Standex International Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the three months ended September 30, 2022. Comparisons are with the three months ended September 30, 2021 unless stated otherwise. Amounts below are in U.S. dollars.
Business context
Standex is a diversified industrial manufacturer with five reportable segments: Electronics, Engraving, Scientific, Engineering Technologies, and Specialty Solutions. It emphasizes customized products and services, operational improvement, and organic growth and acquisitions.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $180.6 million | $175.6 million | +2.8% |
| Gross profit / margin | $68.3 million / 37.8% | $66.2 million / 37.7% | Margin +0.1 percentage point |
| Operating income | $26.3 million | $22.8 million | +15.2% |
| Net income | $18.3 million | $15.8 million | +15.5% |
| Diluted EPS | $1.53 | $1.30 | +17.7% |
| Operating cash flow | $(2.7) million | $13.1 million | Decreased $15.8 million |
Sales growth comprised $12.8 million of organic growth and $1.1 million from acquisitions, partly offset by a $8.9 million adverse foreign-exchange impact. Selling, general and administrative expenses declined to $41.1 million, or 22.8% of sales, from $42.8 million, or 24.3%. Interest expense fell to $1.2 million from $1.7 million; the effective tax rate was 24.0%, versus 25.0%.
Operating cash flow reflected $26.8 million generated before a $29.5 million use of cash for working capital and other balance-sheet changes. Capital expenditures were $5.3 million. Cash from operations less capital expenditures was approximately negative $8.0 million, calculated from reported figures.
Segments and material changes
- Electronics: Sales decreased 0.8% to $75.2 million; operating income decreased 0.7% to $18.1 million. Organic growth and Sensor Solutions sales were offset by foreign exchange and inflationary pressures.
- Engraving: Sales decreased 0.4% to $35.0 million; operating income increased 20.1% to $5.9 million, reflecting organic growth and productivity improvements.
- Scientific: Sales declined 14.3% to $18.5 million and operating income declined 17.4% to $3.7 million, primarily as vaccine cold-storage demand receded.
- Engineering Technologies: Sales declined 3.3% to $17.0 million, while operating income rose to $1.9 million from $0.9 million. The comparison benefited from the absence of a prior-year one-time project charge and from productivity initiatives.
- Specialty Solutions: Sales increased 36.9% to $34.9 million and operating income increased 115.9% to $6.1 million, with pricing, stronger hydraulics demand, and the absence of a prior-year labor stoppage contributing.
Backlog under one year increased 12.6% year over year to $266.2 million. Total backlog was $310.7 million. Segment backlog is not necessarily a reliable indicator of future sales, and customers may delay or cancel orders.
Liquidity, debt, and balance sheet
At September 30, 2022, cash was $103.4 million, long-term debt was $198.9 million, and net debt was $95.5 million. Cash declined by $1.4 million from June 30; debt increased by $24.1 million. The company had $294.2 million of borrowing capacity under its $500 million revolving facility, after accounting for outstanding letters of credit. It reported a 1.16 leverage ratio and an 18.1 interest coverage ratio, and stated that it complied with its financial covenants.
Of cash, $93.9 million was held by foreign subsidiaries. Standex expects to repatriate $30–$35 million during the remainder of FY2023, subject to operating needs, taxes, and other constraints. Current assets were $384.9 million and current liabilities were $124.4 million.
Outlook, risks, and unusual items
- Management expected year-over-year improvement in key financial metrics for the remainder of FY2023, supported by orders growth and productivity initiatives. It provided no specific company-wide revenue or earnings guidance in the filing.
- FY2023 capital spending was expected to be approximately $35–$40 million. Depreciation was expected to be $20–$21 million and amortization $7–$9 million. The company expected approximately $1.0 million of restructuring costs for the remainder of FY2023.
- For Q2 FY2023, outlook varied by segment: Electronics revenue was expected to be similar sequentially with slightly lower margin; Engineering Technologies expected a moderate-to-significant increase in revenue and margin; Scientific expected a slight revenue increase; Specialty Solutions expected slightly lower revenue and similar margin. Engraving expected similar revenue and a slight margin decline.
- Management cited supply-chain shortages, labor availability, inflation and material costs, logistics costs, foreign-exchange movements, and uneven customer demand as ongoing pressures. COVID-19-related uncertainty and Chinese lockdowns also affected operations. Other risks include economic conditions in served markets, competition, acquisition integration, restructuring execution, and pension funding requirements.
- Foreign-currency translation reduced other comprehensive income by $21.5 million in the quarter; total comprehensive income was $0.5 million. The company said a hypothetical 10% currency movement would not materially affect its operations, financial position, or cash flows.
- The company paid a previously accrued $5.7 million settlement relating to litigation with Miniature Precision Components; the matter was considered settled. It reported no material expected impact from currently existing legal matters. The quarter also included $0.6 million of restructuring costs and $0.3 million of acquisition-related costs.
- Standex repurchased 90,368 shares for approximately $8.4 million during the quarter and declared dividends of $0.26 per share. It said it did not expect the Inflation Reduction Act to have a material financial-statement impact.
Important facts for investors to verify
- Whether working-capital uses reverse and operating cash flow improves, given positive earnings but negative operating cash flow this quarter.
- Whether sales growth, backlog conversion, pricing, and productivity offset foreign-exchange, inflation, supply, and labor pressures.
- Whether segment trends—especially declining Scientific demand and strong Specialty Solutions results—continue as management anticipated.
- Availability and timing of the planned foreign-cash repatriation, borrowing capacity, and continued compliance with credit-facility covenants.
- Execution and remaining costs of restructuring, the FY2023 capital-spending plan, and any material changes in legal, pension, or other contingencies.