STANDEX INTERNATIONAL CORPORATION 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 inSalem, New Hampshire . Our long-term strategy is to enhance shareholder value by building larger, more profitable "Customer Intimacy" focused industrial platforms through ourStandex 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 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. 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 Growth Discipline and Operational Excellence playbooks. 26
-------------------------------------------------------------------------------- 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 ("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 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 in Florida and is supported by contract
manufacturers in Asia . 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
our
continue the simplification of our portfolio and enabled 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 Standex to a company with end market exposure that is no
longer dependent on sales of standard products to the food service industry and
into 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 withstand the COVID-19 crisis and 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.
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.
27
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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
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, 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 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 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 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. We have experienced revenue losses in many of our businesses due to the impact that the pandemic has had on our customers. 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 within 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 second quarter of fiscal year 2021 with$109.1 million in cash and$200.0 million of borrowings under our revolving credit facility. Our leverage ratio covenant, as defined in our revolving credit agreement, was 1.47 to 1 and allowed us the capacity to borrow an additional$202.2 million atDecember 31, 2020 . Finally, we continue to monitor our ability to participate in any governmental assistance programs available to us in each of our global locations and participate in these programs as available and appropriate. For instance, we elected to take advantage of a provision inthe United States Coronavirus Aid, Relief, and Economic Security ("CARES") Act, which allowed for deferral untilDecember 31, 2020 of defined benefit pension plan contributions due during calendar year 2020. We believe that we have sufficient liquidity around the world and access to financing to execute on our short and long-term strategic plans. 28
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Results from Continuing Operations
Three Months Ended Six Months Ended
December 31, December 31,
(In thousands, except percentages) 2020 2019 2020 2019
Net sales $ 156,283 $ 153,697 $ 307,569 $ 309,669
Gross profit margin 37.1 % 37.6 % 36.7 % 37.5 %
Income from operations 16,738 17,639 31,092 33,491
Three Months Ended Six Months Ended
(In thousands) December 31, 2020 December 31, 2020
Net sales, prior year period $ 153,697 $ 309,669
Components of change in sales:
Organic sales change (6,524 ) (19,326 )
Effect of acquisitions 6,017 11,913
Effect of exchange rates 3,093 5,313
Net sales, current period $ 156,283 $ 307,569
Net sales increased in the second quarter of fiscal year 2021 by $2.6 million or
1.7% when compared to the prior year quarter. The acquisition of Renco
contributed $6.0 million or 3.9% to overall sales growth. Organic sales declined
$6.5 million or 4.2%, primarily as a result of impacts from the COVID pandemic
while foreign currency had a $3.1 million or 2.0% positive impact on sales.
Net sales decreased slightly in the six months ended December 31, 2020 by $2.1
million or 0.7% when compared to the prior year period. The acquisition of Renco
contributed $11.9 million or 3.9% to overall sales growth. Organic sales
declined $19.3 million or 6.2%, primarily as a result of impacts from the
COVID-19 pandemic, partially offset by strong organic demand in our Electronics
and Scientific business segments, while foreign currency had a $5.3 million or
1.7% positive impact on sales. We discuss our results and outlook for each
segment below.
Gross Profit Margin
Our gross margin for the second quarter of fiscal year 2021 was 37.1%, which
declined from the prior year quarter's gross margin of 37.6%. This decrease is
from organic sales declines, raw material (primarily rhodium) cost headwinds,
and business mix in the quarter, mostly offset by productivity initiatives and
price increases.
Our gross margin for the six months ended December 31, 2021 was 36.7%, which
declined from the prior year period gross margin of 37.5%. This decrease is from
raw material cost increases (primarily rhodium), sales volume declines and $0.6
million of purchase accounting expenses related to the Renco acquisition, mostly
offset by productivity initiatives, cost savings measures and price increases.
29--------------------------------------------------------------------------------
Restructuring Charges
We incurred restructuring expenses of
We expect to incur restructuring costs of approximately$1.5 million throughout the remainder of fiscal year 2021 as we continue to focus our efforts to reduce cost and improve productivity across our businesses, particularly through headcount reductions and productivity initiatives. Acquisition Related Expenses We incurred acquisition-related expenses of$0.6 million for the second quarter and for the six months endedDecember 31, 2020 . Acquisition-related expenses typically consist of due diligence, integration, and valuation expenses incurred in connection with recent or pending acquisitions.
Selling, General, and Administrative Expenses
Selling, General, and Administrative ("SG&A") expenses for the second quarter
of fiscal year 2021 were $40.2 million , or 25.7% of sales, compared to
$38.7 million , or 26.2% of sales, during the prior year quarter. SG&A expenses
during the quarter were impacted by approximately $1.1 million of SG&A expenses
related to the Renco acquisition, general wage inflation, and increases in
research and development initiatives, offset by productivity and cost out
actions.
SG&A expenses for the six months ended December 31, 2020 were $79.1 million , or
25.7% of sales, compared to $78.8 million , or 25.5% of sales, during the prior
year period. SG&A expenses during this period were impacted by approximately
$2.0 million of SG&A expenses related to the Renco acquisition, general wage
inflation, and increases in research and development initiatives, offset by
productivity and cost out actions.
Income from Operations
Income from operations for the second quarter of fiscal year 2021 was
$16.7 million , compared to $17.6 million during the prior year quarter. The
decline of $0.9 million , or 5.1% is primarily due to the impact of volume
related losses triggered by the COVID-19 pandemic along with material inflation,
partially offset by cost reduction activities and productivity improvement
initiatives implemented in all of our businesses.
Income from operations for the six months ended
30
--------------------------------------------------------------------------------Interest Expense Interest expense for the second quarter of fiscal year 2021 was$1.6 million , a 17.0% decline from interest expense of$1.9 million during the prior year quarter. Interest expense for the six months endedDecember 31, 2020 was$3.1 million , a 23.8% decline from interest expense of$4.1 million during the prior year period. The decreased interest expense is due to a lower effective interest rate of 2.63% as ofDecember 31, 2020 , as compared to 3.35% as ofDecember 31, 2019 , partially offset by an increase in borrowings outstanding during the period. Income Taxes The Company's effective tax rate from continuing operations for the second quarter of the fiscal year endingJune 30, 2021 was 21.0% compared with 18.7% for the prior year quarter. The tax rate was impacted in the current period by the following items: (i) reduction of global intangible low-taxed income, (ii) increased capacity to utilize foreign tax credits, (iii) valuation allowance release on foreign tax credits and (iv) the jurisdictional mix of earnings. The Company's effective tax rate from continuing operations for the first six months of the fiscal year endingJune 30, 2021 was 20.8% compared with 23.2% for the prior year period. The tax rate was impacted in the current period by the following items: (i) reduction of global intangible low-taxed income, (ii) increased capacity to utilize foreign tax credits, (iii) a benefit due to the carryback of losses generated in the fiscal year endingJune 30, 2019 and (iv) the jurisdictional mix of earnings. 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. Backlog is not generally a significant factor in the Company's businesses because of our relatively short delivery periods and rapid inventory turnover with the exception of Engineering Technologies. 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. 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. In general, the majority of net realizable backlog beyond one year comes from the Engineering Technologies segment. As of December 31, 2020 As of December 31, 2019 Backlog Backlog Total Backlog under 1 year Total Backlog under 1 year Electronics$ 77,243 $ 76,190 $ 52,341 $ 52,257 Engraving 23,194 15,710 21,722 19,372 Scientific 9,849 9,849 3,534 3,534 Engineering Technologies 87,984 56,495 117,082 93,802 Specialty Solutions 17,746 14,262 17,419 14,716 Total$ 216,016 $ 172,506 $ 212,098 $ 183,681 Total backlog realizable under one year declined$11.2 million , or 6.1%, to$172.5 million atDecember 31, 2020 from$183.7 million atDecember 31, 2019 . We experienced an increase in backlog at Scientific due to increased demand for cold storage products in connection with the COVID-19 vaccine rollout while the acquisition of Renco increased Electronics backlog by$8.1 million . Backlog declines in the Engineering Technologies segment are primarily due to weakening demand in the commercial aviation sector due to COVID-19 pandemic related slowdowns in that industry. 31
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Segment AnalysisElectronics Group Three Months Ended Six Months Ended December 31, % December 31, % (In thousands, except percentages) 2020 2019 Change 2020 2019 Change Net sales$ 60,156 $ 45,834 31.2 %$ 115,427 $ 92,452 24.9 % Income from operations 9,962 7,776 28.1 % 18,497 15,875 16.5 % Operating income margin 16.6 % 17.0 % 16.0 % 17.2 % Net sales in the second quarter of fiscal year 2021 increased$14.3 million , or 31.2%, when compared to the prior year quarter. Organic sales increased by$6.7 million or 14.5% as sales were stronger across most product lines and in all major geographic markets, particularlyAsia . The acquisition of Renco contributed sales of$6.0 million or 13.1%. The foreign currency impact increased sales by$1.6 million , or 3.6%. During the third quarter, we expect revenue to improve moderately due to further growth for relays in solar and electronic vehicle applications along with recovery in the business of our transportation customers which should drive an increase in reed switch demand. Income from operations in the second quarter of fiscal year 2021 increased by$2.2 million , or 28.1%, when compared to the prior year quarter. The operating income increase was the result of organic sales growth, various cost saving initiatives and the impact of the Renco acquisition, offset by rhodium cost increases. We expect moderate sequential operating margin improvement in the third quarter due to sales volume increases. Net sales for the six months endedDecember 31, 2020 increased$23.0 million , or 24.9%, when compared to the prior year period. Organic sales increased by$8.5 million or 9.1% mostly due to strength inAsia partially offset by weakness within the European market. The acquisition of Renco contributed sales of$11.9 million or 12.9%. The foreign currency impact increased sales by$2.6 million , or 2.8%. Income from operations for the six months endedDecember 31, 2020 increased$2.6 million , or 16.5%, when compared to the prior year. The operating income increase was the result of organic sales growth, various cost saving initiatives and the impact of the Renco acquisition, offset by inflationary material cost increases and$0.6 million of purchase accounting expenses. Engraving Group Three Months Ended Six Months Ended December 31, % December 31, % (In thousands, except percentages) 2020 2019 Change 2020 2019 Change Net sales$ 37,950 $ 38,256 (0.8 %)$ 74,351 $ 76,687 (3.0 %) Income from operations 6,501 6,916 (6.0 %) 12,374 13,454 (8.0 %) Operating income margin 17.1 % 18.1 % 16.6 % 17.5 % Net sales in the second quarter of fiscal year 2021 decreased by$0.3 million , or 0.8%, when compared to the prior year quarter. Organic sales declined by$1.5 million , or 4.0%, as a result of the timing of automotive projects in theU.S. Organic declines were partially offset by foreign exchange impacts of$1.2 million , or 3.2%, and ongoing productivity and expense savings initiatives. Income from operations for the first quarter of fiscal year 2021 decreased by$0.4 million , or 6.0%, when compared to the prior year quarter. The decrease was primarily a result of organic sales declines, partially offset by favorable foreign exchange impacts and ongoing productivity and expense savings initiatives. Net sales for the six months endedDecember 31, 2020 decreased by$2.3 million , or 3.0%, when compared to the prior year period. Organic sales declined by$4.6 million , or 6.0%, as a result of the regional timing of automotive projects. Organic declines were partially offset by foreign exchange impacts of$2.2 million , or 2.9%, for the period. Income from operations for the six months endedDecember 31, 2020 decreased by$1.1 million , or 8.0%, when compared to the prior year period. The decrease was primarily a result of organic sales declines for the year, partially offset by favorable foreign exchange impacts.
Sequentially during the third quarter, we expect a slight sales decline and a moderate operating margin decline reflecting geographic mix and project timing. Looking forward, we expect an increase in revenue and operating margin on a sequential and year over year basis in the fourth quarter.
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Scientific
Three Months Ended Six Months Ended
December 31, % December 31, %
(In thousands, except
percentages) 2020 2019 Change 2020 2019 Change
Net sales $ 17,893 $ 15,414 16.1 % $ 34,556 $ 30,164 14.6 %
Income from
operations 4,234 4,056 4.4 % 8,310 7,761 7.1 %
Operating income
margin 23.7 % 26.3 % 24.0 % 25.7 %
Net sales in the second quarter of fiscal year 2021 increased by $2.5 million ,
or 16.1%, compared to the prior year quarter. The net sales increase reflects
overall growth in end markets including retail pharmaceutical chains, clinical
laboratories, and academic institutions, partially in response to anticipated
customer needs for cold storage surrounding COVID-19 vaccine distribution.
Income from operations in the second quarter of fiscal year 2021 increased $0.1
million , or 4.4%, when compared to the prior year quarter reflecting revenue
growth partially offset by reinvestments in the business to take advantage of
future growth opportunities.
Net sales for the six months ended December 31, 2020 increased by $4.4 million ,
or 14.6%, compared to the prior year period. The net sales increase reflects
overall growth in end markets including retail pharmaceutical chains, clinical
laboratories, and academic institutions in addition to sales of our newly
designed undercounter refrigeration units.
Income from operations for the six months ended December 31, 2020 increased $0.5
million , or 7.1%, when compared to the prior year reflecting revenue growth,
partially offset by reinvestments in the business for future growth
opportunities.
In fiscal third quarter 2021, we expect a moderate to strong sequential revenue
increase driven primarily by continued positive trends in COVID-19 vaccine
related demand from retail pharmaceutical chains and clinical end
markets. Operating margin is expected to be slightly ahead of the second quarter
results 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 Group
Three Months Ended Six Months Ended
December 31, % December 31, %
(In thousands, except
percentages) 2020 2019 Change 2020 2019 Change
Net sales $ 17,507 $ 26,495 (33.9 %) $ 35,140 $ 51,319 (31.5 %)
Income from
operations 1,363 3,422 (60.2 %) 1,831 6,781 (73.0 %)
Operating income
margin 7.8 % 12.9 % 5.2 % 13.3 %
Net sales in the second quarter of fiscal year 2021 decreased by $9.0 million ,
or 33.9%, compared to the prior year quarter. The decline was primarily due to
the impact of COVID-19 on the commercial aviation segment, especially engine
parts manufacturing. Aviation market declines were partially offset by higher
sales in the unmanned segment of the space industry.
Net sales for the six months ended December 31, 2020 decreased by $16.0 million ,
or 32%, compared to the prior year period. The decline was primarily due to the
impact of COVID-19 on the commercial 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 second quarter and for the six months ended
December 31, 2020 compared to prior year periods were primarily due to lower
volume in the commercial aviation and energy markets and were partially offset
by productivity actions and cost savings measures enacted in response to the
reduced volume levels.
Sequentially during the third quarter of fiscal 2021 we expect revenue to increase moderately as a result of expected improvements in the commercial aviation market. However, operating margin is expected to remain in line sequentially due to a higher sales mix of the lower margin engine parts business. Productivity improvement initiatives and cost reduction and containment activities are planned to continue while efforts are underway to increase the pipeline of new business opportunities going forward.
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Specialty
Three Months Ended Six Months Ended
December 31, % December 31, %
(In thousands, except
percentages) 2020 2019 Change 2020 2019 Change
Net sales $ 22,777 $ 27,698 (17.8 %) $ 48,095 $ 59,227 (18.8 %)
Income from
operations 3,211 4,341 (26.0 %) 7,117 9,990 (28.8 %)
Operating income
margin 14.1 % 15.7 % 14.8 % 16.9 %
Net sales for the second quarter of fiscal year 2021 decreased $4.9 million or
17.8% when compared to the prior year quarter. Organic sales declined $5.1
million , or 18.4%, partially offset by positive foreign exchange impacts of $0.2
million , or 0.6%. Decreased sales volume is primarily due to the impact of the
COVID-19 pandemic, which created market downturns in the beverage, food service,
and OEM equipment markets.
Income from operations decreased $1.1 million or 26.0% in the second quarter of
fiscal 2021 when compared to the prior year quarter primarily as a result of
reduced sales volume in each of this segment's businesses partially offset by
productivity and cost out actions.
Net sales for the six months ended December 31, 2020 decreased $11.1 million or
18.8% when compared to the prior year period. Organic sales declined $11.5
million , or 19.3%, partially offset by positive foreign exchange impacts of $0.3
million , or 0.6%. Decreased sales volume is primarily due to the impact of the
COVID-19 pandemic, which created market downturns in the beverage, food service,
and OEM equipment markets.
Income from operations decreased $2.9 million or 28.8% for the six months ended
December 31, 2020 when compared to the prior year period. The decrease during
the period is primarily due to reduced sales volume in each of our businesses
partially offset by productivity and cost out actions.
On a sequential basis, the Company expects fiscal third quarter 2021 revenue and
operating margin to increase moderately due to a expected recovery in the
beverage, food service, and strength in the OEM (primarily refuse) equipment
markets.
Corporate and Other
Three Months Ended Six Months Ended
December 31, % December 31, %
(In thousands, except
percentages) 2020 2019 Change 2020 2019 Change
Income (loss) from
operations:
Corporate $ (7,454 ) $ (7,379 ) 1.0 % $ (14,445 ) $ (16,664 ) (13.3 %)
Acquisition-related
costs (570 ) (773 ) (26.3 %) (596 ) (1,507 ) (60.5 %)
Restructuring (509 ) (720 ) (29.3 %) (1,996 ) (2,199 ) (9.2 %)
Corporate expenses in the second quarter of fiscal year 2021 was essentially
flat when compared to the prior year quarter. Corporate expenses in the six
months ended December 31, 2020 decreased by 13.3%, when compared to the prior
year. The corporate expense decrease primarily reflects reductions in incentive
compensation, management transition costs, and other headcount and cost saving
reductions in the six months ended December 31, 2020 compared to the prior year.
The restructuring and acquisition-related costs have been discussed above in the Company Overview.
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--------------------------------------------------------------------------------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 theRefrigerated Solutions Group in current and prior periods have been classified as discontinued operations in the Consolidated Financial Statements and excluded from the results from continuing operations. Activity related to discontinued operations for the three and six months endedDecember 31, 2020 and 2019 is as follows (in thousands): Three Months Ended December 31, Six Months Ended December 31, 2020 2019 2020 2019 Net Sales $ -$ 36,888 $ -$ 77,354 Profit (loss) Before Taxes$ (847 ) $ (80 ) $ (1,673 ) $ 2,532 Benefit (Provision) for Taxes 216 26 415 (719 ) Net income (loss) from Discontinued Operations$ (631 ) $ (54 ) $ (1,258 ) $ 1,813
Liquidity and Capital Resources
AtDecember 31, 2020 , our total cash balance was$109.1 million , of which$80.1 million was held by foreign subsidiaries. During the second quarter and in the first six months of fiscal year 2021, we repatriated$17.2 million and$25.1 million , respectively, tothe United States from our foreign subsidiaries. We expect to repatriate an additional$9.9 million during fiscal year 2021, 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 expenditure, 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 six months endedDecember 31, 2020 , was$31.5 million compared to net cash provided by continuing operating activities of$16.7 million in the prior year. We generated$16.1 million from income statement activities and used$6.3 million of cash to fund working capital and other balance sheet increases. Cash flow used in investing activities for the six months endedDecember 31, 2020 totaled$37.3 million and primarily consisted of$27.4 million for the acquisition of Renco. Cash used by financing activities for the six months endedDecember 31, 2020 was$12.2 million and consisted primarily of stock repurchases of$7.6 million and cash paid for dividends of$5.6 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 million sublimit for swing line loans and a$35 million sublimit 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 ofDecember 31, 2020 , the Company has used$6.0 million against the letter of credit sub-facility and had the ability to borrow$202.2 million under 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 million or 10% of EBITDA. The facility also allows for unlimited non-cash charges including purchase accounting and goodwill adjustments. AtDecember 31, 2020 , the Company's Interest Coverage Ratio was 10.26:1. 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. AtDecember 31, 2020 , the Company's Leverage Ratio was 1.47:1. 35
-------------------------------------------------------------------------------- As ofDecember 31, 2020 , 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 million of active floating to fixed rate swaps. These swaps convert our interest payments from LIBOR to a weighted average rate of 1.27%. The effective rate of interest for our outstanding borrowings, including the impact of the interest rate swaps, was 2.63%. In connection with the acquisition of Renco, we assumed$0.7 million of debt under the Paycheck Protection Program, within the CARES Act. These borrowings mature in April of 2022. 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$25.0 and$28.0 million which includes amounts not spent in fiscal year 2020. We also expect that depreciation and amortization expense will be between$20.0 and$22.0 million and$11.5 and$12.5 million , respectively. The following table sets forth our capitalization atDecember 31, 2020 andJune 30, 2020 : (In thousands) December 31, 2020 June 30, 2020 Long-term debt $ 200,032$ 199,150 Less cash and cash equivalents (109,110 ) (118,809 ) Net debt 90,922 80,341 Stockholders' equity 498,190 461,632 Total capitalization $ 589,112$ 541,973
We sponsor a number of defined benefit and defined contribution retirement
plans. The
We
have evaluated the current and long-term cash requirements of these plans, and our existing sources of liquidity are expected to be sufficient to cover required contributions under ERISA and other governing regulations.
The fair value of the Company'sU.S. defined benefit pension plan assets was$213.3 million atDecember 31, 2020 , as compared to$194.8 million at the most recent measurement date, which occurred as ofJune 30, 2020 . The next measurement date to determine plan assets and benefit obligations will be onJune 30, 2021 . The Company expects to pay$5.2 million in contributions to its defined benefit plans during fiscal 2021. Contributions of$4.8 million and$4.9 million were made during the three and six months endedDecember 31, 2020 compared to$1.7 million and$2.0 million during the three and six months endedDecember 31, 2019 , respectively. Required contributions of$4.7 million will be paid to the Company'sU.S. defined benefit plan during 2021. The Company also expects to make contributions during the current fiscal year of$0.1 million and$0.3 million to its unfunded defined benefit plans in theU.S. andGermany , 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. AtDecember 31, 2020 , the underlying policies had a cash surrender value of$18.9 million and are reported net of loans of$10.0 million for which we have the legal right of offset, these amounts are reported net on our balance sheet. 36
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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. WhileStandex considers 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 PoundSterling (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 and assumed rates of returns. The Company's pension plan is frozen for substantially all eligibleU.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 diversified business with generally low levels of seasonality.
Employee Relations - The Company has labor agreements with several union locals inthe United States and several European employees belong to European trade unions. Critical Accounting Policies The condensed consolidated financial statements include the accounts ofStandex International Corporation and all of its subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America requires 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 endedJune 30, 2020 lists a number of accounting policies which we believe to be the most critical. 37
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