Kewaunee Scientific Corp: Form 10-Q for the period ended Jan 31, 2024

The Company's 2023 Annual Report to Stockholders on Form 10-K contains management's discussion and analysis of the Company's financial condition and results of operations as of and for the fiscal year ended April 30, 2023. The following discussion and analysis describes material changes in the Company's financial condition since April 30, 2023. The analysis of results of operations compares the three and nine months ended January 31, 2024 with the comparable periods of the prior year.

Results of Operations

Sales for the quarter were $46,778,000, a decrease from sales of $60,821,000 in the comparable period of the prior year. Domestic sales for the quarter were $31,774,000, down 12.1% from sales of $36,134,000 in the comparable period of the prior year. 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 sales for the quarter were $15,004,000, down 39.2% when compared to sales of $24,687,000 in the comparable period of the prior year. 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.

Sales for the nine months ended January 31, 2024 were $147,053,000, a decrease from sales of $165,508,000 in the comparable period of the prior year. Domestic sales for the period were $101,379,000, down 9.2% from sales of $111,593,000 in the comparable period of the prior year. 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 sales for the period were $45,674,000, down 15.3% from sales of $53,915,000 in the comparable period of the prior year. 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.

The Company's order backlog was $152.3 million at January 31, 2024, as compared to $153.2 million at January 31, 2023, and $147.9 million at April 30, 2023.

The gross profit margin for the three months ended January 31, 2024 was 25.7% of sales, as compared to 17.0% of sales in the comparable quarter of the prior year. The gross profit margin for the nine months ended January 31, 2024 was 25.4% of sales, as compared to 15.2% of sales in the comparable prior year period. The increase in gross profit margin percentage for the three and nine months ended January 31, 2024 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 periods.

Operating expenses for the three months ended January 31, 2024 were $8,223,000, or 17.6% of sales, as compared to $8,026,000, or 13.2% of sales, in the comparable period of the prior year. Operating expenses for the nine months ended

January 31, 2024 were $24,688,000, or 16.8% of sales, as compared to $22,564,000, or 13.6% of sales, in the comparable period of the prior year. The increase in operating expenses for the three months ended January 31, 2024 was primarily due to increases in SG&A wages, benefits, incentive and stock-based compensation of $440,000, corporate governance expenses of $34,000, and depreciation expense of $51,000, partially offset by decreases in international operating expenses of $227,000, consulting and professional fees of $143,000 and bad debt expense of $44,000. The increase in operating expenses for the nine months ended January 31, 2024 was primarily due to increases in SG&A wages, benefits, incentive and stock-based compensation of $1,898,000, corporate governance expenses of $138,000, depreciation expense of $128,000, bad debt expense of $149,000, and increases in international operating expenses of $259,000, partially offset by decreases in consulting and professional fees of $515,000.

Interest expense, net was $411,000 and $1,213,000 for the three and nine months ended January 31, 2024, respectively, as compared to $436,000 and $1,190,000, respectively, for the comparable periods of the prior year. The changes in interest expense were due to changes in the levels of bank borrowings and interest rates.

The effective income tax rate for the three and nine months ended January 31, 2024 was 27.9% and 33.1%, respectively, as compared to 46.7% and 87.8% for the three and nine months ended January 31, 2023, respectively. Income tax expense of $982,000 and $962,000 was recorded for the three months ended January 31, 2024 and 2023, respectively. Income tax expense of $3,894,000 and $1,911,000 was recorded for the nine months ended January 31, 2024 and 2023, respectively. The effective tax rate for the three and nine months ended January 31, 2024 reflects the impact of foreign operations which are taxed at different rates than the U.S. tax rate of 21%, combined with expected current year tax expense for the Company's domestic operations and estimated increases in the domestic valuation allowance required for the fiscal year. In addition, the income tax expense recorded for the nine months ended January 31, 2024 was unfavorably impacted by additional tax expense of $387,000 related to India tax matters. This one-time expense is related to management's decision to discontinue management fees, citing challenges associated with the Indian tax authority and cost benefit analysis. The effective rate for the three and nine months ended January 31, 2023 was influenced by foreign operations taxed at varying rates, as well as the inclusion of a valuation allowance against deferred tax assets, which led to the nullification of any U.S. income tax benefit for pre-tax losses incurred in the corresponding periods. See Note L, Income Taxes, of the Notes to Condensed Consolidated Financial Statements for additional information.

Non-controlling interests related to the Company's subsidiaries not 100% owned by the Company decreased net earnings by $12,000 and $151,000 for the three and nine months ended January 31, 2024, respectively, as compared to $375,000 and $532,000, respectively, for the comparable periods of the prior year. The change in the net earnings attributable to the non-controlling interest in the current period was due to changes in earnings (losses) of the subsidiaries in the related period.

Net earnings was $2,521,000, or $0.85 per diluted share, for the three months ended January 31, 2024, compared to net earnings of $723,000, or $0.25 per diluted share, in the prior year period. Net earnings was $7,727,000, or $2.64 per diluted share, for the nine months ended January 31, 2024, as compared to a net loss of $267,000, or $(0.09) per diluted share, in the prior year period.

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. Additionally, certain machinery and equipment are financed by non-cancellable operating and financing leases. The Company believes that these sources will be sufficient to support ongoing business requirements in the current fiscal year, including capital expenditures.

The Company had working capital of $54,014,000 at January 31, 2024, compared to $47,867,000 at April 30, 2023. The ratio of current assets to current liabilities was 2.3-to-1.0 at January 31, 2024, compared to 2.2-to-1.0 at April 30, 2023.

The Company provided cash of $18,419,000 during the nine months ended January 31, 2024, primarily from operations, decreases in accounts receivable of $4.7 million and increases in deferred revenue of $6.2 million, partially offset by decreases in accounts payable and other accrued expenses of $3.8 million. During the nine months ended January 31, 2024, the Company used net cash of $3,394,000 in investing activities, all of which was used for capital expenditures. The Company's financing activities used cash of $1,545,000 during the nine months ended January 31, 2024, primarily from a net decrease in borrowings under the Revolving Credit Facility and the purchase of treasury stock during the quarter. See Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds for more details.

The Company expects to contribute approximately $750,000 in the aggregate to its non-contributory defined benefit pension plans in 2024. See Note M, Defined Benefit Pension Plans, of the Notes to Condensed Consolidated Financial Statements for additional information on the non-contributory defined benefit pension plans.

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 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.

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.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

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, including disruptions from government mandates, both domestically and internationally, as well as supplier constraints and other supply disruptions; 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; 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 differences are described under the caption "Risk Factors" in Item 1A in the Company's 2023 Annual Report on Form 10-K and in Item 1A of Part II in this Quarterly Report on Form 10-Q, which you should review carefully. These forward-looking statements speak only as of the date of this document. The Company assumes no obligation, and expressly disclaims any obligation, to update any forward-looking statements, whether as a result of new information, future events or otherwise.

There are no material changes to the disclosures made on this matter in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2023.

(a) Evaluation of disclosure controls and procedures

An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of January 31, 2024. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that, as of January 31, 2024, the Company's disclosure controls and procedures were adequate and effective and designed to ensure that all material information required to be filed in this quarterly report is made known to them by others within the Company and its subsidiaries.

(b) Changes in internal controls

There was no significant change in the Company's internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in Part I, Item 1A of the Company's 2023 Annual Report on Form 10-K under the heading "Risk Factors," any one or more of which could, directly or indirectly, cause the Company's actual financial condition and operating results to vary materially from its past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company's business, financial condition, operating results and stock price. There have been no material changes to the Company's risk factors from those set forth in the Company's Annual Report on Form 10-K for the year ended April 30, 2023 as filed with the SEC on June 30, 2023 beyond those set forth below.

We cannot guarantee that our share repurchase program will enhance long-term stockholder value, or that it will successfully mitigate the dilutive effect of employee equity awards.

While our Board of Directors authorized a share repurchase program that does not have an expiration date, the program does not obligate us to acquire any particular amount of Common Stock and it may be terminated at any time. We cannot guarantee that the program will be fully consummated, that it will enhance long-term stockholder value, or that it will successfully mitigate the dilutive effect of employee equity awards. Any repurchases will reduce the amount of cash we have available to fund working capital, capital expenditures, strategic acquisitions or business opportunities, and other general corporate requirements. In addition, the program could affect the trading price of our Common Stock and increase volatility, and any announcement of a termination of this program may result in a decrease in the trading price of our Common Stock.