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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, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from to
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Commission file number 0-5286
KEWAUNEE SCIENTIFIC CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 38-0715562
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2700 West Front Street
Statesville, North Carolina 28677
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(Address of principal executive offices) (Zip Code)
(704) 873-7202
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(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 August 28, 2002, the Registrant had outstanding 2,479,745 shares of Common
Stock.
Pages: This report, excluding exhibits, contains 15 pages numbered sequentially
from this cover page.
1
KEWAUNEE SCIENTIFIC CORPORATION
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2002
Page
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PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
Three months ended July 31, 2002 and 2001 3
Condensed Consolidated Balance Sheets -
July 31, 2002 and April 30, 2002 4
Condensed Consolidated Statements of Cash Flows -
Three months ended July 31, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Review by Independent Accountants 11
Report of Independent Accountants 12
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 15
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2
Part 1. Financial Information
Item 1. Financial Statements
Kewaunee Scientific Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
Three months ended
July 31
----------------------------
2002 2001
------- -------
Net sales $19,405 $19,740
Costs of products sold 15,964 16,533
------- -------
Gross profit 3,441 3,207
Operating expenses 2,898 2,752
------- -------
Operating earnings 543 455
Interest expense (42) (60)
Other income 1 63
Earnings before income taxes 502 458
Income tax expense 178 165
------- -------
Net earnings $324 $293
------- -------
Net earnings per share
Basic $0.13 $0.12
Diluted $0.13 $0.12
Average number of common shares
outstanding (in thousands)
Basic 2,470 2,472
Diluted 2,484 2,486
See accompanying notes to condensed financial statements.
3
Kewaunee Scientific Corporation
Condensed Consolidated Balance Sheets
(in thousands)
July 31 April 30
2002 2002
-------- --------
Assets (Unaudited)
- ------
Current assets:
Cash and cash equivalents $659 $1,747
Receivables, less allowance 18,631 18,979
Inventories 3,644 3,309
Deferred income taxes 581 581
Prepaid income taxes 130 296
Prepaid expenses and other current assets 801 514
------- -------
Total current assets 24,446 25,426
------- -------
Property, plant and equipment, at cost 37,364 36,691
Accumulated depreciation (24,460) (23,880)
------- -------
Net property, plant and equipment 12,904 12,811
------- -------
Other assets 3,718 3,953
------- -------
Total Assets $41,068 $42,190
======= =======
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Short-term borrowings $977 $ -
Current portion of long-term debt 681 681
Accounts payable 4,785 6,648
Employee compensation and amounts withheld 1,534 1,932
Deferred Revenue 444 481
Other accrued expenses 1,028 867
------- -------
Total current liabilities 9,449 10,609
------- -------
Long-term debt 1,760 1,930
Deferred income taxes 925 925
Accrued employee benefit plan costs 1,583 1,583
Other long-term liabilities 263 231
------- -------
Total Liabilities 13,980 15,278
------- -------
Stockholders' equity:
Common stock 6,550 6,550
Additional paid-in-capital 131 146
Retained earnings 21,297 21,146
Accumulated other comprehensive loss (9) -
Common stock in treasury, at cost (881) (930)
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Total stockholders' equity 27,088 26,912
------- -------
Total Liabilities and Stockholders' Equity $41,068 $42,190
======= =======
See accompanying notes to condensed financial statements.
4
Kewaunee Scientific Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three months ended
July 31
------------------
2002 2001
------ ----
Cash flows from operating activities:
Net earnings $324 $293
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation 591 524
Provision for bad debts 31 33
Decrease in prepaid income taxes 166 543
Decrease in receivables 317 11
Increase in inventories (335) (960)
(Decrease) increase in accounts payable and
other current liabilities (2,100) 137
Decrease in deferred revenue (37) (385)
Other, net (24) 144
----
Net cash (used in) provided by operating activities (1,067) 340
------ ----
Cash flows from investing activities:
Capital expenditures (1,055) (322)
Proceeds from sale of fixed assets 366 -
------ ----
Net cash used in investing activities (689) (322)
------
Cash flows from financing activities:
Payments on long-term debt (170) (155)
Increase in short-term borrowings 977 200
Dividends paid (173) (173)
Proceeds from exercise of stock options (including tax benefit) 34 -
Purchase of treasury stock - (29)
------ ----
Net cash provided by (used in) financing activities 668 (157)
------ ----
Decrease in cash and cash equivalents (1,088) (139)
Cash and cash equivalents, beginning of period 1,747 488
------ ----
Cash and cash equivalents, end of period $659 $349
====== ====
See accompanying notes to condensed financial statements.
5
Kewaunee Scientific Corporation
Notes to Condensed Consolidated 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 2002 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.
Certain prior quarterly accounts have been reclassified with current quarterly
presentations.
B. Inventories
-----------
Inventories consisted of the following (in thousands):
July 31, 2002 April 30, 2002
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Finished products $ 657 $ 671
Work in process 1,106 1,007
Raw materials 1,881 1,631
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$3,644 $3,309
====== ======
C. Balance Sheet
-------------
The Company's April 30, 2002 condensed consolidated balance sheet as presented
herein is derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
6
D. Segment Information
-------------------
The following table shows net sales and profits by business segment for three
months ended July 31, 2002 and 2001 (in thousands):
Laboratory Technical
Products Products Corporate Total
---------- --------- --------- -------
Three months ended
July 31, 2002
- -------------
Revenues from
external customers $18,048 $1,357 -- $19,405
Intersegment revenues 162 -- (162) --
Segment profit (loss) 868 (116) (250) 502
Three months ended
July 31, 2001
- -------------
Revenues from
external customers $17,844 $1,896 -- $19,740
Intersegment revenues -- -- -- --
Segment profit (loss) 825 (184) (183) 458
E. Comprehensive Income
--------------------
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," effective January 1, 2001. SFAS No. 133 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, 2002.
The change in fair value of this cash flow hedge during the current quarter
resulted in an increase of $29,000 to accumulated other comprehensive loss in
the accompanying condensed consolidated balance sheet.
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 average exchange rates prevailing during the period and any
resulting translation adjustments are reported separately in shareholders'
equity. Changes in exchange rates for the current quarter resulted in a decrease
of $20,000 in accumulated other comprehensive loss in the accompanying condensed
consolidated balance sheet.
7
Comprehensive income for the three months ended July 31, 2002 is summarized as
follows (in thousands):
Net income $324
Change in fair value of
cash flow hedge, net of income tax (29)
Change in cumulative foreign currency
translation adjustments 20
----
Total comprehensive income $315
F. Commitments and Contingencies
-----------------------------
The Company previously reported that it was vigorously contesting a judgment in
the amount of approximately $1.3 million that had been issued against the
Company in fiscal year 2002 associated with a legal dispute between the Company
and Bernards Bros. Inc. The Company has filed an appeal of the judgment with the
Court of Appeals of the State of California contending that the amount of such
judgment is not consistent with an arbitrator's previous award in the matter.
The Company feels the appeal efforts are moving forward favorably and expects
the case to ultimately be concluded with a liability to the Company in the
amount of approximately $134,000, the amount previously recorded in the
financial statements.
8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
The Company's 2002 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, 2002. The following discussion and analysis
describes material changes in the Company's financial condition since April 30,
2002. The analysis of results of operations compares the three months ended July
31, 2002 with the comparable period of the prior fiscal year.
Results of Operations
- ---------------------
The Company recorded sales of $19.4 million for the three months ended July 31,
2002, down 1.7% from sales of $19.7 million for the comparable period of the
prior year. Sales of laboratory products increased 1.1% over the same period
last year, reflecting the continuing healthy marketplace for laboratory
products. Sales of technical products, which are sold primarily to customers in
the high-tech industry, declined 28.4% from the same period last year,
reflecting the continuing slowdown in capital spending by customers in the
high-tech industry.
The Company's gross profit margin for the three months ended July 31, 2002 was
17.7%, compared to 16.2% for the comparable period of the prior year. The
increase in the gross profit margin for the quarter resulted primarily from
improved manufacturing efficiencies, continuing cost control activities, and an
improved product sales mix.
Operating expenses for the three months ended July 31, 2002 were $2.9 million,
compared to $2.8 million for the comparable period of the prior year. As a
percent of sales, operating expenses for the three months ended July 31, 2002
were 14.9% of sales, as compared to 13.9% of sales for the comparable period of
the prior year. The increase in operating expenses, which were expected,
resulted primarily from higher general and administrative costs.
Operating earnings of $543,000 were recorded for the three months ended July 31,
2002, as compared to $455,000 recorded in the comparable period of the prior
year.
Interest expense was $42,000 for the three months ended July 31, 2002, compared
to $60,000 for the comparable period of the prior year. The decrease in interest
expense for the current quarter resulted primarily from lower interest rates.
9
Other income was $1,000 for the three months ended July 31, 2002, compared to
other income of $63,000 for the comparable period of the prior year. The
reduction in other income for the current quarter resulted from reductions in
earnings of unconsolidated joint ventures and interest income.
Income tax expense of $178,000 was recorded for the three months ended July 31,
2002, as compared to an income tax expense of $165,000 recorded for the
comparable period of the prior year. The effective tax rate was approximately
35.5% for the three months ended July 31, 2002 and 36.0% for the three months
ended July 31, 2001. The reduction in the effective tax rates from statutory
rates reflect the impact of various federal and state tax credits earned by the
Company.
Net earnings of $324,000, or $.13 per diluted share, were recorded for the three
months ended July 31, 2002, compared to net earnings of $293,000, or $.12 per
diluted share, for the comparable period 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 the Company's credit
facility. 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 $15.0 million at July 31, 2002, as compared
to $14.8 million at April 30, 2002. The ratio of current assets to current
liabilities was 2.6-to-1 at July 31, 2002. At July 31, 2002, advances of
$977,000 were outstanding under the Company's $6.0 million revolving credit
loan.
The Company's operations used cash of $1.1 million during the three months ended
July 31, 2002. The cash used was primarily to reduce accounts payable and other
accrued liabilities, including payments under incentive and sales commission
programs. The Company's operations provided cash of $340,000 during the three
months ended July 31, 2001, primarily attributable to operating earnings,
partially offset by cash requirements associated with increased inventory
levels.
During the three months ended July 31, 2002, the Company used net cash of
$689,000 in investing activities, comprised of $1,055,000 of capital
expenditures, primarily for production equipment, reduced by the proceeds of
$366,000 from the sale of fixed assets, compared to the use of $322,000 for such
expenditures in the comparable period of the prior year.
10
During the quarter, the Company entered into an agreement to lease a 100,000
square foot warehouse facility in Statesville, North Carolina under a ten-year
operating lease arrangement beginning when the facility is constructed and
available for occupancy. The Company is expected to occupy the warehouse in
October 2002. Minimum lease payments are $300,000 for each year of the lease,
increased for changes in the Consumer Price Index each year beginning in year
six of the lease. Upon occupancy of this new warehouse, the Company intends to
vacate several existing warehouses which are currently leased on a
month-to-month basis at an annual cost not significantly different from the
annual obligations associated with the new facility.
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. 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.
REVIEW BY INDEPENDENT ACCOUNTANTS
A review of the interim financial information included in this Quarterly Report
on Form 10-Q for the three months ended July 31, 2002 has been performed by
PricewaterhouseCoopers LLP, the Company's independent accountants. Their report
on the interim financial information follows.
11
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Kewaunee Scientific Corporation
Statesville, North Carolina
We have reviewed the accompanying condensed consolidated balance sheet of
Kewaunee Scientific Corporation as of July 31, 2002, and the related condensed
consolidated statements of operations for the three-month period ended July 31,
2002 and the condensed consolidated statement of cash flows for the three-month
period ended July 31, 2002. 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 it 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,
2002, 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 3, 2002, 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, 2002 is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
PricewaterhouseCoopers LLP
Charlotte, North Carolina
August 15, 2002
12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company previously reported that it was vigorously contesting a
judgment in the amount of approximately $1.3 million that had been
issued against the Company in fiscal year 2002 associated with a legal
dispute between the Company and Bernards Bros. Inc. The Company has
filed an appeal of the judgment with the Court of Appeals of the State
of California contending that the amount of such judgment is not
consistent with an arbitrator's previous award in the matter. The
Company feels the appeal efforts are moving forward favorably and
expects the case to ultimately be concluded with a liability to the
Company in the amount of approximately $134,000, the amount previously
recorded in the financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on August 28,
2002. Each of the nominees for Class I and Class III directors was
re-elected. The votes cast for and withheld from each such director were
as follows:
Director For Withheld
-------- --------- --------
Class I Directors:
Wiley N. Caldwell 2,362,038 36,800
Silas Keehn 2,385,013 13,825
Class III Director:
Margaret Barr Bruemmer 2,385,013 13,825
13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 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.
99.2 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.
99.3 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.
99.4 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.
(b) Reports on form 8-K
No reports on Form 8-K were filed with the Commission during the
three months ended July 31, 2002.
14
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
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(Registrant)
Date: September 12, 2002 By /s/ D. Michael Parker
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D. Michael Parker
Senior Vice President, Finance
Chief Financial Officer
15