Standex International Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2022. The quarter is unaudited; fiscal year ends June 30. Unless noted, amounts below are in millions of dollars.
Business context and results
Standex is a diversified industrial manufacturer with five reportable segments: Electronics, Engraving, Scientific, Engineering Technologies, and Specialty Solutions. It describes its strategy as building focused industrial platforms through organic investment, acquisitions, operational improvements, and selective divestitures.
| Metric | Quarter ended Dec. 31, 2022 | Prior-year quarter | Six months ended Dec. 31, 2022 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $187.8 | $185.7 | $368.4 | $361.3 |
| Gross profit | $72.3 | $68.8 | $140.6 | $135.0 |
| Gross margin | 38.5% | 37.0% | 38.2% | 37.4% |
| Operating income | $27.8 | $21.8 | $54.1 | $44.6 |
| Income from continuing operations | $20.1 | $15.0 | $38.4 | $30.9 |
| Net income | $20.0 | $15.0 | $38.3 | $30.8 |
| Diluted EPS | $1.69 | $1.24 | $3.21 | $2.54 |
Quarterly sales rose 1.1%; management attributed $10.1 million of growth to organic sales and $0.8 million to acquisitions, partly offset by an $8.8 million foreign-exchange headwind. For the six-month period, sales rose 2.0%, with $22.9 million of organic growth and $1.9 million from acquisitions offset by a $17.8 million currency impact. Higher pricing, productivity, and organic growth supported margins and operating income; foreign exchange, material inflation, logistics and labor costs were offsets. Quarterly operating income increased 27.7%; six-month operating income increased 21.3%.
Segment performance
- Electronics: Quarterly sales fell 5.3% and operating income fell 1.1%; currency effects outweighed modest organic softness and acquisition contribution. Six-month sales declined 3.1%.
- Engraving: Quarterly sales increased 2.8% and operating income 22.5%; six-month operating income rose 21.3%, aided by productivity actions and project timing.
- Scientific: Quarterly sales declined 21.7% and operating income 24.1%, primarily from reduced COVID-19 vaccine cold-storage demand. Six-month sales fell 18.2%.
- Engineering Technologies: Quarterly sales increased 33.7% and operating income 61.7%; six-month operating income increased 74.5%, reflecting volume and productivity, as well as the absence of a prior-year one-time project charge.
- Specialty Solutions: Quarterly sales increased 14.6% and operating income 52.9%; six-month sales rose 24.9% and operating income 80.0%, with strength in Hydraulics and Merchandising & Display.
Cash flow, debt, and liquidity
- Six-month cash from operating activities was $27.0 million, down from $36.3 million; continuing operations generated $27.1 million versus $36.7 million. Management cited $28.7 million used for working capital and other balance-sheet increases.
- Investing activities used $10.9 million, including $11.0 million of capital expenditures. Financing activities used $7.6 million: $12.5 million of net borrowings was more than offset by $13.5 million of share repurchases, $6.4 million of dividends, and $1.2 million of contingent-consideration payments.
- Cash was $113.5 million at December 31, 2022, compared with $104.8 million at June 30, 2022; $106.6 million was held by foreign subsidiaries. Net debt was $74.0 million, versus $70.0 million at fiscal year-end.
- Debt was $187.5 million, up from $175.0 million. The company had $323.6 million of borrowing capacity available under its then-existing revolving facility and was compliant with its financial covenants. Its reported leverage ratio was 1.0 and interest coverage ratio 19.0.
- The effective borrowing rate, including swaps, was 2.47%; swaps fixed the rate on $175 million of debt at a weighted average 1.18% base rate. The filing says a 25-basis-point rate increase would not materially change annual interest expense.
- Cash dividends declared were $0.54 per share for the six-month period. The company repurchased $13.5 million of treasury stock during that period.
Material developments, outlook, and risks
- Standex signed an agreement in the second quarter to sell its Procon business for $75 million, subject to customary closing conditions. Procon was classified as held for sale at December 31; management intended to complete the sale within 12 months. The company said proceeds would support investment and shareholder returns.
- In February 2023, after quarter-end, Standex renewed its revolving credit agreement through February 2, 2028. The facility has a $500 million limit, with a conditional $250 million increase option, and broadly similar financial covenant limits.
- Management expected year-over-year improvement in key financial metrics for the remainder of fiscal 2023, supported by orders and productivity initiatives. It cited growth opportunities in electric vehicles, aerospace and defense, and a recovery in food-service equipment demand, while expecting lower vaccine-storage demand and variable project timing in space and Engineering Technologies.
- For the third quarter, management expected sequential revenue increases in Electronics; slight revenue and moderate margin declines in Engraving; slight revenue decline and similar margins in Scientific; a significant revenue decline in Engineering Technologies due to project timing; and a moderate-to-significant revenue decline in Specialty Solutions due partly to Procon. These are management expectations, not guarantees.
- Fiscal 2023 capital spending was expected to be approximately $30–$35 million. Restructuring expense was expected to be about $0.6 million for the remainder of fiscal 2023; current restructuring actions were expected to finish by fiscal 2024.
- Key risks include inflation and raw-material costs, supply-chain and labor constraints, customer demand and project delays, foreign-exchange movements, acquisition execution, restructuring savings, and pandemic-related disruption. Management noted that cash repatriation may have tax or capital-control consequences and that COVID-19-related uncertainty remained.
- Potential contingent consideration of up to $12.8 million could be payable for GS Engineering if specified revenue and gross-margin targets are achieved in fiscal 2023–2024. Standex said targets had not been met in the first three measurement years. The Miniature Precision Components litigation was settled and paid in the first quarter of fiscal 2023; management did not expect other existing legal matters to have a material financial impact.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether and when the Procon sale closes, its final proceeds, and the resulting change in Specialty Solutions revenue and earnings.
- Whether operating cash flow improves after the six-month working-capital outflow, and whether the planned capital spending and shareholder returns remain consistent with liquidity needs.
- Whether segment-level trends match the outlook, particularly Scientific’s post-vaccine-storage demand and Engineering Technologies’ project timing.
- Progress on pricing, productivity, and restructuring savings relative to inflation, labor, logistics, and foreign-exchange headwinds.
- Any developments affecting the $12.8 million potential GS Engineering contingent consideration, covenant compliance, or the terms and utilization of the renewed credit facility.