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Item 7. Management’s Discussion and Analysis

2024-06-28 compared with 2023-06-30 · 39 added, 48 removed, 67 unchanged (56% of the section changed)

15 unchanged sentences

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

CRITICAL ACCOUNTING ESTIMATES

CRITICAL ACCOUNTING POLICIES AND 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.

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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

Evaluation of the allowance for doubtful accounts involves management judgments and estimates.

Allowance for Credit Losses

Evaluation of the allowance for credit losses involves management judgments and estimates.

We evaluate the collectability of our trade accounts receivable based on a number of factors.

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 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

We sponsor pension plans covering all employees who met eligibility requirements as of April 30, 2005.

These pension plans were amended as of April 30, 2005, no further benefits have been, or will be, earned under the plans subsequent to the amendment date, and no additional participants have been, or will be, added to the plans.

Several statistical and other factors, which attempt to anticipate future events, are used in calculating the expense and liability related to the pension plans.

These factors include actuarial assumptions about the discount rate used to calculate and determine benefit obligations and the expected return on plan assets within certain guidelines.

The actuarial assumptions used by us may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants.

These differences may significantly affect the amount of pension income or expense recorded by us in future periods.

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

Self-Insurance Reserves

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We are subject to income taxes in the U.S.

(federal and state) and numerous foreign jurisdictions.

(federal and state) and foreign jurisdictions.

Tax laws, regulations, administrative practices, and interpretations in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes.

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.

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.

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, their valuation, and the assumptions around their realization in connection with any associated valuation, and interpretations related to tax laws and accounting rules in various jurisdictions.

RESULTS OF OPERATIONS

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.

Sales for fiscal year 2024 were $203.8 million, a decrease compared to fiscal year 2023 sales of $219.5 million.

Domestic Segment sales for fiscal year 2024 were $137.2 million, a decrease of 6.5% compared to fiscal year 2023 sales of $146.7 million.

The decrease in Domestic sales was predominantly related to the reduction in non-product revenue related to the Company's decision to stop selling directly to end users.

This revenue typically includes freight, installation services and buyouts.

International Segment sales for fiscal year 2024 were $66.5 million, a decrease of 8.6% from fiscal year 2023 sales of $72.8 million.

International sales decreased when compared to the prior year period due to the delivery of several large projects in the comparable prior year period that were booked in earlier fiscal years.

Our order backlog was $155.6 million at April 30, 2024, as compared to $147.9 million at April 30, 2023.

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 25.5% and 16.2% of sales in fiscal years 2024 and 2023, respectively.

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.

The increase in gross profit margin percentage is primarily being generated from Domestic operations.

Specifically, the increase is primarily driven by improved manufacturing productivity, cost containment actions, and the pricing of new orders in response to higher raw material input costs when compared to the prior year.

Operating expenses were $33.8 million and $30.2 million in fiscal years 2024 and 2023, respectively, and 16.6% and 13.8% of sales, respectively.

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.

The increase in operating expenses in fiscal year 2024 as compared to fiscal year 2023 was primarily due to increases in SG&A wages, benefits, incentive and stock-based compensation of $2,572,000, corporate governance expenses of $170,000, depreciation expense of $164,000, bad debt expense of $156,000, and increases in international operating expenses of $616,000, partially offset by decreases in consulting and professional services of $557,000.

Pension expense was $4,177,000 and $71,000 in fiscal years 2024 and 2023, respectively.

The increase in pension expense was due to the Company successfully annuitizing its pension obligation, which had been in a frozen state since 2005.

Terminating the pension resulted in a one-time expense of $4,019,000 for accounting losses that were being amortized from the Balance Sheet based on an annual evaluation of the pension plan.

By annuitizing the pension obligation, the Company has eliminated all future responsibility for the plan and future administrative costs associated with maintaining and managing the pension plan.

Other income, net was $814,000 and $939,000 in fiscal years 2024 and 2023, respectively.

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.

The decrease in other income in fiscal year 2024 was primarily due to the elimination of interest income earned from the Note Receivable related to the Sale-Leaseback financing transaction that was settled in the prior year, partially offset by interest earned on the increased Domestic cash balances and increased interest on International cash balances when compared to the prior fiscal year.

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

Interest expense was $1,799,000 and $1,734,000 in fiscal years 2024 and 2023, respectively.

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.

The interest expense for fiscal year 2024 was relatively unchanged from the prior fiscal year.

Income tax benefit was $5.9 million for fiscal year 2024, or 45.3% of pretax earnings, as compared to income tax expense of $3.1 million for fiscal year 2023, or 69.8% of pretax earnings.

The income tax benefit for fiscal year 2024 is primarily due to the favorable impact of the reduction of the Domestic valuation allowance of $6.6 million that was required to be established in fiscal year 2020 per ASC 740 and $3.9 million related to prior years' unrecognized tax benefits related to the settlement of the Company's domestic pension plans.

Income tax expense for fiscal year 2024 excluding these one-time benefits is $4.5 million or 34.4% of pretax earnings.

At April 30, 2024, the Company has a Domestic valuation allowance of $808,000 for specific federal and state tax credits as compared to $8.5 million for the Company's Domestic net deferred tax assets at April 30, 2023.

See Note 6 , Income Taxes for additional information.

The effective tax 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 during the fiscal year.

The primary impact of this change was 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.

Net earnings attributable to the non-controlling interest related to our subsidiaries that are not 100% owned by the Company were $304,000 and $621,000 for fiscal years 2024 and 2023, 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 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.

Net earnings were $18,753,000, or $6.38 per diluted share, as compared to $738,000, or $0.25 per diluted share, for fiscal years ended April 30, 2024 and April 30, 2023, respectively.

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

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Total Contractual Cash Obligations $ 52,207 $ 4,538 $ 7,822 $ 6,161 $ 33,686

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 operating activities provided cash of $19,564,000 in fiscal year 2024, primarily from operations and decreases in receivables of $741,000, decreases in inventories of $1,210,000, increases in accounts payable and accrued expenses of $691,000, and increases in deferred revenue of $277,000.

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.

The Company's financing activities used cash of $3,014,000 during fiscal year 2024 as a result of the net decrease in short-term borrowings of $488,000, repayments on our financing liability of $642,000, and the repurchase of outstanding shares as part of our announced share repurchase program for $1,998,000, partially offset by net proceeds from long-term debt of $114,000.

The Company's financing activities provided cash of $14,931,000 during fiscal year 2023 from proceeds of $13,629,000 from the Sale-Leaseback transaction 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 majority of the April 30, 2024 accounts receivable balances are expected to be collected during the first quarter of fiscal year 2025, 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 years 2023 and 2022, we made no contributions to the plans.

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

Capital expenditures were $4,373,000 and $4,148,000 in fiscal years 2024 and 2023, respectively.

Capital expenditures in fiscal year 2024 were funded primarily from financing activities.

Fiscal year 2024 capital expenditures are anticipated to be

approximately $4.4 million.

Fiscal year 2025 capital expenditures are anticipated to be approximately $4.0 million.

The fiscal year 2025 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.

Working capital was $56.0 million at April 30, 2024, up from $47.9 million at April 30, 2023, and the ratio of current assets to current liabilities was 2.4-to-1.0 at April 30, 2024, up from a ratio of 2.2-to-1.0 at April 30, 2023.

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

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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.

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.

The Company's earnings are also impacted by fluctuations in prevailing pricing for projects in the laboratory construction marketplace and costs of raw materials, including steel, wood, and epoxy resin.

The Company is operating more efficiently than in the past due to its ability to focus solely on supporting its dealers and distribution channel partners domestically while continuing to provide turnkey solutions in the international markets it serves.

The improved focus of the organization, combined with a strong global management team, a healthy backlog, improved manufacturing capabilities, and end-use markets that continue to prioritize investment in projects that require the products Kewaunee designs and manufactures, positions the Company well.

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