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| KEQU > SEC Filings for KEQU > Form 10-Q on 12-Dec-2008 | All Recent SEC Filings |
12-Dec-2008
Quarterly Report
The Company's 2008 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, 2008. The following discussion and analysis describes material changes in the Company's financial condition since April 30, 2008. The analysis of results of operations compares the three and six months ended October 31, 2008 with the comparable periods of the prior fiscal year.
Results of Operations
Sales for the three months ended October 31, 2008 were $27,732,000, an increase of 12% from sales of $24,727,000 in the same period last year. Sales from Domestic Operations were $23,785,000, an increase of 18% from the prior year period. Sales from International Operations were $3,947,000, a decrease of 15% from the prior year period. The decline in international operations sales resulted from customer changes in their product delivery dates.
Sales for the six months ended October 31, 2008 were $53,127,000, an increase of 17% from sales of $45,511,000 in the same period last year. Sales from Domestic Operations were $44,798,000, an increase of 18% from the prior year period. Sales from International Operations were $8,329,000, an increase of 12% from the prior year period. The order backlog at October 31, 2008 was $61.6 million, as compared to a backlog of $58.7 million at April 30, 2008 and $54.9 million at October 31, 2007.
The gross profit margin for the three months ended October 31, 2008 was 21.7% of sales, as compared to 22.5% of sales in the comparable quarter of the prior year. The gross profit margin for the six months ended October 31, 2008 was 21.4% of sales, as compared to 21.6% of sales in the comparable quarter of the prior year. The decreases in gross profit margins for the current year period were primarily due to higher raw material costs, particularly steel.
Operating expenses for the three months ended October 31, 2008 were $3,858,000, or 13.9% of sales, as compared to $3,370,000, or 13.6% of sales, in the comparable period of the prior year. Operating expenses for the six months ended October 31, 2008 were $7,444,000, or 14.0% of sales, as compared to $6,518,000, or 14.3% of sales, in the comparable period of the prior year. The increase in operating expenses for the current quarter was primarily due to an increase of $126,000 in administrative salaries and an increase of $85,000 in sales and marketing expenses. The increase in operating expenses for the current year six-month period, was primarily due to an increase of $215,000 in administrative salaries, an increase of $190,000 for costs associated with the performance incentive plans, and an increase of $161,000 in sales and marketing expenses.
Operating earnings were $2,161,000 and $3,926,000 for the three and six months ended October 31, 2008. This compares to operating earnings of $2,183,000 and $3,298,000 for the comparable periods of the prior year.
Interest expense was $93,000 and $182,000 for the three and six months ended October 31, 2008, respectively, as compared to $106,000 and $216,000 for the comparable periods of the prior year. The decrease in interest expense for the current year periods resulted from lower interest rates paid, partially offset by higher levels of borrowings.
The net of other income and other expense was an expense of $1,000 and $39,000 in the three and six months ended October 31, 2008, respectively, as compared to income of $1,000 and $4,000 for the comparable periods of the prior year.
Income tax expense of $566,000 and $1,107,000 was recorded for the three and six months ended October 31, 2008, respectively, as compared to income tax expense of $658,000 and $970,000 recorded for the comparable periods of the prior year. The effective tax rates were 27.4% and 29.9% for the three and six months ended October 31, 2008, respectively, and were 31.7% and 31.4% for the three and six months ended October 31, 2007. The effective tax rates for each of the current year and prior year periods were below the statutory tax rates due to the combination of lower tax rates in geographic locations of the Company's subsidiaries and the impact of state and federal income tax credits on calculated domestic income tax expense. Additionally, income tax expense for the current quarter was reduced by approximately $94,000 for a one-time adjustment for tax credits earned from prior fiscal year capital expenditures resulting from the reinstatement in the current quarter of the United States Federal Research and Environmental Law that had previously expired on December 31, 2007.
Minority interests relate to minority shareholders' interest in the Company's two subsidiaries that are not 100% owned by the Company. Minority interests reduced net earnings by $37,000 and $153,000 for the three and six months ended October 31, 2008, as compared to a reduction of $208,000 and $230,000 for the comparable periods of the prior year. The decrease in minority interests in the current period was related to lower earnings of the Company's two subsidiaries.
Net earnings were $1,464,000, or $0.57 per diluted share, and $2,445,000, or $0.95 per diluted share, for the three and six months ended October 31, 2008. As stated in the discussion of income tax expense above, net earnings for the quarter ended October 31, 2008 benefited from a one-time adjustment for federal tax credits of approximately $94,000, or $0.04 per diluted share. Net earnings were $1,212,000, or $0.47 per diluted share, and $1,886,000, or $0.74 per diluted share, for the three and six-months ended October 31, 2007.
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, including capital expenditures through the current fiscal year.
The Company had working capital of $17.4 million at October 31, 2008, compared to $15.9 million at April 30, 2008. The ratio of current assets to current liabilities was 1.9-to-1 at October 31, 2008, unchanged from April 30, 2008. At October 31, 2008, advances of $4,966,000 were outstanding under the Company's bank revolving credit facility, as compared to advances of $4,551,000 outstanding as of April 30, 2008. In October 2008, the Company increased the bank credit facility from $12 million to $14 million under the same terms and conditions as the $12 million arrangement.
The Company's operations used cash of $503,000 during the six months ended October 31, 2008. Cash was primarily used to fund an increase of $5,537,000 in accounts receivable, which was partially offset by cash provided from operating earnings. The Company's operations provided cash of $1,637,000 during the six months ended October 31, 2007. Cash was provided primarily from operations and an increase in accounts payable and other accrued expenses which were partially offset by an increase in accounts receivable and a decrease in deferred revenue.
During the six months ended October 31, 2008, net cash of $607,000 was used by investing activities, primarily for capital expenditures. This compares to the use of $1,208,000 for investing activities in the comparable period of the prior year, primarily for capital expenditures.
The Company's financing activities used cash of $107,000 during the six months ended October 31, 2008. Cash used included cash dividends paid of $408,000, payments on obligations of capital leases of $192,000, and purchases of treasury stock of $198,000. Cash was provided during this period by an increase of $415,000 in short-term borrowings and $276,000 in proceeds received from the exercise of stock options. Financing activities used cash of $1,372,000 in the same period for the prior year, including $1,153,000 for reduction in short-term borrowings, $351,000 for cash dividends, and $175,000 for payments on obligations under capital leases, partially offset by $307,000 received from the exercise of stock options.
Outlook for Remainder of Fiscal Year 2009
While the Company's ability to predict future demand for its products continues to be limited given, among other general economic factors affecting the Company and its markets, the Company's role as subcontractor or supplier to dealers for subcontractors, the Company expects the remainder of fiscal year 2009 to be profitable. In addition to general economic factors affecting the Company and its markets, demand for its 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 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, we bear the burden of possible increases in labor and material costs between the quotation of an order and delivery of a product.
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, as well as prices for certain raw materials and energy. 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. Over time, the Company's actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by the Company's forward-looking statements, and such difference might be significant and harmful to stockholders' interests. Many important factors that could cause such a difference are described under the caption "Risk Factors," in Item 1A of the Company's 2008 Annual Report on Form 10-K.
A review of the interim consolidated financial information included in this Quarterly Report on Form 10-Q for each of the three and six month periods ended October 31, 2008 and October 31, 2007 has been performed by Cherry, Bekaert & Holland, L.L.P., the Company's registered public accounting firm. Their report on the interim consolidated financial information follows.
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