Standex International Corporation — Form 10-Q Summary
Business context and period: Diversified industrial manufacturer with five reportable segments: Electronics, Engraving, Scientific, Engineering Technologies, and Specialty Solutions. This fiscal second-quarter report covers the three and six months ended December 31, 2020; comparisons are with the corresponding 2019 periods. Refrigerated Solutions Group results are presented as discontinued operations following its divestiture.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $156.3M | $153.7M | $307.6M | $309.7M |
| Gross profit margin | 37.1% | 37.6% | 36.7% | 37.5% |
| Operating income | $16.7M | $17.6M | $31.1M | $33.5M |
| Continuing-operations net income | $12.0M | $12.3M | $22.4M | $22.9M |
| Net income, including discontinued operations | $11.4M | $12.2M | $21.1M | $24.7M |
| Diluted EPS, continuing operations | $0.98 | $0.99 | $1.82 | $1.84 |
Q2 sales rose 1.7%, but organic sales declined 4.2%; Renco contributed $6.0M and foreign exchange $3.1M. For the six-month period, sales declined 0.7%, reflecting a 6.2% organic decline, partly offset by Renco and currency. Operating income fell 5.1% in Q2 and 7.2% for six months. Management cited pandemic-related volume pressure and material inflation, partly offset by productivity, cost reductions, and pricing. Gross margin was pressured by rhodium and other material costs, volume, and mix.
Cash flow and liquidity: Six-month operating cash flow from continuing operations was $31.5M, versus $16.7M a year earlier. Capital expenditures were $10.1M; acquisition spending was $27.4M. Cash at December 31 was $109.1M, including $80.1M held by foreign subsidiaries. Long-term debt was $200.0M net of issuance costs; net debt was $90.9M. The company reported $202.2M of additional borrowing capacity, a 1.47:1 leverage ratio versus a 3.5:1 maximum, and compliance with financial covenants. It paid $5.6M in dividends and repurchased $7.6M of shares in the first six months.
Margins, debt, and balance sheet: Effective borrowing cost, including interest-rate swaps, was 2.63%; swaps fixed the rate on $200M of debt at a weighted-average 1.27% base rate. Total assets were $958.7M and stockholders’ equity $498.2M at period-end. Current assets were $327.1M and current liabilities $117.9M.
Material segment changes
- Electronics: Q2 sales increased 31.2% to $60.2M and operating income rose 28.1% to $10.0M, supported by organic growth and Renco. Organic growth was strongest across major markets, particularly Asia; material inflation was a partial offset.
- Engraving: Q2 sales decreased 0.8% to $38.0M; operating income declined 6.0% to $6.5M, primarily due to timing of U.S. automotive projects.
- Scientific: Q2 sales increased 16.1% to $17.9M and operating income rose 4.4% to $4.2M. Demand included cold-storage products associated with COVID-19 vaccine distribution.
- Engineering Technologies: Q2 sales fell 33.9% to $17.5M and operating income fell 60.2% to $1.4M, mainly due to commercial aviation weakness; space and defense demand partly offset declines.
- Specialty Solutions: Q2 sales declined 17.8% to $22.8M and operating income declined 26.0% to $3.2M, reflecting weaker beverage, food-service, and OEM equipment markets.
Total backlog was $216.0M versus $212.1M a year earlier; backlog realizable within one year declined 6.1% to $172.5M. Electronics and Scientific backlog strengthened, while Engineering Technologies backlog weakened with commercial aviation demand.
Outlook, risks, and unusual items
- Management gave segment-level expectations, not a consolidated revenue or earnings forecast. It expected Q3 improvement in Electronics, Scientific, Engineering Technologies, and Specialty Solutions; Engraving was expected to see a slight sales decline and moderate margin decline. It expected Engraving revenue and margin to improve in Q4 versus Q3 and the prior year.
- Scientific’s Q3 outlook depended in part on continued vaccine-related cold-storage demand. Engineering Technologies anticipated moderate sequential sales improvement but expected margins to remain roughly level because of mix.
- Fiscal 2021 capital spending was expected to be $25M–$28M. The company expected approximately $1.5M of restructuring costs during the remainder of FY2021; restructuring initiatives were expected to conclude by 2022.
- COVID-19 continued to affect customer demand, backlog, and operations. Other disclosed risks include aviation-market weakness, commodity and component inflation (including rhodium and steel), foreign exchange, supply availability, and execution and integration of acquisitions. Management said it believed available liquidity and financing were sufficient for its plans.
- Renco was acquired in Q1 FY2021 for approximately $30.4M of consideration, including $3.0M of contingent consideration. Purchase-price allocation remained preliminary; goodwill recorded was approximately $14.0M. Potential Renco contingent payments could reach $3.5M if targets are met.
- A customer lawsuit against a subsidiary concerning allegedly faulty sensors remains pending. Management said liability was possible but not probable; the disclosed potential range was $0–$4.0M, with no accrual recorded. Management did not expect other existing legal matters to have a material impact.
- RSG generated no sales in the current-year periods and produced discontinued-operations losses of $0.6M in Q2 and $1.3M for six months. The prior-year six-month period included $1.8M of discontinued-operations income.
- Management considered COVID-19 in its estimates and reported no specific event requiring an adjustment to asset or liability carrying values. Disclosure controls were assessed as effective; the acquired Renco business was excluded from the internal-control evaluation.
Important facts for investors to verify
- Whether organic demand and margins recover, particularly in commercial aviation, Specialty Solutions end markets, and pandemic-sensitive businesses.
- Whether Scientific vaccine-storage demand persists and whether the higher backlog converts to revenue on schedule.
- Renco’s integration, final purchase-price allocation, and achievement of earnings targets underlying contingent consideration.
- Available borrowing capacity, covenant headroom, foreign-held cash accessibility, and the timing and tax implications of planned repatriations.
- Potential exposure and subsequent developments in the sensor litigation, and the timing and outcomes of restructuring actions.
- Reconcile the six-month Engineering Technologies comparison: the filing’s segment table gives prior-year sales of $51.139M, while one MD&A passage gives $51.319M.