What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-07-01 compared with 2021-07-15 · 50 added, 85 removed, 70 unchanged (66% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this document constitute "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act").

All statements other than statements of historical fact included in this Annual Report, including statements regarding the Company's future financial condition, results of operations, business operations and business prospects, are 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.

Such forward-looking statements are subject to known and unknown risks, uncertainties, assumptions, and other important factors that could significantly impact results or achievements expressed or implied by such 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;

technological changes in our operations or in our industry;

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;

the effects of COVID-19;

and acts of terrorism, war, governmental action, natural disasters and other Force Majeure events.

The cautionary statements made pursuant to the Reform Act herein and elsewhere by us should not be construed as exhaustive.

We cannot always predict what factors would cause actual results to differ materially from those indicated by the forward-looking statements.

Over time, our actual results, performance, or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such difference might be significant and harmful to our stockholders' interest.

Many important factors that could cause such a difference are described under the caption "Risk Factors," in Item 1A of this Annual Report, which you should review carefully.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Kewaunee Scientific Corporation is a recognized leader in the design, manufacture and installation of laboratory, healthcare and technical furniture products.

The Company's corporate headquarters are located in Statesville, North Carolina.

Direct sales offices are located in the United States, India, Saudi Arabia, and Singapore.

Three manufacturing facilities are located in Statesville serving the domestic and international markets, and one manufacturing facility is located in Bangalore, India serving the Indian, Middle East and Asian markets.

Sales offices are located in the United States, India, Saudi Arabia, and Singapore.

Kewaunee Scientific Corporation's website is located at www.kewaunee.com .

Our products are primarily sold through purchase orders and contracts submitted by customers through our dealers and commissioned agents, a national distributor, and through competitive bids submitted by us and our subsidiaries.

Our products are sold primarily through purchase orders and contracts submitted by customers through our dealers, our subsidiaries in Singapore and India, and a national distributor.

Products are sold principally to pharmaceutical, biotechnology, industrial, chemical and commercial research laboratories, educational institutions, healthcare institutions, governmental entities, manufacturing facilities and users of networking furniture.

We consider the markets in which we compete to be highly competitive, with a significant amount of the business involving competitive public bidding.

We consider the markets in which we compete to be highly competitive, with a significant amount of the market requiring competitive public bidding.

It is common in the laboratory and healthcare furniture industries for customer orders to require delivery at extended future dates, as products are frequently to be installed in buildings yet to be constructed.

18 unchanged sentences

In circumstances where management is aware of a customer's inability to meet its financial obligations to us, or a project dispute makes it unlikely that the outstanding amount owed by a customer will be collected, a specific reserve for bad debts is estimated and recorded to reduce the recognized receivable to the estimated amount we believe will ultimately be collected.

In addition to specific customer identification of potential bad debts, a general reserve for bad debts is estimated and recorded based on our recent past loss history and an overall assessment of past due trade accounts receivable amounts outstanding.

In addition to specific customer identification of potential bad debts, a reserve for bad debts is estimated and recorded based on our recent past loss history and an overall assessment of past due trade accounts receivable amounts outstanding.

Pension Benefits

6 unchanged sentences

Self-Insurance Reserves

The Company's domestic operations are self-insured for employee health care.

The Company has purchased specific stop-loss insurance to limit claims above a certain amount.

The Company's domestic operations are self-insured for employee health care costs.

The Company has purchased specific stop-loss insurance policies to limit claims above a certain amount.

Estimated medical costs were accrued for claims incurred but not reported using assumptions based upon historical loss experiences.

4 unchanged sentences

There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain.

In addition, our actual and forecasted earnings are subject to change due to economic, political, and other conditions, such as the COVID-19 pandemic, and significant judgment is required in determining our ability to use our deferred tax assets.

In addition, our actual and forecasted earnings are subject to change due to economic, political, and other conditions, such as the COVID-19 pandemic.

Our effective tax rates could be affected by numerous factors, such as changes in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, including earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize related tax benefits, the applicability of special tax regimes, changes in foreign currency exchange rates, changes to our forecasts of income and loss and the mix of jurisdictions to which they relate, changes in our deferred tax assets and liabilities and their valuation, and interpretations related to tax laws and accounting rules in various jurisdictions.

RESULTS OF OPERATIONS

Sales for fiscal year 2021 were $147.5 million, relatively unchanged from fiscal year 2020 sales of $147.5 million.

Domestic sales for fiscal year 2021 were $111.0 million, a decrease of 3.5% compared to fiscal year 2020 sales of $115.1 million.

The decrease in Domestic sales in fiscal year 2021 was related to delays in construction projects as well as the timing of awards for new projects due to the coronavirus pandemic.

Sales for fiscal year 2022 were $168.9 million, an increase from fiscal year 2021 sales of $147.5 million.

Domestic sales for fiscal year 2022 were $126.9 million, an increase of 14.2% compared to fiscal year 2021 sales of $111.0 million.

The increase in Domestic sales resulted from both higher volumes and the implementation of price increases in response to higher raw material input costs.

International sales for fiscal year 2022 were $42.0 million, an increase of 15.3% from fiscal year 2021 sales of $36.5 million.

The increase in International sales for fiscal year 2021 is the result of strong international demand coupled with accelerated delivery dates to achieve project completions prior to the government mandated shut-downs in response

to the surge of COVID-19 cases in India, although activity slowed in the Middle East and other Asian markets due to COVID-19 restrictions.

The increase in International sales in fiscal year 2022 is a result of strong demand across the international markets, primarily in India, coupled with COVID-19 related restrictions on construction site access and government mandated shut-downs in India that significantly impacted the prior year sales.

Our order backlog was $173.9 million at April 30, 2022, as compared to $114.5 million at April 30, 2021.

This is the highest order backlog in the Company's history.

The increase in backlog is primarily attributable to strength in the life science and higher education end-use markets within the United States.

Internationally, customers continue to invest in large infrastructure projects requiring laboratories in India, the Middle East, and Africa and we were awarded multiple multi-year projects during the year.

Gross profit represented 14.3% and 16.3% of sales in fiscal years 2022 and 2021, respectively.

The increase in gross profit margin percentage was related to improved operating performance of the Company's Domestic operations with lower unfavorable manufacturing variances when compared to the prior year, combined with a favorable shift in product mix between the Company's business segments.

Raw material costs were higher in fiscal year 2021, particularly in the fourth quarter, due to supplier capacity constraints resulting from COVID-19, as well as other supply disruptions.

The decrease in gross profit margin percentage for fiscal year 2022 is a result of supplier constraints resulting from COVID-19, as well as other supply chain disruptions, that led to increases in steel, wood, and epoxy resin raw material costs, when compared to the prior year, of $4,559,000 in excess of surcharges implemented and recorded as sales.

The gross profit margin decrease was also impacted by the cyber attack that occurred during the third quarter, which resulted in $1,131,000 of margin loss due to disruption of production, loss of sales, and absorption of fixed overhead costs which were not covered by the Company's cyber insurance policy.

Operating expenses were $26.8 million and $25.3 million in fiscal years 2022 and 2021, respectively, and 15.9% and 17.2% of sales, respectively.

The decrease in operating expense in fiscal year 2021 as compared to fiscal year 2020 was primarily due to reductions in salaries and fringe benefits of $722,000, bad debt expense of $310,000, and travel and entertainment expense of $536,000, partially offset by increased incentive and stock compensation of $488,000, and repairs and maintenance expense of $242,000.

During fiscal year 2021, operating expenses were also unfavorably impacted by additional COVID-related expenses, and expenses related to strategic initiatives, including data communications and processing expense of $155,000.

See Note 11 , Restructuring Costs , of the Notes to the Consolidated Financial Statements included in Item 8 for additional information concerning the Company's restructuring costs.

Pension expense was $1,153,000 and $454,000 in fiscal years 2021 and 2020, respectively.

The increase in pension expense was due to changes in underlying valuation assumptions as of the prior fiscal year.

The increase in operating expense in fiscal year 2022 as compared to fiscal year 2021 was primarily for increases related to wages, benefits, incentive and stock-based compensation of $1,098,000, increases in international operating expenses of $693,000, and one-time costs in the amount of $325,000 related to both the Company's decision to exit certain markets where the Company had historically sold products directly and professional fees related to financing activities, partially offset by decreases of $545,000 in marketing expenses.

Pension income was $355,000 in fiscal year 2022, compared to pension expense of $1,153,000 in fiscal year 2021.

The decrease in pension expense was due to the favorable impact from pension accounting because of the recovery of the plan assets at previous fiscal year-ends.

Other income, net was $400,000 and $241,000 in fiscal years 2022 and 2021, respectively.

The decrease in other income in fiscal year 2021 was primarily due to the decrease in interest income.

The increase in other income in fiscal year 2022 was primarily due to the interest earned on the Note Receivable related to the Sale-Leaseback financing transaction that was executed on March 24, 2022.

See Note 5 , Sale-Leaseback Financing Transaction for additional information on this transaction.

Interest expense was $632,000 and $389,000 in fiscal years 2022 and 2021, respectively.

The change in interest expense for fiscal year 2021 was primarily due to changes in the levels of bank borrowings.

Income tax expense was $990,000 and $1.8 million for fiscal years 2021 and 2020, respectively, or -37.8% and -61.3% of pretax loss, respectively.

The effective rate change for fiscal year 2021 is primarily due to changes in valuation allowance and a lesser fiscal year 2021 benefit on net operating loss carryback compared with fiscal year 2020.

The effective rate in fiscal year 2020 was also unfavorably impacted due to the elimination of the indefinite reinvestment assertion of foreign earnings.

The impact of the additional tax expense for fiscal year 2020 was $2.0 million.

The change in interest expense for fiscal year 2022 was primarily due to changes in the levels of bank borrowings and the Sale-Leaseback financing transaction.

Income tax expense was $3.5 million and $990,000 for fiscal years 2022 and 2021, respectively, or 141.6% and 37.8% of pretax loss, respectively.

The effective rate change for fiscal year 2022 is primarily due to an increase in the valuation allowance primarily attributable to the increase in deferred taxes of $4,170,000 before valuation allowance as a result of the book to tax differences related to the Company's execution of a Sale-Leaseback transaction for owned real property, which was treated as a taxable sale transaction for tax purposes and a financing transaction for financial statement reporting purposes.

The effective rate in fiscal year 2021 was also unfavorably impacted due to changes in the valuation allowance and reduced benefit on net operating loss carryback available.

Net earnings attributable to the non-controlling interest related to our subsidiaries that are not 100% owned by the Company were $123,000 and $65,000 for fiscal years 2022 and 2021, respectively.

1 unchanged sentence

Net loss was $6,126,000, or $2.20 per diluted share, and $3,672,000, or $1.33 per diluted share, for fiscal years ended April 30, 2022 and April 30, 2021, respectively.

The decrease in net loss was attributable to the factors discussed above.

The increase in net loss was attributable to the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity have historically been funds generated from operating activities, supplemented as needed by borrowings under our revolving credit facility.

Our principal sources of liquidity have historically been funds generated from operating activities.

In addition, on March 24, 2022, we executed a Sale-Leaseback financing transaction with respect to our manufacturing and corporate facilities in Statesville, North Carolina to provide additional liquidity.

See Note 5 , Sale-Leaseback Financing Transaction for more information.

Additionally, certain machinery and equipment are financed by non-cancelable operating leases.

2 unchanged sentences

See Note 4 , Long-term Debt and Other Credit Arrangements , of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report for additional information concerning our credit facility.

We did not have any off balance sheet arrangements at April 30, 2021.

The following table summarizes the cash payment obligations for our lease arrangements as of April 30, 2021:

We did not have any off balance sheet arrangements at April 30, 2022 or 2021.

The following table summarizes the cash payment obligations for our lease and financing arrangements as of April 30, 2022:

PAYMENTS DUE BY PERIOD

3 unchanged sentences

Financing Lease Obligations 399 148 180 71 —

Sale-Leaseback Financing Transaction 45,811 1,893 3,901 4,059 35,958

Total Contractual Cash Obligations $ 55,031 $ 3,890 $ 6,989 $ 6,347 $ 37,805

Operating activities provided cash of $912,000 in fiscal year 2021, primarily from operations, and decreases in inventories of $1,188,000 and receivables of $6,087,000, partially offset by decreases in accounts payable and accrued expenses of $4,567,000 and a decrease in income tax receivable of $1,762,000.

Operating activities provided cash of $4,161,000 in fiscal year 2020, primarily from operations, and decreases in inventories of $1,876,000 and receivables of $4,833,000, partially offset by decreases in accounts payable and accrued expenses of $2,016,000.

The Company's operating activities used cash of $7,885,000 in fiscal year 2022, primarily for operations, and increases in inventories of $7,279,000 and receivables of $8,464,000, partially offset by increases in accounts payable and accrued expenses of $11,886,000 and a decrease in income tax receivable of $955,000.

Operating activities provided cash of $912,000 in fiscal year 2021, primarily from operations, and increases in accounts payable and accrued expenses of $4,567,000 and a decrease in income tax receivable of $1,762,000, partially offset by increases in inventories of $1,188,000 and receivables of $4,874,000.

The Company's financing activities provided cash of $11,031,000 during fiscal year 2022 from proceeds of $15,893,000 from the Sale-Leaseback transaction, including redemption of preferred shares from the buyer, net of debt issuance costs, partially offset by payments of $5,239,000 for short-term borrowings.

The Company's financing activities provided cash of $1,982,000 during fiscal year 2021 from proceeds from the net increase in short-term borrowings of $2,109,000, partially offset by cash dividends of $108,000 paid to minority interest holders and repayment of long-term debt of $19,000.

The Company's financing activities used cash of $7,458,000 during fiscal year 2020 for payments on short-term borrowings of $4,794,000, cash dividends of $1,044,000 paid to stockholders, cash dividends of $324,000 paid to minority interest holders and repayment of long-term debt of $1,282,000.

The majority of the April 30, 2022 accounts receivable balances are expected to be collected during the first quarter of fiscal year 2023, with the exception of retention amounts on fixed-price contracts which are collected when the entire construction project is completed and all retention funds are paid by the owner.

As discussed above, no further benefits have been, or will be, earned under our pension plans after April 30, 2005, and no additional participants have been, or will be, added to the plans.

In fiscal year 2021, we made contributions to the plans of $30,000.

There were no contributions to the plans in fiscal year 2020.

In fiscal year 2022, we made no contributions to the plans.

fiscal year 2021, we made contributions to the plans of $30,000.

We expect to make no contributions to the plans for fiscal year 2023.

Capital expenditures were $1,908,000 and $2,397,000 in fiscal years 2022 and 2021, respectively.

Capital expenditures in fiscal year 2021 were funded primarily from operations.

During fiscal year 2020, the Company established a strategy for a multi-year transformation of the business, which is designed to lead to sustained profitability and growth.

Capital expenditures in fiscal year 2022 were funded primarily from financing activities.

Fiscal year 2023 capital expenditures are anticipated to be approximately $3.5 million.

The fiscal year 2022 expenditures are expected to be funded primarily by operating activities, supplemented as needed by borrowings under our revolving credit facility.

Working capital was $26.3 million at April 30, 2021, down from $27.2 million at April 30, 2020, and the ratio of current assets to current liabilities was 1.8-to-1.0 at April 30, 2021 and 2.0-to-1.0 at April 30, 2020.

The decrease in working capital for fiscal year 2021 was primarily due to the decrease in income tax receivable of $1.8 million, increases in short term borrowings of $2.1 million, and accounts payable of $3.7 million, partially offset by increases in accounts receivable of $6.1 million and inventories of $1.2 million.

We paid cash dividends of $0.38 per share in fiscal year 2020.

On December 16, 2019, the Company announced that the Board of Directors had elected to suspend the Company's dividend.

The declaration and payment of any future dividends will be at the discretion of the Board of Directors and will depend upon many factors, including the Company's earnings, capital requirements, investment and growth strategies, financial conditions, the terms of the Company's indebtedness, which currently contains provisions that could limit the payment of dividends in certain circumstances, and other factors that the Board of Directors may deem to be relevant.

The fiscal year 2023 expenditures are expected to be funded primarily by operating activities and proceeds from the sale-leaseback financing transaction.

Working capital was $49.3 million at April 30, 2022, up from $26.3 million at April 30, 2021, and the ratio of current assets to current liabilities was 2.2-to-1.0 at April 30, 2022 and 1.8-to-1.0 at April 30, 2021.

The increase in working capital for fiscal year 2022 was driven by a $13.5 million Note Receivable related to the sale-leaseback financing transaction, resulting in a $5.2 million reduction in short-term borrowing and a $5.2 million increase in managed working capital.

No dividends were declared or paid on the Company's common stock during the last two fiscal years.

The declaration and payment of any future dividends is at the discretion of the Board of Directors and will depend upon many factors, including the Company's earnings, capital requirements, investment and growth strategies, financial condition, the terms of the Company's indebtedness, which has contained, and may in the future contain, provisions that could limit the payment of dividends in certain circumstances, and other factors that the Board of Directors may deem to be relevant.

RECENT ACCOUNTING STANDARDS

1 unchanged sentence

Financial Outlook

The Company continues to actively monitor the COVID-19 pandemic and its impact.

Any future developments and effects will be highly uncertain and cannot be predicted, including:

the scope and duration of the pandemic;

further adverse revenue and net income effects;

disruptions to our operations;

closure of project sites;

ability of suppliers to support our operations;

effectiveness of our work from home arrangements;

employee impacts from illness, school closures and other community response measures;

and any actions taken by governmental authorities and other third parties in response to the pandemic.

The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.

The Company will continue to work to ensure the safety of our people and our ability to serve our customers worldwide.

In addition, 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 about opportunities for growth within existing end-markets.

As the economy continues to re-open, the Company anticipates that project awards will accelerate and the pace of construction will increase.

In the near-term, escalating raw material pricing will continue to unfavorably impact net earnings due to the fixed price nature of our contracts.

The Company has, however, taken steps to implement surcharges on new orders to offset broad based price increases for materials including steel, aluminum, hard woods, and resin products.

The impact of these surcharges, to the extent we are able to implement them successfully, will lag what has been an immediate impact of rising commodity prices.

Over the long-term, the Company expects its financial performance to continue to improve based upon its investments in modernizing its operations and reduced operating cost structure.

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 and healthcare construction projects planned and/or current progress in projects already under construction.

As the fiscal year concluded, economic uncertainty remained from continued broad-based inflation, a challenging labor market, and a possible recession.

With that being said, the Company believes the outlook is bright based on Kewaunee’s record backlog and improved operating performance during the fiscal year.

The Company believes the strength in its backlog demonstrates the confidence customers have in Kewaunee’s ability to meet their requirements.

When combined with changes in its go-to-market strategy and continued investment in its manufacturing operations, the Company feels it is well-positioned for the next fiscal year .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis