Kewaunee Scientific: Backlog Surge and Strategic Expansion Fuel Outlook (KEQU) - KEQU Stock Research Report

## Executive Summary / Key Takeaways * Kewaunee Scientific (NASDAQ: KEQU) is undergoing a significant transformation, leveraging the recent Nu Aire acquisition to expand its laboratory and technical product portfolio and market reach. * Fiscal Year 2025 results showed robust top-line growth (18% increase to $240.5M), driven primarily by the Domestic segment's performance, including the contribution from Nu Aire. * A record order backlog of $214.6 million at April 30, 2025, signals strong revenue visibility and potential growth into fiscal year 2026, with over 93% expected to ship within the year. * Operational improvements and the integration of Nu Aire contributed to a meaningful increase in gross profit margin (28.6% in FY25), although integration costs pressured net earnings in the short term. * While facing integration risks, supply chain challenges, and market volatility common in the construction-dependent industry, KEQU's expanded product offering, global presence, and healthy backlog position it to capitalize on sustained demand in life sciences, healthcare, and education. ## A Century in the Lab: Kewaunee Scientific's Strategic Evolution For over a century, Kewaunee Scientific has been a foundational provider of the critical infrastructure that underpins scientific discovery and healthcare delivery. Founded in 1906, the company has built its business around the design, manufacture, and installation of specialized laboratory, healthcare, and technical furniture. This includes essential products like steel and wood casework, fume hoods, adaptable modular systems, and specialized work surfaces. Operating within the project-based laboratory and healthcare building construction industry, KEQU's business is inherently tied to the pace of new construction and renovation, often involving long lead times and fixed-price contracts that expose the company to material cost fluctuations and project delays. Recognizing the evolving needs of modern laboratories and the competitive dynamics of the market, Kewaunee has strategically expanded its capabilities. A pivotal moment in this evolution was the acquisition of Nu Aire, Inc. on November 1, 2024. This move was designed to significantly broaden KEQU's product portfolio beyond traditional furniture to include highly specialized equipment such as biological safety cabinets, CO2 incubators, and ultralow freezers. This strategic expansion aims to create a more comprehensive offering for end-users and accelerate KEQU's vision of becoming a market leader by leveraging Nu Aire's established product lines and distribution channels, particularly in regions where Kewaunee previously had limited presence. ## Technological Foundation and Expanded Capabilities Kewaunee's competitive positioning is partly built on its product design and manufacturing expertise. Its traditional offerings include adaptable modular systems, which provide laboratories with flexibility to reconfigure spaces as research needs change. This modularity offers a tangible benefit in dynamic research environments, providing an estimated 20% greater flexibility compared to less adaptable alternatives. While specific quantitative performance metrics for all of KEQU's core technologies like fume hood efficiency or casework durability relative to competitors are not extensively detailed, the company's long history suggests a focus on robust, functional design tailored to demanding laboratory environments. The Nu Aire acquisition significantly enhances KEQU's technological footprint. Nu Aire is known for its specialized biological safety cabinets and environmental control equipment critical for life sciences research. These products are complementary to KEQU's furniture, allowing the combined entity to offer more integrated laboratory solutions. While direct comparative performance metrics for Nu Aire's specific technologies against all rivals are not provided, the strategic intent is clear: to offer products that meet the rigorous demands of biotech and pharmaceutical labs. The competitive landscape analysis suggests that while larger competitors like Thermo Fisher Scientific (TICKER:TMO) and Danaher (TICKER:DHR) may lead in certain high-tech instrument areas or overall R&D investment, Nu Aire's products, when combined with KEQU's infrastructure, aim to provide a compelling value proposition, potentially offering benefits like lower operating costs in specific applications compared to some alternatives. KEQU's R&D expenditures were approximately $919,000 in fiscal year 2025, consistent with the prior year, indicating ongoing investment in product development, though specific project goals or quantifiable targets for new technologies were not disclosed. ## Financial Performance: Acquisition Impact and Margin Expansion Fiscal year 2025 marked a period of significant growth for Kewaunee Scientific, largely influenced by the Nu Aire acquisition. Total net sales increased by 18% to $240.5 million, up from $203.8 million in fiscal year 2024. This growth was predominantly driven by the Domestic segment, where sales surged by 30.7% to $179.4 million. Management explicitly attributed this substantial increase in Domestic sales to the inclusion of Nu Aire's results since the November 1, 2024 acquisition date. Nu Aire contributed $37.8 million in revenue during the six months ended April 30, 2025. In contrast, the International segment experienced an 8.2% decrease in sales, falling to $61.1 million from $66.5 million in the prior year. This decline was primarily due to customer site delays in India, which pushed back the timing of deliveries and revenue recognition. Despite the mixed segment performance, the company saw a notable improvement in overall gross profit margin, which rose to 28.6% in fiscal year 2025 from 25.5% in fiscal year 2024. This expansion was primarily driven by the Domestic operations, benefiting from the integration of Nu Aire, improved manufacturing productivity, and effective cost-containment measures. This margin improvement is a key operational achievement, suggesting enhanced efficiency in product delivery.

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However, the increase in operating expenses outpaced revenue growth, rising to $51.1 million (21.2% of sales) in fiscal year 2025 from $33.8 million (16.6% of sales) in fiscal year 2024. This increase was largely attributable to the Nu Aire acquisition, including significant professional and consulting fees ($2.1M increase) and higher SGA wages ($1.44M increase), as well as increased international operating expenses. The company also saw an increase in interest expense, rising to $3.21 million from $1.80 million, due to elevated borrowing levels associated with the acquisition financing. The successful annuitization of the pension obligation in fiscal year 2024 eliminated a $4.18 million pension expense recognized in that year, contributing to a more favorable comparison in operating results excluding acquisition impacts. The combined effect of these factors resulted in net earnings of $11.4 million, or $3.83 per diluted share, in fiscal year 2025, a decrease from $18.75 million, or $6.38 per diluted share, in fiscal year 2024. While the top line and gross margin showed strength, the significant costs associated with the Nu Aire acquisition and integration, coupled with higher interest expense, weighed on the bottom line in the short term.

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## Liquidity, Capital Structure, and Shareholder Focus Kewaunee's liquidity is primarily supported by cash generated from operations and its credit facilities. Operating activities provided $14.78 million in cash in fiscal year 2025. The Nu Aire acquisition significantly impacted the capital structure and financing activities. The company terminated its previous Mid Cap Revolving Credit Facility and entered into a new Loan Agreement with PNC Bank (TICKER:PNC), including a $20 million Revolving Credit Facility (with no advances outstanding at April 30, 2025) and a $15 million Term Loan. The acquisition was funded through a combination of cash, the Term Loan, and $23 million in subordinated seller notes. This resulted in increased long-term debt, and the debt-to-equity ratio rose to 0.78 at April 30, 2025 (or 0.57-to-1 net of the sale-leaseback liability) from 0.20 a year prior.

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The company was in compliance with its financial covenants under the new Loan Agreement as of April 30, 2025. Working capital increased to $64.7 million at April 30, 2025, from $56.0 million, supporting ongoing business needs.

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Management believes these sources of funds are sufficient to support operations and planned capital expenditures of approximately $7 million in fiscal year 2026. The company also continues to execute its share repurchase program, which was amended in March 2025 to authorize the repurchase of an additional 100,000 shares, demonstrating a commitment to shareholder value creation and offsetting potential dilution from equity awards. ## Competitive Landscape and Strategic Positioning The laboratory and healthcare furniture industry is highly competitive, with price, product performance, and customer service being key deciding factors, often involving competitive public bidding. KEQU competes with a range of players, from large diversified conglomerates with laboratory divisions like Thermo Fisher Scientific (TICKER:TMO) and Danaher Corporation (TICKER:DHR) to more specialized providers like Agilent Technologies (TICKER:A) in certain product areas. Compared to larger rivals, KEQU operates at a smaller scale, which is reflected in its financial metrics. For instance, KEQU's TTM gross profit margin of 28.63% trails TMO's 41%, DHR's 60%, and A's 54%, indicating potentially lower pricing power or higher manufacturing costs relative to revenue. Similarly, KEQU's TTM operating margin of 7.39% is significantly lower than TMO (17%), DHR (20%), and A (23%). This highlights a key challenge for KEQU in translating its revenue into operating profit compared to more efficient or higher-value competitors. KEQU's strategic response involves leveraging its specific strengths: its long-standing relationships with dealers and distributors (accounting for 41% of sales in FY25), its global manufacturing footprint (Statesville, Minnesota, India), and its ability to provide customized solutions. The Nu Aire acquisition directly addresses competitive pressures by expanding the product offering, particularly in high-demand life sciences equipment, and broadening the distribution network. While competitors like TMO invest heavily in R&D, leading to faster product cycles, KEQU's focus on adaptable systems and now specialized equipment aims to differentiate through flexibility and a more integrated solution set. However, KEQU faces vulnerabilities. Its R&D investment is lower than larger competitors, potentially leading to slower technological advancements in certain areas. Dependence on a few large channel partners (41% of sales from three domestic partners in FY25) poses a significant risk if relationships change. The volatility inherent in the construction industry and reliance on government funding for some customers also expose KEQU to market fluctuations that larger, more diversified competitors might weather more easily. Supply chain disruptions and raw material price increases remain ongoing concerns that can impact profitability, especially given the practice of quoting firm prices for future delivery. ## Outlook and Forward Indicators A critical indicator for Kewaunee's future performance is its robust order backlog. At April 30, 2025, the backlog stood at a record $214.6 million, a substantial increase from $155.6 million a year prior. This 38% increase provides significant revenue visibility for fiscal year 2026, with the company estimating that not less than 93% of this backlog will be shipped during the year. This strong backlog suggests sustained demand across KEQU's end markets, including healthcare, education, and life sciences, aligning with broader industry trends like growth in data center, healthcare, and education construction spend. Management expresses optimism, citing the healthy backlog, improved manufacturing capabilities, and the strategic benefits of the Nu Aire acquisition as positioning the company well. They are focused on capitalizing on long-term market trends and improving profitability as the integration costs related to Nu Aire normalize. However, the outlook remains subject to potential delays in customer projects and fluctuations in raw material costs, factors largely outside the company's direct control. ## Conclusion Kewaunee Scientific is navigating a period of strategic expansion marked by the transformative Nu Aire acquisition. While the integration process has introduced short-term financial pressures through increased operating expenses and debt, it has also significantly broadened KEQU's product portfolio and market reach, particularly in the growing life sciences sector. The record order backlog provides a strong foundation for revenue growth in fiscal year 2026, signaling continued demand for the company's expanded offerings. For investors, the core thesis centers on KEQU's ability to successfully integrate Nu Aire, realize anticipated synergies, and leverage its enhanced capabilities and healthy backlog to drive sustained profitability in a competitive and sometimes volatile industry. Key factors to monitor include the progress and costs of the Nu Aire integration, the company's ability to manage supply chain and raw material cost pressures, the execution of its substantial backlog, and its competitive positioning against larger, more technologically advanced rivals. While challenges remain, KEQU's strategic moves and strong demand indicators suggest potential for future growth and improved operational performance.