STANDEX INTERNATIONAL CORPORATION 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 that aggregate to five reportable segments. Please refer to Item 1. Business, above, for additional information regarding our segment structure and management strategy.
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:
o 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 pre-tax loss on the sale of
Statements including a goodwill impairment charge of
the entirety of the Engineering Technologies segment, and a
write-down of intangible assets.
o During the first quarter of fiscal year 2021, we acquired RencoElectronics, 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 between the two companies. Renco operates one
manufacturing facility in Florida and is supported by contract
manufacturers in Asia . Renco's results are reported within our
Electronics segment beginning in fiscal year 2021.
o 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. The divestiture impacts the
consolidated company results as follows:
Year Ended June 30, 2020 Year Ended June 30, 2019
Continuing Continuing
Ops Prior Divested Restated Ops Prior Divested Restated
to Divested RSG Continuing to Divested RSG Continuing
$000 's RSG Businesses Ops RSG Businesses Ops
Net Sales $ 719,606 $ 115,071 $ 604,535 $ 791,579 $ 151,648 $ 639,931
Operating Income/(Loss) 39,543 (20,985 ) 60,528 - - -
Asset Impairment Charge (20,278 ) (20,278 ) - - - -
Operating Income/(Loss) without
impairment charge 59,821 (707 ) 60,528 78,117 (1,359 ) 79,476
% 8.3 % (0.6 )% 10.0 % 9.9 % (0.9 )% 12.4 %
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o During the first quarter of 2019, we decided to divest our Cooking Solutions
Group, which consisted of three operating segments, Associated American
Industries, BKI, and Ultrafryer, along with a minority interest investment.
We completed this divestiture during the third quarter of 2019 and received
proceeds for the sale on the first day of the fourth quarter of 2019. In
connection with the divestiture efforts, we also sold our minority interest in
a European oven manufacturer back to the majority owners. Results of the
discontinued operations in the Consolidated Financial Statements.
o In the fourth quarter of 2019, we acquired Ohio -based Genius SolutionsEngineering Company (d/b/a GS Engineering), a provider of specialized "soft
surface" skin texturized tooling, primarily serving the automotive end market.
GS Engineering brought us critical proprietary technologies that offer
significant advantages in creating tools for "soft surface" components which
are used increasingly in vehicle interiors. The tooling for soft surface
products offered by GS is highly complementary to our industry-leading
capabilities in texturing molds and tools used to create "hard surface"
components. This technology also complements and enabled us to improve our
existing nickel shell technology that produces soft surface tooling. GS
operates one facility in Ohio and its results are reported within our
Engraving segment.
o In
Mfg.
operated under the name Agile Magnetics), a provider of high-reliability
magnetics. The addition of Agile Magnetics is an important step forward in
building out the high reliability magnetics business of
As a result of this combination, we have broadened our exposure to several
attractive end-markets and added a valuable manufacturing and sales base in
the northeast. Additionally, we can now offer complementary products from
products include transformers, inductors and coils for mission critical
applications for blue chip OEMs in the semiconductor, military, aerospace,
healthcare, and industrial markets. Agile operates one manufacturing facility
in
o In
Inc., a provider of chemical and laser texturing services. The combination of
Tenibac and
increased responsiveness to customer demands, and drove innovative approaches
to solving customer needs. The combined customer base now has access to the
full line of mold and tool services, such as the Architecture design
consultancy, chemical and laser engraving, tool finishing, and tool
enhancements. Tenibac serves automotive, packaging, medical and consumer
products customers, and operates three facilities, two in
China . The Tenibac results are reported within our Engraving segment. As a result of these portfolio moves, we have transformedStandex to a company with a more focused group of businesses selling customized solutions to high value end markets via a compelling customer value proposition. The narrowing of the portfolio allows for greater management focus on driving operational disciplines and positions us well to 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. 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 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. 20 -------------------------------------------------------------------------------- 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 their performance. Those units report pertinent information to senior management, which uses it to the extent relevant to assess the future performance of the Company. A description of any such material trends is described below in the applicable segment analysis. We monitor a number of key performance indicators ("KPIs") including net sales, income from operations, backlog, effective income tax rate, gross profit margin, and operating cash flow. A discussion of these KPIs is included below. We may also supplement the discussion of these KPIs by identifying the impact of foreign exchange rates, acquisitions, and other significant items when they have a material impact on a specific KPI. We believe the discussion of these items provides enhanced information to investors by disclosing their impact on the overall trend which provides a clearer comparative view of the KPI, as applicable. For discussion of the impact of foreign exchange rates on KPIs, the Company calculates the impact as the difference between the current period KPI calculated at the current period exchange rate as compared to the KPI calculated at the historical exchange rate for the prior period. For discussion of the impact of acquisitions, we isolate the effect on the KPI amount that would have existed regardless of our acquisition. Sales resulting from synergies between the acquisition and existing operations of the Company are considered organic growth for the purposes of our discussion.
Unless otherwise noted, references to years are to fiscal years.
Impact of COVID-19 Pandemic on the Company
Given the global nature of our business and the number of our facilities 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. During the end of fiscal year 2020 and the beginning of fiscal year 2021, we 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. Given the impact that the pandemic created on our backlog and incoming order rate, we took immediate actions in the end of fiscal year 2020 to identify and implement cost savings and restructuring actions within each of our operating units as well as our corporate headquarters. Actions identified included 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 fourth quarter of 2021 with$136.4 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 1.31 to 1 and allowed us the capacity to borrow an additional$245.2 million atJune 30, 2021 . We believe that we have sufficient liquidity around the world and access to financing to execute on our short and long-term strategic plans. Finally, we continue to monitor our ability to participate in 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 required contributions tothe United States funded pension plan for the second half of fiscal year 2021 of approximately$1.7 million was reduced to zero upon passage of the American Rescue Plan Act (the "Act"). The required contributions tothe United States funded pension plan for fiscal year 2022 is approximately$1.0 million . 21
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Consolidated Results from Continuing Operations (in thousands):
2021 2020 2019
Net sales $ 656,232 $ 604,535 $ 639,931
Gross profit margin 36.8 % 35.6 % 36.7 %
Restructuring costs 3,478 4,669 1,289
Acquisition related expenses 931 1,759 3,075
Loss on sale of business (14,624 ) - -
Income from operations 59,165 60,528 79,476
Backlog (realizable within 1 year)
2021 2020 2019
Net sales $ 656,232 $ 604,535 $ 639,931
Components of change in sales:
Effect of acquisitions 25,554 11,635 29,122
Effect of exchange rates 14,471 (6,089 ) (12,041 )
Effect of business divestitures (3,633 ) - -
Organic sales change 15,305 (40,942 ) 27,335
Net sales increased for fiscal year 2021 by $51.7 million or 8.6% when compared
to the prior year end. The acquisition of Renco contributed $25.6 million or
4.2% to overall sales growth. Organic sales increased $15.3 million or 2.5%
primarily as a result of impacts from the COVID-19 pandemic economic recovery,
and foreign currency had a $14.5 million or 2.4% positive impact on sales. These
increases were offset by a $3.6 million impact on sales due to the divestiture
of Enginetics in the third quarter of fiscal year 2021.We discuss our results
and outlook for each segment below.
Net sales for the fiscal year 2020 decreased by $35.4 million , or 5.5%, when
compared to the prior year. Incremental sales from our acquisitions accounted
for $11.6 million or 1.8% of the increase, while organic sales accounted for a
decrease of $40.9 million or 6.4%. Changes in foreign exchange rates
contributed to sales declines of $6.1 million or 1.0%. The organic sales
decrease occurred in all of our segments and was primarily a result of both
direct and indirect impacts of the pandemic driven economic slowdown.
Gross Profit
Gross profit in fiscal year 2021 increased to $241.3 million , or a gross margin
of 36.8% as compared to $215.5 million , or a gross margin of 35.6% in fiscal
year 2020. This increase is a result of organic sales increases, productivity
initiatives and targeted prices increases, offset by raw material and ocean
freight cost headwinds, along with business mix.
Gross profit in fiscal year 2020 declined to $215.5 million , or a gross margin
of 35.6% as compared to $234.7 million , or a gross margin of 36.7% in fiscal
year 2019 primarily due to the pandemic related organic sales decline during the
second half of the year.
Restructuring Charges
During fiscal year 2021, we incurred restructuring expenses of $3.5 million ,
primarily related to productivity improvements, facility rationalization
activities, and global headcount reductions within our Engraving and Specialty
Solutions segments.
During fiscal year 2020, we incurred restructuring expenses of
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Acquisition Related Expenses We incurred acquisition-related expenses of$0.9 million in fiscal year 2021. Acquisition-related expenses typically consist of due diligence, integration, and valuation expenses incurred in connection with recent or pending acquisitions. Acquisition related expenses in fiscal year 2020 were$1.8 million . These expenses were comprised primarily of$1.2 million for deferred compensation payments earned by the Horizon Scientific seller during the year. Because these payments were contingent on the seller remaining an employee of the Company, they are treated as compensation expense. We made the third and final scheduled payment to the seller during the first quarter of fiscal year 2020 and this arrangement was settled. Loss on Sale of Business We recorded a pre-tax loss on sale of theEnginetics business of$14.6 million for fiscal year 2021. 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.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses, ("SG&A") for the fiscal year
2021 were $163.1 million , or 24.8% of sales compared to $148.5 million , or 24.6%
of sales during the prior year. SG&A expenses during this period were impacted
by approximately $4.8 million of SG&A expenses related to the Renco acquisition,
increased distribution expenses of $2.0 million as a result of increased organic
sales, an increase in research and development spending to drive future product
initiatives, and general wage inflation, offset by productivity and cost out
actions.
SG&A for the fiscal year 2020 were $148.5 million , or 24.6% of sales compared to
$150.3 million , or 23.5% of sales during the prior year. SG&A expenses were
impacted by on-going expenses related to our recent acquisitions of $1.7 million
offset by a decrease in variable distribution and selling expenses primarily as
a result of organic sales declines.
Income from Operations
Income from operations for the fiscal year 2021 was $59.2 million , compared to
$60.5 million during the prior year. The $1.4 million decrease, or 2.3% is
primarily due to the loss on sale of the Enginetics business of $14.6 million
along with material inflation, partially offset by income from organic sales
increases and pricing actions, along with cost reduction activities and
productivity improvement initiatives implemented in all of our businesses.
Income from operations for the fiscal year 2020 was $60.5 million , compared to
$79.5 million during the prior year. The $19.0 million decrease, or 23.8%,
was 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.
Discussion of the performance of each of our reportable segments is fully explained in the segment analysis that follows.
Interest Expense
Interest expense for the fiscal year 2021 was
Interest expense for the fiscal year 2020 was$7.5 million , a decrease of$3.3 million as compared to the prior year. Decreased interest expense was a result of lower borrowings and a lower effective interest rate. Income Taxes OnMarch 27, 2020 , the CARES Act was enacted to address the economic impact of the COVID-19 pandemic inthe United States . Among other things, the CARES Act allows a five-year carryback period for tax losses generated in 2019 through 2021. TheJune 30, 2021 tax provision includes benefits of$0.2 million and$0.8 million from tax losses in the years endedJune 30, 2019 andJune 30, 2020 , respectively, that the CARES Act allows to be carried back to the years endedJune 30, 2014 andJune 30, 2015 , when theU.S. federal income tax rate was 35%. The Company's income tax provision from continuing operations for the fiscal year endedJune 30, 2021 was$14.2 million , or an effective rate of 26.9% compared to$13.1 million , or an effective rate of 24.2% for the year endedJune 30, 2020 , and$18.7 million , or an effective rate of 27.9% for the year endedJune 30, 2019 . Changes in the effective tax rates from period to period may be significant as they depend on many factors including, but not limited to, the amount of the Company's income or loss, the mix of income earned in the US versus outside the US, the effective tax rate in each of the countries in which we earn income, and any one-time tax issues which occur during the period. 23
-------------------------------------------------------------------------------- The Company's income tax provision from continuing operations for the fiscal year endedJune 30, 2021 was impacted by the following items: (i) a tax provision of$5.1 million due to the mix of income in various jurisdictions, (ii) a tax benefit of$1.0 million from our 2019 and 2020 tax losses that the CARES Act allows to be carried back to 2014 and 2015, when theU.S. federal income tax rate was 35%, (iii) a tax benefit of$0.8 million related to Federal R&D credit and Foreign Tax Credit, (iv) a tax benefit of$1.7 million related to return-to-accrual adjustments to true-up up prior-period provision amounts, and (v) the tax expense of$1.2 million attributable to the divestiture of theEnginetics Corporation during the year. The Company's income tax provision from continuing operations for the fiscal year endedJune 30, 2020 was impacted by the following items: (i) a tax benefit of$1.2 million related to the Federal R&D credit, (ii) a tax provision of$1.4 million due to the mix of income in various jurisdictions, (iii) a tax benefit of$0.7 million related to the release of uncertain tax provision reserves, and (iv) a tax provision of$0.8 million related to GILTI. The Company's income tax provision from continuing operations for the fiscal year endedJune 30, 2019 was impacted by the following items: (i) a tax benefit related to the impact of the Sec. 965 toll tax of$0.8 million , (ii) a tax provision of$0.3 million related to the elimination of the performance based compensation exception for executive compensation under Sec. 162(m) of the Internal Revenue Code, and (iii) a tax provision related to expected foreign withholding taxes on cash repatriation of$2.1 million . Capital Expenditures
Our capital spending is focused on growth initiatives, cost reduction activities, and upgrades to extend the capabilities of our capital assets. In general, we anticipate our capital expenditures over the long-term will be approximately 3% to 4% of net sales.
During fiscal year 2021, capital expenditures increased to$21.4 million or 3.3% of net sales, as compared to$19.3 million , or 3.2%, of net sales in the prior year. At the onset of the COVID-19 pandemic in fiscal year 2020, we reduced our capital expenditures to only necessary maintenance, safety and the highest priority growth initiatives. As the global economic recovery began to take shape in fiscal year 2021, we increased our investments in machinery and equipment for those opportunities that will provide future growth and increased productivity, primarily in our Electronics and Engraving segments. Additionally, in fiscal year 2021,$2.2 million of capital expenditures was spent for construction underway to build a new Electronics facility inGermany to replace a legacy facility sold in fiscal year 2019. We expect 2022 capital spending to be between$25 million and$30 million . Backlog Backlog includes all active or open orders for goods and services. Backlog also includes any future deliveries based on executed customer contracts, so long as such deliveries are based on agreed upon delivery schedules. Backlog orders are not necessarily an indicator of future sales levels because of variations in lead times and customer production demand pull systems, with the exception of Engineering Technologies. Customers may delay delivery of products or cancel orders prior to shipment, subject to possible cancellation penalties. Due to the nature of long-term agreements in the Engineering Technologies segment, the timing of orders and delivery dates can vary considerably resulting in significant backlog changes from one period to another. In general, the majority of net realizable backlog beyond one year comes from the Engineering Technologies segment. Backlog orders in place atJune 30, 2021 and 2020 are as follows (in thousands): As of June 30, 2021 As of June 30, 2020 Total Backlog under Total Backlog under Backlog 1 year Backlog 1 year Electronics$ 121,488 $ 118,322 $ 56,170 $ 55,991 Engraving 20,076 13,401 16,076 13,719 Scientific 5,872 5,871 3,341 3,341 Engineering Technologies 68,375 46,350 97,682 66,493 Specialty Solutions 31,356 26,547 17,071 12,760 Total$ 247,167 $ 210,491 $ 190,340 $ 152,304 Total backlog realizable within one year increased$58.2 million , or 38.2% to$210.5 million atJune 30, 2021 from$152.3 million atJune 30, 2020 . We experienced 76% increase in backlog at Scientific due to increased demand for cold storage products in connection with the COVID-19 vaccine rollout. Electronics backlog increased 111% due to demand in all geographic markets in response to the beginning of the global recovery from the pandemic, new business opportunities and the acquisition of Renco. Backlog declines in the Engineering Technologies segment are primarily due to the divestiture ofEnginetics . 24 --------------------------------------------------------------------------------
Changes in backlog under 1 year are as follows (in thousands):
As of June 30, 2021
Backlog under 1 year, prior year period $ 152,304
Components of change in backlog:
Organic change 61,811
Effect of acquisitions 10,983
Effect of divestitures (14,607 )
Backlog under 1 year, current period $ 210,491
Segment Analysis (in thousands)
Overall
Looking forward to fiscal year 2022, we expect to be well-positioned to build on fiscal year 2021 momentum, with anticipated continued improvement in key financial metrics, supported by orders growth and productivity initiatives.
In general, for fiscal year 2022, we expect:
? continued end market strength in reed switch and relay products as well as
growth in magnetics in our Electronics segment;
? an increase in soft trim demand in our Engraving segment;? a decline in demand for COVID-19 related vaccine storage in our Scientific
segment;
? continued strength in the commercial aviation market and growth in the space
market in our Engineering Technologies segment; and
? recovery in the food service market in our Specialty Solutions segment.
Electronics
2021 compared to 2020 2020 compared to 2019
(in thousands except % %
percentages) 2021 2020 Change 2020 2019 Change
Net sales $253,369 $185,294 36.7% $185,294 $204,073 (9.2%)
Income from operations 46,600 29,749 56.6% 29,749 41,227 (27.8%)
Operating income margin 18.4% 16.1% 16.1% 20.2%
Net sales in fiscal year 2021 increased $68.1 million , or 36.7%, when compared
to the prior year as organic sales increased $35.9 million , or 3.6%. The Renco
Electronics acquisition added $25.6 million or 13.8%. The foreign currency
impacted increased sales by $6.6 million , or 6.5%. Organic sales growth was
positive in all geographic areas as well as the product groups of magnetics,
sensors and switching technologies supported by the rebound from the COVID-19
pandemic impact.
Income from operations in the fiscal year 2021 increased $16.9 million , or
56.6%, when compared to the prior year. The operating income increase was the
result of organic sales growth, product line mix, various cost savings
initiatives, and the impact of the Renco acquisition, offset by inflationary
material cost increases and $0.6 million of purchase accounting expenses.
Looking forward to the first quarter of fiscal year 2022, we expect slight revenue growth and moderate operating margin improvement compared to the fourth quarter of fiscal year 2021, reflecting continued end market strength.
Net sales in fiscal year 2020 decreased 18.8 million, or 9.2%, when compared to the prior year. Sales were slightly down inNorth America while down significantly inEurope andAsia . New sensor, switch and relay applications continued to offset some of the core business loss due to economic conditions and COVID-19 impact. The incremental sales impact of the Agile Magnetics acquisition, which was acquired in September of fiscal year 2019, was$3.1 million during the year and foreign exchange rates unfavorably affected sales by$1.6 million or 0.8%.
Income from operations in the fiscal year 2020 decreased
25
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Engraving
2021 compared to 2020 2020 compared to 2019
(in thousands except % %
percentages) 2021 2020 Change 2020 2019 Change
Net sales $147,016 $143,736 2.3% $143,736 $149,693 (4.0%)
Income from operations 22,510 20,493 9.8% 20,493 23,996 (14.6%)
Operating income margin 15.3% 14.3% 14.3% 16.0%
Net sales in fiscal year 2021 increased by $3.3 million or 2.3% compared to the
prior year. Favorable foreign exchange impacts of $6.6 million , or 4.6%, for the
period were offset by organic sales declines of $3.3 million , or 2.3%, as a
result of the regional timing of automotive projects.
Income from operations in fiscal year 2021 increased by $2.0 million , or 9.8%,
when compared to the prior year. The increase was primarily a result of cost
savings initiatives partially offset by organic sales declines for the year.
Looking forward to the first quarter of fiscal year 2022, we expect slight to
moderate revenue and operating margin declines from the fourth quarter of fiscal
year 2021 reflecting the timing of projects and regional mix.
Net sales in fiscal year 2020 decreased by $6.0 million or 4.0% compared to the
prior year. The effect of acquisitions generated $8.5 million or 5.7% of
additional sales for fiscal year 2020 which were partially offset by foreign
exchange declines of $3.6 million for the year. Organic sales declines of $10.9
million , or 7.3%, were a result of the timing of automotive projects, slower
incoming workloads as a result of pandemic related delays, and the closure of
unprofitable sites as part of our announced restructuring.
Income from operations in fiscal year 2020 decreased by $3.5 million , or 14.6%,
when compared to the prior year. The decrease was primarily a result of organic
sales declines for the year.
Scientific
2021 compared to 2020 2020 compared to 2019
(in thousands except % %
percentages) 2021 2020 Change 2020 2019 Change
Net sales $79,421 $57,523 38.1% $57,523 $57,621 (0.2%)
Income from operations 18,240 13,740 32.8% 13,740 13,676 0.5%
Operating income margin 23.0% 23.9% 23.9% 23.7%
Net sales in fiscal year 2021 increased by $21.9 million , or 38.1% when compared
to the prior year. The net sales increase reflects overall growth in end
markets including pharmaceutical channels, clinical laboratories, and academic
institutions, primarily in response to customer needs for cold storage
surrounding COVID-19 vaccine distribution.
Income from operations in fiscal year 2021 increased by $4.5 million , or 32.8%,
reflecting revenue growth, partially offset by reinvestments in the business for
future growth opportunities and increased freight costs.
Looking forward to the first quarter of fiscal year 2022, we expect a moderate
sequential decrease in revenue and a slight operating margin decline from the
fourth quarter of fiscal year 2021, reflecting lower demand for COVID-19 vaccine
related storage and increased freight costs partially offset by pricing actions.
Net sales in fiscal year 2020 remained relatively flat compared to the prior
year. We experienced decreased sales volume in our clinical laboratories,
physicians' offices, hospitals and academic laboratories markets, primarily due
to impacts of the COVID-19 pandemic and the economic downturn. This was largely
offset by sales in the pharmaceutical market.
Income from operations in fiscal year 2020 increased $0.1 million or 0.5% when
compared to the prior year as modest sales declines were overcome with cost
controls of labor and discretionary spending as well as stronger sales in our
pharmaceutical market.
26
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Engineering Technologies
2021 compared to 2020 2020 compared to 2019
(in thousands except % %
percentages) 2021 2020 Change 2020 2019 Change
Net sales $75,562 $104,047 (27.4%) $104,047 $105,270 (1.2%)
Income from operations 6,164 14,027 (56.1%) 14,027 11,169 25.6%
Operating income margin 8.2% 13.5% 13.5% 10.6%
Net sales in fiscal year 2021 decreased $28.5 million or 27.4% when compared to
the prior year. Sales distribution by market in 2021 was as follows: 40% space,
26% aviation, 19% defense, 7% energy, and 8% other markets. The decline was
primarily due to the impact of COVID-19 on the commercial aviation segment,
especially engine parts manufacturing, along with the divestiture of our
Enginetics business.
Income from operations in fiscal year 2021 decreased $7.9 million or 56.1% when
compared to the prior year. The decrease was primarily due to lower volume in
the commercial aviation segment along with project timing in the energy markets.
These declines were partially offset by higher defense segment sales,
improvements in manufacturing efficiencies, and cost reductions in response to
the reduced volume levels.
Looking forward to the first quarter of fiscal year 2022, we expect slight to
moderate sequential decrease in revenue and operating margin from the fourth
quarter of fiscal year 2021, due to project timing.
Net sales in fiscal year 2020 decreased $1.2 million or 1.2% when compared to
the prior year. A decline in aviation sales of 8% from the prior year was
primarily in the aircraft engine segment, as a result of both the grounding of
the Boeing MAX 737 aircraft and the impacts of the COVID-19 pandemic on the
aviation industry in general. Space market sales increased 13.4% from the prior
year driven by higher sales in the unmanned and manned space segment on
production and new development programs, while defense sales increased by 12.5%
from the prior year driven by higher volume in the missile segment.
Income from operations in fiscal year 2020 increased $2.8 million or 25.6% when
compared to the prior year. The increase in operating income was driven by
improved manufacturing efficiencies, cost reduction programs implemented during
the year, and a favorable product mix.
Specialty Solutions
2021 compared to 2020 2020 compared to 2019
(in thousands except % %
percentages) 2021 2020 Change 2020 2019 Change
Net sales $100,864 $113,935 (11.5%) $113,935 $123,274 (7.6%)
Income from operations 14,358 18,546 (22.6%) 18,546 19,000 (2.4%)
Operating income margin 14.2% 16.3% 16.3% 15.4%
Net sales for fiscal year 2021 decreased $13.1 million , or 11.5% when compared
to the prior year. Organic sales declined $13.6 million , or 11.9%, partially
offset by positive foreign exchange impacts of $0.5 million , or 0.5%. Decreased
sales volume is primarily due to the impact of the COVID-19 pandemic earlier in
the year, which created market downturns in the beverage, food service, and OEM
equipment markets.
Income from operations for fiscal year 2021 decreased $4.2 million , or 22.6%,
when compared to the prior year. 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, particularly for steel, partially offset by
productivity and cost out actions.
Looking forward to the first quarter of fiscal year 2022, we expect a slight
sequential increase in revenue and operating margin from the fourth quarter of
fiscal year 2021, due to a continued recovery in Merchandising and Pumps
businesses, partially offset by the impact of a prior work stoppage at one of
the plants.
Net sales for fiscal year 2020 decreased $9.3 million , or 7.6% when compared to
the prior year as organic sales declined by $8.8 million or 7.1% and foreign
exchange rates unfavorably affected sales by $0.6 million or 0.5%. Decreased
sales volume is primarily due to impacts of the COVID-19 pandemic which created
market downturns in the beverage, convenience store and dump markets.
Income from operations for fiscal year 2020 decreased $0.5 million , or 2.4%,
when compared to the prior year, primarily due to decreased sales volume in each
of our businesses. The sales volume decrease was offset in our Hydraulics and
Display Merchandising businesses by favorable mix, cost control of labor, and
the implementation of identified manufacturing efficiencies.
27
--------------------------------------------------------------------------------Corporate, Restructuring and Other
2021 compared to 2020 2020 compared to 2019
(in thousands except % %
percentages) 2021 2020 Change 2020 2019 Change
Corporate $ (29,674) $ (29,599) 0.3% $ (29,599) $ (24,728) 19.7%
Loss on sale of business (14,624) - (100.0%) - - 0.0%
Restructuring (3,478) (4,669) (25.5%) (4,669) (1,289) 262.2%
Other Operating Expenses (931) (1,759) (47.1%) (1,759) (3,575) (50.8%)
Corporate expenses remained flat in in fiscal year 2021 primarily due to general
wage inflation and benefit increases offset by cost saving reductions compared
to the prior year.
Corporate expenses increased by 19.7% in fiscal year 2020 primarily due to increased stock-based compensation, management transition, and benefit expenses in the first two quarters of fiscal year 2020.
The loss on sale of business, restructuring, and acquisition-related costs have been discussed above in the Company Overview.
Discontinued Operations In pursing 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 andCooking Solutions Group in current and prior periods have been classified as discontinued operations in the Consolidated Financial Statements and excluded from the results of continuing operations. Activity related to discontinued operations is as follows (in thousands): Year Ended June 30, 2021 2020 2019 Net sales $ -$ 111,841 $ 223,067 Gain (loss) on sale of business $ -$ (19,996 ) $ 20,539 Transaction fees - (1,933 ) (4,397 ) Profit (loss) before taxes$ (2,620 ) $ (23,439 ) $ 17,175 Benefit (provision) for taxes 550 2,613 2,453
Net income (loss) from discontinued operations
Liquidity and Capital Resources
AtJune 30, 2021 , our total cash balance was$136.4 million , of which$92.2 million was held outside ofthe United States . During fiscal years 2021, 2020 and 2019, we repatriated$37.6 million ,$39.2 million , and$51.5 million of our cash previously held outside ofthe United States , respectively. During fiscal year 2022, we anticipate returning$30.0 million to$35.0 million of foreign cash, however, the amount and timing of cash repatriation during 2022 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.
Cash Flow Net cash provided by continuing operating activities for the year endedJune 30, 2021 was$81.9 million compared to net cash provided by continuing operating activities of$54.7 million in the prior year. We generated$94.7 million from income statement activities and used$4.4 million of cash to fund working capital decreases. Cash flow used in investing activities for the year endedJune 30, 2021 totaled$39.1 million . Uses of investing cash consisted primarily of$27.4 million for the acquisition of Renco and capital expenditures of$21.8 million offset by$11.7 million of proceeds from sale of theEnginetics business. Cash used by financing activities for the year endedJune 30, 2021 were$31.7 million and included stock repurchases of$21.2 million and cash paid for dividends of$11.4 million . 28
-------------------------------------------------------------------------------- Net cash provided by continuing operating activities for the year endedJune 30, 2020 was$54.7 million compared to net cash provided by continuing operating activities of$72.9 million in the prior year. We generated$88.6 million from income statement activities and used$32.1 million of cash to fund working capital increases. Cash flow used in investing activities for the year endedJune 30, 2020 totaled$20.6 million . Uses of investing cash consisted primarily of capital expenditures of$21.52 million . Cash used by financing activities for the year endedJune 30, 2020 were$19.0 million and included cash paid for dividends of$10.6 million and stock repurchases of$10.4 million offset by net borrowings of$1.2 million . We sponsor a number of defined benefit and defined contribution retirement plans. TheU.S. pension plan is frozen for all participants. 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$212.6 million atJune 30, 2021 , as compared to$194.8 million as ofJune 30, 2020 . We participate in two multi-employer pension plans and sponsor six defined benefit plans including two in theU.S. and one in theU.K. ,Germany ,Ireland , andJapan . The Company's pension plan is frozen forU.S. employees and participants in the plan ceased accruing future benefits. Our primaryU.S. defined benefit plan is not expected to be 100% funded under ERISA rules atJune 30, 2021 .U.S. defined benefit plan contributions of$7.8 million were made during fiscal year 2021 compared to$3.1 million during fiscal year 2020.The required contributions tothe United States funded pension plan for fiscal year 2022 is approximately$1.0 million . The Company expects to make contributions during fiscal year 2022 of$0.2 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 evaluated the current and long-term cash requirements of our defined benefit and defined contribution plans as ofJune 30, 2021 and determined our operating cash flows from continuing operations and available liquidity are expected to be sufficient to cover the required contributions under ERISA and other governing regulations. We have an insurance program in place to fund supplemental retirement income benefits for five retired executives. Current executives and new hires are not eligible for this program. AtJune 30, 2021 , the underlying policies had a cash surrender value of$19.3 million and are reported net of loans of$9.1 million for which we have the legal right of offset. These amounts are reported net on our balance sheet. Capital Structure
During the second quarter of fiscal year 2019, the Company entered into a
five-year Amended and Restated Credit Agreement ("credit agreement", or
"facility"). The facility has a borrowing limit of
Under the terms of the Credit Facility, we will pay a variable rate of interest and a fee on borrowed amounts as well as a commitment fee on unused amounts under the facility. The amount of the commitment fee will depend 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. 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 ofJune 30, 2021 , the Company has used$6.0 million against the letter of credit sub-facility and had the ability to borrow$245.2 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 allows for unlimited non-cash charges including purchase accounting and goodwill adjustments. AtJune 30, 2021 , the Company's Interest Coverage Ratio was 13.1:1. 29
-------------------------------------------------------------------------------- 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. AtJune 30, 2021 , the Company's Leverage Ratio was 1.31:1. As ofJune 30, 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 rate of 1.27%. The effective rate of interest for our outstanding borrowings, including the impact of the interest rate swaps, was 2.59%. Our primary cash requirements in addition to day-to-day operating needs include interest payments, capital expenditures, acquisitions, share repurchases, and dividends. 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 were forgiven inJune 2021 . Our primary sources of cash are cash flows from continuing operations and borrowings under the facility. We expect that fiscal year 2022 depreciation and amortization expense will be between$21.0 and$22.0 million and$12.0 and$13.0 million , respectively.
The following table sets forth our capitalization at
2021 2020
Long-term debt $ 199,490 $ 199,150
Less cash and cash equivalents 136,367 118,809
Net debt 63,123 80,341
Stockholders' equity 506,425 461,632
Total capitalization $ 569,548 $ 541,973
Stockholders' equity increased year over year by $44.8 million , primarily as a
result of current year net income of $36.5 million . The Company's net debt to
capital percentage changed to 11.1% as of June 30, 2021 from 14.8% in the prior
year.
At June 30, 2021 , we expect to pay estimated interest payments of $15.4 million
within the next five years. This estimate is based upon effective interest rates
as of June 30, 2021 and excludes any interest rate swaps which are assets to us.
See Item 7A for further discussions surrounding interest rate exposure on our
variable rate borrowings.
Post-retirement benefits and pension plan contribution payments represents
future pension payments to comply with local funding requirements. Our policy is
to fund domestic pension liabilities in accordance with the minimum and maximum
limits imposed by the Employee Retirement Income Security Act of 1974 ("ERISA"),
federal income tax laws and the funding requirements of the Pension Protection
Act of 2006. At June 30, 2021 , we expect to pay estimated post-retirement
benefit payments of $175.5 million . See "Item 8. Financial Statements and
Supplementary Data, Note 16. Employee Benefit Plans" for additional information
regarding these obligations.
At June 30, 2021 , we had $37.0 million of operating lease obligations. See "Item
8. Financial Statements and Supplementary Data, Note 20. Leases" for additional
information regarding these obligations.
At June 30, 2021 , we had $9.4 million of non-current liabilities for uncertain
tax positions. We are not able to provide a reasonable estimate of the timing of
future payments related to these obligations.
Other Matters
Inflation - Certain of our expenses, such as wages and benefits, occupancy
costs, freight and equipment repair and replacement, are subject to normal
inflationary pressures. Inflation for medical costs can impact both our employee
benefit costs as well as our reserves for workers' compensation claims. We
monitor the inflationary rate and make adjustments to reserves whenever it is
deemed necessary. Our ability to control worker compensation insurance medical
cost inflation is dependent upon our ability to manage claims and purchase
insurance coverage to limit the maximum exposure for us. Each of our segments is
subject to the effects of changing raw material costs caused by the underlying
commodity price movements. In the past year, we have experienced price
fluctuations for a number of materials including rhodium, steel, and other metal
commodities. These materials are some of the key elements in the products
manufactured in these segments. Wherever possible, we will implement price
increases to offset the impact of changing prices. The ultimate acceptance of
these price increases, if implemented, will be impacted by our affected
divisions' respective competitors and the timing of their price increases. In
general, we do not enter into purchase contracts that extend beyond one
operating cycle. While Standex 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 Pound Sterling (Pound) , Japanese
(Yen), and Chinese (Yuan).
30
--------------------------------------------------------------------------------
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 all eligible U.S. employees
and participants in the plan ceased accruing future benefits.
Environmental Matters - To the best of our knowledge, we believe that we are
presently in substantial compliance with all existing applicable environmental
laws and regulations and do not anticipate any instances of non-compliance that
will have a material effect on our future capital expenditures, earnings or
competitive position.
Seasonality - We are a diversified business with generally low levels of seasonality.
Employee Relations - The Company has labor agreements with five union locals in
Critical Accounting Policies
The Consolidated Financial Statements include accounts of the Company and all of our 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 Consolidated Financial Statements. Although, we believe that materially different amounts would not be reported due to the accounting policies described below, the application of these 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. We have listed a number of accounting policies which we believe to be the most critical. Revenue Recognition - EffectiveJuly 1, 2018 , the Company adopted accounting standard ASU No. 2014-09, "Revenue from Contracts with Customers" (ASC 606) using the modified retrospective method to contracts that were not completed as ofJune 30, 2018 . We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings, whereby the cumulative impact of all prior periods is recorded in retained earnings or other impacted balance sheet line items upon adoption. The impact on the Company's consolidated income statements, balance sheets, equity or cash flows as of the adoption date as a result of applying ASC 606 have been reflected within those respective financial statements. The Company's accounting policy has been updated to align with ASC 606. The adoption of ASC 606 represents a change in accounting principle that provides enhanced revenue recognition disclosures. Revenue is recognized when the control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. The Company recognizes all revenues on a gross basis based on consideration of the criteria set forth in ASC Topic 606-10-55, Principal versus Agent Considerations. Most of the Company's contracts have a single performance obligation which represents, the product or service being sold to the customer. Some contracts include multiple performance obligations such as a product and the related installation and/or extended warranty. Additionally, most of the Company's contracts offer assurance type warranties in connection with the sale of a product to customers. Assurance type warranties provide a customer with assurance that the product complies with agreed-upon specifications. Assurance type warranties do not represent a separate performance obligation. In general, the Company recognizes revenue at the point in time control transfers to their customer based on predetermined shipping terms. Revenue is recognized over time under certain long-term contracts within the Engineering Technologies and Engraving groups for highly customized customer products that have no alternative use and in which the contract specifies the Company has a right to payment for its costs, plus a reasonable margin. For products recognized over time, the transfer of control is measured pro rata, based upon current estimates of costs to complete such contracts. Losses on contracts are fully recognized in the period in which the losses become determinable. Revisions in profit estimates are reflected on a cumulative basis in the period in which the basis for such revision becomes known. Collectability of Accounts Receivable - Accounts Receivable are reduced by an allowance for amounts that represent management's best estimate of estimated losses over the life of the underlying asset. Our estimate for the allowance for credit loss accounts related to trade receivables includes evaluation of specific accounts where we have information that the customer may have an inability to meet its financial obligation together with a detailed review of the collectability of pooled assets based on a combination of qualitative and quantitative factors. Realizability of Inventories - Inventories are valued at the lower of cost or market. The Company regularly reviews inventory values on hand using specific aging categories and records a write down for obsolete and excess inventory based on historical usage and estimated future usage. As actual future demand or market conditions may vary from those projected by management, adjustments to inventory valuations may be required. 31 -------------------------------------------------------------------------------- Realization ofGoodwill -Goodwill and certain indefinite-lived intangible assets are not amortized, but instead are tested for impairment at least annually and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than its carrying amount of the asset. The Company's annual test for impairment is performed using aMay 31st measurement date. We have identified seven reporting units for impairment testing: Electronics, Engraving, Scientific, Engineering Technologies,Procon , Federal, and Hydraulics. As quoted market prices are not available for the Company's reporting units, the fair value of the reporting units is determined using a discounted cash flow model (income approach). This method uses various assumptions that are specific to each individual reporting unit in order to determine the fair value. In addition, the Company compares the estimated aggregate fair value of its reporting units to its overall market capitalization. Our annual impairment testing at each reporting unit relied on assumptions surrounding general market conditions, short-term growth rates, a terminal growth rate of 2.5%, and detailed management forecasts of future cash flows prepared by the relevant reporting unit. Fair values were determined primarily by discounting estimated future cash flows at a weighted average cost of capital of 9.54%. During our annual impairment testing, we evaluated the sensitivity of our most critical assumption, the discount rate, and determined that a 100-basis point change in the discount rate selected would not have impacted the test results. Additionally, the Company could reduce the terminal growth rate from its current 2.5% to 1.0% and the fair value of all reporting units would still exceed their carrying value.
While we believe that our estimates of future cash flows are reasonable, changes in assumptions could significantly affect our valuations and result in impairments in the future. The most significant assumption involved in the Company's determination of fair value is the cash flow projections of each reporting unit.
As a result of our annual assessment in the fourth quarter of fiscal year 2021, the Company determined that the fair value of the seven reporting units substantially exceeded their respective carrying values. Therefore, no impairment charges were recorded in connection with our annual assessment during the fourth quarter of fiscal year 2021. In connection with the divestiture ofEnginetics , the Company determined that, based on the net realizable value of the operations divested, the goodwill of the Engineering Technologies reporting unit was partially impaired. As such, the Company recognized$7.6 million in impairment charges during the third quarter of fiscal year 2021. As a result of theEnginetics divestiture, the Company completed an interim goodwill impairment assessment for its other reporting units in the third quarter of fiscal year 2021. During the third quarter fiscal year 2021 review, the Company determined that there were no indications of impairment, therefore, no additional impairment charges were recorded Cost of Employee Benefit Plans - We provide a range of benefits to certain retirees, including pensions and some postretirement benefits. We record expenses relating to these plans based upon various actuarial assumptions such as discount rates, assumed rates of return, compensation increases and turnover rates. The expected return on plan assets assumption of 6.9% in theU.S. is based on our expectation of the long-term average rate of return on assets in the pension funds and is reflective of the current and projected asset mix of the funds and considers the historical returns earned on the funds. We have analyzed the rates of return on assets used and determined that these rates are reasonable based on the plans' historical performance relative to the overall markets as well as our current expectations for long-term rates of returns for our pension assets. TheU.S. discount rate of 3.0% reflects the current rate at which pension liabilities could be effectively settled at the end of the year. The discount rate is determined by matching our expected benefit payments from a stream of AA- or higher bonds available in the marketplace, adjusted to eliminate the effects of call provisions. We review our actuarial assumptions, including discount rate and expected long-term rate of return on plan assets, on at least an annual basis and make modifications to the assumptions based on current rates and trends when appropriate. Based on information provided by our actuaries and other relevant sources, we believe that our assumptions are reasonable. The cost of employee benefit plans includes the selection of assumptions noted above. A twenty-five-basis point change in theU.S. expected return on plan assets assumptions, holding our discount rate and other assumptions constant, would increase or decrease pension expense by approximately$0.5 million per year. A twenty-five-basis point change in our discount rate, holding all other assumptions constant, would have no impact on 2021 pension expense as changes to amortization of net losses would be offset by changes to interest cost. In future years, the impact of discount rate changes could yield different sensitivities. See the Notes to the Consolidated Financial Statements for further information regarding pension plans. 32 -------------------------------------------------------------------------------- Business Combinations - The accounting for business combinations requires estimates and judgments as to expectations for future cash flows of the acquired business and the allocation of those cash flows to identifiable intangible assets in determining the estimated fair values for assets acquired and liabilities assumed. The fair values assigned to tangible and intangible assets acquired and liabilities assumed, are based on management's estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. If the actual results differ from the estimates and judgments used in these fair values, the amounts recorded in the consolidated financial statements could result in a possible impairment of the intangible assets and goodwill or require acceleration of the amortization expense of finite-lived intangible assets. Allocations of the purchase price for acquisitions are based on estimates of the fair value of the net assets acquired and are subject to adjustment upon finalization of the purchase price allocation. During this measurement period, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. All changes that do not qualify as measurement period adjustments are included in current period earnings.
Recently Issued Accounting Pronouncements
See "Item 8. Financial Statements and Supplementary Data, Note 1. Summary of Accounting Policies" for information regarding the effect of recently issued accounting pronouncements on our consolidated statements of operations, comprehensive income, stockholders' equity, cash flows, and notes for the year endedJune 30, 2021 .
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