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, 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; 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; and our ability to increase manufacturing production to meet demand; and potential changes to future pension funding requirements. To read more about these risk factors, please see the "Risk Factors" section of our most recent annual report on Form 10-K. 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. 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
Our long-term strategy is to enhance shareholder value by building larger, more profitable "Customer Intimacy" focused industrial platforms through a 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.
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 work 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 work 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 training, development, and succession planning for employees throughout our worldwide organization. The Standex Value Creation System ties all disciplines together under a common umbrella by providing a standard playbook of tools and processes to deliver our business objectives. Through the use of our Standex Value Creation System, we have developed a balanced approach to value creation. While we intend to continue investing acquisition capital in high margin and growth segments such as Electronics, Engraving, and Scientific, we will continue to support all of our businesses as they enhance value through deployment of our GDP+ and OpEx playbooks.
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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, and the introduction of products and technologies into new markets, key accounts and strategic sales channel partners. 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 first quarter of fiscal year 2021, we acquiredRenco Electronics , 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 areas such as consumer and industrial applications are highly complementary to our existing business with the potential to further expand key account relationships and capitalize on cross selling opportunities. Renco operates one manufacturing facility inFlorida and is supported by contract manufacturers inAsia . Renco's results are reported within our Electronics segment. ? During the third quarter of fiscal year 2020, we initiated a program and signed an agreement to divest our Master-Bilt and NorLake businesses (together ourRefrigerated Solutions Group or RSG). This divestiture allows us to continue the simplification of our portfolio and enables us to focus more clearly on those of our businesses that sell differentiated products and which have higher growth and margin profiles. The divestiture was finalized and consideration was exchanged in the fourth quarter of 2020. Results of RSG in current and prior periods have been classified as discontinued operations in the Consolidated Financial Statements.
As a result of our portfolio moves over the last several years, we have
transformed
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.
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 the strategic growth programs described above, including acquisitions and investments for organic growth, investments in capital assets to upgrade our facilities, improve productivity and lower costs, and to return cash to our shareholders through payment of dividends and stock buybacks.
Restructuring expenses reflect costs associated with the Company's 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.
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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 their 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, the Company calculates 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 our 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 noted, references to years are to fiscal years.
Impact of COVID-19 Pandemic on the Company
Given the global nature of our business and the number of our facilities in
Given the impact that the pandemic created on our backlog and incoming order rate, we took actions to identify and implement cost savings and restructuring actions with each of our operating units as well as our corporate headquarters. Actions identified include reducing outside discretionary spend, the natural elimination of travel and trade show expenses that were a result of COVID-19 related curtailments, implementation of rolling furloughs in several businesses where appropriate, and the elimination of certain salaried and hourly positions. The costs, including restructuring charges, for many of these items occurred in our fourth quarter of fiscal year 2020.
We exited the first quarter of fiscal year 2021 with
Finally, we are reviewing our ability to participate in any governmental
assistance programs available to us in each of our global locations, and we will
participate in these programs as available and appropriate. For instance, we
have elected to take advantage of provisions in
Three Months Ended September 30, (In thousands, except percentages) 2020 2019 Net sales$151,286 $155,978 Gross profit margin 36.2 % 37.3 % Income from operations 14,354 15,851 24
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Three Months Ended (In thousands) September 30, 2020 Net sales, prior year period $ 155,978 Components of change in sales: Organic sales change (12,808 ) Effect of acquisitions 5,896 Effect of exchange rates 2,220 Net sales, current period $ 151,286
Net sales decreased in the first quarter of fiscal year 2021 by
Gross Profit Margin
Our gross margin for the first quarter of fiscal year 2021 was 36.2% which
declined from the prior year quarter's gross margin of 37.3% primarily a result
of the impact of
Selling, General, and Administrative Expenses
Selling, General, and Administrative Expenses ("SG&A") for the first quarter of
fiscal year 2021 were
Restructuring Charges
We incurred restructuring expenses of
Acquisition Related Expenses
We incurred acquisition-related expenses of less than
Income from Operations
Income from operations for the first quarter of fiscal year 2021 was
Interest Expense
Interest expense for the first quarter of fiscal year 2021 was
Income Taxes
The Company's effective tax rate from continuing operations for the first
quarter of the fiscal year ending
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Backlog
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. With the exception of our Engineering Technologies group, backlog has limited value as an indicator for the Company's businesses because of our relatively short delivery periods and rapid inventory turnover. Due to the nature of long-term agreements in the Engineering Technologies group, the timing of orders and delivery dates can vary considerably resulting in significant backlog changes from one period to another. Backlog orders are not necessarily an indicator of future sales levels because of variations in lead times and customer production demand pull systems. Customers may delay delivery of products or cancel orders prior to shipment, subject to possible cancellation penalties. In general, the majority of net realizable backlog beyond one year comes from the Engineering Technologies group.
As of September 30, 2020 As of September 30, 2019 Backlog Backlog Total Backlog under 1 year Total Backlog under 1 year Electronics$ 62,442 $ 60,840 $ 55,536 $ 52,485 Engraving 18,873 14,695 18,381 15,917 Scientific 6,018 6,018 4,824 4,824 Engineering Technologies 91,363 59,816 110,906 84,193 Specialty Solutions 13,995 10,501 19,517 15,672 Total$ 192,691 $ 151,870 $ 209,164 $ 173,091
Total backlog realizable under one year decreased
Electronics Three Months Ended September 30, % (In thousands, except percentages) 2020 2019 Change Net sales$55,271 $46,617 18.6 % Income from operations 8,535 8,099 5.4 % Operating income margin 15.4 % 17.4 %
Net sales in the first quarter of fiscal year 2021 increased by
In the second quarter, we expect revenue to be slightly higher sequentially and improve in the second half of the fiscal year as demand accelerates in the European markets.
Engraving Three Months Ended September 30, % (In thousands, except percentages) 2020 2019 Change Net sales$36,401 $38,431 (5.3 %) Income from operations 5,873 6,537 (10.2 %) Operating income margin 16.1 % 17.0 %
Net sales in the first quarter of fiscal year 2021 decreased by
Looking forward, we expect sales volume and income from operations to improve due to our expectations regarding new automotive launches along with the continued introduction of our soft skin and tool finishing offerings throughout our global sales network. Additionally, we expect to see sequential operating income improvement as we continue to realize benefits of cost and productivity actions.
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Scientific Three Months Ended September 30, % (In thousands, except percentages) 2020 2019 Change Net sales$16,663 $14,750 13.0 % Income from operations 4,076 3,705 10.0 % Operating income margin 24.5 % 25.1 %
Net sales in the first quarter of fiscal year 2021 increased by
In fiscal second quarter 2021, the Company expects to see a sequential revenue increase driven primarily by continued positive trends in retail pharmaceutical chains and clinical end markets. Operating margin is expected to slightly improve reflecting volume increase balanced with reinvestment in the business for R&D and future growth opportunities. We continue to enact measures to prepare for anticipated increases in demand for medication and COVID-19 vaccine storage in the coming quarters.
Engineering Technologies Three Months Ended September 30, % (In thousands, except percentages) 2020 2019 Change Net sales$17,633 $24,644 (28.4 %) Income from operations 469 3,359 (86.0 %) Operating income margin 2.7 % 13.6 %
Engineering Technologies revenue declined 28.4% over the first quarter of fiscal year 2020 primarily due to the impact of COVID-19 on the aviation segment, especially engine parts manufacturing. Aviation market declines were partially offset by higher sales in the unmanned segment of the space industry and defense sales driven by higher volume from missile production and development programs. Operating income declines in the quarter were primarily due to lower volume and were partially offset by cost savings measures enacted in response to the reduced volume levels.
During the second quarter the Company expects revenue to be sequentially similar as a result of continued aviation end market weakness. Operating margin is expected to slightly increase sequentially reflecting productivity initiatives and cost reduction activities. Productivity improvement initiatives and aggressive cost reduction and containment activities will continue while efforts are underway to increase the pipeline of new business opportunities going forward.
Specialty Solutions Three Months Ended September 30, % (In thousands, except percentages) 2020 2019 Change Net sales$25,318 $31,536 (19.7 %) Income from operations 3,906 5,648 (30.8 %) Operating income margin 15.4 % 17.9 %
Net sales for the first quarter of fiscal year 2021 decreased
On a sequential basis, the Company expects fiscal second quarter 2021 revenue and operating margin to decline slightly due to seasonality and a lower number of shipping days in the quarter.
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Corporate and Other Three Months Ended September 30, % (In thousands, except percentages) 2020 2019 Change Income (loss) from operations: Corporate$(6,992 ) $(9,284 ) (24.7 %) Acquisition-related costs (25 ) (734 ) (96.6 %) Restructuring (1,488 ) (1,479 ) 0.6 %
Corporate expenses in the first quarter of fiscal year 2021 decreased by
The restructuring and acquisition-related costs have been discussed above in the Company Overview.
Discontinued Operations
In pursuing our business strategy, the Company continues to divest certain
businesses and record activities of these businesses as discontinued operations.
Results of the
Three months ended September 30, 2020 2019 Net Sales $ - $ 40,466 Profit (loss) Before Taxes $ (826 ) $ 2,611 Benefit (Provision) for Taxes 199 (745 ) Net income (loss) from Discontinued Operations $ (627 ) $ 1,866
Liquidity and Capital Resources
At
Net cash provided by continuing operating activities for the three months ended
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
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.
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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
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
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
As of
In connection with the acquisition of Renco, we assumed
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 2021 capital spending to be between
The following table sets forth our capitalization atSeptember 30, 2020 andJune 30, 2020 : (In thousands) September 30, 2020 June 30, 2020 Long-term debt $ 199,947$ 199,150 Less cash and cash equivalents (93,698 ) (118,809 ) Net debt 106,249 80,341 Stockholders' equity 476,569 461,632 Total capitalization $ 582,818$ 541,973
We sponsor a number of defined benefit and defined contribution retirement
plans. The
The fair value of the Company's
The Company expects to pay
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
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Other Matters
Inflation - Certain of our expenses, such as wages and benefits, occupancy costs
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 adjust 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. In general, we do not enter into purchase contracts that extend
beyond one operating cycle. While
Foreign Currency Translation - Our primary functional currencies used by our
non-
Defined Benefit Pension Plans - We record expenses related to these plans based
upon various actuarial assumptions such as discount rates and assumed rates of
returns. The Company's pension plan is frozen for substantially all eligible
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 diversified business with generally low levels of seasonality.
Employee Relations - The Company has labor agreements with several union locals
in
Critical Accounting Policies
The condensed consolidated financial statements include the accounts of
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