Standex(SXI) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements and accompanying notes for the periods ended March 31, 2021, and March 31, 2020 Condensed Consolidated Balance Sheets The balance sheet shows a slight increase in total assets and stockholders' equity from June 30, 2020, to March 31, 2021, driven by current assets and goodwill, while total liabilities remained relatively stable Condensed Consolidated Balance Sheets | Metric | March 31, 2021 (in thousands) | June 30, 2020 (in thousands) | | :-------------------------- | :---------------------------- | :--------------------------- | | Total Assets | $946,338 | $930,878 | | Total Liabilities | $463,685 | $469,246 | | Total Stockholders' Equity | $482,653 | $461,632 | | Cash and cash equivalents | $118,040 | $118,809 | | Goodwill | $277,902 | $271,221 | Condensed Consolidated Statements of Operations For the three months ended March 31, 2021, net sales increased, but income from operations significantly declined due to a loss on the sale of a business, resulting in a net income compared to a net loss in the prior year. For the nine months, net sales and net income increased, despite a decline in income from operations Three Months Ended March 31 | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (%) | | :--------------------------------- | :------------------ | :------------------ | :--------- | | Net sales | $172,216 | $155,474 | 10.8% | | Gross profit | $62,700 | $52,515 | 19.4% | | Income from operations | $5,650 | $16,909 | (66.6%) | | Net income (loss) | $1,427 | $(6,323) | N/A | | Basic earnings (loss) per share | $0.11 | $(0.51) | N/A | | Diluted earnings (loss) per share | $0.11 | $(0.51) | N/A | Nine Months Ended March 31 | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (%) | | :--------------------------------- | :------------------ | :------------------ | :--------- | | Net sales | $479,797 | $465,150 | 3.1% | | Gross profit | $175,453 | $168,537 | 4.1% | | Income from operations | $36,743 | $50,398 | (27.1%) | | Net income (loss) | $22,524 | $18,353 | 22.7% | | Basic earnings (loss) per share | $1.85 | $1.49 | 24.2% | | Diluted earnings (loss) per share | $1.84 | $1.48 | 24.3% | - Loss on sale of business: $14,624k for both three and nine months ended March 31, 2021[10] Condensed Consolidated Statements of Comprehensive Income (Loss) The company reported a comprehensive loss for the three months ended March 31, 2021, primarily due to foreign currency translation losses, but a significant comprehensive income for the nine months ended March 31, 2021, driven by net income and other comprehensive income components Three Months Ended March 31 | Metric | 2021 (in thousands) | 2020 (in thousands) | | :--------------------------------- | :------------------ | :------------------ | | Net income (loss) | $1,427 | $(6,323) | | Other comprehensive income (loss), net of tax | $(6,894) | $(6,512) | | Comprehensive income (loss) | $(5,467) | $(12,835) | Nine Months Ended March 31 | Metric | 2021 (in thousands) | 2020 (in thousands) | | :--------------------------------- | :------------------ | :------------------ | | Net income (loss) | $22,524 | $18,353 | | Other comprehensive income (loss), net of tax | $16,616 | $(5,638) | | Comprehensive income (loss) | $39,140 | $12,715 | - Foreign currency translation gains (losses) (net of tax): $(11,299)k for Q3 2021, $9,301k for 9M 2021[11][12] Condensed Consolidated Statement of Stockholders' Equity Stockholders' equity increased from June 30, 2020, to March 31, 2021, primarily due to net income and positive changes in accumulated other comprehensive income, partially offset by treasury stock acquisitions and dividends Condensed Consolidated Statement of Stockholders' Equity | Metric | March 31, 2021 (in thousands) | June 30, 2020 (in thousands) | | :-------------------------- | :---------------------------- | :--------------------------- | | Total Stockholders' Equity | $482,653 | $461,632 | | Net income (9M) | $22,524 | N/A | | Dividends declared (9M) | $(8,689) | N/A | | Treasury stock acquired (9M) | $(16,205) | N/A | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly increased for the nine months ended March 31, 2021, compared to the prior year, while cash used in investing activities also increased due to acquisitions and capital expenditures, partially offset by proceeds from divestitures. Cash used in financing activities also increased Nine Months Ended March 31 | Metric | 2021 (in thousands) | 2020 (in thousands) | | :--------------------------------- | :------------------ | :------------------ | | Net cash provided by operating activities | $51,563 | $25,931 | | Net cash provided by (used in) investing activities | $(32,789) | $(4,877) | | Net cash provided by (used in) financing activities | $(23,635) | $(2,014) | | Net change in cash and cash equivalents | $(769) | $16,152 | - Expenditures for acquisitions, net of cash acquired: $(27,406)k (9M 2021)[15] - Proceeds from sale of business: $11,678k (9M 2021)[15] - Purchases of treasury stock: $(16,205)k (9M 2021)[15] - Cash dividends paid: $(8,547)k (9M 2021)[15] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the unaudited condensed consolidated financial statements, covering key accounting policies, acquisitions, and operational impacts 1) Management Statement%20Management%20Statement) The interim financial statements are unaudited and prepared in accordance with SEC rules, condensing certain disclosures. Management believes all necessary adjustments are included for fair presentation. The company has reclassified prior period amounts for discontinued operations (Refrigerated Solutions Group) and revised reportable segments. The COVID-19 pandemic's impact is considered, but no specific events require asset/liability adjustments as of March 31, 2021 - Refrigerated Solutions Group divested to focus on remaining portfolio; reclassified as discontinued operations[17] - Company has seven operating segments aggregating to five reportable segments, revised for all periods presented[17][84] - COVID-19 impact considered, but no specific event requires updates to estimates or adjustments to assets/liabilities as of March 31, 2021[18] RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The company adopted ASU 2020-04 and ASU 2021-01 (Reference Rate Reform) and ASU 2016-13 (Credit Losses) in fiscal year 2021, none of which had a material impact on the consolidated financial statements. The company is evaluating ASU 2018-14 (Retirement Benefits) for future impact - Adopted ASU 2020-04 and ASU 2021-01 (Reference Rate Reform) in FY2021, no material impact[20] - Adopted ASU 2016-13 (Credit Losses) in FY2021, no material impact; updated critical accounting policy for trade account receivables[21][22] - Evaluating ASU 2018-14 (Retirement Benefits) for future impact[23] 2) Acquisitions%20Acquisitions) In Q1 FY2021, the company acquired Renco Electronics for $27.4 million cash, integrating it into the Electronics segment. The acquisition added $14.0 million in goodwill and $10.4 million in intangible assets, primarily for trademarks and customer relationships, and is strategically significant for expanding existing business and cross-selling opportunities - Acquired Renco Electronics in Q1 FY2021 for $27.4 million cash[25][26] - Renco's results reported within the Electronics segment[25] - Preliminary goodwill recorded: $14.0 million[27] - Preliminary intangible assets recorded: $10.4 million (trademarks $3.6M, customer relationships $6.8M)[27] Acquisition-Related Costs | Period | 2021 (in thousands) | 2020 (in thousands) | | :------------------ | :------------------ | :------------------ | | Three Months Ended Mar 31 | $255 | $120 | | Nine Months Ended Mar 31 | $850 | $1,650 | 3) Revenue From Contracts With Customers%20Revenue%20From%20Contracts%20With%20Customers) The company primarily recognizes revenue at a point in time when control transfers to the customer, with some long-term contracts recognized over time. Revenue disaggregation shows Electronics and Scientific segments experienced significant growth for both the three and nine months ended March 31, 2021, while Engineering Technologies and Specialty Solutions saw declines. Geographically, the U.S. and Asia Pacific saw growth, while EMEA and Other Americas declined for the nine-month period - Revenue recognition: Primarily at a point in time (products/services transferred), with some over time for highly customized products[36][39] Revenue by Product Line (Three Months Ended March 31) | Product Line | 2021 (in thousands) | 2020 (in thousands) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :--------- | | Electronics | $65,085 | $48,069 | 35.4% | | Engraving | $36,026 | $35,431 | 1.7% | | Scientific | $24,221 | $14,670 | 65.1% | | Engineering Technologies | $19,951 | $26,730 | (25.4%) | | Specialty Solutions | $26,933 | $30,574 | (11.9%) | | Total Revenue | $172,216 | $155,474 | 10.8% | Revenue by Product Line (Nine Months Ended March 31) | Product Line | 2021 (in thousands) | 2020 (in thousands) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :--------- | | Electronics | $180,524 | $140,521 | 28.5% | | Engraving | $110,377 | $112,118 | (1.6%) | | Scientific | $58,777 | $44,834 | 31.1% | | Engineering Technologies | $55,091 | $77,869 | (29.3%) | | Specialty Solutions | $75,028 | $89,808 | (16.5%) | | Total Revenue | $479,797 | $465,150 | 3.1% | Revenue by Geography (Nine Months Ended March 31) | Geography | 2021 (in thousands) | 2020 (in thousands) | Change (%) | | :------------------ | :------------------ | :------------------ | :--------- | | United States | $286,522 | $282,146 | 1.5% | | Asia Pacific | $89,189 | $71,495 | 24.7% | | EMEA | $93,549 | $100,543 | (7.0%) | | Other Americas | $10,537 | $10,966 | (3.9%) | 4) Fair Value Measurements%20Fair%20Value%20Measurements) The company measures certain financial instruments at fair value, categorized into Level 1 (quoted prices), Level 2 (observable inputs), and Level 3 (unobservable inputs). Level 3 liabilities primarily include contingent consideration for acquisitions (Renco, GS Engineering, Piazza Rosa), with Renco's contingent consideration at $3.0 million as of March 31, 2021 - Fair value hierarchy: Level 1 (marketable securities), Level 2 (foreign exchange contracts, interest rate swaps), Level 3 (contingent acquisition payments)[43][44][45][47] Contingent Acquisition Payments (Level 3) | Metric | March 31, 2021 (in thousands) | June 30, 2020 (in thousands) | | :-------------------------- | :---------------------------- | :--------------------------- | | Contingent acquisition payments | $3,000 | $1,343 | - Contingent consideration for Renco Electronics: up to $3.5 million if earnings targets are met through FY2024[51] - Contingent consideration for GS Engineering: up to $12.8 million if revenue and gross margin targets are met through FY2024[50] 5) Divestitures%20Divestitures) On March 31, 2021, the company divested Enginetics Corporation, its jet engine components business, for $11.7 million cash. This resulted in a pre-tax loss on sale of $14.6 million, including a $7.6 million goodwill impairment and a $5.4 million intangible asset write-down, as the company focuses on higher-growth core spin forming solutions - Divested Enginetics Corporation on March 31, 2021, for $11.7 million cash[54] - Recorded pre-tax loss on sale of $14.6 million[54] - Loss included $7.6 million goodwill impairment and $5.4 million intangible asset write-down[54] - Enginetics generated approximately $9.0 million in revenue in the first nine months of fiscal 2021[54] 6) Discontinued Operations%20Discontinued%20Operations) The Refrigerated Solutions Group (Master-Bilt and NorLake) was classified as discontinued operations in Q3 FY2020 and divested in Q4 FY2020 to focus on higher-growth, higher-margin businesses. For the three and nine months ended March 31, 2021, there were no net sales from discontinued operations, and a net loss was reported - Refrigerated Solutions Group (Master-Bilt and NorLake) classified as discontinued operations[56] Discontinued Operations Financials (Three Months Ended March 31) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :--------------------------------- | :------------------ | :------------------ | | Net Sales | $0 | $31,565 | | Net income (loss) from Discontinued Operations | $(331) | $(18,375) | Discontinued Operations Financials (Nine Months Ended March 31) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :--------------------------------- | :------------------ | :------------------ | | Net Sales | $0 | $108,918 | | Net income (loss) from Discontinued Operations | $(1,588) | $(16,562) | 7) Inventories%20Inventories) Total inventories from continuing operations increased to $90.9 million at March 31, 2021, from $85.0 million at June 30, 2020, primarily driven by an increase in raw materials Inventories | Metric | March 31, 2021 (in thousands) | June 30, 2020 (in thousands) | | :-------------------------- | :---------------------------- | :--------------------------- | | Total Inventories | $90,868 | $85,031 | | Raw materials | $45,459 | $37,257 | 8) Goodwill%20Goodwill) Goodwill increased to $277.9 million at March 31, 2021, from $271.2 million at June 30, 2020. This was primarily due to $14.0 million from the Renco acquisition, partially offset by a $7.6 million impairment charge in the Engineering Technologies segment related to the Enginetics divestiture Goodwill | Metric | March 31, 2021 (in thousands) | June 30, 2020 (in thousands) | | :-------------------------- | :---------------------------- | :--------------------------- | | Total Goodwill | $277,902 | $271,221 | - Goodwill from Renco acquisition: $13,991k[61] - Goodwill impairment charge (Engineering Technologies): $(7,600)k due to Enginetics divestiture[59][61] 9) Warranties%20Warranties) The warranty reserve increased to $2.2 million at March 31, 2021, from $1.8 million at June 30, 2020, reflecting higher warranty expense and acquisitions, partially offset by claims Warranties | Metric | March 31, 2021 (in thousands) | June 30, 2020 (in thousands) | | :-------------------------- | :---------------------------- | :--------------------------- | | Warranty reserve | $2,231 | $1,781 | - Warranty expense: $1,832k (9M 2021) vs $1,783k (9M 2020)[63] 10) Debt%20Debt) Long-term debt remained stable at approximately $200.1 million at March 31, 2021, primarily from bank credit agreements. The company assumed $0.7 million in Paycheck Protection Program debt from the Renco acquisition. The company was compliant with all financial covenants under its $500 million credit facility Debt | Metric | March 31, 2021 (in thousands) | June 30, 2020 (in thousands) | | :-------------------------- | :---------------------------- | :--------------------------- | | Total long-term debt | $200,117 | $199,150 | - Assumed $0.7 million PPP debt from Renco acquisition[66] - $500 million Credit Facility with $209.2 million available borrowing capacity at March 31, 2021[65][67] - Interest Coverage Ratio: 11.4:1 (required >= 2.75:1)[159] - Leverage Ratio: 1.44:1 (allowed <= 3.5:1)[160] 11) Accrued Liabilities%20Accrued%20Liabilities) Total accrued liabilities remained stable at $59.7 million at March 31, 2021, compared to $59.9 million at June 30, 2020. Key components include payroll and employee benefits, fair value of derivatives, and lease liabilities Accrued Liabilities | Metric | March 31, 2021 (in thousands) | June 30, 2020 (in thousands) | | :-------------------------- | :---------------------------- | :--------------------------- | | Total accrued liabilities | $59,664 | $59,929 | | Fair value of derivatives | $4,458 | $9,144 | 12) Derivative Financial Instruments%20Derivative%20Financial%20Instruments) The company uses interest rate swaps to manage variable rate debt exposure and foreign exchange contracts to limit currency fluctuations. As of March 31, 2021, $200 million of debt was converted to a fixed rate of 1.27% via swaps. The fair value of interest rate swaps decreased significantly, while foreign exchange contracts showed net unrealized losses - Interest rate swaps convert $200 million of debt to a weighted average fixed rate of 1.27% (Mar 31, 2021)[70][161] Fair Value of Interest Rate Swaps (Liability) | Metric | March 31, 2021 (in thousands) | June 30, 2020 (in thousands) | | :-------------------------- | :---------------------------- | :--------------------------- | | Fair value of interest rate swaps | $(3,168) | $(6,667) | Fair Value of Foreign Exchange Contracts (Liability) | Metric | March 31, 2021 (in thousands) | June 30, 2020 (in thousands) | | :-------------------------- | :---------------------------- | :--------------------------- | | Fair value of foreign exchange contracts | $(1,290) | $(2,477) | Gain (Loss) Recognized in Comprehensive Income from Derivatives | Period | 2021 (in thousands) | 2020 (in thousands) | | :------------------ | :------------------ | :------------------ | | Three Months Ended Mar 31 | $3,747 | $(1,595) | | Nine Months Ended Mar 31 | $3,532 | $(1,832) | 13) Retirement Benefits%20Retirement%20Benefits) The company has defined benefit pension plans, with the U.S. plan frozen for most participants. Net periodic benefit cost for U.S. plans decreased for both the three and nine months ended March 31, 2021, while non-U.S. plans saw an increase. Contributions to defined benefit plans increased significantly for the nine months ended March 31, 2021, and remaining required contributions for the U.S. funded plan for FY2021 were reduced to zero by the American Rescue Plan Act - U.S. pension plan frozen for substantially all participants[75] Net Periodic Benefit Cost (U.S. Plans) | Period | 2021 (in thousands) | 2020 (in thousands) | | :-------------------------- | :------------------ | :------------------ | | Three Months Ended Mar 31 | $91 | $259 | | Nine Months Ended Mar 31 | $273 | $779 | Net Periodic Benefit Cost (Non-U.S. Plans) | Period | 2021 (in thousands) | 2020 (in thousands) | | :-------------------------- | :------------------ | :------------------ | | Three Months Ended Mar 31 | $271 | $167 | | Nine Months Ended Mar 31 | $793 | $495 | - Contributions to defined benefit plans: $7,962k (9M 2021) vs $3,483k (9M 2020)[76] - Remaining required contributions to U.S. funded plan for FY2021 reduced to zero due to American Rescue Plan Act[76] 14) Income Taxes%20Income%20Taxes) The effective tax rate from continuing operations significantly increased to 56.3% for Q3 FY2021 (vs 21.6% in Q3 FY2020) and to 25.3% for 9M FY2021 (vs 22.7% in 9M FY2020). This was primarily due to the establishment of a valuation allowance against a deferred tax asset related to a capital loss carryforward from the Enginetics divestiture, which negatively impacted the rate - Effective tax rate (continuing operations): 56.3% (Q3 2021) vs 21.6% (Q3 2020)[77] - Effective tax rate (continuing operations): 25.3% (9M 2021) vs 22.7% (9M 2020)[78] - Impacted by valuation allowance against deferred tax asset from Enginetics divestiture's capital loss carryforward[77][78][126] 15) Earnings Per Share%20Earnings%20Per%20Share) Basic and diluted earnings per share from continuing operations decreased for both the three and nine months ended March 31, 2021, compared to the prior year, while total EPS saw a significant improvement from a loss to a positive value for the three-month period and an increase for the nine-month period Earnings Per Share (Continuing Operations) | Period | Basic EPS (2021) | Basic EPS (2020) | Diluted EPS (2021) | Diluted EPS (2020) | | :-------------------------- | :--------------- | :--------------- | :----------------- | :----------------- | | Three Months Ended Mar 31 | $0.14 | $0.98 | $0.14 | $0.97 | | Nine Months Ended Mar 31 | $1.98 | $2.83 | $1.97 | $2.81 | Total Earnings Per Share | Period | Basic EPS (2021) | Basic EPS (2020) | Diluted EPS (2021) | Diluted EPS (2020) | | :-------------------------- | :--------------- | :--------------- | :----------------- | :----------------- | | Three Months Ended Mar 31 | $0.11 | $(0.51) | $0.11 | $(0.51) | | Nine Months Ended Mar 31 | $1.85 | $1.49 | $1.84 | $1.48 | 16) Accumulated Other Comprehensive Income (Loss)%20Accumulated%20Other%20Comprehensive%20Income%20(Loss)) Accumulated other comprehensive loss decreased to $(131.0) million at March 31, 2021, from $(147.7) million at June 30, 2020, primarily due to a reduction in foreign currency translation adjustment and unrealized losses on derivative instruments Accumulated Other Comprehensive Income (Loss) | Metric | March 31, 2021 (in thousands) | June 30, 2020 (in thousands) | | :--------------------------------- | :---------------------------- | :--------------------------- | | Total Accumulated Other Comprehensive Income (Loss) | $(131,043) | $(147,659) | | Foreign currency translation adjustment | $(21,745) | $(31,046) | | Unrealized losses on derivative instruments, net of tax | $(2,877) | $(6,733) | 17) Contingencies%20Contingencies) The company is subject to various claims and legal proceedings in the ordinary course of business, including an ongoing lawsuit regarding allegedly faulty sensors. Management believes the outcome of existing legal matters will not have a material impact on the company's financial position, results of operations, or cash flow, with potential liability for the sensor lawsuit estimated between $0 and $4.0 million - Ongoing lawsuit against Standex Electronics, Inc. for allegedly faulty sensors[83] - Potential liability for sensor lawsuit: $0 to $4.0 million[83] - Management does not believe existing legal matters will have a material impact[82] 18) Industry Segment Information%20Industry%20Segment%20Information) The company operates in five reportable segments: Electronics, Engraving, Scientific, Engineering Technologies, and Specialty Solutions. For the three months ended March 31, 2021, Electronics and Scientific segments showed strong net sales and income from operations growth, while Engineering Technologies and Specialty Solutions experienced declines. For the nine-month period, Electronics and Scientific also grew, but Engraving, Engineering Technologies, and Specialty Solutions saw sales and operating income decreases - Five reportable segments: Electronics, Engraving, Scientific, Engineering Technologies, Specialty Solutions[84] Net Sales by Segment (Three Months Ended March 31) | Segment | 2021 (in thousands) | 2020 (in thousands) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :--------- | | Electronics | $65,085 | $48,069 | 35.4% | | Engraving | $36,026 | $35,431 | 1.7% | | Scientific | $24,221 | $14,670 | 65.1% | | Engineering Technologies | $19,951 | $26,730 | (25.4%) | | Specialty Solutions | $26,933 | $30,574 | (11.9%) | Income from Operations by Segment (Three Months Ended March 31) | Segment | 2021 (in thousands) | 2020 (in thousands) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :--------- | | Electronics | $12,364 | $8,017 | 54.2% | | Engraving | $4,510 | $4,472 | 0.8% | | Scientific | $5,803 | $3,204 | 81.1% | | Engineering Technologies | $1,245 | $3,098 | (59.8%) | | Specialty Solutions | $4,251 | $4,879 | (12.9%) | Net Sales by Segment (Nine Months Ended March 31) | Segment | 2021 (in thousands) | 2020 (in thousands) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :--------- | | Electronics | $180,524 | $140,521 | 28.5% | | Engraving | $110,377 | $112,118 | (1.6%) | | Scientific | $58,777 | $44,834 | 31.1% | | Engineering Technologies | $55,091 | $77,869 | (29.3%) | | Specialty Solutions | $75,028 | $89,808 | (16.5%) | Income from Operations by Segment (Nine Months Ended March 31) | Segment | 2021 (in thousands) | 2020 (in thousands) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :--------- | | Electronics | $30,861 | $23,892 | 29.2% | | Engraving | $16,884 | $17,925 | (5.8%) | | Scientific | $14,113 | $10,965 | 28.7% | | Engineering Technologies | $3,076 | $9,879 | (68.9%) | | Specialty Solutions | $11,368 | $14,867 | (23.5%) | 19) Restructuring%20Restructuring) The company incurred $0.5 million in restructuring expenses for Q3 FY2021 and $2.5 million for 9M FY2021, primarily for headcount reductions and productivity improvements in the Engraving segment. Additional restructuring costs of approximately $0.7 million are expected for the remainder of FY2021 Restructuring Expenses | Period | 2021 (in thousands) | 2020 (in thousands) | | :-------------------------- | :------------------ | :------------------ | | Three Months Ended Mar 31 | $482 | $593 | | Nine Months Ended Mar 31 | $2,478 | $2,792 | - Primarily related to headcount reductions and productivity initiatives[88][116] - Expected additional restructuring costs: $0.7 million for remainder of FY2021[92][117] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and future outlook, including strategic overview, COVID-19 impact, and liquidity Overview Standex is a diversified industrial manufacturer with five reportable segments, focused on "Customer Intimacy" through custom solutions. Its long-term strategy involves enhancing shareholder value by building profitable industrial platforms via the Standex Value Creation System, which includes Balanced Performance Plan, Growth Disciplines, Operational Excellence, and Talent Management. The company aims for organic growth and strategic acquisitions, while divesting non-strategic businesses. Recent portfolio moves include divesting Enginetics and Refrigerated Solutions Group, and acquiring Renco Electronics, to focus on higher-growth, higher-margin businesses - Diversified industrial manufacturer with five reportable segments: Electronics, Engraving, Scientific, Engineering Technologies, and Specialty Solutions[94] - Strategy: Enhance shareholder value by building larger, more profitable "Customer Intimacy" focused industrial platforms through the Standex Value Creation System[95] - Standex Value Creation System components: Balanced Performance Plan, Growth Disciplines, Operational Excellence, and Talent Management[97] - Recent portfolio moves: Divested Enginetics (Q3 FY2021), acquired Renco Electronics (Q1 FY2021), divested Refrigerated Solutions Group (Q3 FY2020)[100] Impact of COVID-19 Pandemic on the Company The company continues to be impacted globally by COVID-19, implementing safety protocols and cost-saving measures. While some businesses experienced revenue losses, the Scientific segment saw increased sales due to COVID-19 vaccine distribution. The company maintains strong liquidity with $118.0 million in cash and $209.2 million available under its credit facility, and benefited from the American Rescue Plan Act, reducing pension contributions - Implemented safety protocols and cost-saving measures due to COVID-19[108][109] - Scientific segment experienced increased sales due to COVID-19 vaccine distribution[108] - Cash balance: $118.0 million (Mar 31, 2021)[110] - Available borrowing capacity: $209.2 million (Mar 31, 2021)[110] - Remaining FY2021 U.S. funded pension plan contributions reduced to zero by American Rescue Plan Act[111] Results from Continuing Operations Net sales increased by 10.8% for Q3 FY2021 and 3.1% for 9M FY2021, driven by the Renco acquisition, organic growth in Electronics and Scientific, and positive foreign currency impacts. Gross profit margin improved due to organic sales, productivity, and price increases, despite raw material and freight cost headwinds. Income from operations declined significantly for both periods, primarily due to the $14.6 million loss on the sale of Enginetics. Interest expense decreased due to lower borrowings and rates, while the effective tax rate increased due to a valuation allowance from the Enginetics divestiture. Total backlog under one year declined slightly, with Scientific backlog increasing over 200% due to cold storage demand Net Sales Growth (Continuing Operations) | Period | Total Change | Organic Change | Acquisitions Impact | FX Impact | | :------------------ | :----------- | :------------- | :------------------ | :-------- | | Q3 FY2021 | 10.8% ($16.7M) | 3.9% ($6.1M) | 4.1% ($6.4M) | 2.8% ($4.3M) | | 9M FY2021 | 3.1% ($14.6M) | (2.9%) ($13.4M) | 3.9% ($18.3M) | 2.1% ($9.6M) | Gross Profit Margin | Period | 2021 | 2020 | | :------------------ | :--- | :--- | | Q3 FY2021 | 36.4% | 33.8% | | 9M FY2021 | 36.6% | 36.2% | - Income from operations: $5.7 million (Q3 2021) vs $16.9 million (Q3 2020), a 66.6% decline; $36.7 million (9M 2021) vs $50.4 million (9M 2020), a 27.1% decline[121][122] - Primary reason for operating income decline: $14.6 million loss on sale of Enginetics business[121][122] - Interest expense: $1.3 million (Q3 2021), 25.8% decline; $4.4 million (9M 2021), 24.3% decline[123] - Effective tax rate: 56.3% (Q3 2021) vs 21.6% (Q3 2020); 25.3% (9M 2021) vs 22.7% (9M 2020)[124][125] - Total backlog under 1 year: $177.1 million (Mar 31, 2021) vs $182.3 million (Mar 31, 2020), a 2.9% decline[128] - Scientific backlog increased over 200% due to COVID-19 vaccine rollout demand[128] Segment Analysis This section provides a detailed analysis of the financial performance of each of the company's five reportable segments: Electronics, Engraving, Scientific, Engineering Technologies, and Specialty Solutions, highlighting key drivers for changes in net sales and income from operations for the three and nine months ended March 31, 2021 Electronics Group Net sales increased significantly by 35.4% in Q3 FY2021 and 28.5% in 9M FY2021, driven by strong organic growth (solar, EV, transportation relays/reed switches) and the Renco acquisition. Income from operations also saw substantial growth due to sales volume and cost savings, despite material cost increases Electronics Group Performance | Metric | Q3 2021 (in thousands) | Q3 2020 (in thousands) | Q3 Change (%) | 9M 2021 (in thousands) | 9M 2020 (in thousands) | 9M Change (%) | | :-------------------------- | :--------------------- | :--------------------- | :------------ | :--------------------- | :--------------------- | :------------ | | Net sales | $65,085 | $48,069 | 35.4% | $180,524 | $140,521 | 28.5% | | Income from operations | $12,364 | $8,017 | 54.2% | $30,861 | $23,892 | 29.2% | - Organic sales growth: 17.7% (Q3 2021), 12.1% (9M 2021)[130][132] - Renco acquisition contribution: 13.2% to Q3 sales, 13.0% to 9M sales[130][132] - Expected moderate sequential revenue increase and slight operating margin improvement in Q4 FY2021[134] Engraving Group Net sales increased slightly by 1.7% in Q3 FY2021 but decreased by 1.6% in 9M FY2021. Organic sales declined due to automotive project timing, partially offset by positive foreign exchange impacts. Income from operations remained flat in Q3 but decreased by 5.8% for 9M, reflecting organic sales declines Engraving Group Performance | Metric | Q3 2021 (in thousands) | Q3 2020 (in thousands) | Q3 Change (%) | 9M 2021 (in thousands) | 9M 2020 (in thousands) | 9M Change (%) | | :-------------------------- | :--------------------- | :--------------------- | :------------ | :--------------------- | :--------------------- | :------------ | | Net sales | $36,026 | $35,431 | 1.7% | $110,377 | $112,118 | (1.6%) | | Income from operations | $4,510 | $4,472 | 0.8% | $16,884 | $17,925 | (5.8%) | - Organic sales decline: 3.5% (Q3 2021), 5.2% (9M 2021)[135][137] - Expected slight revenue and more significant operating margin increase in Q4 FY2021 due to favorable geographic mix and demand[138] Scientific Net sales surged by 65.1% in Q3 FY2021 and 31.1% in 9M FY2021, driven by increased demand for cold storage products related to COVID-19 vaccine distribution and growth in pharmaceutical, clinical, and academic markets. Income from operations also increased significantly, despite R&D reinvestments Scientific Group Performance | Metric | Q3 2021 (in thousands) | Q3 2020 (in thousands) | Q3 Change (%) | 9M 2021 (in thousands) | 9M 2020 (in thousands) | 9M Change (%) | | :-------------------------- | :--------------------- | :--------------------- | :------------ | :--------------------- | :--------------------- | :------------ | | Net sales | $24,221 | $14,670 | 65.1% | $58,777 | $44,834 | 31.1% | | Income from operations | $5,803 | $3,204 | 81.1% | $14,113 | $10,965 | 28.7% | - Driven by demand for cold storage for COVID-19 vaccine distribution[139] - Expected moderate sequential decrease in revenue and margin in Q4 FY2021 due to lower COVID-19 vaccine storage demand and higher freight costs[142] Engineering Technologies Group Net sales decreased significantly by 25.4% in Q3 FY2021 and 29.3% in 9M FY2021, primarily due to the impact of COVID-19 on commercial aviation and project timing in space and energy segments, partially offset by defense sales. Operating income also declined sharply due to lower volume Engineering Technologies Group Performance | Metric | Q3 2021 (in thousands) | Q3 2020 (in thousands) | Q3 Change (%) | 9M 2021 (in thousands) | 9M 2020 (in thousands) | 9M Change (%) | | :-------------------------- | :--------------------- | :--------------------- | :------------ | :--------------------- | :--------------------- | :------------ | | Net sales | $19,951 | $26,730 | (25.4%) | $55,091 | $77,869 | (29.3%) | | Income from operations | $1,245 | $3,098 | (59.8%) | $3,076 | $9,879 | (68.9%) | - Decline due to COVID-19 impact on commercial aviation and project timing in space/energy[143][144] - Expected Q4 FY2021 revenue similar to prior quarter (after Enginetics sale impact) with significant operating margin increase[146] Specialty Net sales decreased by 11.9% in Q3 FY2021 and 16.5% in 9M FY2021, primarily due to COVID-19 related market downturns in beverage and food service display merchandising, and OEM equipment markets. Income from operations also declined due to reduced sales volume and increased raw material costs, partially offset by productivity actions Specialty Group Performance | Metric | Q3 2021 (in thousands) | Q3 2020 (in thousands) | Q3 Change (%) | 9M 2021 (in thousands) | 9M 2020 (in thousands) | 9M Change (%) | | :-------------------------- | :--------------------- | :--------------------- | :------------ | :--------------------- | :--------------------- | :------------ | | Net sales | $26,933 | $30,574 | (11.9%) | $75,028 | $89,808 | (16.5%) | | Income from operations | $4,251 | $4,879 | (12.9%) | $11,368 | $14,867 | (23.5%) | - Decline due to COVID-19 impact on beverage, food service, and OEM equipment markets[147][149] - Expected slight revenue increase in Q4 FY2021 due to recovery in beverage/food service and OEM markets, but slight operating income decrease due to material inflation[151] Corporate and Other Corporate expenses increased by 18.4% in Q3 FY2021 due to wage inflation and incentive compensation, but decreased by 4.8% for 9M FY2021 due to reductions in incentive compensation and cost savings. This section also includes the loss on sale of business, acquisition-related costs, and restructuring expenses Corporate and Other Performance | Metric | Q3 2021 (in thousands) | Q3 2020 (in thousands) | Q3 Change (%) | 9M 2021 (in thousands) | 9M 2020 (in thousands) | 9M Change (%) | | :-------------------------- | :--------------------- | :--------------------- | :------------ | :--------------------- | :--------------------- | :------------ | | Corporate Income (loss) from operations | $(7,162) | $(6,048) | 18.4% | $(21,607) | $(22,688) | (4.8%) | | Loss on sale of business | $(14,624) | $0 | N/A | $(14,624) | $0 | N/A | | Acquisition-related costs | $(255) | $(120) | 112.5% | $(850) | $(1,650) | (48.5%) | | Restructuring | $(482) | $(593) | (19%) | $(2,478) | $(2,792) | (11.2%) | - Q3 increase in corporate expenses due to general wage inflation and incentive compensation[152] - 9M decrease in corporate expenses due to reductions in incentive compensation, management transition costs, and other cost savings[152] Discontinued Operations The Refrigerated Solutions Group, previously classified as discontinued operations, reported no net sales for the three and nine months ended March 31, 2021, as the divestiture was finalized in Q4 FY2020. The segment reported net losses for both periods - No net sales from discontinued operations for Q3 and 9M FY2021[154] Net Income (Loss) from Discontinued Operations | Period | 2021 (in thousands) | 2020 (in thousands) | | :-------------------------- | :------------------ | :------------------ | | Three Months Ended Mar 31 | $(331) | $(18,375) | | Nine Months Ended Mar 31 | $(1,588) | $(16,562) | Liquidity and Capital Resources The company maintains strong liquidity with $118.0 million in cash (69% held by foreign subsidiaries) and $209.2 million available under its $500 million credit facility. Net cash from operating activities increased significantly for 9M FY2021. Cash used in investing activities increased due to the Renco acquisition and capital expenditures, partially offset by Enginetics divestiture proceeds. Financing activities primarily involved stock repurchases and dividends. The company expects FY2021 capital spending of $22.0-$25.0 million and has sufficient liquidity to cover pension contributions - Cash balance: $118.0 million (Mar 31, 2021), with $81.6 million held by foreign subsidiaries[155] - Net cash provided by continuing operating activities: $49.3 million (9M 2021) vs $29.5 million (9M 2020)[156] - Net cash used in investing activities: $32.8 million (9M 2021), including $27.4 million for Renco acquisition and $15.6 million for capital expenditures, offset by $11.7 million from Enginetics sale[156] - Net cash used in financing activities: $23.6 million (9M 2021), including $16.2 million for stock repurchases and $8.5 million for dividends[156] - Available borrowing capacity under credit facility: $209.2 million (Mar 31, 2021)[159] - Expected FY2021 capital spending: $22.0-$25.0 million[163] Capitalization | Metric | March 31, 2021 (in thousands) | June 30, 2020 (in thousands) | | :-------------------------- | :---------------------------- | :--------------------------- | | Net debt | $82,077 | $80,341 | | Stockholders' equity | $482,653 | $461,632 | | Total capitalization | $564,730 | $541,973 | Other Matters The company addresses various operational factors including inflation (wages, benefits, raw materials), foreign currency translation risks (Euro, British Pound Sterling, Japanese Yen, Chinese Yuan), defined benefit pension plans (U.S. plan frozen), environmental compliance, low seasonality, and employee relations (union agreements) - Exposure to inflation for wages, benefits, occupancy, and raw materials (steel, metals, petroleum-based products, rhodium)[168][179] - Primary functional currencies for non-U.S. subsidiaries: Euro, British Pound Sterling, Japanese Yen, Chinese Yuan[169] - U.S. defined benefit pension plan is frozen[169] - Believes to be in substantial compliance with environmental laws and regulations[170] - Generally low levels of seasonality[171] Critical Accounting Policies The company's financial statements require estimates and assumptions, and while management believes reported amounts are not materially different, actual results could vary. Key accounting policies are detailed in the annual Form 10-K - Preparation of financial statements involves significant estimates and assumptions[172] - Actual results could differ from estimates[172] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section details the company's exposure to market risks, including interest rate, commodity price, and foreign currency exchange risks, and outlines its strategies for managing these risks, primarily through hedging instruments and diversified operations Risk Management The company is exposed to market risks from interest rates, commodity prices, and foreign currency exchange. It uses derivative financial instruments selectively for hedging purposes only, with internal policies restricting speculative trading - Exposed to market risks from interest rates, commodity prices, and foreign currency exchange[173] - Uses derivative financial instruments for hedging purposes only; speculative trading is prohibited[173] Exchange Rate Risk The company faces transactional and translation risks from foreign currency exchange rates. Transactional risk is mitigated by natural hedges and forward foreign currency contracts, which are used for hedging anticipated cash flows. Translation risk is primarily from the Euro, British Pound Sterling, Peso, Japanese Yen, and Chinese Yuan, but a hypothetical 10% change is not expected to materially impact operations - Mitigates transactional risk with natural hedges and forward foreign currency contracts[174] - Primary translation risk currencies: Euro, British Pound Sterling, Peso, Japanese Yen, Chinese Yuan[175] - Hypothetical 10% currency fluctuation not expected to materially impact operations, financial position, or cash flows[175] - Fair value of open foreign exchange contracts (liability): $1.3 million (Mar 31, 2021)[174] Interest Rate Risk The company's interest rate exposure is primarily from variable rate borrowings, mitigated by $200.0 million in interest rate swap agreements that convert LIBOR to a weighted average fixed rate of 1.27%. The effective interest rate on borrowings was 2.62% at March 31, 2021, and a 25-basis point increase would not change annual interest expense due to these swaps - Effective interest rate on borrowings: 2.62% (Mar 31, 2021)[176] - $200.0 million in interest rate swaps convert LIBOR to a weighted average fixed rate of 1.27%[176] - A 25-basis point interest rate increase would not change annual interest expense[176] - Fair value of interest rate swaps (liability): $3.2 million (Mar 31, 2021)[176] Concentration of Credit Risk The company has a diversified customer base, minimizing concentration of credit risk. No single customer accounted for more than 5% of consolidated outstanding receivables or sales as of March 31, 2021 - Diversified customer base minimizes credit risk[177] - No single customer accounted for >5% of receivables or sales (Mar 31, 2021)[177] Commodity Prices The company is exposed to fluctuating commodity prices for materials like steel, other metals, and petroleum-based products, particularly rhodium in the Electronics segment. While the company generally does not use long-term purchase contracts, it aims to offset price increases through pricing actions, though acceptance depends on competitors - Exposed to fluctuating prices for steel, other metal commodities, and petroleum-based products (e.g., rhodium)[178][179] - Aims to implement price increases to offset rising raw material costs[179] Item 4. Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2021. The evaluation excluded Renco Electronics, acquired in FY2021, which represents a small portion of consolidated revenue and assets. No material changes to internal control over financial reporting occurred during the quarter - Disclosure controls and procedures were effective as of March 31, 2021[180] - Evaluation excluded Renco Electronics (acquired FY2021), which represents ~3.8% of consolidated revenue and ~2.6% of consolidated assets[181] - No material changes to internal control over financial reporting during the quarter[182] PART II. OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 93,515 shares of common stock for approximately $8.6 million during the quarter ended March 31, 2021, under its open-ended Stock Buyback Program. As of March 31, 2021, $27.0 million remained authorized for repurchase under the program - Shares repurchased: 93,515 shares (Q1 2021)[184] - Average price paid per share: $92.10[184] - Remaining authorization under Stock Buyback Program: $27,038k (Mar 31, 2021)[184] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial Officer, and the financial statements formatted in iXBRL - Includes certifications (31.1, 31.2, 32) and iXBRL financial statements (101, 104)[188] SIGNATURES The report is duly signed on behalf of Standex International Corporation by its Vice President/Chief Financial Officer and Vice President/Chief Accounting Officer/Assistant Treasurer on May 7, 2021 - Signed by Ademir Sarcevic (VP/CFO) and Sean C. Valashinas (VP/CAO/Assistant Treasurer)[191] - Date of signing: May 7, 2021[191]