KEWAUNEE SCIENTIFIC CORP DE

Notes to Condensed Consolidated Financial Statements

(unaudited)

A. Financial Information

The unaudited interim Condensed Consolidated Financial Statements of Kewaunee Scientific Corporation (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted, although the Company believes that the disclosures are adequate to make the information presented not misleading.

These interim Condensed Consolidated Financial Statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of these financial statements and should be read in conjunction with the Consolidated Financial Statements and Notes included in the Company's 2024 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. The Condensed Consolidated Balance Sheet as of April 30, 2024 included in this interim period filing has been derived from the audited consolidated financial statements at that date, but does not include all of the information and related notes required by GAAP for complete financial statements.

The preparation of the interim Condensed Consolidated Financial Statements requires management to make certain estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates.

B. Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents consist of cash on hand and highly liquid investments with original maturities of three months or less. During the six months ended October 31, 2024 and twelve months ended April 30, 2024, the Company had cash deposits in excess of FDIC insured limits. The Company has not experienced any losses from such deposits. Restricted cash includes bank deposits of subsidiaries used for performance guarantees against customer orders.

The Company includes restricted cash along with the cash balance for presentation in the Condensed Consolidated Statements of Cash Flows. The reconciliation between the Condensed Consolidated Balance Sheet and the Condensed Consolidated Statement of Cash Flows is as follows (in thousands):

C. 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.

Disaggregated Revenue

A summary of net sales transferred to customers over time and at a point in time for the periods ended October 31, 2024 and October 31, 2023 is as follows (in thousands):

Contract Balances

The closing balances of contract assets included $13,634,000 in accounts receivable and $173,000 in other assets at October 31, 2024. The opening balance of contract assets arising from contracts with customers included $11,840,000 in accounts receivable and $312,000 in other assets at April 30, 2024. The closing and opening balances of contract liabilities included in deferred revenue arising from contracts with customers were $6,239,000 at October 31, 2024 and $4,374,000 at April 30, 2024. The timing of revenue recognition, billings and cash collections results in accounts receivable, unbilled receivables, and deferred revenue which are disclosed in the Condensed Consolidated Balance Sheets and in the Notes to the Condensed Consolidated Financial Statements. In general, the Company receives payments from customers based on a billing schedule established in its contracts. Unbilled receivables represent amounts earned which have not yet been billed in accordance with contractually stated billing terms and are included in receivables on the Condensed Consolidated Balance Sheets. Receivables are recorded when the right to consideration becomes unconditional and the Company has a right to invoice the customer. Deferred revenue relates to payments received in advance of performance under the contract. Deferred revenue is recognized as revenue as (or when) the Company performs under the contract. Approximately 100% of the contract liability balances at April 30, 2024 and October 31, 2024 are expected to be recognized as revenue during the respective succeeding 12 months.

D. Inventories

The Company measures inventory using the first-in, first-out method at the lower of cost or net realizable value. Inventories consisted of the following (in thousands):

The Company's International subsidiaries' inventories were $3,091,000 at October 31, 2024 and $3,239,000 at April 30, 2024 and are included in the above tables.

E. Fair Value of Financial Instruments

The Company's financial instruments consist primarily of cash and equivalents, mutual funds, short-term borrowings, and the cash surrender value of life insurance policies. The carrying value of these assets and liabilities approximates their fair value. The following tables summarize the Company's fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of October 31, 2024 and April 30, 2024 (in thousands):

(1)The Company maintainstwo non-qualified compensation plans which include investment assets in a rabbi trust. These assets consist of marketable securities, which are valued using quoted market prices multiplied by the number of shares owned, and life insurance policies, which are valued at their cash surrender value.

(2)Plan liabilities are equal to the individual participants' account balances and other earned retirement benefits.

F. Long-term Debt and Other Credit Arrangements

At April 30, 2024, advances of $3.0 million were outstanding under the Company's Revolving Credit Facility. Amounts available under the Revolving Credit Facility were $11.6 million at April 30, 2024. The borrowing rate under the Revolving Credit Facility was 9.54% as of April 30, 2024. The Company's International subsidiaries had a balance outstanding at April 30, 2024 of $99,000 in short-term borrowings related to overdraft protection and short-term loan arrangements. At April 30, 2024, the Company was in compliance with all of the financial covenants under its Revolving Credit Facility.

On September 30, 2024, the Company terminated its Revolving Credit Facility with Mid Cap Funding IV Trust. At the time of termination, there was a $3.0 million balance outstanding under the Revolving Credit Facility, which was paid off in full as part of the termination. The Company incurred $0.5 million in related expenses as a result of the termination.

The Company's International subsidiaries had a balance outstanding of $805,000 in short-term borrowings related to overdraft protection and short-term loan arrangements at October 31, 2024.

On November 1, 2024, the Company entered into a new Loan Agreement and issued Seller Notes as part of the acquisition of Nu Aire, Inc. ("Nu Aire"). See Note P, Subsequent Events, for more details.

G. Sale-Leaseback Financing Transaction

On December 22, 2021, the Company entered into an Agreement for Purchase and Sale of Real Property with CAI Investments Sub-Series 100 LLC, a Nevada limited liability company (the "Buyer"), for the Company’s headquarters and manufacturing facilities located at 2700 West Front Street in Statesville, North Carolina (the "Sale Agreement").

The Sale Agreement was finalized on March 24, 2022 and coincided with the Company and CAI Investments Medical Products I Master Lessee LLC ("Lessor") entering into a lease agreement. The lease arrangement is for a 20-year term, with four renewal options offive years each. Under the terms of the lease agreement, the Company’s initial basic rent is approximately $158,000 per month, with annual increases of approximately 2% each year of the initial term.

The Company accounted for the Sale-Leaseback Arrangement as a financing transaction as the lease agreement was determined to be a finance lease due to the significance of the present value of the lease payments, using a discount rate of 4.75% to reflect the Company’s incremental borrowing rate, compared to the fair value of the leased property as of the lease commencement date. In measuring the lease payments for the present value analysis, the Company elected the practical expedient to combine the lease component (the leased facilities) with the non-lease component (property management provided by the Buyer/Lessor) into a single lease component.

The presence of a finance lease indicates that control of the property has not transferred to the Buyer/Lessor and, as such, the transaction was deemed a failed sale-leaseback and accounted for as a financing arrangement. As a result of this determination, the Company is viewed as having received the sale proceeds from the Buyer/Lessor in the form of a hypothetical loan collateralized by its leased facilities. The hypothetical loan is payable as principal and interest in the form of “lease payments” to the Buyer/Lessor. As such, the Company will not derecognize the property from its books for accounting purposes until the lease ends. No gain or loss was recognized under GAAP related to the Sale-Leaseback Arrangement.

As of October 31, 2024, the carrying value of the financing liability was $27,782,000, net of $618,000 in debt issuance costs, of which $750,000 was classified as current on the Consolidated Balance Sheet with $27,032,000 classified as long-term. As of April 30, 2024, the carrying value of the financing liability was $28,133,000, net of $648,000 in debt issuance costs, of which $713,000 was classified as current on the Consolidated Balance Sheet with $27,420,000 classified as long-term. The monthly lease payments are split between a reduction of principal and interest expense using the effective interest rate method. Interest expense associated with the financing arrangement was $315,000 and $322,000 for the three months ended October 31, 2024 and October 31, 2023, respectively. Interest expense associated with the financing arrangement was $632,000 and $647,000 for the six months ended October 31, 2024 and October 31, 2023, respectively.

The Company will continue to depreciate the building down to zero over the 20-year assumed economic life of the property so that at the end of the lease term, the remaining carrying amount of the financing liability will equal the carrying amount of the land of $41,000.

Remaining future cash payments related to the financing liability as of October 31, 2024 are as follows:

H. Leases

The Company recognizes lease assets and lease liabilities reflecting the rights and obligations created by operating type leases for real estate and equipment in both the U.S. and internationally and financing leases for vehicles and IT equipment in the U.S. At October 31, 2024 and April 30, 2024, right-of-use assets totaled $6,941,000 and $7,454,000, respectively. Operating cash paid to settle lease liabilities was $1,334,000 and $1,282,000 for the six months ended October 31, 2024 and October 31, 2023, respectively. The Company's leases have remaining lease terms of up to 7 years. In addition, some of the leases may include options to extend the leases for up to 5 years or options to terminate the leases within 1 year. Operating lease expenses were $878,000 and $1,760,000 for the three and six months ended October 31, 2024, inclusive of period cost for short-term leases, not included in lease liabilities, of $202,000 and $426,000. Operating lease expenses were $847,000 and $1,714,000 for the three and six months ended October 31, 2023, inclusive of period cost for short-term leases, not included in lease liabilities, of $204,000 and $432,000.

At October 31, 2024, the weighted average remaining lease term for the capitalized operating leases was 3.9 years and the weighted average discount rate was 5.4%. For the financing leases, the weighted average remaining lease term was 4.5 years and the weighted average discount rate was 8.7%. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of those lease payments. The Company uses the implicit rate when readily determinable.

Future minimum lease payments under non-cancelable leases as of October 31, 2024 were as follows:

I. Stockholders' Equity

Common Stock

The Company is authorized to issue 5,000,000 shares of Common Stock, par value of $2.50 per share. Holders of the Company's Common Stock are entitled toone vote per share. As of October 31, 2024 and April 30, 2024, there were approximately 2,872,000 and 2,839,000 shares, respectively, of Common Stock issued and outstanding. The Company has not declared or paid any dividends with respect to its Common Stock during the three and six months ended October 31, 2024. 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 conditions, 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.

Share Repurchase Program

On August 31, 2023, the Board of Directors of the Company adopted a share repurchase program with authorization to repurchase up to 100,000 shares. There is no expiration date and currently, management has no plans to terminate this program. The Company did not purchase any shares under its share repurchase program during the three and six months ended October 31, 2024. As of October 31, 2024, the total remaining purchase authorization was 33,809 shares.

J. Earnings Per Share

Basic earnings per share is based on the weighted average number of common shares outstanding during the year. Diluted earnings per share reflects the assumed exercise of outstanding options and the conversion of restricted stock units ("RSUs") under the Company's various stock compensation plans, except when RSUs and options have an antidilutive effect. There wereno antidilutive RSUs and options outstanding at October 31, 2024. There were 19,200 antidilutive RSUs and options outstanding at October 31, 2023. The following is a reconciliation of basic to diluted weighted average common shares outstanding (in thousands):

K. Stock Options and Stock-based Compensation

The Company recognizes compensation costs related to stock options and other stock awards granted by the Company as operating expenses over their vesting period.

In August 2023, the stockholders approved the 2023 Omnibus Incentive Plan ("2023 Plan"), which enables the Company to grant equity-based awards, with potential recipients including directors, consultants, and employees. This plan replaces the 2017 Omnibus Incentive Plan ("2017 Plan"). No new awards will be granted under the prior plans. All outstanding options granted under the prior plans remain subject to, and will be settled upon exercise under, the prior plans. At the date of approval of the 2023 Plan, there were 64,633 shares available for issuance under the 2017 Plan. These shares and any outstanding awards that subsequently cease to be subject to such awards are available under the 2023 Plan. The 2023 Plan also increased the total number of shares reserved for issuance under the Company's equity compensation plans by 310,000, for a total of 374,633 shares initially reserved for issuance under the 2023 Plan. At October 31, 2024, there were 383,572 shares available for future issuance under the 2023 Plan.

In June 2024, the Company granted 47,940 RSUs under the 2023 Plan. These RSUs include both a service and a performance component, vesting over athree-year period. The recognized expense is based upon the vesting period for service criteria and estimated attainment of the performance criteria at the end of thethree-year period, based on the ratio of cumulative days of service to total days over thethree-year period. The Company recorded stock-based compensation expense of $373,000 and $691,000 during the three and six months ended October 31, 2024 with the remaining estimated stock-based compensation expense of $2,714,000 to be recorded over the remaining vesting periods. The Company recorded stock-based compensation expense of $241,000 and $414,000 during the three and six months ended October 31, 2023.

L. Income Taxes

Income tax expense of $916,000 and $1,108,000 was recorded for the three and six months ended October 31, 2024, respectively. Income tax expense of $2,015,000 and $2,912,000 was recorded for the three and six months ended October 31, 2023, respectively. The effective tax rate was 23.3% and 17.4% for the three and six months ended October 31, 2024, respectively. The effective tax rate for the current three and six months periods 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 six months ended October 31, 2024 was favorably impacted by a discrete tax benefit of $421,000 resulting from the issuance of stock through the vesting of restricted stock units and the exercise of stock options during the first quarter. The effective tax rate was 41.6% and 35.3% for the three and six months ended October 31, 2023, respectively. The prior year effective tax rate was influenced by foreign operations which are taxed at different rates than the U.S. tax rate of 21%, combined with expected tax expense for the Company's domestic operations and estimated increases in the domestic valuation allowance required for the corresponding period. In addition, income tax expense for the three and six months ended October 31, 2023 was unfavorably impacted by additional foreign tax expense of $534,000 related to India tax matters. This one-time expense was related to management's decision to discontinue management fees, citing challenges associated with the Indian tax authority and cost benefit analysis.

In August 2019, the Company revoked its indefinite reinvestment of foreign unremitted earnings position in compliance with ASC 740 "Income Taxes" and terminated its indefinite reinvestment of unremitted earnings assertion for the Singapore and Kewaunee Labway India Pvt. Ltd. international subsidiaries. The Company has a deferred tax liability of $1,392,000 and $1,572,000 for the withholding tax related to Kewaunee Labway India Pvt. Ltd. as of October 31, 2024 and April 30, 2024, respectively.

M. Defined Benefit Pension Plans

During the year ended April 30, 2024, the Company settled its non-contributory defined benefit plans by transferring approximately $17.8 million of pension obligations through the purchase of group annuity contracts for all remaining liabilities under the pension plan. In connection with the transfer, the Company contributed $287,000 in cash to the pension plans, which was intended to fully fund the Company’s remaining defined benefit pension liabilities. These non-contributory defined benefit pension plans, which covered some domestic employees, were amended as of April 30, 2005. Following this amendment, no further benefits have been earned under the plans, and no additional participants have been added. The defined benefit plan for salaried employees provides pension benefits that are based on each employee's years of service and average annual compensation during the last ten consecutive calendar years of employment as of April 30, 2005. The benefit plan for hourly employees provides benefits at stated amounts based on years of service as of April 30, 2005.

There wereno Company contributions paid to the plans for the three and six months ended October 31, 2023. The Company assumed an expected long-term rate of return of 7.75% for the period ended October 31, 2023.

Pension expense consisted of the following (in thousands):

N. Segment Information

The Company's operations are classified intotwo business segments: Domestic and International. The Domestic business segment principally designs, manufactures, and installs scientific and technical furniture, including steel and wood laboratory cabinetry, fume hoods, flexible systems, worksurfaces, workstations, workbenches, and computer enclosures. The International business segment, which consists of the Company's foreign subsidiaries, provides products and services, including facility design, detailed engineering, construction, and project management from the planning stage through testing and commissioning of laboratories. Intersegment transactions are recorded at normal profit margins. All intercompany balances and transactions have been eliminated. Certain corporate expenses shown below have not been allocated to the business segments.

The following tables provide financial information by business segment and unallocated corporate expenses for the periods ended October 31, 2024 and 2023 (in thousands):

O. New Accounting Standards

In November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures," which improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company adopted this standard effective May 1, 2024 for its fiscal year 2025 annual reporting and subsequent interim periods. The adoption of this standard did not have a significant impact on the Company's consolidated financial position or results of operations.

In December 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740) - Improvements for Income Tax Disclosures," which requires public business entities to, on an annual basis, (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold. This ASU also provides for additional disclosure requirements to provide clarity for investors related to income tax disclosures. This guidance is effective for annual periods beginning after December 15, 2024. The Company will adopt this standard in fiscal year 2026. The Company does not expect the adoption of this standard to have a significant impact on the Company's consolidated financial position or results of operations.

P. Subsequent Events

Securities Purchase Agreement

On November 1, 2024 (the “Closing Date”), the Company completed an acquisition of Nu Aire. The Company purchased all of the outstanding capital stock of Nu Aire for $55.0 million in the aggregate, subject to certain customary adjustments for debt, cash, transaction expenses and net working capital (the “Transaction”).

Based on the terms of the transaction, $1.0 million of the purchase price is being held in a working capital escrow account to satisfy amounts payable to any party pursuant to certain post-closing true-up mechanisms with respect to cash, debt, transaction expenses and net working capital. In addition, $32.0 million of the purchase price payable at closing of the Transaction was paid in cash, which cash was funded, in part, through the Revolving Credit Facility (as defined below) and Term Loan (as defined below), provided to the Company by PNC Bank, National Association (“PNC”). The remaining $23.0 million of the purchase price payable at closing of the Transaction was funded pursuant to subordinated seller notes (the “Seller Notes”) in an aggregate amount of $23.0 million.

Loan Agreement

On the Closing Date, the Company entered into a Loan Agreement (the “Loan Agreement”) with PNC. The loans governed by the Loan Agreement include (i) a $20.0 million committed senior secured revolving line of credit facility (the “Revolving Credit Facility”), which contains an option to increase the facility upon request by the Company and approval by PNC, in its discretion, by an additional $10.0 million; and (ii) a $15.0 million term loan (the “Term Loan”). The Revolving Credit Facility and Term Loan mature on November 1, 2029. The Revolving Credit Facility and the Term Loan can be paid at any time without penalty.

For the Revolving Credit Facility, the interest rate will be selected by the Company at each advance from one of two options. Option one is a base rate option. Option 2 is a daily secured overnight financing rate. There is an unused fee of 0.15% to 0.25%, determined by the ratio of senior debt to the Company’s EBITDA, of the unused daily balance of the Revolving Credit Facility. For the Term Loan, the principal will be paid in 60 substantially equal monthly installments commencing on the Closing Date. Interest will be paid at the same time and calculated on the outstanding principal balance at an interest rate equal to the rate under Option 2 of the Revolving Credit Facility.

The Loan Agreement has customary reporting covenants. The principal financial covenants require that (1) the Company maintain on a consolidated basis a ratio of senior funded indebtedness to EBITDA of not more than 2.50 to 1.00 and (2) a fixed charge coverage ratio of at least 1.20 to 1.00. The Loan Agreement also contains covenants prohibiting under certain circumstances (1) the incurrence of certain indebtedness, (2) the granting of security interests by the Company to persons other than PNC, (3) the delivery of guaranties for debts of third parties, and (4) certain transactions not in the ordinary course of business.

Seller Notes

As noted above, $23.0 million of the purchase price was paid by the issuance of the Seller Notes entered into by and between the Company and each seller on the Closing Date. The Seller Notes will accrue interest at 8% per annum and will mature on

November 1, 2027, at which time the outstanding principal amount and all unpaid accrued interest will become due and payable by the Company.

The Seller Notes may be prepaid, in full or in part, any time without prepayment penalty, premium, or other fee; subject, however, to each seller’s obligation not to accept any prepayment under the Seller Notes until all Secured Claims (as defined in the Seller Notes) have been paid to PNC. The Company’s obligations under the Seller Notes are secured by a security agreement entered into between the Company and each seller, pursuant to which the sellers have the option to cause the Company to issue shares of the Company’s common stock to the sellers, solely upon the occurrence of an event of default.

The rights of the sellers to receive payments under the Seller Notes are subordinate to the rights of PNC under the Loan Agreement pursuant to a separate subordination agreement that the sellers entered into with PNC on the Closing Date in connection with the Transaction.