KEWAUNEE SCIENTIFIC CORP /DE/ Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)


Kewaunee Scientific Corporation is a recognized leader in the design,
manufacture and installation of laboratory, healthcare and technical furniture
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.
Kewaunee Scientific Corporation's website is located at

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. 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 lumbers and plywood, paint,
chemicals, resins, hardware, plumbing and electrical fittings. Such materials
and products are purchased from multiple suppliers and are typically readily


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 policies, 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.

Revenue Recognition

The Company recognizes revenue when control of a good or service promised in a
contract (i.e. performance obligation) is transferred to a customer. Control is
obtained when a customer has the ability to direct the use of and obtain
substantially all of the remaining benefits from that good or service. The
majority of the Company's revenues are recognized over time as the customer
receives control as the Company performs work under a contract. However, a
portion of the Company's revenues are recognized at a point-in-time as control
is transferred at a distinct point in time per the terms of a contract.

Allowance for Doubtful Accounts

Evaluation of the allowance for doubtful accounts 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.


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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

Income Taxes

We are subject to income taxes in the U.S. (federal and state) and numerous
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, such as the COVID-19 pandemic.

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.


Sales for fiscal year 2022 were $168.9 million, an increase from fiscal year
2021 sales of $147.5 million. Domestic sales for fiscal year 2022 were $126.9
million, an increase of 14.2% compared to fiscal year 2021 sales of $111.0
million. The increase in Domestic sales resulted from both higher volumes and
the implementation of price increases in response to higher raw material input
costs. International sales for fiscal year 2022 were $42.0 million, an increase
of 15.3% from fiscal year 2021 sales of $36.5 million. The increase in
International sales in fiscal year 2022 is a result of strong demand across the
international markets, primarily in India, coupled with COVID-19 related
restrictions on construction site access and government mandated shut-downs in
India that significantly impacted the prior year sales.

Our order backlog was $173.9 million at April 30, 2022, as compared to $114.5
million at April 30, 2021. This is the highest order backlog in the Company's
history. The increase in backlog is primarily attributable to strength in the
life science and higher education end-use markets within the United States.
Internationally, customers continue to invest in large infrastructure projects
requiring laboratories in India, the Middle East, and Africa and we were awarded
multiple multi-year projects during the year.

Gross profit represented 14.3% and 16.3% of sales in fiscal years 2022 and 2021,
respectively. The decrease in gross profit margin percentage for fiscal year
2022 is a result of supplier constraints resulting from COVID-19, as well as
other supply chain disruptions, that led to increases in steel, wood, and epoxy
resin raw material costs, when compared to the prior year, of $4,559,000 in
excess of surcharges implemented and recorded as sales. The gross profit margin
decrease was also impacted by the cyber attack that occurred during the third
quarter, which resulted in $1,131,000 of margin loss due to disruption of
production, loss of sales, and absorption of fixed overhead costs which were not
covered by the Company's cyber insurance policy.

Operating expenses were $26.8 million and $25.3 million in fiscal years 2022 and
2021, respectively, and 15.9% and 17.2% of sales, respectively. The increase in
operating expense in fiscal year 2022 as compared to fiscal year 2021 was
primarily for increases related to wages, benefits, incentive and stock-based
compensation of $1,098,000, increases in international operating expenses of
$693,000, and one-time costs in the amount of $325,000 related to both the
Company's decision to exit certain markets where the Company had historically
sold products directly and professional fees related to financing activities,
partially offset by decreases of $545,000 in marketing expenses.

Pension income was $355,000 in fiscal year 2022, compared to pension expense of
$1,153,000 in fiscal year 2021. The decrease in pension expense was due to the
favorable impact from pension accounting because of the recovery of the plan
assets at previous fiscal year-ends.

Other income, net was $400,000 and $241,000 in fiscal years 2022 and 2021,
respectively. The increase in other income in fiscal year 2022 was primarily due
to the interest earned on the Note Receivable related to the Sale-Leaseback
financing transaction that was executed on March 24, 2022. See Note 5 ,
Sale-Leaseback Financing Transaction for additional information on this



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Interest expense was $632,000 and $389,000 in fiscal years 2022 and 2021,
respectively. The change in interest expense for fiscal year 2022 was primarily
due to changes in the levels of bank borrowings and the Sale-Leaseback financing

Income tax expense was $3.5 million and $990,000 for fiscal years 2022 and 2021,
respectively, or 141.6% and 37.8% of pretax loss, respectively. The effective
rate change for fiscal year 2022 is primarily due to an increase in the
valuation allowance primarily attributable to the increase in deferred taxes of
$4,170,000 before valuation allowance as a result of the book to tax differences
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
effective rate in fiscal year 2021 was also unfavorably impacted due to changes
in the valuation allowance and reduced benefit on net operating loss carryback

Net earnings attributable to the non-controlling interest related to our
subsidiaries that are not 100% owned by the Company were $123,000 and $65,000
for fiscal years 2022 and 2021, 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 loss was $6,126,000, or $2.20 per diluted share, and $3,672,000, or $1.33
per diluted share, for fiscal years ended April 30, 2022 and April 30, 2021,
respectively. The increase in net loss was attributable to the factors discussed


Our principal sources of liquidity have historically been funds generated from
operating activities. In addition, on March 24, 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 5  , Sale-Leaseback Financing Transaction for more
information. Additionally, certain machinery and equipment are financed by
non-cancelable operating leases. We believe that these sources of funds will be
sufficient to support ongoing business requirements, including capital
expenditures, through fiscal year 2023.

At April 30, 2022, we had advances of $1.6 million and standby letters of credit
aggregating $716,000 outstanding under our secured, $4.7 million revolving
credit facility. See   Note 4  , 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. We did
not have any off balance sheet arrangements at April 30, 2022 or 2021.

The following table summarizes the cash payment obligations for our lease and
financing arrangements as of April 30, 2022:

                             PAYMENTS DUE BY PERIOD
                                ($ in thousands)

Contractual Cash Obligations                Total            1 Year           2-3 Years           4-5 Years           After 5 years
Operating Leases                         $  8,821$ 1,849

$ 2,908$ 2,217$ 1,847
Financing Lease Obligations

                   399              148                 180                  71                       -
Sale-Leaseback Financing Transaction       45,811            1,893               3,901               4,059                  35,958

Total Contractual Cash Obligations $ 55,031$ 3,890$ 6,989$ 6,347$ 37,805

The Company's operating activities used cash of $7,885,000 in fiscal year 2022,
primarily for operations, and 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. Operating activities provided cash of $912,000 in fiscal year 2021,
primarily from operations, and increases in accounts payable and accrued
expenses of $4,567,000 and a decrease in income tax receivable of $1,762,000,
partially offset by increases in inventories of $1,188,000 and receivables of

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 financing activities provided cash of $1,982,000 during fiscal year
2021 from proceeds from the net increase in short-term borrowings of $2,109,000,
partially offset by cash dividends of $108,000 paid to minority interest holders
and repayment of long-term debt of $19,000.

The majority of the April 30, 2022 accounts receivable balances are expected to
be collected during the first quarter of fiscal year 2023, 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 year 2022, we made no contributions to
the plans. In


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fiscal year 2021, we made contributions to the plans of $30,000. We expect to
make no contributions to the plans for fiscal year 2023.

Capital expenditures were $1,908,000 and $2,397,000 in fiscal years 2022 and
2021, respectively. Capital expenditures in fiscal year 2022 were funded
primarily from financing activities. Fiscal year 2023 capital expenditures are
anticipated to be approximately $3.5 million. The fiscal year 2023 expenditures
are expected to be funded primarily by operating activities and proceeds from
the sale-leaseback financing transaction.

Working capital was $49.3 million at April 30, 2022, up from $26.3 million at
April 30, 2021, and the ratio of current assets to current liabilities was
2.2-to-1.0 at April 30, 2022 and 1.8-to-1.0 at April 30, 2021. The increase in
working capital for fiscal year 2022 was driven by a $13.5 million Note
Receivable related to the sale-leaseback financing transaction, resulting in a
$5.2 million reduction in short-term borrowing and a $5.2 million increase in
managed working capital.

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
has contained, and may in the future contain, provisions that could limit the
payment of dividends in certain circumstances, and other factors that the Board
of Directors may deem to be relevant.


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.


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.

As the fiscal year concluded, economic uncertainty remained from continued
broad-based inflation, a challenging labor market, and a possible recession.
With that being said, the Company believes the outlook is bright based on
Kewaunee's record backlog and improved operating performance during the fiscal
year. The Company believes the strength in its backlog demonstrates the
confidence customers have in Kewaunee's ability to meet their requirements. When
combined with changes in its go-to-market strategy and continued investment in
its manufacturing operations, the Company feels it is well-positioned for the
next fiscal year.

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