Item 7. Management’s Discussion and Analysis
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
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, Spain, India, Saudi Arabia, and Singapore. 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 directly or 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, and manufacturing facilities. 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. Changes or delays in building construction may cause delays in delivery of the orders and our recognition of the sale. Since prices are normally quoted on a firm basis in the industry, we bear the burden of possible increases in labor and material costs between quotation of an order and delivery of the product. 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 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.
In November 2024, the Company completed an acquisition of Nu Aire (the "Transaction"). 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 a $20.0 million committed senior secured revolving line of credit facility (the "Revolving Credit Facility") and a $15.0 million term loan (the "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 presented 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 offerings. This acquisition expanded 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 did not previously have 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
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 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.
Income Taxes
We are subject to income taxes in the U.S. (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. 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
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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 2026 were $282.0 million, an increase compared to fiscal year 2025 sales of $240.5 million. LPG Segment sales for fiscal year 2026 were $214.9 million, an increase of 19.8% compared to fiscal year 2025 sales of $179.4 million. The increase in LPG sales was predominantly related to the acquisition of Nu Aire on November 1, 2024. International Segment sales for fiscal year 2026 were $67.1 million, an increase of 9.9% from fiscal year 2025 sales of $61.1 million. International sales increased when compared to the prior year period primarily due to the delivery of projects in India that had experienced customer site delays in the prior year.
Our order backlog was $165.9 million at April 30, 2026, as compared to $214.6 million at April 30, 2025. LPG order backlog was $118.8 million on April 30, 2026, as compared to $123.9 million on April 30, 2025. International order backlog was $47.1 million on April 30, 2026, as compared to $90.7 million on April 30, 2025.
Gross profit represented 28.5% and 28.6% of sales in fiscal years 2026 and 2025, respectively. Gross profit margin remained relatively consistent with the prior year, reflecting offsetting changes in margin performance across our LPG and International operations.
Operating expenses were $63.7 million and $51.1 million in fiscal years 2026 and 2025, respectively, and 22.6% and 21.2% of sales, respectively. The increase in operating expenses in fiscal year 2026 as compared to fiscal year 2025 was largely attributable to our acquisition of Nu Aire. Other significant factors were increases in SG&A wages of $1,034,000, increases to bad debt expenses of $275,000, increases to corporate governance costs of $229,000, offset by decreases in consulting and professional fees of $522,000. The increases in corporate governance costs for the year were primarily attributed to costs associated with Sarbanes-Oxley 404(b) compliance readiness.
Other income, net was $880,000 and $240,000 in fiscal years 2026 and 2025, respectively. Other income, net increased year over year as a result of the acceleration of deferred financing costs related to the payoff of the secured revolving line of credit initially up to $15.0 million (the "Mid Cap Revolving Credit Facility") and fixed asset disposal activity incurred in fiscal year 2025, partially offset by lower interest income earned on domestic cash balances during fiscal year 2026.
Interest expense was $3,862,000 and $3,214,000 in fiscal years 2026 and 2025, respectively. The increase in interest expense for fiscal year 2026 was attributable to a full year of interest on the borrowings incurred in connection with the Nu Aire acquisition, which closed on November 1, 2024, compared to a partial-year impact in fiscal year 2025. This was partially offset by a decrease in interest expense related to debt repayments made during fiscal year 2026.
Income tax expense was $3.3 million for fiscal year 2026, or 23.8% of pretax earnings, as compared to $3.2 million for fiscal year 2025, or 21.7% of pretax earnings. The increase in the effective tax rate was primarily attributable to higher state and local income taxes and an increase in deferred taxes on unremitted foreign earnings. These unfavorable impacts were partially offset by lower nondeductible expenses, increased tax credits, and other tax items. At April 30, 2026, the Company has an LPG-related valuation allowance of $637,000 associated with certain federal tax credits, compared to $808,000 at April 30, 2025. The decrease was primarily attributable to the write-off of state tax credits that were fully reserved through a valuation allowance. See Note 8 , Income Taxes for additional information.
Net earnings attributable to the non-controlling interest related to our subsidiaries that are not 100% owned by the Company were $847,000 and $178,000 for fiscal years 2026 and 2025, 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.
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Net earnings were $9,618,000, or $3.22 per diluted share, as compared to $11,405,000, or $3.83 per diluted share, for fiscal years ended April 30, 2026 and April 30, 2025, respectively. 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 previous Mid Cap Revolving Credit Facility. 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 the 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 2027.
At April 30, 2026, we had no advances outstanding under our $20.0 million Revolving Credit Facility with PNC. See Note 6 , Long-term Debt and Other Credit Arrangements , of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report for additional information concerning our credit facility. In fiscal year 2022, we executed a Sale-Leaseback financing transaction with respect to our manufacturing and corporate facilities in Statesville, North Carolina to provide additional liquidity. See Note 7 , Sale-Leaseback Financing Transaction for more information. We did not have any off balance sheet arrangements at April 30, 2026 or 2025.
The following table summarizes the cash payment obligations for our lease and financing arrangements as of April 30, 2026:
PAYMENTS DUE BY PERIOD
($ in thousands)
Contractual Cash Obligations Total 1 Year 2-3 Years 4-5 Years After 5 years
Operating Lease Obligations
$ 11,072 $ 4,259 $ 5,012 $ 1,758 $ 43
Financing Lease Obligations 414 94 188 132 —
Sale-Leaseback Financing Transaction 38,007 2,049 4,222 4,393 27,343
Term Loans 20,083 5,000 10,000 5,083 —
Total Contractual Cash Obligations $ 69,576 $ 11,402 $ 19,422 $ 11,366 $ 27,386
The Company's operating activities provided cash of $18,633,000 in fiscal year 2026. Net cash provided by operating activities was primarily from operations and decreases in inventories of $2,316,000, decreases in receivables of $3,303,000, and the change in other, net of $1,255,000, partially offset by decreases in deferred revenue of $1,921,000 and decreases in accounts payable and accrued expenses of $5,147,000. Operating activities provided cash of $14,783,000 in fiscal year 2025. Excluding the impacts of the Nu Aire acquisition, this was primarily driven by 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.
The Company's financing activities used cash of $19,326,000 during fiscal year 2026, primarily related to the completion of the Company's Seller Note Repayment, the servicing of the Company's long-term debt arrangements, and the payment of employee taxes withheld for stock-based compensation, partially offset by the entrance into the First Amendment to Loan Agreement with PNC. See Note 6 , Long-term Debt and Other Credit Arrangements , for additional information regarding this Amendment and the Seller Note Repayment. 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.
The Company's investing activities used cash of $3,937,000 in fiscal year 2026, all of which was related to capital expenditures. 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. Capital expenditures in fiscal year 2026 were funded primarily by operations and from financing activities. Fiscal year 2027 capital expenditures are anticipated to be approximately $6.0 million. The fiscal year 2027 expenditures are expected to be funded primarily by operating activities, supplemented as needed by borrowings under our revolving credit facility.
The majority of the April 30, 2026 accounts receivable balances are expected to be collected during the first quarter of fiscal year 2027, 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.
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Working capital was $57.0 million at April 30, 2026, down from $64.7 million at April 30, 2025, and the ratio of current assets to current liabilities was 2.2-to-1.0 at April 30, 2026, unchanged from a ratio of 2.2-to-1.0 at April 30, 2025.
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 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
See Note 1 , Summary of Significant Accounting Policies , to our Consolidated Financial Statements in this Form 10-K for a discussion of new accounting pronouncements, which is incorporated herein by reference.
OUTLOOK
Financial Outlook
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. 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.
Kewaunee's fiscal year 2026 results highlight the meaningful progress the Company has made on its strategic priorities, particularly in light of the challenging operating environment in which these results were delivered. Kewaunee continued to invest in the Corporate platform required to scale as a public company and accelerate the Company's organic and inorganic growth strategy. The Company also made significant progress in its integration of Nu Aire, positioning the business for improved performance as life sciences market conditions recover, while also strengthening Kewaunee's balance sheet through the servicing and repayment of acquisition-related debt.
Entering fiscal year 2027, the Company remains focused on disciplined capital allocation, operational execution, and serving our customers with excellence.