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Item 7. Management’s Discussion and Analysis

2023-06-30 compared with 2022-07-01 · 43 added, 48 removed, 72 unchanged (56% of the section changed)

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

The reference to our website does not constitute incorporation by reference of any information contained at that site.

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.

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Such materials and products are purchased from multiple suppliers and are typically readily available.

CRITICAL ACCOUNTING POLICIES

CRITICAL ACCOUNTING ESTIMATES

In the ordinary course of business, we have made estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of our consolidated financial statements in conformity with generally accepted accounting principles in the United States of America.

Actual results could differ significantly from those estimates.

We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations, and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Revenue Recognition

The Company recognizes revenue when control of a good or service promised in a contract (i.e.

performance obligation) is transferred to a customer.

Control is obtained when a customer has the ability to direct the use of and obtain substantially all of the remaining benefits from that good or service.

The majority of the Company's revenues are recognized over time as the customer receives control as the Company performs work under a contract.

However, a portion of the Company's revenues are recognized at a point-in-time as control is transferred at a distinct point in time per the terms of a contract.

We believe that the following discussion addresses our most critical accounting estimates, which are those that are most important to the portrayal of our financial condition and results of operations, and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Allowance for Doubtful Accounts

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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.

In addition, our actual and forecasted earnings are subject to change due to economic, political, and other conditions.

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 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 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.

Sales for fiscal year 2023 were $219.5 million, an increase compared to fiscal year 2022 sales of $168.9 million.

Domestic Segment sales for fiscal year 2023 were $146.7 million, an increase of 15.7% compared to fiscal year 2022 sales of $126.8 million.

The increase in Domestic Segment sales is primarily driven by the pricing of new orders in response to higher raw material input costs.

International Segment sales for fiscal year 2023 were $72.8 million, an increase of 73.2% from fiscal year 2022 sales of $42.0 million.

The increase in International Segment sales in fiscal year 2023 is due to the delivery of several large projects in India, Asia, and Africa that were awarded over the course of the past eighteen months.

Our order backlog was $147.9 million at April 30, 2023, as compared to $173.9 million at April 30, 2022.

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.

The decrease in backlog is primarily attributable to the substantial completion of the previously announced Dangote Oil project in Nigeria during the fiscal year and a reduction in new orders within the ASEAN marketplace.

The Company's backlog for the United States and Indian markets on April 30, 2023 is similar to prior fiscal year levels as order rates in these markets remain strong.

Gross profit represented 16.2% and 14.3% of sales in fiscal years 2023 and 2022, respectively.

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.

The increase in gross profit margin percentage for fiscal year 2023 is driven by the significant increase in International Segment sales, which has a higher gross profit rate than the Domestic Segment, coupled with an increase in Domestic Segment sales that had improved pricing as noted above.

Operating expenses were $30.2 million and $26.8 million in fiscal years 2023 and 2022, respectively, and 13.8% and 15.9% of sales, respectively.

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.

The increase in operating expense in fiscal year 2023 as compared to fiscal year 2022 was primarily due to increases in consulting and professional fees of $552,000, corporate governance expenses of $113,000, and increases in International Segment operating expenses of $2,286,000 as a result of the significant sales growth experienced.

These increases were partially offset by reductions in administrative wages, benefits, and stock-based compensation of $142,000, and marketing expense of $223,000.

The increase in operating expenses for fiscal year 2023 also included a one-time charge related to the write-down of a prior year insurance claim in the amount of $260,000.

The increase in international operating expenses for fiscal year 2023 is related to the continued sales growth in the International operating segment.

Pension expense was $71,000 in fiscal year 2023, compared to pension income of $355,000 in fiscal year 2022.

The increase in pension expense was primarily due to the lower expected return on plan assets driven by a decrease in plan assets in the prior fiscal year.

Other income, net was $939,000 and $400,000 in fiscal years 2023 and 2022, respectively.

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.

The increase in other income in fiscal year 2023 was primarily due to interest income earned on the cash balances held by the Company's international subsidiaries and the increased interest earned on the Note Receivable related to the Sale-Leaseback financing transaction when compared to the prior fiscal year.

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

Interest expense was $1,734,000 and $632,000 in fiscal years 2023 and 2022, respectively.

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.

The increase in interest expense for fiscal year 2023 was primarily due to the Sale-Leaseback financing transaction noted above, partially offset by a decrease in interest expense related to the Company's revolving credit facility.

Income tax expense was $3.1 million and $3.5 million for fiscal years 2023 and 2022, respectively, or 69.8% and 141.6% of pretax earnings (loss), respectively.

The effective rate for fiscal year 2023 was unfavorably impacted by the increase in the valuation allowance attributable to changes to Internal Revenue Code Section 174 Research and Experimental Expenditures, which became effective in the current fiscal year.

The primary impact of this change is the amortization of current year expenditures over a five year period, as compared to prior fiscal years where research expenditures were deductible in the year incurred.

The effective rate change for fiscal year 2022 was also unfavorably impacted due to changes in the valuation allowance

attributable to the net increase in deferred tax assets of $4,170,000 before valuation allowance as a result of the book to tax differences primarily 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.

Net earnings attributable to the non-controlling interest related to our subsidiaries that are not 100% owned by the Company were $621,000 and $123,000 for fiscal years 2023 and 2022, respectively.

The changes in the net earnings attributable to the non-controlling interest for each year were due to changes in the levels of net income of the subsidiaries.

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

Net earnings were $738,000, or $0.25 per diluted share, as compared to net loss of $6,126,000, or $2.20 per diluted share, for fiscal years ended April 30, 2023 and April 30, 2022, respectively.

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

LIQUIDITY AND CAPITAL RESOURCES

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.

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

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

We believe that these sources of funds will be sufficient to support ongoing business requirements, including capital expenditures, through fiscal year 2024.

At April 30, 2022, we had advances of $1.6 million and standby letters of credit aggregating $716,000 outstanding under our secured, $4.7 million revolving credit facility.

At April 30, 2023, we had $3,548,000 outstanding under our $15.0 million revolving credit facility.

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.

In fiscal year 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.

We did not have any off balance sheet arrangements at April 30, 2023 or 2022.

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Total Contractual Cash Obligations $ 54,807 $ 4,395 $ 8,237 $ 6,928 $ 35,247

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 operating activities used cash of $3,790,000 in fiscal year 2023, primarily for increases in receivables of $4,947,000 and decreases in accounts payable and accrued expenses of $5,558,000, partially offset by cash from operations, decreases in inventories of $1,907,000, and increases in deferred revenue of $568,000.

Operating activities used cash of $7,885,000 in fiscal year 2022, primarily for operations, 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.

The Company's financing activities provided cash of $14,931,000 during fiscal year 2023 as a result of the collection of $13,629,000 in final proceeds from the Sale-Leaseback transaction executed in the prior fiscal year and proceeds from the net increase in short-term borrowings of $1,998,000, partially offset by repayment of long-term debt of $121,000.

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 majority of the April 30, 2023 accounts receivable balances are expected to be collected during the first quarter of fiscal year 2024, 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 2022, we made no contributions to the plans.

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

In fiscal years 2023 and 2022, we made no contributions to the plans.

We expect to make no contributions to the plans for fiscal year 2024.

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Capital expenditures in fiscal year 2023 were funded primarily from financing activities.

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

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.

Fiscal year 2024 capital expenditures are anticipated to be

approximately $4.4 million.

The fiscal year 2024 expenditures are expected to be funded primarily by operating activities, supplemented as needed by borrowings under our revolving credit facility.

Working capital was $47.9 million at April 30, 2023, down from $49.3 million at April 30, 2022, and the ratio of current assets to current liabilities was 2.2-to-1.0 at April 30, 2023 unchanged from April 30, 2022.

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.

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 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.

RECENT ACCOUNTING STANDARDS

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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 .

Fiscal year 2023 was a transition year for the Company as it emerged from a generally disruptive three-year period that included a global pandemic, rapid broad-based inflation, labor shortages, and supply chain disruptions.

The Company believes it is well-positioned for the next fiscal year due to its strong global management team, a healthy backlog, improved manufacturing capabilities, and end-use markets that will continue to prioritize investment in projects that require the products Kewaunee designs and manufactures.

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