Standex International Corporation — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended December 31, 2021. Standex is a diversified industrial manufacturer reporting five segments: Electronics, Engraving, Scientific, Engineering Technologies, and Specialty Solutions. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Three months ended Dec. 31 | Six months ended Dec. 31 |
|---|---|---|
| Net sales | $185.7, up 18.8% from $156.3 | $361.3, up 17.5% from $307.6 |
| Gross profit | $68.8 vs. $58.0 | $135.0 vs. $112.8 |
| Gross margin | 37.0% vs. 37.1% | 37.4% vs. 36.7% |
| Operating income | $21.8 vs. $16.7 | $44.6 vs. $31.1 |
| Income from continuing operations | $15.0 vs. $12.0 | $30.9 vs. $22.4 |
| Net income | $15.0 vs. $11.4 | $30.8 vs. $21.1 |
| Diluted EPS | $1.24 vs. $0.93 | $2.54 vs. $1.72 |
Second-quarter operating income rose 30.1%; first-half operating income rose 43.4%. Management attributed gains mainly to organic sales growth, pricing, productivity, and cost savings, partly offset by higher materials and freight costs. Second-quarter SG&A was $43.5 million (23.4% of sales), compared with $40.2 million (25.7%) a year earlier. First-half effective tax rate was 24.8%, unchanged year over year; the quarter’s rate was 24.7% versus 21.0%.
Cash flow: First-half cash from continuing operations was $36.7 million, compared with $31.5 million. Total operating cash flow was $36.3 million; capital expenditures were $9.7 million. Investing activities used $8.1 million, and financing activities used $15.6 million, including $9.5 million of share repurchases and $6.0 million of dividends. Cash increased by $10.8 million to $147.2 million.
Liquidity and debt: At December 31, cash was $147.2 million and funded debt was $200.0 million, producing net debt of $52.5 million. The company reported $281.2 million of additional borrowing capacity and compliance with its credit covenants. Its leverage ratio was 1.20, against a 3.5 maximum; interest coverage was 14.7, against a 2.75 minimum. Interest-rate swaps fixed the rate on $200 million of borrowings at a weighted average 1.27%; the effective borrowing rate was 2.62%. Of cash, $100.0 million was held by foreign subsidiaries.
Material changes and business drivers
- Organic sales growth was $32.0 million in the quarter and $57.6 million in the first half, primarily reflecting pricing and demand in Electronics and Scientific. Prior-year comparisons included $2.3 million and $5.4 million, respectively, from divested Enginetics.
- Electronics delivered strong growth: quarterly sales increased 27.4% and operating margin rose to 22.4% from 16.6%. Scientific sales increased 37.7%, but margin declined to 22.3% from 23.7%.
- Engraving quarterly sales decreased 3.4% and margin declined to 14.2% from 17.1%, mainly due to project timing and mix. Specialty Solutions sales increased 30.4% in the quarter, while first-half operating income fell 7.9% amid labor, material, and freight costs and a temporary work stoppage earlier in the year.
- Engineering Technologies’ quarterly sales increased 3.4%; excluding divested Enginetics, sales increased 19.0%. First-half operating income included a $1.1 million one-time project charge.
- Backlog due within one year increased 53.1% year over year to $264.2 million, led by Electronics and Specialty Solutions. Total backlog was $294.4 million. Management cautions that backlog is not necessarily predictive of sales and orders may be delayed or cancelled.
Outlook, risks, and unusual items
- Management expected year-over-year improvement in key financial metrics for the remainder of FY2022, supported by order growth and productivity initiatives. It expected continued strength in Electronics, more soft-trim demand in Engraving, lower COVID-19 vaccine-storage demand in Scientific, recovery in food service, and strength in commercial aviation and space. These are directional expectations; the filing provides no quantified full-year sales or earnings guidance.
- For Q3 FY2022, management expected slight revenue and margin improvement in Electronics; broadly similar results in Engraving; a moderate decline in Scientific; similar or slightly higher revenue and somewhat higher margin in Engineering Technologies; and slight-to-moderate improvement in Specialty Solutions.
- Expected FY2022 capital spending was $25–30 million. Management expected approximately $1.1 million of additional restructuring expense in the remainder of FY2022; restructuring initiatives were expected to conclude by 2023.
- COVID-19-related uncertainty, supply-chain and logistics constraints, labor availability, inflation, and higher raw-material and freight costs remain risks. The filing notes that pricing actions may not fully offset cost increases and that supply shortages cannot be ruled out.
- Litigation: Standex accrued $1.7 million following unsuccessful mediation in a customer lawsuit concerning allegedly faulty sensors. Trial was scheduled for July 2022; the company estimated reasonably possible additional loss of $0–6.3 million beyond the accrual.
- Other items: Quarterly results include the $1.7 million litigation accrual. Contingent acquisition consideration could require additional payments, including up to $12.8 million for GS Engineering and up to $2.2 million for Renco if specified targets are met. First-half foreign currency translation reduced other comprehensive income by $9.3 million.
Important facts for investors to verify
- Whether strong Electronics-led orders and the $264.2 million under-one-year backlog convert to shipments and sales as expected.
- Whether pricing and productivity offset persistent material, freight, and labor cost pressure, particularly in Engraving and Specialty Solutions.
- The eventual outcome and financial exposure from the sensor litigation, including any loss beyond the $1.7 million accrual.
- Cash availability and repatriation needs: $100.0 million was held abroad, and management expected to repatriate $15–20 million in the second half of FY2022.
- Progress against FY2022 capital-spending expectations, restructuring plans, and acquisition contingent-payment obligations.