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 January 31, 1999 [_] 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 (I.R.S. Employer incorporation or organization) 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 ----- ----- As of February 26, 1999, the Registrant had outstanding 2,436,296 shares of Common Stock. Pages: This report, including exhibits, contains 16 pages numbered sequentially from this cover page.
KEWAUNEE SCIENTIFIC CORPORATION INDEX TO FORM 10-Q FOR THE QUARTERLY PERIOD ENDED January 31, 1999 <TABLE> <CAPTION> Page Number ------ <S> <C> PART I. FINANCIAL INFORMATION - ------------------------------ Item 1. Financial Statements Condensed Statements of Operations - Three and nine months ended January 31, 1999 and 1998 3 Condensed Balance Sheets - January 31, 1999 and April 30, 1998 4 Condensed Statements of Cash Flows - Nine months ended January 31, 1999 and 1998 5 Notes to Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Review of Independent Accountants 13 Report of Independent Accountants 14 PART II. OTHER INFORMATION - --------------------------- Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURE 16 - --------- </TABLE> 2
Part 1. Financial Information Item 1. Financial Statements Kewaunee Scientific Corporation Condensed Statements of Operations (Unaudited) <TABLE> <CAPTION> Three months ended Nine Months Ended January 31 January 31 ---------------------- -------------------- 1999 1998 1999 1998 ---------- -------- -------- -------- ($ in thousands, except per share data) <S> <C> <C> <C> <C> Net sales $ 18,404 $ 17,333 $ 57,281 $ 53,437 Cost of products sold 14,302 12,990 44,733 41,003 ---------- -------- -------- -------- Gross profit 4,102 4,343 12,548 12,434 Operating expenses 3,000 3,345 9,108 9,525 ---------- -------- -------- -------- Operating earnings 1,102 998 3,440 2,909 Interest expense (37) (37) (63) (136) Other income (expense), net (5) 10 (33) 32 ---------- -------- -------- -------- Earnings before income taxes 1,060 971 3,344 2,805 Income tax expense 425 388 1,338 1,122 ---------- -------- -------- -------- Net earnings $ 635 $ 583 $ 2,006 $ 1,683 ========== ======== ======== ======== Net earnings per share- Basic $0.26 $0.24 $0.83 $ 0.71 Diluted $0.26 $0.23 $0.81 $ 0.68 Average number of common shares outstanding (in thousands)- Basic 2,436 2,395 2,431 2,378 Diluted 2,467 2,483 2,464 2,457 </TABLE> See accompanying notes to condensed financial statements. 3
Kewaunee Scientific Corporation Condensed Balance Sheets ($ in thousands) <TABLE> <CAPTION> January 31 April 30 1999 1998 ----------- --------- <S> <C> <C> Assets (Unaudited) - ------ Current assets: Cash and cash equivalents $ 500 $ 1,809 Receivables 16,456 13,819 Inventories 3,580 3,710 Deferred income taxes 1,240 1,240 Prepaid expenses and other current assets 466 275 ---------- --------- Total current assets 22,242 20,853 ---------- --------- Property, plant and equipment, at cost 29,988 27,063 Accumulated depreciation (18,245) (17,029) ---------- --------- Net property, plant and equipment 11,743 10,034 ---------- --------- Other assets 1,041 979 ---------- --------- Total Assets $ 35,026 $ 31,866 ========== ========= Liabilities and Stockholders' Equity - ------------------------------------ Current liabilities: Short-term borrowings 2,422 0 Accounts payable 5,850 6,209 Employee compensation and amounts withheld 1,733 2,439 Other current liabilities 2,745 2,639 ---------- --------- Total current liabilities 12,750 11,287 ---------- --------- Deferred income taxes 809 809 Accrued employee benefit plan costs 741 731 ---------- --------- Total Liabilities 14,300 12,827 ---------- --------- Stockholders' equity: Common stock 6,550 6,550 Additional paid-in-capital 86 144 Retained earnings 15,185 13,568 Common stock in treasury, at cost (1,095) (1,223) ---------- --------- Total stockholders' equity 20,726 19,039 ---------- --------- Total Liabilities and Stockholders' Equity $ 35,026 $ 31,866 ========== ========= </TABLE> See accompanying notes to condensed financial statements. 4
Kewaunee Scientific Corporation Condensed Statements of Cash Flows (Unaudited) ($ in thousands) <TABLE> <CAPTION> Nine months ended January 31 ----------------- 1999 1998 ------- ------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 2,006 $ 1,683 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 1,262 1,115 Provision for bad debts 107 81 Increase in receivables (2,744) (2,344) (Increase) decrease in inventories 130 (2,337) Increase (decrease) in accounts payable and other current liabilities (959) 2,009 Other, net (245) 233 -------- -------- Net cash provided by (used in) operating activities (443) 440 -------- -------- Cash flows from investing activities: Capital expenditures (2,969) (816) -------- -------- Net cash used in investing activities (2,969) (816) -------- -------- Cash flows from financing activities: Net increase in short-term borrowings 2,422 572 Dividends paid (389) (309) Proceeds from exercise of stock options 70 114 -------- -------- Net cash provided by financing activities 2,103 377 ------- -------- Increase (decrease) in cash and cash equivalents (1,309) 1 Cash and cash equivalents, beginning of period 1,809 6 -------- -------- Cash and cash equivalents, end of period $ 500 $ 7 ======== ======== Supplemental disclosure: Interest paid $49 $128 Income taxes paid $1,732 $1,145 </TABLE> See accompanying notes to condensed financial statements. 5
Kewaunee Scientific Corporation Notes to Condensed Financial Statements (unaudited) A. Financial Information - ------------------------- The unaudited interim condensed 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 generally accepted accounting principles 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 1998 Annual Report to Stockholders. The preparation of the financial statements in conformity with generally accepted accounting principles 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 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): <TABLE> <CAPTION> January 31, 1999 April 30, 1998 ---------------- -------------- <S> <C> <C> Finished products $ 629 $1,020 Work-in-process 1,145 1,016 Raw materials 1,806 1,674 ------ ------ $3,580 $3,710 ====== ====== </TABLE> 6
C. Financing Arrangements - -------------------------- On January 6, 1999, the Company entered into a new credit facility, replacing the Company's previous $8.5 million two-year secured revolving credit facility with another lender which expired on that date. The new facility allows the Company to borrow up to $3 million under a two-year unsecured revolving credit component and up to $5 million under a seven-year equipment loan component. All advances under the equipment loan component must be made during the first two years of the agreement and must be secured by qualifying machinery and equipment. The Company provides monthly interest payments under both components of the facility calculated at the lower of (1) the LIBOR Market Index Rate plus 1.75%, or (2) the lender's Prime Rate minus .75%. Beginning in the third year of the equipment loan, monthly principal payments will be required in sixty equal installments. The equipment loan includes financial covenants with respect to the Company's tangible net worth, funds flow coverage, current ratio, and ratio of liabilities to tangible net worth. At January 31, 1999, advances of $2.4 million were outstanding under the revolving credit loan. No advances were outstanding under the equipment loan. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company's 1998 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, 1998. The following discussion and analysis describes material changes in the Company's financial condition since April 30, 1998. The analysis of results of operations compares the three months and nine months ended January 31, 1999 with the comparable periods of the prior fiscal year. Results of Operations - --------------------- The Company recorded sales of $18.4 million for the three months ended January 31, 1999, up 6.2% from sales of $17.3 million for the comparable period of the prior year. Sales for the nine months ended January 31, 1999 were $57.3 million, up 7.2% from sales of $53.4 million in the comparable period of the prior year. The sales improvements over the prior year periods resulted primarily from increased unit sales of laboratory furniture, as continued strong demand for these products more than offset the impact of a weaker technical furniture marketplace during the current year periods. The gross profit margin for the quarter ended January 31, 1999 was 22.3% of sales, as compared to 25.1% of sales in the comparable quarter of the prior year. The gross profit margin for the nine months ended January 31, 1999 was 21.9%, as compared to 23.3% in the comparable period of the prior year. The decreases in the gross profit margins in the current year resulted primarily from continuing start-up and other costs associated with the Company's new product lines, particularly in the second quarter of the current year, and to a lesser extent, in the third quarter of the current year. Operating expenses for the quarter ended January 31, 1999 were $3.0 million, or 16.3% of sales, as compared to $3.3 million, or 19.3% of sales, in the comparable quarter of the prior year. Operating expenses for the nine months ended January 31, 1999 were $9.1 million, or 15.9% of sales, as compared to $9.5 million, or 17.8% of sales, in the comparable period of the prior year. The decreases in operating expenses in the current year were primarily attributable to reduced sales commissions, resulting from lower commissionable sales, and lower administrative expenses. 8
Operating earnings of $1.1 million and $3.4 million were recorded for the three months and nine months ended January 31, 1999, respectively. This compares to operating earnings of $1.0 million and $2.9 million for the comparable periods of the prior year. Interest expense was $37,000 and $63,000 for the three months and nine months ended January 31, 1999, respectively, compared to $37,000 and $136,000 for the comparable periods of the prior year. The decreases in interest expense for the current year resulted primarily from lower levels of borrowings under the Company's revolving credit facility. Other expenses were $5,000 and $33,000 for the three months and nine months ended January 31, 1999, respectively, compared to other income of $10,000 and $32,000 for the comparable periods of the prior year. Income tax expense of $425,000 and $1.3 million was recorded for the three months and nine months ended January 31, 1999, respectively, compared to income tax expense of $388,000 and $1.1 million recorded for the comparable periods of the prior year. The effective tax rate was approximately 40% for each of the periods in the current year and the prior year. Net earnings of $635,000 and $2.0 million, or $.26 cents per diluted share and $.81 cents per diluted share, were recorded for the three months and nine months ended January 31, 1999, respectively. This compares to net earnings of $583,000 and $1.7 million, or $.23 cents per diluted share and $.68 cents per diluted share, respectively, for the comparable periods of the prior 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. The Company's new credit facility, which is more fully described in the notes to the condensed financial statements, is available to support short-term needs, as well as longer-term financing for machinery and other capital needs. The Company believes that these sources will be sufficient to support ongoing working capital needs. 9
The Company had working capital of $9.5 million at January 31, 1999, as compared to $9.6 million at April 30, 1998. The ratio of current assets to current liabilities was 1.74-to-1 at January 31, 1999, as compared to 1.85-to-1 at April 30, 1998. The debt-to-equity ratio was .12-to-1 at January 31, 1999; the Company had no debt at April 30, 1998. At January 31, 1999, the Company had outstanding borrowings of $2.4 million under the revolving credit component of its new credit facility. The Company's operations used cash of $443,000 during the nine months ended January 31, 1999, primarily to support increases in customer receivables and reductions in accounts payable and other current liabilities. The Company's operations provided cash of $440,000 during the nine months ended January 31, 1998, primarily from operating earnings and an increase in accounts payable and other current liabilities, offset by increases in customer receivables and inventories. The Company used cash of $3.0 million for capital expenditures during the nine months ended January 31, 1999 and used cash of $816,000 for such expenditures during the comparable period of the prior year, in both instances primarily for the purchase of production machinery. The increase in capital expenditures for the current year is part of a strategy to invest heavily in computerized machinery at the Company's Statesville operations to improve manufacturing efficiencies and reduce costs. An increase in short-term borrowings during the nine months ended January 31, 1999 provided cash of $2.4 million, as compared to an increase of $572,000 in these borrowings in the comparable period of the prior year. Cash dividends in the amount of $389,000 were paid during the nine months ended January 31, 1999, as compared to dividends paid of $309,000 for the comparable period of the prior year. Year 2000 - --------- The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. In the event that the Company's internal systems or one or more significant suppliers or customers fail to achieve Year 2000 compliance, the Company's business and profitability could be adversely affected. 10
The Company has completed an inventory and assessment of its computer systems and application software and has determined that its main business applications are Year 2000 compliant. An action plan is well underway to address Year 2000 issues for smaller applications and all other aspects of the Company's business. Actions include upgrading or replacing non-compliant software and monitoring the Year 2000 compliance of suppliers, customers and other external entities. The Company is on schedule to meet its internal target date of April 30, 1999 for establishing compliance. The Company has not yet determined the extent of the consequences, if any, to the Company should one or more of its significant suppliers or business partners fail to become Year 2000 compliant, and, accordingly, has not determined if any contingency plan with respect to these entities is needed. The Company is presently not aware of any material exposures or contingencies related to the Year 2000 compliance efforts of its significant suppliers and business partners. However, if a significant supplier or business partner should be non-compliant, there can be no assurance that such an event will not have a material adverse effect on the Company's consolidated financial position, results of operations and cash flows. The Company has not incurred, nor does it expect to incur, significant costs in addressing Year 2000 issues. 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
Recent Accounting Standards - --------------------------- The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement will be adopted as required at the end of the Company's 1999 fiscal year. SFAS No. 131 redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. The Company has not completed its evaluation of the effects that SFAS No. 131 will have on its financial reporting and disclosures. 12
REVIEW OF INDEPENDENT ACCOUNTANTS 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, 1999 has been performed by PricewaterhouseCoopers LLP, the Company's independent accountants. Their report on the interim financial information follows. There have been no adjustments proposed by PricewaterhouseCoopers LLP which have not been reflected in the interim financial information. 13
REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Kewaunee Scientific Corporation Statesville, North Carolina We have reviewed the accompanying condensed balance sheet of Kewaunee Scientific Corporation as of January 31, 1999, and the related condensed statements of operations for the three-month and nine-month periods ended January 31, 1999, and the condensed statement of cash flows for the nine-month period ended January 31, 1999. 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 of 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 financial information for it to be in conformity with generally accepted accounting principles. We previously audited in accordance with generally accepted auditing standards, the balance sheets as of April 30, 1998 and the related statements of income, of retained earnings, and of cash flows for the year then ended (not presented herein), and in our report dated June 1, 1998 we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of April 30, 1998, is fairly stated in all material respects in relation to the balance sheet from which it was derived. PricewaterhouseCoopers LLP Charlotte, North Carolina February 12, 1999 14
PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed with the Commission during the three months ended January 31, 1999. 15
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: March 11, 1999 By /s/ D. Michael Parker -------------------------------- D. Michael Parker Vice President of Finance Chief Financial Officer 16