The Company's 2022 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 year ended April 30, 2022. The following
discussion and analysis describes material changes in the Company's financial
condition since April 30, 2022. The analysis of results of operations compares
the three and nine months ended January 31, 2023 with the comparable periods of
the prior year.
Results of Operations
Sales for the quarter were $60,821,000, an increase from sales of $40,633,000 in
the comparable period of the prior year. Domestic sales for the quarter were
$36,134,000, up 22.4% from sales of $29,531,000 in the comparable period of the
prior year. The increase in Domestic sales was predominantly from higher input
costs being rolled into product pricing. International sales for the quarter
were $24,687,000, up 122.4% from sales of $11,102,000 in the comparable period
of the prior year. International sales increased when compared to the prior year
period due to the delivery of large projects booked in the prior fiscal year.
Sales for the nine months ended January 31, 2023 were $165,508,000, an increase
from sales of $119,157,000 in the comparable period of the prior year. Domestic
sales for the quarter were $111,593,000, up 25.2% from sales of $89,128,000 in
the comparable period of the prior year. The increase in Domestic sales was
predominantly from higher input costs being rolled into product pricing.
International sales for the quarter were $53,915,000, up 79.5% from sales of
$30,029,000 in the comparable period of the prior year. International sales
increased when compared to the prior year period due to the delivery of large
projects booked in the prior fiscal year.
The Company's order backlog was $153.2 million at January 31, 2023, as compared
to $138.1 million at January 31, 2022, and $173.9 million at April 30, 2022.
The gross profit margin for the three months ended January 31, 2023 was 17.0% of
sales, as compared to 13.8% of sales in the comparable quarter of the prior
year. The gross profit margin for the nine months ended January 31, 2023 was
15.2% of sales, as compared to 12.5% of sales in the comparable quarter of the
prior year. The increase in gross profit margin percentage for the three and
nine months ended January 31, 2023 is primarily due to higher input costs being
rolled into domestic pricing for the current fiscal year as compared to the
prior year comparable periods. During the three and nine months ended January
31, 2022, the Company's gross profit margin percentage was unfavorably impacted
by increases in steel, wood, and epoxy resin raw material costs that could not
be added to existing fixed-price contracts of $424,000 and $4,186,000,
respectively.
Operating expenses for the three months ended January 31, 2023 were $8,026,000,
or 13.2% of sales, as compared to $6,490,000, or 16.0% of sales, in the
comparable period of the prior year. Operating expenses for the nine months
ended January 31, 2023 were $22,564,000, or 13.6% of sales, as compared to
$19,742,000, or 16.6% of sales, in the comparable period of the prior year. The
increase in operating expenses for the three months ended January 31, 2023 was
primarily due to increases in administrative wages, benefits, inventive and
stock-based compensation of $122,000, consulting and professional fees of
$195,000, marketing expenses of $53,000, bad debt expense of $58,000, corporate
governance expenses of $30,000, and increases in international operating
expenses of $730,000. The increase in operating expenses for the nine months
ended January 31, 2023 was primarily due to increases in consulting and
professional fees of $671,000, bad debt expense of $51,000, corporate governance
expenses of $18,000, and increases in international operating expenses of
$2,037,000, partially offset by reductions in administrative wages, benefits,
and stock-based compensation of $579,000, and marketing expense of $137,000. The
increase in operating expenses for the nine months ended January 31, 2023 also
included a one-time charge related to the write-down of a prior year insurance
claim in the amount of $260,000. The increase in international operating
expenses for the three and nine months ended January 31, 2023 is related to the
continued sales growth in the International operating segment.
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Interest expense, net was $436,000 and $1,190,000 for the three and nine months
ended January 31, 2023, as compared to $158,000 and $396,000 for the comparable
periods of the prior year. The changes in interest expense were primarily due to
changes in the levels of bank borrowings and the Sale-Leaseback financing
transaction.
The effective income tax rate for the three and nine months ended January 31,
2023 was 46.7% and 87.8%, respectively, as compared to (45.0)% and (17.5)% for
the three and nine months ended January 31, 2022, respectively. Income tax
expense of $962,000 and $399,000 was recorded for the three months ended
January 31, 2023 and 2022, respectively. Income tax expense of $1,911,000 and
$845,000 was recorded for the nine months ended January 31, 2023 and 2022,
respectively. The change in the effective tax rate for the three and nine months
ended January 31, 2023 reflects the impact of international operations which are
taxed at different rates, combined with no U.S. tax benefit being recorded for
the most recent quarter due to the Company's full valuation allowance position.
See Note K , 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 increased net loss by $375,000 and $532,000 for the three and
nine months ended January 31, 2023, respectively, compared to $33,000 and
$89,000, 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 of the subsidiaries in the related period.
Net earnings was $723,000, or $0.25 per diluted share, for the three months
ended January 31, 2023, compared to a net loss of $1,319,000, or $(0.47) per
diluted share, in the prior year period. Net loss was $267,000, or $(0.09) per
diluted share, for the nine months ended January 31, 2023, compared to
$5,764,000, or $(2.07) 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. 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 G , Sale-Leaseback Financing Transaction for more
information. Additionally, certain machinery and equipment are financed by
non-cancellable operating 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 $47,348,000 at January 31, 2023, compared to
$49,272,000 at April 30, 2022. The ratio of current assets to current
liabilities was 2.1-to-1.0 at January 31, 2023, compared to 2.2-to-1.0 at
April 30, 2022.
As previously reported in the Company's 2022 Annual Report on Form 10-K , the
Company was compliant at April 30, 2022 with all of the financial covenants
under its prior revolving credit facility. On June 27, 2022, the Company
terminated its prior credit agreement with Wells Fargo, National Bank (the
"Prior Credit Agreement"). At the time of termination, there were no borrowings
under the Prior Credit Agreement, and the Company did not incur any material
termination penalties as a result of the termination. On December 19, 2022, the
Company entered into a Credit and Security Agreement with Mid Cap Funding IV
Trust and the lenders from time to time party thereto (the "Credit Agreement").
The Credit Agreement provides for a secured revolving line of credit initially
of up to $15.0 million. At January 31, 2023, there were $3.0 million outstanding
under the revolving credit facility governed by the Credit Agreement. For
additional information concerning the credit agreement, see Note F ,
Long-Term Debt and Other Credit Arrangements.
The Company used cash of $3,547,000 during the nine months ended January 31,
2023, primarily for decreases in accounts payable and other accrued expenses of
$4.5 million and receivables of $2.8 million and increases in prepaid expenses
and other assets of $1.6 million, partially offset by an increase in deferred
revenue of $1.5 million and a decrease in inventory of $2.4 million. During the
nine months ended January 31, 2023, the Company used net cash of $1,562,000 in
investing activities, all of which was used for capital expenditures. The
Company's financing activities provided cash of $17,089,000 during the nine
months ended January 31, 2023, primarily from proceeds of the sale-leaseback
financing transaction that was previously recorded as a note receivable at April
30, 2022, proceeds from a small balance being drawn on the new credit facility,
and short-term borrowings by our International subsidiaries.
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 increased costs of raw materials, including steel, wood, and
epoxy resin, and whether the Company can increase product prices to customers in
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amounts that correspond to such increases without materially and adversely
affecting sales. Additionally, since prices are normally quoted on a firm basis
in the industry, the Company bears the burden of possible increases in labor and
material costs between the quotation of an order and delivery of a product.
The Company continues to improve the quality of the order backlog by delivering
a portion of the lower margin direct sales orders and replacing those orders in
the backlog with higher margin product orders. This dynamic, as well as the
Company's ability to focus solely on supporting its dealers and distribution
channel partners domestically and the continued growth of its International
business, positions Kewaunee well as the Company moves through the balance of
the fiscal year.
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 Quarterly 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, and 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 differences
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 2022 Annual Report on Form 10-K, 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.
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