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. 27 -------------------------------------------------------------------------------- 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. We will continue to support all of our businesses as they enhance value through deployment of our Growth Discipline and Operational Excellence playbooks. 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 third quarter of fiscal year 2021, we divested
("Enginetics") our jet engine components business reported within our
Engineering Technologies segment, to
aerospace engine component manufacturing company. This divestiture allows us
to focus on the higher growth and margin opportunities of our core spin
forming solutions business that serves the space, commercial aviation and
defense end markets. We received
a loss on the sale of
? 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 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 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 benefit from an
economic rebound associated with 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.
28
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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 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.
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. Conversely, public and private sector responses to COVID-19 vaccine distribution, especially inthe United States , have also resulted in increased sales of scientific refrigeration equipment to customers within our Scientific reporting segment. 29 -------------------------------------------------------------------------------- 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 third quarter of fiscal year 2021 with$118.0 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 1.44 to 1 and allowed us the capacity to borrow an additional$209.2 million atMarch 31, 2021 . 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, the Company's remaining required contributions tothe United States funded pension plan for fiscal year 2021 of approximately$1.7 million have been reduced to zero upon passage of the American Rescue Plan Act ("the Act") and heretofore required contributions in fiscal year 2022 will also be reduced under terms of the Act. The required contributions tothe United States funded pension plan for fiscal year 2022 is approximately$1.4 million . We believe that we have sufficient liquidity around the world and access to financing to execute on our short and long-term strategic plans.
Results from Continuing Operations
Three Months Ended Nine Months Ended
March 31, March 31,
(In thousands, except percentages) 2021 2020 2021 2020
Net sales $ 172,216 $ 155,474 $ 479,797 $ 465,150
Gross profit margin 36.4 % 33.8 % 36.6 % 36.2 %
Income from operations 5,650 16,909 36,743 50,398
Three Months Ended Nine Months Ended
(In thousands) March 31, 2021 March 31, 2021
Net sales, prior year period $ 155,474 $ 465,150
Components of change in sales:
Organic sales change 6,058 (13,263 )
Effect of acquisitions 6,357 18,270
Effect of exchange rates 4,327 9,640
Net sales, current period $ 172,216 $ 479,797
Net sales increased in the third quarter of fiscal year 2021 by $16.7 million or
10.8% when compared to the prior year quarter. The acquisition of Renco
contributed $6.4 million or 4.1% to overall sales growth. Organic sales
increased $6.1 million or 3.9%, primarily due to strong demand in our
Electronics and Scientific business segments, while foreign currency had a $4.3
million or 2.8% positive impact on sales.
Net sales increased in the nine months ended March 31, 2021 , by $14.6 million or
3.1% when compared to the prior year period. The acquisition of Renco
contributed $18.3 million or 3.9% to overall sales growth. Organic sales
declined $13.4 million or 2.9%, 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 $9.6 million or
2.1% positive impact on sales. We discuss our results and outlook for each
segment below.
Gross Profit Margin
Our gross margin for the third quarter of fiscal year 2021 was 36.4%, which
increased from the prior year quarter's gross margin of 33.8%. This increase is
a result of organic sales increases, productivity initiatives and targeted price
increases, offset by raw material and ocean freight cost headwinds, along with
business mix in the quarter.
Our gross margin for the nine months ended March 31, 2021 was 36.6%, which
increased from the prior year gross margin of 36.2%. This increase is due to
sales volume increases, productivity initiatives, cost savings measures and
price increases, partially offset by raw material (primarily rhodium used in our
Electronics business) and ocean freight cost increases, and $0.6 million of
purchase accounting expenses related to the Renco acquisition.
30
--------------------------------------------------------------------------------Restructuring Charges
We incurred restructuring expenses of
We expect to incur restructuring costs of approximately$0.7 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. Loss on sale of business We recorded a loss on sale of theEnginetics business of$14.6 million for the third quarter of fiscal year 2021 and nine months endedMarch 31, 2021 , respectively. The loss included a$7.6 million impairment of goodwill assigned to the entirety of the Engineering Technologies segment and a$5.4 million write-down of intangible assets. Acquisition Related Expenses We incurred acquisition-related expenses of$0.3 million for the third quarter and$0.9 million for nine months endedMarch 31, 2021 . 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 third quarter of
fiscal year 2021 were $41.7 million , or 24.2% of sales, compared to $34.9
million , or 22.4% of sales, during the prior year quarter. SG&A expenses during
the quarter were impacted by approximately $1.5 million of SG&A expenses related
to the Renco acquisition, increased distribution expense of approximately $1.0
million associated with higher organic sales volume in the quarter, increases in
research and development initiatives and general wage inflation, offset by
productivity and cost out actions.
SG&A expenses for the nine months ended March 31, 2021 were $120.8 million , or
25.2% of sales, compared to $113.7 million , or 24.4% of sales, during the prior
year period. SG&A expenses during this period were impacted by approximately
$3.5 million of SG&A expenses related to the Renco acquisition, an increase in
research and development spending to drive future product initiatives, and
general wage inflation, offset by productivity and cost out actions.
Income from Operations
Income from operations for the third quarter of fiscal year 2021 was $5.7
million , compared to $16.9 million during the prior year quarter. The decline
of $11.3 million , or 66.6%, is primarily due to the loss on sale of the
Enginetics business of $14.6 million 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 nine months ended March 31, 2021 was
$36.7 million , compared to $50.4 million during the prior year period. The
decline of $13.7 million , or 27.1%, is primarily due to the loss on sale of the
Enginetics business of $14.6 million , partially offset by cost reduction
activities and productivity improvement initiatives implemented in all of our
businesses.
Interest Expense
Interest expense for the third quarter of fiscal year 2021 was $1.3 million , a
25.8% decline from interest expense of $1.8 million during the prior year
quarter. Interest expense for the nine months ended March 31, 2021 was $4.4
million , a 24.3% decline from interest expense of $5.8 million during the prior
year period. The decreased interest expense is due to lower borrowings
outstanding and a lower effective interest rate during the period.
Income Taxes
The Company's effective tax rate from continuing operations for the third
quarter of the fiscal year ending June 30, 2021 was 56.3% compared with 21.6%
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)
the jurisdictional mix of earnings and (iii) the establishment of a valuation
allowance against our deferred tax asset attributable to the divestiture of
Enginetics Corporation during the quarter.
31
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The Company's effective tax rate from continuing operations for the first nine
months of the fiscal year ending June 30, 2021 was 25.3% compared with 22.7% 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 ending June 30, 2019 , (iv) the
jurisdictional mix of earnings and (v) the establishment of a valuation
allowance against our deferred tax asset attributable to the divestiture of
Enginetics Corporation .
The divestiture of Enginetics Corporation 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 do not have
capital gains in the current year or the applicable carryback period, the
capital loss will be carried forward. A full valuation allowance was established
during the quarter, which negatively impacted the effective tax rate, and could
be released at such time as it is determined we will have sufficient taxable
income of the appropriate character within the carryforward period.
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 March 31, 2021 As of March 31, 2020
Backlog Backlog
Total Backlog under 1 year Total Backlog under 1 year
Electronics $ 97,241 $ 96,331 $ 54,489 $ 54,272
Engraving 20,108 13,901 22,509 19,676
Scientific 9,344 9,344 2,736 2,736
Engineering Technologies 67,615 39,574 112,341 88,802
Specialty Solutions 20,776 17,957 19,181 16,842
Total $ 215,084 $ 177,107 $ 211,256 $ 182,328
Total backlog realizable under one year declined $5.2 million , or 2.9%, to
$177.1 million at March 31, 2021 from $182.3 million at March 31, 2020 . We
experienced over a 200% 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 $9.5 million .
Backlog declines in the Engineering Technologies segment are primarily due to
the divestiture of Enginetics and the weakening demand in the commercial
aviation sector due to COVID-19 pandemic related slowdowns in that industry.
As of
(In thousands) March 31, 2021
Backlog under 1 year, prior year period
4,445
Effect of acquisitions 9,454
Effect of exchange rates (19,120 )
Backlog under 1 year, current period
32
--------------------------------------------------------------------------------Segment AnalysisElectronics Group Three Months Ended Nine Months Ended March 31, % March 31, % (In thousands, except percentages) 2021 2020 Change 2021 2020 Change Net sales$ 65,085 $ 48,069 35.4 %$ 180,524 $ 140,521 28.5 % Income from operations 12,364 8,017 54.2 % 30,861 23,892 29.2 % Operating income margin 19.0 % 16.7 % 17.1 % 17.0 % Net sales in the third quarter of fiscal year 2021 increased$17.0 million , or 35.4%, when compared to the prior year quarter. Organic sales increased by$8.5 million or 17.7%, reflecting a broad-based geographical recovery with a strengthening in demand for relays in solar and electric vehicle applications as well as reed switch demand in transportation end markets. The acquisition of Renco contributed sales of$6.4 million or 13.2%. The foreign currency impact increased sales by$2.2 million , or 4.5%. Income from operations in the third quarter of fiscal year 2021 increased by$4.3 million , or 54.2%, 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 material cost increases. Net sales for the nine months endedMarch 31, 2021 increased$40.0 million , or 28.5%, when compared to the prior year period. Organic sales increased by$17.0 million or 12.1% mostly due to strength inAsia partially offset by weakness within the European market. The acquisition of Renco contributed sales of$18.3 million or 13.0%. The foreign currency impact increased sales by$4.8 million , or 3.4%. Income from operations for the nine months endedMarch 31, 2021 increased$7.0 million , or 29.2%, 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$0.6 million of purchase accounting expenses. In fiscal fourth quarter 2021, we expect a moderate sequential increase in revenue and slight operating margin improvement compared to fiscal third quarter 2021 due to broad based end market recovery, including further growth for relays in solar and electronic vehicle applications. Engraving Group Three Months Ended Nine Months Ended March 31, % March 31, % (In thousands, except percentages) 2021 2020 Change 2021 2020 Change Net sales$ 36,026 $ 35,431 1.7 %$ 110,377 $ 112,118 (1.6 %) Income from operations 4,510 4,472 0.8 % 16,884 17,925 (5.8 %) Operating income margin 12.5 % 12.6 % 15.3 % 16.0 % Net sales in the third quarter of fiscal year 2021 increased by$0.6 million , or 1.7%, when compared to the prior year quarter. Organic sales declined by$1.3 million , or 3.5%, as a result of the timing of automotive projects in theU.S. Organic declines were offset by foreign exchange impacts of$1.9 million , or 5.2%.
Income from operations for the third quarter of fiscal year 2021 remained essentially flat, when compared to the prior year quarter. Operating income improved during the quarter as ongoing productivity and expense savings initiatives more than offset the impact of less favorable project mix.
Net sales for the nine months endedMarch 31, 2021 decreased by$1.7 million , or 1.6%, when compared to the prior year period. Organic sales declined by$5.8 million , or 5.2%, as a result of the regional timing of automotive projects and were partially offset by foreign exchange impacts of$4.1 million , or 3.6%, for the period. Income from operations for the nine months endedMarch 31, 2021 decreased by$1.0 million , or 5.8%, 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 fourth quarter, we expect a slight revenue and more significant operating margin increase reflecting favorable geographic mix, project timing and global demand increases for our soft trim product offering.
33
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Scientific
Three Months Ended Nine Months Ended
March 31, % March 31, %
(In thousands, except
percentages) 2021 2020 Change 2021 2020 Change
Net sales $ 24,221 $ 14,670 65.1 % $ 58,777 $ 44,834 31.1 %
Income from
operations 5,803 3,204 81.1 % 14,113 10,965 28.7 %
Operating income
margin 24.0 % 21.8 % 24.0 % 24.5 %
Net sales in the third quarter of fiscal year 2021 increased by $9.6 million , or
65.1%, compared to the prior year quarter. The net sales increase reflects
overall growth in end markets including pharmaceutical channels, clinical
laboratories, and academic institutions, partially in response to customer needs
for cold storage surrounding COVID-19 vaccine distribution.
Income from operations in the third quarter of fiscal year 2021 increased $2.6
million , or 81.1%, when compared to the prior year quarter reflecting revenue
growth partially offset by R&D reinvestments in the business to take advantage
of identified future growth opportunities.
Net sales for the nine months ended March 31, 2021 increased by $13.9 million ,
or 31.1%, compared to the prior year period. The net sales increase reflects
overall growth in end markets including pharmaceutical channels, clinical
laboratories, and academic institutions.
Income from operations for the nine months ended March 31, 2021 increased $3.1
million , or 28.7%, when compared to the prior year reflecting revenue growth,
partially offset by reinvestments in the business for future growth
opportunities.
In fiscal fourth quarter 2021, we expect a moderate sequential decrease in revenue and margin reflecting lower demand for COVID-19 vaccine storage and higher freight costs.
Engineering Technologies Group
Three Months Ended Nine Months Ended
March 31, % March 31, %
(In thousands, except
percentages) 2021 2020 Change 2021 2020 Change
Net sales $ 19,951 $ 26,730 (25.4 %) $ 55,091 $ 77,869 (29.3 %)
Income from
operations 1,245 3,098 (59.8 %) 3,076 9,879 (68.9 %)
Operating income
margin 6.2 % 11.6 % 5.6 % 12.7 %
Net sales in the third quarter of fiscal year 2021 decreased by $6.8 million , or
25.4%, 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, and project timing in the space and energy segments. These
declines were partially offset by higher sales in the defense segment.
Net sales for the nine months ended March 31, 2021 decreased by $22.8 million ,
or 29.3%, 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. Energy market sales declined due to project timing and were
slightly offset by higher sales in the defense segment.
Operating income declines in the third quarter and for the nine months ended
March 31, 2021 compared to prior year periods were primarily due to lower volume
in the commercial aviation segment along with project timing in the space and
energy markets. These declines were partially offset by higher defense segment
sales and productivity actions and cost savings measures enacted in response to
the reduced volume levels.
Sequentially during the fourth quarter of fiscal 2021, we expect revenue, after
accounting for the impact of the Enginetics sale, to be similar to the prior
quarter with strength in commercial aviation, defense and space markets.
Operating margin is expected to increase significantly sequentially due to a
continued broad-based end market recovery and favorable mix complemented by
ongoing productivity initiatives.
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Specialty
Three Months Ended Nine Months Ended
March 31, % March 31, %
(In thousands, except
percentages) 2021 2020 Change 2021 2020 Change
Net sales $ 26,933 $ 30,574 (11.9 %) $ 75,028 $ 89,808 (16.5 %)
Income from
operations 4,251 4,879 (12.9 %) 11,368 14,867 (23.5 %)
Operating income
margin 15.8 % 16.0 % 15.2 % 16.6 %
Net sales for the third quarter of fiscal year 2021 decreased $3.6 million or
11.9% when compared to the prior year quarter. Organic sales declined $3.7
million , or 12.1%, partially offset by positive foreign exchange impacts.
Decreased sales volume is primarily due to the impact of the COVID-19 pandemic,
which created market downturns in the beverage and food service display
merchandising markets.
Income from operations decreased $0.6 million or 12.9% in the third quarter of
fiscal 2021 when compared to the prior year quarter primarily as a result of
reduced sales volume in the beverage and food service markets and increased raw
material costs in the OEM equipment market, partially offset by productivity and
cost out actions.
Net sales for the nine months ended March 31, 2021 decreased $14.8 million or
16.5% when compared to the prior year period. Organic sales declined $15.2
million , or 16.9%, partially offset by positive foreign exchange impacts of $0.4
million , or 0.4%. 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 $3.5 million or 23.5% for the nine months ended
March 31, 2021 when compared to the prior year period. The decrease during the
period is primarily due to reduced sales volume in each of our businesses and
increased raw material costs in the OEM equipment market, partially offset by
productivity and cost out actions.
On a sequential basis, we expect fiscal fourth quarter 2021 revenue to increase
slightly due to an expected recovery in the beverage and food service markets,
and strength in the OEM (primarily refuse) equipment market. Operating income is
expected to slightly decrease sequentially reflecting material inflation which
the Company is seeking to recover through pricing actions.
Corporate and Other
Three Months Ended Nine Months Ended
March 31, % March 31, %
(In thousands, except
percentages) 2021 2020 Change 2021 2020 Change
Income (loss) from
operations:
Corporate $ (7,162 ) $ (6,048 ) 18.4 % $ (21,607 ) $ (22,688 ) (4.8 %)
Loss on sale of
business (14,624 ) - (14,624 ) -
Acquisition-related
costs (255 ) (120 ) 112.5 % (850 ) (1,650 ) (48.5 %) Restructuring (482 ) (593 ) (19 %) (2,478 ) (2,792 ) (11.2 %) Corporate expenses in the third quarter of fiscal year 2021 increased by 18.4% when compared to the prior year quarter. Corporate expenses in the nine months endedMarch 31, 2021 decreased by 4.8%, when compared to the prior year. The corporate expense increase primarily reflects general wage inflation and incentive compensation in the three months endedMarch 31, 2021 compared to the prior year quarter as prior year results reflected performance measurement declines associated with the onset of the pandemic. The full year corporate expense decrease primarily reflects reductions in incentive compensation, management transition costs, and other headcount and cost saving reductions in the nine months endedMarch 31, 2021 compared to the prior year.
The restructuring and acquisition-related costs have been discussed above in the Company Overview.
35
--------------------------------------------------------------------------------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. 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 is as follows (in thousands): Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 Net Sales $ -$ 31,565 $ -$ 108,918 Profit (loss) Before Taxes$ (339 ) $ (22,422 ) $ (2,011 ) $ (19,891 ) Benefit (Provision) for Taxes 8 4,047 423 3,329 Net income (loss) from Discontinued Operations$ (331 ) $ (18,375 ) $ (1,588 ) $ (16,562 )
Liquidity and Capital Resources
AtMarch 31, 2021 , our total cash balance was$118.0 million , of which$81.6 million was held by foreign subsidiaries. During the third quarter and in the first nine months of fiscal year 2021, we repatriated$5.8 million and$30.8 million , respectively, tothe United States from our foreign subsidiaries. We expect to repatriate an additional$6.5 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 nine months endedMarch 31, 2021 , was$49.3 million compared to net cash provided by continuing operating activities of$29.5 million in the prior year. We generated$68.7 million from income statement activities and used$11.4 million of cash to fund working capital and other balance sheet increases. Cash flow used in investing activities for the nine months endedMarch 31, 2021 totaled$32.8 million and primarily consisted of$27.4 million for the acquisition of Renco and$15.6 million used for capital expenditure offset by$11.7 million proceeds from the sale of theEnginetics business. Cash used by financing activities for the nine months endedMarch 31, 2021 was$23.6 million and consisted primarily of stock repurchases of$16.2 million and cash paid for dividends of$8.5 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 ofMarch 31, 2021 , the Company used$6.0 million against the letter of credit sub-facility and had the ability to borrow$209.2 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. AtMarch 31, 2021 , the Company's Interest Coverage Ratio was 11.4:1. 36
-------------------------------------------------------------------------------- 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. AtMarch 31, 2021 , the Company's Leverage Ratio was 1.44:1. As ofMarch 31, 2021 , 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 fixed rate of 1.27%. The effective rate of interest for our outstanding borrowings, including the impact of the interest rate swaps, was 2.62%. In connection with the acquisition of Renco, we assumed$0.7 million of debt under the Paycheck Protection Program, within the United States Coronavirus Aid, Relief, and Economic Security ("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$22.0 and$25.0 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$12.5 million , respectively.
The following table sets forth our capitalization:
(In thousands) March 31, 2021 June 30, 2020 Long-term debt$ 200,117 $ 199,150 Less cash and cash equivalents (118,040 ) (118,809 ) Net debt 82,077 80,341 Stockholders' equity 482,653 461,632 Total capitalization$ 564,730 $ 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$204.4 million atMarch 31, 2021 , 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$0.4 million in contributions to its defined benefit plans during the remainder of fiscal year 2021. Contributions of$3.1 million and$8.0 million were made during the three and nine months endedMarch 31, 2021 compared to$1.5 million and$3.5 million during the three and nine months endedMarch 31, 2020 , respectively. We are not required to make any further contributions to ourU.S. defined benefit plan during 2021. The Company expects to make contributions during fiscal year 2021 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. AtMarch 31, 2021 , the underlying policies had a cash surrender value of$9.1 million and are reported net of loans of$19.1 million for 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 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. 37
-------------------------------------------------------------------------------- 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.
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