to noncontrolling interest in subsidiaries |
— | (75 | ) | |||||
| Increase in short-term borrowings and interest rate swaps |
2,904 | 574 | ||||||
| Payments on long-term debt |
(210 | ) | (211 | ) | ||||
| Payment toward purchase of noncontrolling interest in subsidiary |
— | (888 | ) | |||||
| Net proceeds from exercise of stock options (including tax benefit) |
141 | 458 | ||||||
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| Net cash provided by (used in) financing activities |
2,078 | (806 | ) | |||||
| Effect of exchange rate changes on cash |
(83 | ) | (161 | ) | ||||
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| Increase in cash and cash equivalents |
2,357 | 230 | ||||||
| Cash and cash equivalents, beginning of period |
5,222 | 3,044 | ||||||
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| Cash and cash equivalents, end of period |
$ | 7,579 | $ | 3,274 | ||||
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See accompanying notes to consolidated financial statements.
5
Kewaunee Scientific Corporation
Notes to Consolidated Financial Statements
(unaudited)
A. Financial Information
The unaudited interim consolidated financial statements of Kewaunee Scientific Corporation (the “Company”) 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 include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of these financial statements and should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2016 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 consolidated balance sheet as of April 30, 2016 included in this interim period filing has been derived from the audited financial statements at that date, but does not include all of the information and related notes required by generally accepted accounting principles (GAAP) for complete financial statements.
The preparation of the interim consolidated financial statements requires management to make certain estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates.
B. Earnings Per Share
Basic earnings per share is based on the weighted average number of common shares outstanding during the three and six month periods. 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 anti-dilutive effect. Options to purchase 45,200 shares were not included in the computation of diluted earnings per share for the three and six month periods ended October 31, 2016, because the option exercise prices were greater than the average market price of the common shares at that date, and accordingly, such options would have an antidilutive effect. Options to purchase 113,000 shares were not included in the computation of diluted earnings per share for the three and six month periods ended October 31, 2015, because the effect would be anti-dilutive.
C. Inventories
Inventories consisted of the following (in thousands):
| October 31, 2016 | April 30, 2016 | |||||||
| Finished products |
$ | 4,116 | $ | 3,707 | ||||
| Work in process |
2,052 | 1,889 | ||||||
| Raw materials |
10,621 | 10,030 | ||||||
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| $ | 16,789 | $ | 15,626 | |||||
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The Company uses the last-in, first-out (LIFO) method of valuing inventory for its domestic operations. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs, and are subject to the final year-end LIFO inventory valuation.
6
D. Segment Information
The following table provides financial information by business segments for the three and six months ended October 31, 2016 and 2015 (in thousands):
| Domestic Operations |
International Operations |
Corporate | Total | |||||||||||||
| Three months ended October 31, 2016 |
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| Revenues from external customers |
$ | 28,211 | $ | 8,118 | $ | — | $ | 36,329 | ||||||||
| Intersegment revenues |
2,571 | 1,263 | (3,834 | ) | — | |||||||||||
| Earnings (loss) before income taxes |
2,444 | 1,250 | (1,365 | ) | 2,329 | |||||||||||
| Three months ended October 31, 2015 |
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| Revenues from external customers |
$ | 26,279 | $ | 4,758 | $ | — | $ | 31,037 | ||||||||
| Intersegment revenues |
160 | 752 | (912 | ) | — | |||||||||||
| Earnings (loss) before income taxes |
1,927 | 535 | (1,309 | ) | 1,153 | |||||||||||
| Domestic Operations |
International Operations |
Corporate | Total | |||||||||||||
| Six months ended October 31, 2016 |
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| Revenues from external customers |
$ | 57,848 | $ | 15,760 | $ | — | $ | 73,608 | ||||||||
| Intersegment revenues |
3,437 | 2,398 | (5,835 | ) | — | |||||||||||
| Earnings (loss) before income taxes |
5,017 | 2,067 | (2,655 | ) | 4,429 | |||||||||||
| Six months ended October 31, 2015 |
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| Revenues from external customers |
$ | 50,594 | $ | 11,532 | $ | — | $ | 62,126 | ||||||||
| Intersegment revenues |
446 | 1,273 | (1,719 | ) | — | |||||||||||
| Earnings (loss) before income taxes |
3,760 | 1,300 | (2,373 | ) | 2,687 | |||||||||||
E. Defined Benefit Pension Plans
The Company has non-contributory defined benefit pension plans. These plans were amended as of April 30, 2005. No further benefits have been, or will be, earned under the plans, subsequent to the amendment date, and no additional participants will be added to the plans. Contributions of $555,000 were paid to the plans during the six months ended October 31, 2016 and the Company does not expect any contributions to be paid to the plans during the remainder of the fiscal year. Contributions of $64,000 were paid to the plans during the six months ended October 31, 2015.
Pension expense consisted of the following (in thousands):
| Three months ended October 31, 2016 |
Three months ended October 31, 2015 |
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| Service cost |
$ | -0- | $ | -0- | ||||
| Interest cost |
232 | 230 | ||||||
| Expected return on plan assets |
(311 | ) | (344 | ) | ||||
| Recognition of net loss |
318 | 294 | ||||||
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| Net periodic pension expense |
$ | 239 | $ | 180 | ||||
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| Six months ended October 31, 2016 |
Six months ended October 31, 2015 |
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| Service cost |
$ | -0- | $ | -0- | ||||
| Interest cost |
463 | 460 | ||||||
| Expected return on plan assets |
(621 | ) | (688 | ) | ||||
| Recognition of net loss |
628 | 588 | ||||||
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| Net periodic pension expense |
$ | 470 | $ | 360 | ||||
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7
F. Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and equivalents, mutual funds, cash surrender value of life insurance policies and short-term borrowings. The carrying value of these assets and liabilities approximate their fair value. The following tables summarize the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring and nonrecurring basis as of October 31, 2016 and April 30, 2016 (in thousands):
| October 31, 2016 | ||||||||||||
| Financial Assets | Level 1 | Level 2 | Total | |||||||||
| Trading securities held in non-qualified compensation plans (1) |
$ | 3,387 | $ | — | $ | 3,387 | ||||||
| Cash surrender value of life insurance policies (1) |
— | 62 | 62 | |||||||||
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| Total |
$ | 3,387 | $ | 62 | $ | 3,449 | ||||||
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| Financial Liabilities |
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| Non-qualified compensation plans (2) |
$ | — | $ | 3,772 | $ | 3,772 | ||||||
| Interest rate swap derivatives |
— | 136 | 136 | |||||||||
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| Total |
$ | — | $ | 3,908 | $ | 3,908 | ||||||
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| April 30, 2016 | ||||||||||||
| Financial Assets | Level 1 | Level 2 | Total | |||||||||
| Trading securities held in non-qualified compensation plans (1) |
$ | 3,867 | $ | — | $ | 3,867 | ||||||
| Cash surrender value of life insurance policies (1) |
— | 62 | 62 | |||||||||
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| Total |
$ | 3,867 | $ | 62 | $ | 3,929 | ||||||
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| Financial Liabilities |
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| Non-qualified compensation plans (2) |
$ | — | $ | 4,215 | $ | 4,215 | ||||||
| Interest rate swap derivatives |
— | 166 | 166 | |||||||||
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| Total |
$ | — | $ | 4,381 | $ | 4,381 | ||||||
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| (1) | The Company maintains two non-qualified compensation plans which include investment assets in a rabbi trust. These assets consist of marketable securities, which are valued using quoted market prices multiplied by the number of shares owned, and life insurance policies, which are valued at their cash surrender value. |
| (2) | Plan liabilities are equal to the individual participants’ account balances and other earned retirement benefits. |
G. New Accounting Standards
In November 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-17, “Income Taxes (Topic 740) – Balance Sheet Classification of Deferred Taxes.” This guidance eliminates the requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Instead, the update requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted prospectively or retrospectively. The Company early adopted this guidance prospectively beginning with the Consolidated Balance Sheet at April 30, 2016. Prior periods were not retrospectively adjusted.
In April 2015, the FASB issued ASU 2015-03, “Interest (Topic 835) – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.” This guidance requires that debt issuance costs related to a recognized liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The Company adopted this standard effective May 1, 2016. The adoption of this standard did not have a significant impact on the Company’s consolidated financial position or results of operations.
8
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The Company’s 2016 Annual Report to Stockholders contains management’s discussion and analysis of financial condition and results of operations as of and for the year ended April 30, 2016. The following discussion and analysis describes material changes in the Company’s financial condition since April 30, 2016. The analysis of results of operations compares the three and six months ended October 31, 2016 with the comparable periods of the prior year.
Results of Operations
Sales for the three months ended October 31, 2016 were $36,329,000, an increase of 17.1% from sales of $31,037,000 in the comparable period of the prior year. Sales from Domestic Operations were $28,211,000, up from $26,279,000 in the comparable period of the prior year. The increase in domestic sales reflects the increased demand for the Company’s products across the country. Sales from International Operations were $8,118,000, up 70.6% from $4,758,000 in the comparable period of the prior year. The increase in international sales reflects the completion of multi-year laboratory projects in Kuwait and India in the current period.
Sales for the six months ended October 31, 2016 were $73,608,000, up 18.5% from sales of $62,126,000 in the same period last year. Domestic Operations sales for the six-month period were $57,848,000, up 14.3% from sales of $50,594,000 in the same period last year. International Operations sales were $15,760,000, up 36.7% from sales of $11,532,000 in the same period last year.
The order backlog was $101.1 million at October 31, 2016, as compared to $86.2 million at July 31, 2016 and $92.4 million at October 31, 2015.
The gross profit margin for the three months ended October 31, 2016 was 19.6% of sales, as compared to 17.8% of sales in the comparable quarter of the prior year. The gross profit margin for the six months ended October 31, 2016 was 19.3% of sales, as compared to 18.3% in the same period last year. The increase in the gross profit margin percentage for the current three and six month periods was primarily due to favorable operating leverage from higher volumes of products being produced by the Company’s operations.
Operating expenses for the three months ended October 31, 2016 were $4,816,000, or13.3% of sales, as compared to $4,403,000, or 14.2% of sales, in the comparable period of the prior year. The increase in operating expenses for the three months ended October 31, 2016 is related primarily to increases in wages and benefits of $145,000, incentive compensation of $206,000, pension expense of $59,000, professional services of $154,000 and an increase of $195,000 in operating expenses for the Company’s International operations, partially offset by a decrease of $413,000 in non-recurring expenses incurred from the comparable period of the prior year.
Operating expenses for the six months ended October 31, 2016 were $9,894,000, or 13.4% of sales, as compared to $8,722,000, or 14.0% of sales in the comparable period of the prior year. The increase in operating expenses for the six months ended October 31, 2016 is related primarily to increases in wages and benefits of $315,000, incentive compensation of $358,000, pension expense of $110,000, professional services of $318,000 and an increase of $231,000 in operating expenses for the Company’s International operations, partially offset by a decrease of $524,000 in non-recurring expenses incurred from the comparable period of the prior year.
Interest expense was $78,000 and $158,000 for the three and six months ended October 31, 2016, respectively, as compared to $61,000 and $153,000 for the comparable periods of the prior year. The increases for the current year periods resulted primarily from higher borrowing levels.
Income tax expense of $792,000 was recorded for the three months ended October 31, 2016, as compared to income tax expense of $446,000 recorded for the comparable period of the prior year. Income tax expense of $1,562,000 was recorded for the six months ended October 31, 2016, as compared to income tax expense of $1,017,000 recorded for the comparable period of the prior year. The effective tax rate was 34.0% and 38.7% for the three-month periods ended October 31, 2016 and 2015, respectively. The effective tax rates were 35.3% and 37.8% for the six months ended October 31, 2016 and 2015, respectively. The lower effective tax rate for the current three and six month periods resulted from the inclusion of certain tax credits (research and development) in the calculations that were not included in prior periods.
Noncontrolling interests related to the Company’s subsidiary that is not 100% owned by the Company reduced net earnings by $51,000 for the three months ended October 31, 2016, as compared to $12,000 for the comparable period of the prior year. Net
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earnings were reduced by $81,000 and $35,000 for the six months ended October 31, 2016 and 2015, respectively. The changes in the amounts between each of these periods were directly attributable to changes in the amounts of net income reported for the Company’s one subsidiary that is not 100% owned by the Company.
Net earnings of $1,486,000, or $0.54 per diluted share, were reported for the three months ended October 31, 2016, compared to net earnings of $695,000, or $0.26 per diluted share, in the prior year period. Net earnings of $2,786,000, or $1.02 per diluted share, were reported for the six months ended October 31, 2016, compared to net earnings of $1,635,000, or $0.61 per diluted share, for the same period last year.
Liquidity and Capital Resources
Historically, the Company’s principal sources of liquidity have been funds generated from operations, supplemented as needed by short-term borrowings under the Company’s revolving credit facility. Additionally, certain machinery and equipment are financed by non-cancellable operating leases or capital leases. The Company believes that these sources will be sufficient to support ongoing business requirements in the current fiscal year, including capital expenditures.
The Company had working capital of $31,440,000 at October 31, 2016, compared to $30,007,000 at April 30, 2016. The ratio of current assets to current liabilities was 2.3-to-1.0 at October 31, 2016, compared to 2.4-to-1.0 at April 30, 2016. At October 31, 2016, advances of $6,521,000 were outstanding under the Company’s bank revolving credit facility, compared to advances of $3,600,000 outstanding as of April 30, 2016. The Company had standby letters of credit outstanding of $4,210,000 at October 31, 2016 and April 30, 2016. Amounts available under the $20 million revolving credit facility were $9.3 million and $12.2 million at October 31, 2016 and April 30, 2016, respectively. Total bank borrowings were $10,282,000 at October 31, 2016, compared to $7,588,000 at April 30, 2016.
The Company’s operations provided cash of $2,206,000 during the six months ended October 31, 2016. Cash was primarily provided from earnings, an increase in deferred revenue of $330,000, and a decrease in accounts payable and other accrued expenses of $456,000, which was partially offset by an increase in receivables of $1,228,000 and an increase in inventories of $1,163,000. The Company’s operations provided cash of $1,861,000 during the six months ended October 31, 2015. Cash was primarily provided from earnings, a decrease in receivables of $510,000, and an increase in deferred revenue of $477,000, which was partially offset by an increase in inventories of $995,000 and a decrease in accounts payable and other accrued expense of $817,000.
During the six months ended October 31, 2016, the Company used cash of $1,762,000 in investing activities for capital expenditures and an increase in restricted cash of $82,000. This compares to the net use of cash of $664,000 for investing activities in the comparable period of the prior year for capital expenditures of $1,261,000, partially offset by a decrease of $597,000 in restricted cash.
The Company’s financing activities provided cash of $2,078,000 during the six months ended October 31, 2016, primarily from an increase in short-term borrowings of $2,904,000, partially offset by cash dividends of $757,000 and payment on long-term debt of $210,000. The Company’s financing activities used cash of $806,000 during the six months ended October 31, 2015 for the final payment of $888,000 toward the purchase of the noncontrolling interest in a subsidiary, cash dividends of $664,000 paid to stockholders, cash dividends of $75,000 paid to minority interest holders, and payments of $211,000 on long-term debt, partially offset by an increase in short-term borrowings of $574,000.
Outlook
The Company’s ability to predict future demand for its products continues to be limited given its role as subcontractor or supplier to dealers for subcontractors. 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 earnings are also impacted by fluctuations in prevailing pricing for projects in the laboratory construction marketplace and increased costs of raw materials, including stainless steel, wood, and epoxy resin, and whether the Company is able to increase product prices to customers in amounts that correspond to such increases without materially and adversely affecting sales. Additionally, since prices are normally quoted on a firm basis in the industry, the Company bears the burden of possible increases in labor and material costs between the quotation of an order and delivery of a product. Looking forward the Company is optimistic that the results for the current fiscal year will be strong as the Company continues to see new opportunities worldwide.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This report contains statements that the Company believes to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this report, including statements regarding the Company’s future financial condition, results of operations, business operations and business prospects, are
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forward-looking statements. Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “predict,” “believe” and similar words, expressions and variations of these words and expressions are intended to identify forward-looking statements. All forward-looking statements are subject to important factors, risks, uncertainties and assumptions, including industry and economic conditions that could cause actual results to differ materially from those described in the forward-looking statements. Such factors, risks, uncertainties and assumptions include, but are not limited to, competitive and general economic conditions, both domestically and internationally; changes in customer demands; dependence on customers’ required delivery schedules; risks related to fluctuations in the Company’s operating results from quarter to quarter; risks related to international operations, including foreign currency fluctuations; changes in the legal and regulatory environment; changes in raw materials and commodity costs; and acts of terrorism, war, governmental action, natural disasters and other Force Majeure events. Many important factors that could cause such a difference are described under the caption “Risk Factors” in Item 1A in the Company’s 2016 Annual Report on Form 10-K. These forward-looking statements speak only as of the date of this document. The Company assumes no obligation, and expressly disclaims any obligation, to update any forward-looking statements, whether as a result of new information, future events or otherwise.
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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, 2016.
| Item 4. | Controls and Procedures |
(a) Evaluation of disclosure controls and procedures
An evaluation was performed under the supervision and with 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 October 31, 2016. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that, as of October 31, 2016, 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 was no significant change in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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| Item 6. | Exhibits |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), 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. | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
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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: December 9, 2016 | By | /s/ Thomas D. Hull III | ||||
| Thomas D. Hull III | ||||||
| (As duly authorized officer and Vice President, Finance and Chief Financial Officer) | ||||||
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