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Item 7. Management’s Discussion and Analysis

2025-07-02 compared with 2024-06-28 · 69 added, 50 removed, 56 unchanged (68% of the section changed)

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

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

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

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

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 local, Asian, and African markets.

Three manufacturing facilities are located in Statesville and one facility is located in Plymouth, Minnesota, with additional manufacturing capabilities in Long Lake, Minnesota, serving the domestic and international markets, and one manufacturing facility is located in Bangalore, India serving the local, Asian, and African markets.

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.

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.

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

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

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The impact of such possible increases is considered when determining the sales price.

The principal raw materials and products manufactured by others used in our products are cold-rolled carbon and stainless steel, hardwood lumbers and plywood, paint, chemicals, resins, hardware, plumbing and electrical fittings.

The principal raw materials and products manufactured by others used in our products are cold-rolled carbon and stainless steel, hardwood lumber and plywood, paint, chemicals, resins, hardware, plumbing and electrical fittings.

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

ACQUISITION OF NU AIRE, INC.

On November 1, 2024, the Company completed an acquisition of Nu Aire.

The Company purchased all of the outstanding capital stock of Nu Aire for $55.0 million, subject to certain customary adjustments for debt, cash, transaction expenses, and net working capital.

$23.0 million of the purchase price payable at closing of the Transaction was funded pursuant to subordinated seller notes.

The remaining purchase price payable at closing of the Transaction was paid in cash, which cash was funded, in part, through the Revolving Credit Facility and Term Loan, provided by PNC Bank, National Association.

Nu Aire is renowned for its manufacturing of biological safety cabinets, airflow products, CO2 incubators, ultralow freezers, animal handling equipment, pharmacy compounding isolators, and related parts and accessories.

Their products serve a diverse range of industries, including life sciences, healthcare, pharmacy, education, food and beverage, and industrial sectors.

The acquisition of Nu Aire presents a unique opportunity for the Company to combine its robust capabilities with a recognized market leader whose product portfolio and well-developed channel strategy complement the Company's existing offerings.

This acquisition expands the Company's capabilities, allowing the combined organization to better meet the diverse needs of end-users in laboratory furnishings.

Additionally, Nu Aire has established distribution partners in regions where the Company has not previously had a presence.

This move accelerates the Company's vision of becoming the market leader in the design and manufacturing of laboratory furniture and technical products essential for outfitting laboratories.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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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 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 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

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.

The Company's exposure reflected in the self-insurance reserves varies depending upon market conditions in the insurance industry, availability of cost-effective insurance coverage, and actual claims versus estimated future claims.

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

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

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.

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, 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.

Goodwill and Other Intangible Assets

The Company accounted for the Nu Aire acquisition as a business combination using the acquisition method of accounting in accordance with ASC 805, Business Combinations .

The purchase price was allocated to the assets acquired and liabilities assumed based on the estimated fair values at the date of acquisition.

The excess of the purchase price over the fair value of the net assets was allocated to goodwill.

The fair value of intangible assets acquired were valued using the income approach.

A cost approach was applied for property, plant and equipment.

In many cases, the determination of fair values required estimates about discount rates, future expected cash flows and other future events that are judgmental and subject to change.

Intangible assets and property, plant and equipment will be amortized or depreciated on a straight-line basis over the relevant estimated useful life.

The Company will conduct its impairment analysis annually, or more frequently if the Company determines potential indicators of impairment exist.

RESULTS OF OPERATIONS

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.

Sales for fiscal year 2025 were $240.5 million, an increase compared to fiscal year 2024 sales of $203.8 million.

Domestic Segment sales for fiscal year 2025 were $179.4 million, an increase of 30.7% compared to fiscal year 2024 sales of $137.2 million.

The increase in Domestic sales was predominantly related to the acquisition of Nu Aire on November 1, 2024.

International Segment sales for fiscal year 2025 were $61.1 million, a decrease of 8.2% from fiscal year 2024 sales of $66.5 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.

International sales decreased when compared to the prior year period due to customer site delays in India which pushed out the timing of deliveries.

Our order backlog was $214.6 million at April 30, 2025, as compared to $155.6 million at April 30, 2024.

Gross profit represented 28.6% and 25.5% of sales in fiscal years 2025 and 2024, respectively.

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.

The increase in gross profit margin percentage is primarily attributable to our Domestic operations.

The acquisition of Nu Aire on November 1, 2024, combined with improved manufacturing productivity and effective cost-containment measures, contributed significantly to this improvement.

Operating expenses were $51.1 million and $33.8 million in fiscal years 2025 and 2024, respectively, and 21.2% and 16.6% of sales, respectively.

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.

The increase in operating expenses in fiscal year 2025 as compared to fiscal year 2024 was largely attributable to our acquisition of Nu Aire.

Other significant factors were increases in professional and consulting fees of $2,097,000, increases in SG&A wages of $1,443,000 and an increase in international operating expenses of $1,412,000.

The increases in consulting and professional fees for the year were primarily attributed to costs associated with the acquisition and integration of Nu Aire and costs incurred related to Sarbanes-Oxley 404(b) compliance readiness.

Pension expense was $0 and $4,177,000 in fiscal years 2025 and 2024, 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.

The decrease in pension expense was due to the Company successfully annuitizing its pension obligation during fiscal year 2024, which had been in a frozen state since 2005.

Terminating the pension resulted in a one-time expense during the prior fiscal year 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 eliminated all future responsibility for the plan and future administrative costs associated with maintaining and managing the pension plan.

Other income, net was $240,000 and $814,000 in fiscal years 2025 and 2024, respectively.

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.

The decrease in other income in fiscal year 2025 was primarily due to lower interest earned on international cash balances and the acceleration of deferred financing costs related to the payoff of the Company's Mid Cap Revolving Credit Facility, partially offset by higher interest earned on increased domestic cash balances.

Interest expense was $3,214,000 and $1,799,000 in fiscal years 2025 and 2024, respectively.

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.

The increase in interest expense for fiscal year 2025 was primarily due to elevated borrowing levels.

Income tax expense was $3.2 million for fiscal year 2025, or 21.7% of pretax earnings, as compared to an income tax benefit of $5.9 million for fiscal year 2024, or 45.3% of pretax earnings.

The income tax expense for fiscal year 2025 reflects the impact of foreign operations, which are taxed at different rates than the US tax rate of 21%, combined with the expected current year tax expense for the Company's Domestic operations.

At April 30, 2025, the Company has a Domestic valuation allowance of $808,000 for specific federal and st

ate tax credits, unchanged from the valuation allowance balance at April 30, 2024.

See Note 8 , 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 $178,000 and $304,000 for fiscal years 2025 and 2024, respectively.

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Net earnings were $11,405,000, or $3.83 per diluted share, as compared to $18,753,000, or $6.38 per diluted share, for fiscal years ended April 30, 2025 and April 30, 2024, respectively.

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

The decrease 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, supplemented as needed by borrowings under our revolving credit facility.

Our principal sources of liquidity have historically been funds generated from operating activities, supplemented as needed by borrowings under our previous Mid Cap Revolving Credit Facility (as defined below).

The Company terminated the Mid Cap Revolving Credit Facility on September 30, 2024.

In conjunction with the Nu Aire Acquisition (see Note 4 , Nu Aire Acquisition for additional details), the Company entered into a new Revolving Credit Facility with PNC, which is available on an ongoing basis to supplement our sources of liquidity as needed.

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 2026.

At April 30, 2024, we had $3,000,000 outstanding under our $15.0 million revolving credit facility.

At April 30, 2025, we had no advances outstanding under our $20.0 million Revolving Credit Facility with PNC.

See Note 6 , 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.

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Contractual Cash Obligations Total 1 Year 2-3 Years 4-5 Years After 5 years

Operating Leases $ 9,802 $ 2,437 $ 3,612 $ 1,859 $ 1,894

Operating Lease Obligations

$ 13,660 $ 3,903 $ 5,844 $ 3,749 $ 164

Financing Lease Obligations 293 113 80 80 20

Sale-Leaseback Financing Transaction 40,016 2,009 4,139 4,307 29,561

13,750 3,000 6,000 4,750 —

Seller Note (1)

23,000 — 23,000 — —

Total Contractual Cash Obligations $ 90,719 $ 9,025 $ 39,063 $ 12,886 $ 29,745

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.

(1) Excludes accrued PIK Interest of $935,000 as of April 30, 2025.

All unpaid accrued PIK Interest will become due and payable on November 1, 2027, along with the outstanding principal balance.

The Company's operating activities provided cash of $14,783,000 in fiscal year 2025.

Excluding the impacts of the Nu Aire acquisition, net cash provided by operating activities was primarily from operations and decreases in inventories of $3,351,000, increases in deferred revenue of $765,000, increases in accounts payable and accrued expenses of $583,000, and the change in other, net of $20,000, partially offset by increases in receivables of $6,738,000.

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.

The Company's financing activities provided cash of $7,411,000 during fiscal year 2025, primarily related to the issuance of a new term loan from PNC bank in connection with the acquisition of Nu Aire, partially offset by the termination of the Company's Mid Cap Revolving Credit Facility on September 30, 2024 and the purchase of shares under the Company's share repurchase program.

See Note 6 , Long-term Debt and Other Credit Arrangements , for additional information regarding the new term loan and see Note 10 , Stockholder's Equity , for additional information on the Company's share repurchase program.

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.

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.

The Company's investing activities used cash of $30,901,000 in fiscal year 2025, of which $28,735,000 related to the acquisition of Nu Aire, net of cash acquired and $2,166,000 was used for capital expenditures.

The Company's investing activities used cash of $4,373,000 in fiscal year 2024, of which the full amount related to capital expenditures.

Capital expenditures in fiscal year 2025 were funded primarily by operations and from financing activities.

Fiscal year 2026 capital expenditures are anticipated to be approximately $7.0 million.

The fiscal year 2026 expenditures are expected to be funded primarily by operating activities, supplemented as needed by borrowings under our revolving credit facility.

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.

The majority of the April 30, 2025 accounts receivable balances are expected to be collected during the first quarter of fiscal year 2026, 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.

Working capital was $64.7 million at April 30, 2025, up from $56.0 million at April 30, 2024, and the ratio of current assets to current liabilities was 2.2-to-1.0 at April 30, 2025, down from a ratio of 2.4-to-1.0 at April 30, 2024.

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

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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.

In November 2024, the Company took a significant step forward in its growth journey with the acquisition of Nu Aire, a pioneer in laboratory and biosafety solutions, bringing together two market leaders with complementary strengths, shared values, and a common vision for the future of laboratory innovation.

Kewaunee's fiscal year 2025 results are a testament to the consistent execution and dedication of the Company's global team, as well as the Company's strong relationships with its dealers and distribution channel partners, who bring our solutions to customers across multiple end markets.

The Company's strong global management team, 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