STANDEX INTERNATIONAL CORP/DE/ Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
Statements contained in this Quarterly Report that are not based on historical facts are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as "should," "could," "may," "will," "expect," "believe," "estimate," "anticipate," "intend," "continue," or similar terms or variations of those terms or the negative of those terms. There are many factors that affect the Company's business and the results of its operations and that may cause the actual results of operations in future periods to differ materially from those currently expected or anticipated. These factors include, but are not limited to: the impact of pandemics such as the current coronavirus on employees, our supply chain, and the demand for our products and services around the world; materially adverse or unanticipated legal judgments, fines, penalties or settlements; conditions in the financial and banking markets, including fluctuations in exchange rates and the inability to repatriate foreign cash; domestic and international economic conditions, including the impact, length and degree of economic downturns on the customers and markets we serve and more specifically conditions in the automotive, construction, aerospace, defense, transportation, food service equipment, consumer appliance, energy, oil and gas and general industrial markets; lower-cost competition; the relative mix of products which impact margins and operating efficiencies in certain of our businesses; the impact of higher raw material and component costs, particularly steel, certain materials used in electronics parts, petroleum based products, and refrigeration components; the impact of higher transportation and logistics costs, especially with respect to transportation of goods from
Asia; the impact of inflation on the costs of providing our products and services; an inability to realize the expected cost savings from restructuring activities including effective completion of plant consolidations, cost reduction efforts including procurement savings and productivity enhancements, capital management improvements, strategic capital expenditures, and the implementation of lean enterprise manufacturing techniques; the potential for losses associated with the exit from or divestiture of businesses that are no longer strategic or no longer meet our growth and return expectations; the inability to achieve the savings expected from global sourcing of raw materials and diversification efforts in emerging markets; the impact on cost structure and on economic conditions as a result of actual and threatened increases in trade tariffs; the inability to attain expected benefits from acquisitions and the inability to effectively consummate and integrate such acquisitions and achieve synergies envisioned by the Company; market acceptance of our products; our ability to design, introduce and sell new products and related product components; the ability to redesign certain of our products to continue meeting evolving regulatory requirements; the impact of delays initiated by our customers; our ability to increase manufacturing production to meet demand including as a result of labor shortages; and potential changes to future pension funding requirements. In addition, any forward-looking statements represent management's estimates only as of the day made and should not be relied upon as representing management's estimates as of any subsequent date. While the Company may elect to update forward-looking statements at some point in the future, the Company and management specifically disclaim any obligation to do so, even if management's estimates change. Overview We are a diversified industrial manufacturer with leading positions in a variety of products and services that are used in diverse commercial and industrial markets. We have seven operating segments aggregated into five reportable segments: Electronics, Engraving, Scientific, Engineering Technologies, and Specialty Solutions. Three operating segments are aggregated into Specialty Solutions. Our segments differentiate themselves by collaborating with our customers in order to develop and deliver custom solutions or engineered components that solve problems for our customers or otherwise meet their needs (a business model we refer to as "Customer Intimacy"). Overall management, strategic development and financial control are led by the executive staff at our corporate headquarters located in Salem, New Hampshire. Our long-term strategy is to enhance shareholder value by building larger, more profitable focused industrial platforms through our Standex Value Creation System that assists management in meeting specific corporate and business unit financial and strategic performance goals in order to create, improve, and enhance shareholder value. In so doing, we expect to focus our financial assets and managerial resources on our higher growth and operating margin businesses while considering divestiture of those businesses that we feel are not strategic or do not meet our growth and return expectations. 25 -------------------------------------------------------------------------------- The Standex Value Creation System is a methodology which provides standard work and consistent tools used throughout the Company in order to achieve our organization's goals. The Standex Value Creation System employs four components: Balanced Performance Plan, Growth Disciplines, Operational Excellence, and Talent Management. The Balanced Performance Plan process aligns annual goals throughout the Company and provides a standard reporting, management and review process. It is focused on setting, tracking and reviewing annual and quarterly targets that support our short and long-term goals. The Growth Disciplines use a standard playbook of tools and processes including market maps, market tests and growth laneways to identify, explore and execute on opportunities that expand the business organically and through acquisitions. Operational Excellence also employs a standard playbook of tools and processes, based on Lean, to improve operating execution (effectiveness), eliminate waste (efficiency) and thereby improve profitability, cash flow and customer satisfaction. Finally, Talent Management is an organizational development process that provides recruitment, training, development, and succession planning for employees throughout our worldwide organization. Through the use of our Standex Value Creation System, we have developed a balanced approach to value creation. We intend to continue investing acquisition capital in high margin and growth businesses, and we will continue to support all of our businesses as they enhance value through deployment of the Standex Valuation Creation System. It is our objective to grow larger and more profitable business units through both organic initiatives and acquisitions. We seek to identify and implement organic growth initiatives such as new product development, geographic expansion, the introduction of products and technologies into new markets, key accounts and strategic sales channel partners, and the introduction of new technologies into existing markets. To advance this strategy, we recently established an innovation and technology function focused on accelerating new growth opportunities for emerging technologies, including our ongoing development project with a global solar energy company. Also, we have a long-term objective to create sizable business platforms by adding strategically aligned or "bolt on" acquisitions to strengthen the individual businesses, create both sales and cost synergies with our core business platforms, and accelerate their growth and margin improvement. We look to create both sales and cost synergies within our core business platforms, accelerate growth and improve margins. We have a particular focus on identifying and investing in opportunities that complement our products and will increase the global presence and capabilities of our businesses. From time to time, we have divested, and likely will continue to divest, businesses that we feel are not strategic or do not meet our growth and return expectations.
As part of our ongoing strategy:
? In the third quarter of fiscal 2022, we acquired Sensor Solutions, a
designer and manufacturer of custom standard magnetic sensor products
including hall effect switch and interlock sensors, linear and rotary sensors,
and specialized sensors. Sensor Solutions customers in the automotive industry,
industrial, medical, aerospace, military and consumer electronics end markets
are a strategic complement and extend our presence in these markets. Sensor
Solution’s operates a light manufacturing facility in
are reported within our Electronics segment.
? In the third quarter of fiscal 2021, we sold
(“Enginetics”), our jet engine components business reported within our
the engineering technologies segment, for
aerospace engine component manufacturing company. This sale allowed us
focus on growth and higher margin opportunities in our core business
forming a solutions company serving space, commercial aviation and
defense end markets. We received
a loss on the sale of
? In the first quarter of fiscal year 2021, we acquired
Renco Electronics("Renco"), a designer and manufacturer of customized standard magnetics
components and products including transformers, inductors, chokes and coils
for power and RF applications. Renco’s end markets and customer base in the regions
such as consumer and industrial applications are highly complementary to our
existing business with the potential to further expand the key account
relationships and capitalize on cross-selling opportunities. Renco operates
one manufacturing facility in
Floridaand is supported by contract manufacturers in Asia. Renco's results are reported within our Electronics segment. As a result of our portfolio moves over the past several years, we have transformed Standexto a company with a more focused group of businesses selling customized solutions to high value end markets via a compelling customer value proposition. The narrowing of the portfolio allows for greater management focus on driving operational disciplines and positions us well to continue benefitting from the economic rebound associated with the emergence from the end of the COVID-19 crisis and to use our cash flow from operations to invest selectively in our ongoing pipeline of organic and inorganic opportunities. We develop "Customer Intimacy" by utilizing the Standex Growth Disciplines to partner with our customers in order to develop and deliver custom solutions or engineered components. By partnering with our customers during long-term product development cycles, we become an extension of their development teams. Through this Partner, Solve, Deliver® approach, we are able to secure our position as a preferred long-term solution provider for our products and components. This strategy results in increased sales and operating margins that enhance shareholder returns. 26 -------------------------------------------------------------------------------- Standex Operational Excellence drives continuous improvement in the efficiency of our businesses, both on the shop floor and in the office environment. We recognize that our businesses are competing in a global economy that requires us to improve our competitive position. We have deployed a number of management competencies to drive improvements in the cost structure of our business units including operational excellence through lean enterprise, the use of low-cost manufacturing facilities, the consolidation of manufacturing facilities to achieve economies of scale and leveraging of fixed infrastructure costs, alternate sourcing to achieve procurement cost reductions, and capital improvements to increase productivity. The Company's strong historical cash flow has been a cornerstone for funding our capital allocation strategy. We use cash flow generated from operations to fund investments in capital assets to upgrade our facilities, improve productivity and lower costs, invest in the strategic growth programs described above, including organic growth and acquisitions, and to return cash to our shareholders through payment of dividends and stock buybacks. Restructuring expenses reflect costs associated with our efforts of continuously improving operational efficiency and expanding globally in order to remain competitive in our end user markets. We incur costs for actions to size our businesses to a level appropriate for current economic conditions, improve our cost structure, enhance our competitive position and increase operating margins. Such expenses include costs for moving facilities to locations that allow for lower fixed and variable costs, external consultants who provide additional expertise starting up plants after relocation, downsizing operations because of changing economic conditions, and other costs resulting from asset redeployment decisions. Shutdown costs include severance, benefits, stay bonuses, lease and contract terminations, asset write-downs, costs of moving fixed assets, and moving and relocation costs. Vacant facility costs include maintenance, utilities, property taxes and other costs. Because of the diversity of the Company's businesses, end user markets and geographic locations, management does not use specific external indices to predict the future performance of the Company, other than general information about broad macroeconomic trends. Each of our individual business units serves niche markets and attempts to identify trends other than general business and economic conditions which are specific to its business and which could impact its performance. Those units report pertinent information to senior management, which uses it to the extent relevant to assess the future performance of the Company. A description of any such material trends is described below in the applicable segment analysis. We monitor a number of key performance indicators ("KPIs") including net sales, income from operations, backlog, effective income tax rate, gross profit margin, and operating cash flow. A discussion of these KPIs is included below. We may also supplement the discussion of these KPIs by identifying the impact of foreign exchange rates, acquisitions, and other significant items when they have a material impact on a specific KPI. We believe the discussion of these items provides enhanced information to investors by disclosing their impact on the overall trend which provides a clearer comparative view of the KPI, as applicable. For discussion of the impact of foreign exchange rates on KPIs, we calculate the impact as the difference between the current period KPI calculated at the current period exchange rate as compared to the KPI calculated at the historical exchange rate for the prior period. For discussion of the impact of acquisitions, we isolate the effect on the KPI amount that would have existed regardless of such acquisition. Sales resulting from synergies between the acquisition and existing operations of the Company are considered organic growth for the purposes of our discussion.
Unless otherwise indicated, references to years refer to fiscal years.
Impact of the COVID-19 pandemic on the business
Given the global nature of our business and the number of our facilities worldwide, we continue to be impacted globally by COVID-19 related issues. We have taken effective action around the world to protect our health and safety, continue to serve our customers, support our communities and manage our cash flows. Our priority was and remains the health and safety of all of our employees. Each of our facilities is following safe practices as defined in their local jurisdictions as well as sharing experiences and innovative ways of overcoming challenges brought on by the crisis during updates with global site leaders. We are rigorously following health protocols in our plants, including changing work cell configurations and revising shift schedules when appropriate, in order to do our best to maintain operations. Initially, we experienced revenue reductions in many of our businesses due to the impact that the pandemic had on our customers. Conversely, public and private sector responses to COVID-19 vaccine distribution, especially in
the United States, have resulted in increased sales of scientific refrigeration equipment to customers within our Scientific reporting segment. While overall customer demand has rebounded from the impact of the pandemic, more recently we have been impacted by (i) supply chain shortages, (ii) increased material costs and (iii) labor shortages, especially in North America. Like other industrial manufacturers, we are impacted by the impact of rising inflation which we attempt to manage through appropriate pricing actions and enhanced production efficiency measures. 27 -------------------------------------------------------------------------------- We exited the third quarter of fiscal year 2022 with $133.9 millionin cash and $199.7 millionof borrowings under our revolving credit facility. Our leverage ratio covenant, as defined in our revolving credit agreement, was 1.15 to 1 and allowed us the capacity to borrow an additional $299.5 millionat March 31, 2022. We believe that we have sufficient liquidity around the world and access to financing to execute on our short and long-term strategic plans.
Finally, we continue to monitor our ability to participate in all government assistance programs made available to us at each of our global locations and to participate in such programs as available and appropriate.
Results from continuing operations
Three Months Ended Nine Months Ended March 31, March 31, (In thousands, except percentages) 2022 2021 2022 2021 Net sales
$ 189,281 $ 172,216 $ 550,600 $ 479,797Gross profit margin 36.1 % 36.4 % 36.9 % 36.6 % Income from operations 24,470 5,650 69,071 36,743 Three Months Ended Nine Months Ended (In thousands) March 31, 2022 March 31, 2022 Net sales, prior year period $ 172,216 $ 479,797 Components of change in sales: Organic sales change 25,012
Effect of acquisitions 394
Effect of business divestitures (3,901 ) (9,239 ) Effect of exchange rates (4,440 ) (2,975 ) Net sales, current period $ 189,281 $ 550,600 Net sales increased in the third quarter of fiscal year 2022 by
$17.1 millionor 9.9% when compared to the prior year quarter. Organic sales increased $25.0 millionor 14.5%, primarily due to pricing actions and strong demand in our Electronics segment, while foreign currency had a $4.4 millionor 2.6% negative impact on sales. Sales in the prior year quarter included revenue of $3.9 millionrelated to our divested Engineticsbusiness. The Sensor Solutions acquisition in the third quarter of fiscal year 2022 added $0.4 millionin sales for the year. Net sales increased in the nine months ended March 31, 2022by $70.8 millionor 14.8% when compared to the prior year period. Organic sales increased $82.6 millionor 17.2%, primarily due to pricing actions and strong demand in our Electronics and Scientific segments, while foreign currency had a $3.0 millionor 0.6% negative impact on sales. Sales in the prior year period included revenue of $9.2 millionrelated to our divested Engineticsbusiness. The Sensor Solutions acquisition in the third quarter of fiscal year 2022 added $0.4 millionin sales for the year. Gross Profit Margin
Our gross margin for the third quarter of fiscal 2022 was 36.1%, down slightly from the prior year quarter gross margin of 36.4%. This decline was primarily the result of project mix and raw material and ocean freight cost headwinds, offset by organic increases in sales and pricing and productivity initiatives in our segments.
Our gross margin for the nine months ended
March 31, 2022was 36.9%, which increased from the prior year quarter's gross margin of 36.6%. This increase is a result of organic sales increases and price and productivity initiatives, partially offset by raw material and ocean freight cost headwinds, a one-time project related charge at Engineering Technologies in the first quarter, along with production decreases due to a temporary work stoppage in our Specialty Solutions segment which was resolved during the first quarter.
Selling, general and administrative expenses
Selling, General, and Administrative ("SG&A") expenses for the third quarter of fiscal year 2022 were
$42.3 million, or 22.4% of sales, compared to $41.7 million, or 24.2% of sales, during the prior year quarter. SG&A expenses during the quarter were impacted by increased compensation related accruals and research and development costs. 28 -------------------------------------------------------------------------------- SG&A expenses for the nine months ended March 31, 2022were $128.6 million, or 23.4% of sales, compared to $120.8 million, or 25.2% of sales, during the nine months ended March 31, 2021. SG&A expenses during the period were impacted by increases in compensation related accruals, distribution expense of approximately $2.7 millionassociated with the customer mix and higher organic sales volume and increased research and development costs. Restructuring Charges
We incurred restructuring expenses of
We expect to incur restructuring costs of approximately
$1.5 millionthroughout the remainder of fiscal year 2022, as we continue to focus our efforts to reduce cost and improve productivity across our businesses, particularly through headcount reductions and productivity initiatives.
We incurred acquisition related expenses of
$0.4 millionin the third quarter of fiscal year 2022 and $1.6 millionfor the nine months ended March 31, 2022. Acquisition related expenses typically consist of due diligence, integration, and valuation expenses incurred in connection with recent or pending acquisitions. Income from Operations Income from operations for the third quarter of fiscal year 2022 was $24.5 million, compared to $5.7 millionduring the prior year quarter. The increase of $18.8 million, or 333.1%, is primarily due to the impact of the loss recognized on the sale of our Engineticsbusiness in the third quarter of fiscal year 2021, organic sales growth, productivity and cost savings initiatives, offset by increases in material, logistics and labor costs. Income from operations for the nine months ended March 31, 2022was $69.1 million, compared to $36.7 millionduring the prior year quarter. The increase of $32.3 million, or 88.0%, is primarily due to the impact of the sale of our Engineticsbusiness in the third quarter of fiscal year 2021, organic sales growth, productivity and cost savings initiatives, offset by increases in material costs. Interest Expense Interest expense for the third quarter of fiscal year 2022 was $1.2 million, a 6.0% decrease from interest expense of $1.3 millionduring the prior year quarter. Interest expense for the nine months ended March 31, 2022was $4.5 million, a 1.8% increase from interest expense of $4.4 millionduring the prior year. Our effective interest rate in the third quarter of fiscal year 2022 was 2.63%. Income Taxes Our effective tax rate from continuing operations for the third quarter of fiscal year 2022 was 24.0% compared with 56.3% for the prior year quarter. The tax rate was impacted in the current period by the following items: (i) a discrete benefit related to a reduction in an uncertain tax position, (ii) a discrete benefit related to a return to provision adjustment, and (iii) the jurisdictional mix of earnings. The tax rate was impacted in the prior period by the following items: (i) reduction of global intangible low-taxed income, (ii) the jurisdictional mix of earnings and (iii) the establishment of a valuation allowance against our deferred tax asset attributable to the divestiture of Enginetics Corporationduring the quarter. The divestiture of the Engineticsbusiness gave rise to a capital loss carryforward, which, if unused, will expire after 5 years. Capital losses are allowed only to the extent of capital gains; however, because we did not have capital gains in the prior period or the applicable carryback period, the capital loss was carried forward. We believe it is more likely than not that the capital loss carryforward will expire unutilized. Therefore, a full valuation allowance was established, which negatively impacted the effective tax rate. The valuation allowance could be released if it is determined that we will have sufficient taxable income of the appropriate character within the carryforward period. Our effective tax rate from continuing operations for the first nine months of the fiscal year ending June 30, 2022was 24.5% compared with 25.3% for the prior year period. The tax rate was impacted in the current period by the following items: (i) a discrete tax benefit related to equity compensation, (ii) a discrete benefit related to a reduction in an uncertain tax position, (iii) a discrete benefit related to a return to provision adjustment, (iv) the jurisdictional mix of earnings, and (v) foreign withholding taxes. 29 --------------------------------------------------------------------------------
Backlog includes all active or open orders for goods and services. Backlog also includes any future deliveries based on executed customer contracts, so long as such deliveries are based on agreed upon delivery schedules. Backlog orders are not necessarily an indicator of future sales levels because of variations in lead times and customer production demand pull systems, with the exception of Engineering Technologies. Customers may delay delivery of products or cancel orders prior to shipment, subject to possible cancellation penalties. Due to the nature of long-term agreements in the Engineering Technologies segment, the timing of orders and delivery dates can vary considerably resulting in significant backlog changes from one period to another. As of March 31, 2022 As of March 31, 2021 Backlog Backlog Total Backlog under 1 year Total Backlog under 1 year Electronics
$ 164,786 $ 151,033 $ 97,241 $ 96,331Engraving 26,097 19,868 20,108 13,901 Scientific 6,542 6,542 9,344 9,344 Engineering Technologies 55,564 41,197 67,615 39,574 Specialty Solutions 51,948 48,342 20,776 17,957 Total $ 304,937 $ 266,982 $ 215,084 $ 177,107Total backlog realizable under one year increased $89.9 million, or 50.7%, to $267.0 millionat March 31, 2022from $177.1 millionat March 31, 2021. Electronics total backlog increased 67% in all geographic markets in response to the beginning of the global recovery from the pandemic and new business opportunities, plus an additional $2.4 milliondue to the acquisition of Sensor Solutions. Backlog declines in the Engineering Technologies segment are primarily due to project related timing, particularly in the space end market.
The evolution of the order book at less than one year is as follows (in thousands):
As of (In thousands)
March 31, 2022
Backlog less than 1 year, prior year period
Components of change in the order book: organic change
87,455 Effect of acquisitions 2,420
Backlog less than one year, current period
Segment Analysis Overall Looking forward to the remainder of fiscal year 2022, we expect to be well positioned to build on fiscal year 2021 and the nine months ended
March 31, 2022momentum, with anticipated year over year improvement in key financial metrics, supported by orders growth and productivity initiatives.
Overall, for the fourth quarter of fiscal 2022, we expect:
? continued end market strength in relay and reed switch products as well as
growth in magnetics in our Electronics segment; ? an increase in soft trim demand in our Engraving segment;
? a decline in demand for storage of COVID-19 related vaccines in our
segment; ? continued strength in the commercial aviation market and growth in the space market in our Engineering Technologies segment; ? strong demand in the food service equipment market in our Specialty Solutions segment; and
? a delay in sales due to the impact of the COVID-related containment in
primarily in our Electronics segment. 30
Electronics GroupThree Months Ended Nine Months Ended March 31, % March 31, % (In thousands, except percentages) 2022 2021 Change 2022 2021 Change Net sales $ 79,889 $ 65,08522.7 % $ 232,351 $ 180,52428.7 % Income from operations 19,194 12,364 55.2 % 54,624 30,861 77.0 % Operating income margin 24.0 % 19.0 % 23.5 % 17.1 % Net sales in the third quarter of fiscal year 2022 increased $14.8 million, or 22.7%, when compared to the prior year quarter. Organic sales increased by $17.6 millionor 27.1%, reflecting a broad-based geographical recovery with continued strong demand for all product groups as well as new business opportunities. Sensor Solutions was acquired in the third quarter of fiscal year 2022, adding $0.4 millionin sales for the quarter. The foreign currency impact decreased sales by $3.2 million, or 5.0%. Income from operations in the third quarter of fiscal year 2022 increased by $6.8 million, or 55.2%, when compared to the prior year quarter. The operating income increase was the result of organic sales growth, various price actions and cost saving initiatives, partially offset by material and freight cost increases. Net sales in the nine months ended March 31, 2022increased $51.8 million, or 28.7%, when compared to the prior year period. Organic sales increased by $54.4 millionor 30.1%, reflecting a broad-based geographical recovery with a strengthening in demand for all product groups including relays in renewable energy and electric vehicle applications as well as reed switch demand in transportation end markets and the impact of pricing actions. The acquisition of Sensor Solutions during the third quarter of fiscal year 2022 added $0.4 millionin sales. The foreign currency impact decreased sales by $2.9 million, or 1.6%. Income from operations in the nine months ended March 31, 2022increased by $23.8 million, or 77.0% when compared to the prior year period. The operating income increase was the result of organic sales growth, various price actions and cost saving initiatives, partially offset by material and freight cost increases. Sequentially during the fourth quarter of fiscal year 2022, we expect moderate decline in revenue and operating margin mostly due to the COVID lockdown in China, partially offset by continued strong global demand across all key markets. Engraving Group Three Months Ended Nine Months Ended March 31, % March 31, %
(In thousands, except percentages) 2022 2021 Change
2022 2021 Change Net sales
$ 37,223 $ 36,0263.3 % $ 109,037 $ 110,377(1.2 %) Income from operations 5,728 4,510 27.0 % 15,806 16,884 (6.4 %) Operating income margin 15.4 % 12.5 % 14.5 % 15.3 % Net sales in the third quarter of fiscal year 2022 increased by $1.2 million, or 3.3%, when compared to the prior year quarter. Organic sales increased by $2.0 million, or 5.5% as a result of timing of projects and geographic mix. The sales increase was offset by foreign exchange impacts of $0.8 million, or 2.2%. Income from operations in the third quarter of fiscal year 2022 increased by $1.2 million, when compared to the prior year quarter. Operating income increased during the quarter reflecting timing of projects, geographic mix and productivity initiatives. Net sales in the nine months ended March 31, 2022decreased by $1.3 million, or 1.2%, when compared to the prior year period. Organic sales decreased by $1.7 million, or 1.5% as a result of timing of projects. Foreign exchange impacts increased sales by $0.4 million, or 0.3%. Income from operations in the nine months ended March 31, 2022decreased by $1.1 million, when compared to the prior year period. Operating income decreased during the period due to the volume decline and sales mix, partially offset by productivity initiatives. Sequentially during the fourth quarter of fiscal year 2022, we expect a slight decline in revenue and operating margin due to the timing of projects and geographic mix. In addition, we are implementing new cost savings and margin improvement actions targeting $2 millionof annualized savings upon completion. 31
Scientific Three Months Ended Nine Months Ended March 31, % March 31, % (In thousands, except percentages) 2022 2021 Change 2022 2021 Change Net sales
$ 18,914 $ 24,221(21.9 %) $ 65,079 $ 58,77710.7 % Income from operations 4,155 5,803 (28.4 %) 14,153 14,113 0.3 % Operating income margin 22.0 % 24.0 % 21.7 % 24.0 % Net sales in the third quarter of fiscal year 2022 decreased by $5.3 million, or 21.9% when compared to the prior year quarter. The net sales decrease reflects ongoing sales in pharmaceutical, clinical laboratories, and academic institution end markets, offset by lower demand associated with COVID-19 vaccination storage. Income from operations in the third quarter of fiscal year 2022 decreased $1.6 million, or 28.4% when compared to the prior year quarter. The decrease reflects lower volume and higher freight costs, partially offset by price and productivity actions. Net sales for the nine months ended March 31, 2022increased $6.3 million, or 10.7%, compared to the prior year period. The net sales increase reflects overall growth in end markets, such as pharmaceutical channels, clinical settings, and academic laboratories, including continued strong demand for cold storage surrounding COVID-19 vaccine distribution and the general market recovery as well as pricing actions. Income from operations in the nine months ended March 31, 2022increased by less than $0.1 millioncompared to the prior period. This reflects revenue growth and pricing actions, offset by higher freight costs and investments in new product development.
Sequentially in the fourth quarter of fiscal 2022, we expect similar revenue and a slight decline in operating margin due to product mix.
Engineering Technologies Group
Three Months Ended Nine Months Ended March 31, % March 31, % (In thousands, except percentages) 2022 2021 Change 2022 2021 Change Net sales
$ 20,890 $ 19,9514.7 % $ 56,558 $ 55,0912.7 % Income from operations 2,327 1,245 86.9 % 5,540 3,076 80.1 % Operating income margin 11.1 % 6.2 % 9.8 % 5.6 % Net sales in the third quarter of fiscal year 2022 increased by $0.9 million, or 4.7%, compared to the prior year quarter. Sales in the prior year quarter included revenue of $3.9 millionrelated to our divested Engineticsbusiness. Excluding the impact of the divestiture, sales increased $4.9 millionor 24.7% primarily due to strong demand in the commercial aviation industry, defense and medical end markets. Income from operations increased $1.1 million, or 86.9%, in the third quarter of fiscal year 2022 compared to the prior year quarter primarily due to increased volume, along with the absences of losses associated with the Engineticsbusiness. Net sales in the nine months ended March 31, 2022increased by $1.5 million, or 2.7%, compared to the prior year period. Sales in the prior year period included revenue of $9.2 millionrelated to our divested Engineticsbusiness. Excluding the impact of the divestiture, sales increased $10.7 millionprimarily due to customer demand in the commercial aviation and defense markets, along with an increase in sales into the space end market, particularly related to commercialization of space. Income from operations increased $2.5 million, or 80.1%, in the nine months ended March 31, 2022compared to the prior year period primarily due to cost saving measures implemented during the pandemic and maintained as economic activity resumed along with the absences of losses associated with the Engineticsbusiness, offset by a $1.1 millionone-time project-related charge during the first quarter. Sequentially during the fourth quarter of fiscal year 2022, we expect revenue to remain similar or slightly higher due to strength in the commercial space and aviation end markets. Operating margin is expected to increase slightly to moderately due to end market strength particularly in the commercial space end market, combined with productivity initiatives and reduced labor shortages. 32 -------------------------------------------------------------------------------- Specialty Solutions Group Three Months Ended Nine Months Ended March 31, % March 31, % (In thousands, except percentages) 2022 2021 Change 2022 2021 Change Net sales $ 32,365 $ 26,93320.2 % $ 87,575 $ 75,02816.7 % Income from operations 3,632 4,251 (14.6 %) 10,185 11,368 (10.4 %) Operating income margin 11.2 % 15.8 % 11.6 % 15.2 % Net sales in the third quarter of fiscal year 2022 increased $5.4 millionor 20.2% when compared to the prior year quarter. Organic sales increased $5.8 million, or 21.4%. Increased sales volume is primarily due to positive trends in food service equipment and refuse end markets, as well as various pricing actions. Income from operations decreased $0.6 millionor 14.6% in the third quarter of fiscal year 2022 when compared to the prior year quarter reflecting the impact of material inflation and increased freight costs primarily in our Hydraulics business partially offset by volume growth and pricing actions. Net sales in the nine months ended March 31, 2022increased $12.5 millionor 16.7% when compared to the prior year period. Organic sales increased $13.0 million, or 17.3%. Increased sales volume is primarily due to a continued recovery in the Pumps and Merchandising businesses and pricing actions, partially offset by the impact of a temporary work stoppage which was resolved during the first quarter. Income from operations decreased $1.2 millionor 10.4% in the nine months ended March 31, 2022when compared to the prior year period primarily as a result of higher costs of labor, including the temporary work stoppage in the first quarter and higher raw material and ocean freight costs, partially offset by pricing actions. Sequentially during the fourth quarter of fiscal year 2022, we expect revenue to increase slightly due to increased production levels at our Hydraulics business, and solid demand in our display merchandising business. We expect a moderate increase to operating margin due to increased demand and productivity initiatives. Corporate and Other Three Months Ended Nine Months Ended March 31, % March 31, % (In thousands, except percentages) 2022 2021 Change 2022 2021 Change Income (loss) from operations: Corporate $ (8,961 ) $ (7,162 )25.1 % $ (25,507 ) $ (21,607 )18.0 % Loss on sale of business - (14,624 ) (100 %) - (14,624 ) (100.0 %) Restructuring (1,186 ) (482 ) 146.1 % (2,469 ) (2,478 ) (0.4 %) Acquisition related costs (419 ) (255 ) 64.3 % (1,561 ) (850 ) 83.6 % Other income (expense), net - - 0.0 % (1,700 ) - 100.0 % Corporate expenses in the third quarter of fiscal year 2022 and in the nine months ended March 31, 2022increased by 25.1%, and 18.0%, respectively, when compared to the prior year period. The increase is related to employee related compensation accruals and research and development costs. The restructuring and acquisition related costs have been discussed above in the Company Overview. The increase in other expenses in the nine months ended March 31, 2022reflects a $1.7 millionlitigation accrual in the second quarter of fiscal year 2022. Discontinued Operations In pursuing our business strategy, the Company may divest certain businesses. Future divestitures may be classified as discontinued operations based on their strategic significance to the Company. Net loss from discontinued operations was $0.1 millionand $0.3 millionfor the three months ended March 31, 2022and 2021, respectively. Net loss from discontinued operations was $0.1 millionand $1.6 millionfor the nine months ended March 31, 2022and 2021, respectively. 33
Cash and capital resources
March 31, 2022, our total cash balance was $133.9 million, of which $100.6 millionwas held by foreign subsidiaries. During the third quarter and in the first nine months of fiscal year 2022, we repatriated $4.5 millionand $20.4 million, respectively to the United Statesfrom our foreign subsidiaries. We expect to repatriate between $10.0 millionand $15.0 millionduring the fourth quarter of fiscal year 2022, however, the amount and timing of cash repatriation during the fiscal year will be dependent upon each business unit's operational needs including requirements to fund working capital, capital expenditures, and jurisdictional tax payments. The repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences or be subject to capital controls; however, those balances are generally available without legal restrictions to fund ordinary business operations. Net cash provided by continuing operating activities for the nine months ended March 31, 2022, was $48.6 millioncompared to net cash provided by continuing operating activities of $49.3 millionin the prior year. We generated $31.2 millionfrom income statement activities and used $30.9 millionof cash to fund working capital and other balance sheet increases. Cash flow used in investing activities for the nine months ended March 31, 2022totaled $17.3 millionand primarily consisted of $13.1 millionused for capital expenditures, $9.9 millionused for the acquisition of Sensor Solutions, $5.0 milliongenerated by proceeds from a life insurance policy related to the death of a retired Company executive, $1.7 milliongenerated by sales of property, plant, and equipment, and $1.0 millionused in other investing activities. Cash used by financing activities for the nine months ended March 31, 2022was $30.4 millionand consisted primarily of purchases of stock of $21.4 million, cash paid for dividends of $9.1 million, and contingent consideration payments due to the seller of the Renco business of $1.2 million. During the second quarter of fiscal year 2019, we entered into a five-year Amended and Restated Credit Agreement ("credit agreement", or "facility") with a borrowing limit of $500 million. The facility can be increased by an amount of up to $250 million, in accordance with specified conditions contained in the agreement. The facility also includes a $10 millionsublimit for swing line loans and a $35 millionsublimit for letters of credit. Under the terms of the Credit Facility, we pay a variable rate of interest and a commitment fee on borrowed amounts as well as a commitment fee on unused amounts under the facility. The amount of the commitment fee depends upon both the undrawn amount remaining available under the facility and the Company's funded debt to EBITDA (as defined in the agreement) ratio at the last day of each quarter. As our funded debt to EBITDA ratio increases, the commitment fee increases. Funds borrowed under the facility may be used for the repayment of debt, working capital, capital expenditures, acquisitions (so long as certain conditions, including a specified funded debt to EBITDA leverage ratio is maintained), and other general corporate purposes. As of March 31, 2022, the Company used $6.2 millionagainst the letter of credit sub-facility and had the ability to borrow $299.5 millionunder the facility based on our current trailing twelve-month EBITDA. The facility contains customary representations, warranties and restrictive covenants, as well as specific financial covenants. The Company's current financial covenants under the facility are as follows: Interest Coverage Ratio - The Company is required to maintain a ratio of Earnings Before Interest and Taxes, as Adjusted ("Adjusted EBIT per the Credit Facility"), to interest expense for the trailing twelve months of at least 2.75:1. Adjusted EBIT per the Credit Facility specifically excludes extraordinary and certain other defined items such as cash restructuring and acquisition related charges up to the lower of $20.0 millionor 10% of EBITDA. The facility also allows for unlimited non-cash charges including purchase accounting and goodwill adjustments. At March 31, 2022, the Company's Interest Coverage Ratio was 15.9. Leverage Ratio - The Company's ratio of funded debt to trailing twelve month Adjusted EBITDA per the Credit Facility, calculated as Adjusted EBIT per the Credit Facility plus depreciation and amortization, may not exceed 3.5:1. Under certain circumstances in connection with a Material Acquisition (as defined in the Facility), the Facility allows for the leverage ratio to go as high as 4.0:1 for a four-fiscal quarter period. At March 31, 2022, the Company's Leverage Ratio was 1.15. As of March 31, 2022, we had borrowings under our facility of $200.0 million. In order to manage our interest rate exposure on these borrowings, we are party to $200.0 millionof active floating to fixed rate swaps. These swaps convert our interest payments from LIBOR to a weighted average fixed rate of 1.27%. The effective rate of interest for our outstanding borrowings, including the impact of the interest rate swaps, was 2.63%. Our primary cash requirements in addition to day-to-day operating needs include interest payments, capital expenditures, acquisitions, share repurchases, and dividends. Our primary sources of cash for these requirements are cash flows from continuing operations and borrowings under the facility. We expect fiscal year 2022 capital spending to be approximately $25.0 millionwhich includes amounts not spent in fiscal year 2021. We also expect that fiscal year 2022 depreciation and amortization expense will be an estimated $21.0 millionand $12.0 million, respectively. 34 --------------------------------------------------------------------------------
The following table presents our capitalization:
(In thousands) March 31, 2022 June 30, 2021 Long-term debt
$ 199,745 $ 199,490Less cash and cash equivalents (133,902 ) (136,367 ) Net debt 65,843 63,123 Stockholders' equity 527,620 506,425 Total capitalization $ 593,463 $ 569,548
We sponsor a number of defined benefit and defined contribution pension plans. the
assessed the current and long-term cash requirements of these plans, and our existing sources of cash should be sufficient to cover the contributions required under ERISA and other applicable regulations.
The fair value of the Company's
U.S.defined benefit pension plan assets was $186.9 millionat March 31, 2022, as compared to $212.6 millionat the most recent measurement date, which occurred as of June 30, 2021. The next measurement date to determine plan assets and benefit obligations will be on June 30, 2022. The Company expects to pay $0.4 millionin contributions to its defined benefit plans during the remainder of fiscal year 2022. Contributions of $0.1 millionand $0.2 millionwere made during the three and nine months ended March 31, 2022compared to $3.1 millionand $8.0 millionduring the three and nine months ended March 31, 2021, respectively. The Company does not expect to make additional contributions during fiscal year 2022 to its U.S.defined benefit plan. The Company expects to make contributions during fiscal year 2022 of $0.1 millionand $0.3 millionto its unfunded defined benefit plans in the U.S.and Germany, respectively. Any subsequent plan contributions will depend on the results of future actuarial valuations. We have an insurance program in place to fund supplemental retirement income benefits for four retired executives. Current executives and new hires are not eligible for this program. At March 31, 2022, the underlying policies had a cash surrender value of $6.0 millionand are reported net of loans of $5.1 millionfor which we have the legal right of offset, these amounts are reported net on our balance sheet. Other Matters Inflation - Certain of our expenses, such as wages and benefits, occupancy costs, freight and equipment repair and replacement, are subject to normal inflationary pressures. Inflation for medical costs can impact both our employee benefit costs as well as our reserves for workers' compensation claims. We monitor the inflationary rate and make adjustments to reserves whenever it is deemed necessary. Our ability to control worker compensation insurance medical cost inflation is dependent upon our ability to manage claims and purchase insurance coverage to limit the maximum exposure for us. Each of our segments is subject to the effects of changing raw material costs caused by the underlying commodity price movements. We have experienced price fluctuations for a number of materials including rhodium, steel, and other metal commodities. These materials are some of the key elements in the products manufactured in these segments. Wherever possible, we will implement price increases to offset the impact of changing prices. The ultimate acceptance of these price increases will be impacted by our affected divisions' respective competitors and the timing of their price increases. In general, we do not enter into purchase contracts that extend beyond one operating cycle. While Standexconsiders our relationship with our suppliers to be good, there can be no assurances that we will not experience any supply shortage. Foreign Currency Translation - Our primary functional currencies used by our non- U.S.subsidiaries are the Euro, British Pound Sterling (Pound), Japanese (Yen), and Chinese (Yuan). Defined Benefit Pension Plans - We record expenses related to these plans based upon various actuarial assumptions such as discount rates, mortality rates, and assumed rates of returns. The Company's pension plan is frozen for substantially all eligible U.S.employees and participants in the plan ceased accruing future benefits. Environmental Matters - To the best of our knowledge, we believe that we are presently in substantial compliance with all existing applicable environmental laws and regulations and do not anticipate any instances of non-compliance that will have a material effect on our future capital expenditures, earnings or competitive position.
Seasonality – We are a diverse business with generally low levels of seasonality.
35 -------------------------------------------------------------------------------- Employee Relations - The Company has labor agreements with several union locals in
the United Statesand several European employees belong to European trade unions. Critical Accounting Policies The condensed consolidated financial statements include the accounts of Standex International Corporationand all of its subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of Americarequires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying condensed consolidated financial statements. Although we believe that materially different amounts would not be reported due to the accounting policies adopted, the application of certain accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Our Annual Report on Form 10-K for the year ended June 30, 2021lists a number of accounting policies which we believe to be the most critical. 36
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