Kewaunee Scientific Corp: Form 10-Q for the period ended Jul 31, 2025

The Company's 2025 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, 2025. The following discussion and analysis describes material changes in the Company's financial condition since April 30, 2025. The analysis of results of operations compares the three months ended July 31, 2025 with the comparable period of the prior year.

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 to the Company 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 Estimates

In the ordinary course of business, the Company may make 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. There have been no material changes to the Company's determination of its 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, from those described in Part II, Item 7 of the Company's 2025 Annual Report on Form 10-K under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" beyond those set forth below.

Results of Operations

Sales for the quarter were $71,104,000, an increase from sales of $48,393,000 in the comparable period of the prior year. Domestic sales for the quarter were $54,352,000, up 53.0% when compared to sales of $35,523,000 in the comparable period of the prior year. Domestic sales increased when compared to the prior year primarily due to the acquisition of Nu Aire, as discussed above, which closed on November 1, 2024 and was not part of the prior year comparable results. International sales for the quarter were $16,752,000, up 30.2% when compared to sales of $12,870,000 in the comparable period of the prior year. International sales increased when compared to the prior year period due to the commencement of delivery of large projects booked in the prior fiscal year.

The Company's order backlog was $205.0 million at July 31, 2025, as compared to $159.4 million at July 31, 2024, and $214.6 million at April 30, 2025.

The gross profit margin for the three months ended July 31, 2025 was 29.4% of sales, as compared to 25.8% of sales in the comparable quarter of the prior year. The increase in gross profit margin percentage for the three months ended July 31, 2025 was primarily driven by the acquisition of Nu Aire on November 1, 2024, along with improved manufacturing productivity and ongoing cost-containment initiatives.

Operating expenses for the three months ended July 31, 2025 were $16,120,000, or 22.7% of sales, as compared to $9,913,000, or 20.5% of sales, in the comparable period of the prior year. The increase in operating expenses for the three months ended July 31, 2025 was largely related to the acquisition of Nu Aire. The increase in operating expenses from the comparable period was also impacted by increases in international operating expenses of $392,000 and SG&A wages, benefits, incentive and stock-based compensation of $182,000.

Interest expense was $1,058,000 for the three months ended July 31, 2025, as compared to $472,000 for the comparable period of the prior year. The changes in interest expense were due to changes in the levels of bank and other borrowings and interest rates.

Income tax expense of $761,000 and $192,000 were recorded for the three months ended July 31, 2025 and 2024, respectively. The effective income tax rate for the three months ended July 31, 2025 was 19.4%, as compared to 7.9% for the three months ended July 31, 2024. The effective tax rate for the current three month period 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. In addition, the income tax expense recorded for the three months ended July 31, 2025 was favorably impacted by a discrete tax benefit of $303,000 resulting from the issuance of stock through the vesting of restricted stock units during the first quarter. On July 4, 2025, the U.S. government enacted Public Law No. 119-21, commonly known as the One Big Beautiful Bill Act ("OBBBA"), which includes a broad range of tax reform provisions affecting businesses. Since OBBBA was enacted on July 4, 2025, its full impact is not reflected in the Company's Condensed Consolidated Financial Statements for the three months ended July 31, 2025. The Company is evaluating the provisions to assess potential effects on its effective tax rate, deferred tax assets and liabilities, and future cash tax obligations. See Note N, 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 $66,000 for the three months ended July 31, 2025, as compared to $45,000, for the comparable period 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 $3,093,000, or $1.04 per diluted share, for the three months ended July 31, 2025, compared to net earnings of $2,193,000, or $0.74 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 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 C, 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-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 $66,662,000 at July 31, 2025, compared to $64,651,000 at April 30, 2025. The ratio of current assets to current liabilities was 2.3-to-1.0 at July 31, 2025, compared to 2.2-to-1.0 at April 30, 2025.

The Company's operating activities provided cash of $5,791,000 during the three months ended July 31, 2025. Net cash provided by operating activities was primarily driven by operations and decreases in receivables of $5.5 million, partially offset by increases in inventories of $2.1 million, decreases in accounts payable and other accrued expenses of $1.5 million, and decreases in deferred revenue of $1.1 million. During the three months ended July 31, 2025, the Company used net cash of $771,000 in investing activities related to capital expenditures. The Company's financing activities used net cash of $1,463,000 during the three months ended July 31, 2025, primarily related to the servicing of the Company's long-term debt arrangements and a net decrease in the short-term borrowings of its International subsidiaries. See Note H, Long-term Debt and Other Credit Arrangements, for more details.

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.

Kewaunee's first quarter results for fiscal year 2026 demonstrate the Company's resilience in the face of challenging market conditions, including uncertainty around government policy, evolving tariff structures, and broader geopolitical upheaval. Though the Company anticipates some volatility in project delivery timelines, which may create uneven performance by quarter for the balance of fiscal year 2026, the Company's overall backlog remains strong.

The Company remains focused on growth, both organically and inorganically, and is committed to making strategic investments in the people, processes, and technology that will support and enable this growth in a sustainable manner. The Company is confident that these strategic investments and its healthy backlog position the Company well to handle any anticipated short-term headwinds and maintain the long-term health of the business.

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: our ability to realize the benefits anticipated as a result of the Nu Aire acquisition; 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 2025 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, 2025.

(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 July 31, 2025. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that, as of July 31, 2025, 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

In November 2024, the Company completed the acquisition of Nu Aire. The Company is in the process of integrating Nu Aire into its systems and control environment as of July 31, 2025. The Company believes it has taken the necessary steps to monitor and maintain appropriate internal control over financial reporting during this integration. Other than the impact of this business acquisition, there were no significant changes in the Company's internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are 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 2025 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, 2025 as filed with the SEC on July 2, 2025 beyond those set forth below.