Item 5. Market for Registrant’s Common Equity
Item 5. Market for Standex Common Stock
 
Related Stockholder Matters and Issuer Purchases of Equity Securities
 
The principal market in which the Common Stock of Standex is traded is the New York Stock Exchange under the ticker symbol “SXI”.  The approximate number of stockholders of record on July 31,  2022 was 1,247.
 
Additional information regarding our equity compensation plans is presented in the Notes to Consolidated Financial Statements under the caption “Stock-Based Compensation and Purchase Plans” and Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
 
Issuer Purchases of Equity Securities (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter Ended June 30, 2022
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period
 
(a) Total Number of Shares (or units) Purchased
 
 
(b) Average Price Paid per Share (or unit)
 
 
(c) Total Number of Shares (or units) Purchased as Part of Publicly Announced Plans or Programs
 
 
(d) Maximum Number (or Appropriate Dollar Value) of Shares (or units) that May Yet Be Purchased Under the Plans or Programs
 
April 1 - April 30, 2022
 
 
-
 
 
$
-
 
 
 
-
 
 
$
100,648
 
May 1 - May 31, 2022
 
 
107,314
 
 
 
93.16
 
 
 
107,314
 
 
 
90,651
 
June 1 - June 30, 2022
 
 
-
 
 
 
-
 
 
 
-
 
 
 
90,651
 
TOTAL
 
 
107,314
 
 
$
93.16
 
 
 
107,314
 
 
$
90,651
 
 
(1) The Company has a Stock Buyback Program (the “Program”) which was originally announced on January 30, 1985 and most recently amended on April 28, 2022. Under the Program, the Company is authorized to repurchase up to an aggregate of $200 million of its shares. Under the program, purchases may be made from time to time on the open market, including through 10b5-1 trading plans, or through privately negotiated transactions, block transactions, or other techniques in accordance with prevailing market conditions and the requirements of the Securities and Exchange Commission. The Board’s authorization is open-ended and does not establish a timeframe for the purchases. The Company is not obligated to acquire a particular number of shares, and the program may be discontinued at any time at the Company’s discretion.
 
16
 
 
The following graph compares the cumulative total stockholder return on the Company’s Common Stock as of the end of each of the last five fiscal years, with the cumulative total stockholder return on the Standard & Poor’s Small Cap 600 (Industrial Segment) Index and on the Russell 2000 Index, assuming an investment of $100 in each at their closing prices on June 30, 2017 and the reinvestment of all dividends.
 
 
 
Item 6. Selected Consolidated Financial Data
 
Not Applicable
 
17
 
 
Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
We are a diversified industrial manufacturer with leading positions in a variety of products and services that are used in diverse commercial and industrial markets. We have seven operating segments that aggregate to five reportable segments. Please refer to Item 1. Business, above, for additional information regarding our segment structure and management strategy.
 
As part of our ongoing strategy:
 
 
o
In the third quarter of fiscal year 2022, we acquired Sensor Solutions, a designer and manufacturer of customized standard magnetic sensor products including hall effect switch and latching sensors, linear and rotary sensors, and specialty sensors. Sensor Solutions' customer base in automotive, industrial, medical, aerospace, military and consumer electronics end markets are a strategic fit and expand our presence in these markets. Sensor Solution's operates one light manufacturing facility in Colorado. Its results are reported within our Electronics segment. 
 
 
o
In the third quarter of fiscal year 2021, we divested Enginetics Corporation (“Enginetics”) our jet engine components business reported within our Engineering Technologies segment, to Enjet Aero, LLC, a privately held aerospace engine component manufacturing company. This divestiture allows us to focus on the higher growth and margin opportunities of our core spin forming solutions business that serves the space, commercial aviation and defense end markets.  We received $11.7 million cash consideration and recorded a pre-tax loss on the sale of $14.6 million in the Consolidated Financial Statements including a goodwill impairment charge of $7.6 million, assigned to the entirety of the Engineering Technologies segment, and a $5.4 million write-down of intangible assets.  
 
 
o
During the first quarter of fiscal year 2021, we acquired Renco Electronics, a designer and manufacturer of customized standard magnetics components and products including transformers, inductors, chokes and coils for power and RF applications.  Renco’s end markets and customer base in areas such as consumer and industrial applications are highly complementary to our existing business with the potential to further expand key account relationships and capitalize on cross selling opportunities between the two companies.  Renco operates one manufacturing facility in Florida and is supported by contract manufacturers in Asia.  Renco’s results are reported within our Electronics segment beginning in fiscal year 2021.
 
 
o
During the third quarter of fiscal year 2020, we initiated a program and signed an agreement to divest our Master-Bilt and NorLake businesses (together our Refrigerated Solutions Group or RSG).  This divestiture allowed us to continue the simplification of our portfolio and enabled us to focus more clearly on those of our businesses that sell differentiated products and which have higher growth and margin profiles.  The divestiture was finalized and consideration was exchanged in the fourth quarter of 2020.  Results of RSG in current and prior periods have been classified as discontinued operations in the Consolidated Financial Statements.  
 
18
 
 
As a result of these portfolio moves, we have transformed Standex to a company with a more focused group of businesses selling customized solutions to high value end markets via a compelling customer value proposition.  The narrowing of the portfolio allows for greater management focus on driving operational disciplines and positions us well to use our cash flow from operations to invest selectively in our ongoing pipeline of organic and inorganic opportunities.
 
The Company’s strong historical cash flow has been a cornerstone for funding our capital allocation strategy.  We use cash flow generated from operations to fund investments in capital assets to upgrade our facilities, improve productivity and lower costs, invest in the strategic growth programs described above, including organic growth and acquisitions, and to return cash to our shareholders through payment of dividends and stock buybacks. 
 
Restructuring expenses reflect costs associated with our efforts of continuously improving operational efficiency and expanding globally in order to remain competitive in our end-user markets.  We incur costs for actions to size our businesses to a level appropriate for current economic conditions, improve our cost structure, enhance our competitive position and increase operating margins.  Such expenses include costs for moving facilities to locations that allow for lower fixed and variable costs, external consultants who provide additional expertise starting up plants after relocation, downsizing operations because of changing economic conditions, and other costs resulting from asset redeployment decisions.  Shutdown costs include severance, benefits, stay bonuses, lease and contract terminations, asset write-downs, costs of moving fixed assets, and moving and relocation costs. Vacant facility costs include maintenance, utilities, property taxes and other costs.
 
Because of the diversity of the Company’s businesses, end user markets and geographic locations, management does not use specific external indices to predict the future performance of the Company, other than general information about broad macroeconomic trends.  Each of our individual business units serves niche markets and attempts to identify trends other than general business and economic conditions which are specific to its business and which could impact their performance.  Those units report pertinent information to senior management, which uses it to the extent relevant to assess the future performance of the Company.  A description of any such material trends is described below in the applicable segment analysis.
 
We monitor a number of key performance indicators (“KPIs”) including net sales, income from operations, backlog, effective income tax rate, gross profit margin, and operating cash flow.  A discussion of these KPIs is included below.  We may also supplement the discussion of these KPIs by identifying the impact of foreign exchange rates, acquisitions, and other significant items when they have a material impact on a specific KPI. 
 
We believe the discussion of these items provides enhanced information to investors by disclosing their impact on the overall trend which provides a clearer comparative view of the KPI, as applicable.  For discussion of the impact of foreign exchange rates on KPIs, the Company calculates the impact as the difference between the current period KPI calculated at the current period exchange rate as compared to the KPI calculated at the historical exchange rate for the prior period.  For discussion of the impact of acquisitions, we isolate the effect on the KPI amount that would have existed regardless of our acquisition.  Sales resulting from synergies between the acquisition and existing operations of the Company are considered organic growth for the purposes of our discussion.
 
Unless otherwise noted, references to years are to fiscal years.
 
19
 
Impact of COVID-19 Pandemic on the Company
 
Given the global nature of our business and the number of our facilities worldwide, we continue to be impacted globally by COVID-19 related issues. We have taken effective action around the world to protect our health and safety, continue to serve our customers, support our communities and manage our cash flows.  Our priority was and remains the health and safety of all of our employees.  Each of our facilities is following safe practices as defined in their local jurisdictions as well as sharing experiences and innovative ways of overcoming challenges brought on by the crisis during updates with global site leaders.  We are rigorously following health protocols in our plants, including changing work cell configurations and revising shift schedules when appropriate, in order to do our best to maintain operations.  Initially, we experienced revenue reductions in many of our businesses due to the impact that the pandemic had on our customers. Conversely, public and private sector responses to COVID-19 vaccine distribution, especially in the United States, have resulted in increased sales of scientific refrigeration equipment to customers within our Scientific reporting segment. While overall customer demand has rebounded from the impact of the pandemic, more recently we have been impacted by (i) supply chain shortages, (ii) increased material costs, (iii) labor shortages, especially in North America, and (iv) lockdowns implemented by the Chinese government in select cities in which we operate. Like other industrial manufacturers, we are impacted by rising inflation which we attempt to manage through appropriate pricing actions and enhanced production efficiency measures.
 
We exited the fourth quarter of 2022 with $104.8 million in cash and $175.0 million of borrowings under our revolving credit facility.  Our leverage ratio covenant, as defined in our revolving credit agreement, was 0.98 to 1 and allowed us the capacity to borrow an additional $312.6 million at June 30, 2022.  We believe that we have sufficient liquidity around the world and access to financing to execute on our short and long-term strategic plans.
 
Finally, we continue to monitor our ability to participate in any governmental assistance programs available to us in each of our global locations and participate in these programs as available and appropriate. 
 
Consolidated Results from Continuing Operations (in thousands):
 
 
 
2022
 
 
2021
 
 
2020
 
Net sales
 
$
735,339
 
 
$
656,232
 
 
$
604,535
 
Gross profit margin
 
 
36.7
%
 
 
36.8
%
 
 
35.6
%
Restructuring costs
 
 
4,399
 
 
 
3,478
 
 
 
4,669
 
Acquisition related expenses
 
 
1,618
 
 
 
931
 
 
 
1,759
 
Other operating expense
 
 
5,745
 
 
 
-
 
 
 
-
 
Loss on sale of business
 
 
-
 
 
 
(14,624
)
 
 
-
 
Income from operations
 
 
88,294
 
 
 
59,165
 
 
 
60,528
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Backlog (realizable within 1 year)
 
$
256,248
 
 
$
210,491
 
 
$
152,304
 
 
 
 
2022
 
 
2021
 
 
2020
 
Net sales
 
$
735,339
 
 
$
656,232
 
 
$
604,535
 
Components of change in sales:
 
 
 
 
 
 
 
 
 
 
 
 
Effect of acquisitions
 
 
1,918
 
 
 
25,554
 
 
 
11,635
 
Effect of exchange rates
 
 
(9,874
)
 
 
14,471
 
 
 
(6,089
)
Effect of business divestitures
 
 
(9,239
)
 
 
(3,633
)
 
 
-
 
Organic sales change
 
 
96,302
 
 
 
15,305
 
 
 
(40,942
)
 
Net sales increased for fiscal year 2022 by $79.1 million or 12.1% when compared to the prior year. Organic sales increased $96.3 million or 14.7% primarily due to pricing actions and strong demand in our Electronics segment, acquisitions had a $1.9 million impact on sales, and foreign currency had a $9.9 million or 1.5% negative impact on sales. Net sales in the prior year included revenue of $9.2 million related to our divested Enginetics business. We discuss our results and outlook for each segment below. 
 
Net sales increased for fiscal year 2021 by $51.7 million or 8.6% when compared to the prior year end. The acquisition of Renco contributed $25.6 million or 4.2% to overall sales growth. Organic sales increased $15.3 million or 2.5% primarily as a result of impacts from the COVID-19 pandemic economic recovery, and foreign currency had a $14.5 million or 2.4% positive impact on sales. These increases were offset by a $3.6 million impact on sales due to the divestiture of Enginetics in the third quarter of fiscal year 2021.
 
Gross Profit 
 
Gross profit in fiscal year 2022 increased to $269.9 million, or a gross margin of 36.7% as compared to $241.3 million, or a gross margin of 36.8% in fiscal year 2021. This increase is a result of organic sales increases, productivity initiatives and targeted prices increases, partially offset by raw material and ocean freight cost headwinds, a one-time project related charge at Engineering Technologies, along with production decreases due to a temporary work stoppage in our Specialty Solutions segment which was resolved during the first quarter.
20
 
Gross profit in fiscal year 2021 increased to $241.3 million, or a gross margin of 36.8% as compared to $215.5 million, or a gross margin of 35.6% in fiscal year 2020. This increase is a result of organic sales increases, productivity initiatives and targeted prices increases, offset by raw material and ocean freight cost headwinds, along with business mix. 
 
Selling, General, and Administrative Expenses
 
Selling, general, and administrative expenses, (“SG&A”) for the fiscal year 2022 were $169.9 million, or 23.1% of sales compared to $163.1 million, or 24.8% of sales during the prior year. SG&A expenses during this period were primarily impacted by increased distribution expenses associated with the customer mix and higher organic sales volume and increased research and development spending to drive future product initiatives.
 
Selling, general, and administrative expenses, (“SG&A”) for the fiscal year 2021 were $163.1 million, or 24.8% of sales compared to $148.5 million, or 24.6% of sales during the prior year. SG&A expenses during this period were impacted by approximately $4.8 million of SG&A expenses related to the Renco acquisition, increased distribution expenses of $2.0 million as a result of increased organic sales, an increase in research and development spending to drive future product initiatives, and general wage inflation, offset by productivity and cost out actions. 
 
Restructuring Charges
 
During fiscal year 2022, we incurred restructuring expenses of $4.4 million, primarily related to productivity improvements, facility rationalization activities, and global headcount reductions within our Engraving and Electronics segments.
 
During fiscal year 2021, we incurred restructuring expenses of $3.5 million, primarily related to productivity improvements, facility rationalization activities, and global headcount reductions within our Engraving and Specialty Solutions segments.
 
Loss on Sale of Business
 
We recorded a pre-tax loss on sale of the Enginetics business of $14.6 million for fiscal year 2021. The loss included a $7.6 million impairment of goodwill assigned to the entirety of the Engineering Technologies segment and a $5.4 million write-down of intangible assets. 
 
Acquisition Related Expenses
 
We incurred acquisition related expenses of $1.6 million and $0.9 million in fiscal year 2022 and 2021, respectively. Acquisition related expenses typically consist of due diligence, integration, and valuation expenses incurred in connection with recent or pending acquisitions.
 
Other Operating Expense 
 
We incurred expense of $5.7 million in fiscal year 2022 related to a litigation accrual. Refer to Part II, Item 8, Note 12, "CONTINGENCIES," in the Notes to the Consolidated Financial Statements for details.
 
Income from Operations
 
Income from operations for the fiscal year 2022 was $88.3 million, compared to $59.2 million during the prior year. The $29.1 million increase, or 49.2% is primarily due to the loss on sale of the Enginetics business of $14.6 million in the prior year, income from organic sales increases and pricing actions, along with cost reduction activities and productivity improvement initiatives implemented in all of our businesses, partially offset by material inflation, logistics and labor costs as well as the impact of the COVID-19 lockdown in China in the fourth fiscal quarter of 2022 and a litigation charge of $5.7 million.
 
Income from operations for the fiscal year 2021 was $59.2 million, compared to $60.5 million during the prior year. The $1.4 million decrease, or 2.3% is primarily due to the loss on sale of the Enginetics business of $14.6 million along with material inflation, partially offset by income from organic sales increases and pricing actions, along with cost reduction activities and productivity improvement initiatives implemented in all of our businesses.
 
Discussion of the performance of each of our reportable segments is fully explained in the segment analysis that follows.  
 
Interest Expense
 
Interest expense for the fiscal year 2022 was $5.9 million a decrease of $0.1 million as compared to the prior year. Interest expense for the fiscal year 2021 was $6.0 million, a decrease of $1.5 million as compared to the prior year.
 
21
 
 
Income Taxes
 
On March 27, 2020, the CARES Act was enacted to address the economic impact of the COVID-19 pandemic in the United States. Among other things, the CARES Act allows a five-year carryback period for tax losses generated in 2019 through 2021. The June 30, 2021 tax provision includes benefits of $0.2 million and $0.8 million from tax losses in the years ended June 30, 2019 and June 30, 2020, respectively, that the CARES Act allows to be carried back to the years ended June 30, 2014 and June 30, 2015, when the U.S. federal income tax rate was 35%.
 
The income tax provision from continuing operations for the fiscal year ended June 30, 2022 was $19.8 million, or an effective rate of 24.4% compared to $14.2 million, or an effective rate of 26.9% for the year ended June 30, 2021, and $13.1 million, or an effective rate of 24.2% for the year ended June 30, 2020. Changes in the effective tax rates from period to period may be significant as they depend on many factors including, but not limited to, the amount of our income or loss, the mix of income earned in the US versus outside the US, the effective tax rate in each of the countries in which we earn income, and any one-time tax issues which occur during the period.
 
The income tax provision from continuing operations for the fiscal year ended June 30, 2022 was impacted by the following items: (i) a tax provision of $4.3 million due to the mix of income in various jurisdictions, (ii) a tax benefit of $2.2 million related to Federal R&D credit and Foreign Tax credit (iii) a tax benefit of $1.3 million related to return-to-accrual adjustments to true up prior-period provision amounts, and (iv) a tax expense of $1.0 million related to uncertain tax position. 
 
The income tax provision from continuing operations for the fiscal year ended June 30, 2021 was impacted by the following items: (i) a tax provision of $5.1 million due to the mix of income in various jurisdictions, (ii) a tax benefit of $1.0 million from our 2019 and 2020 tax losses that the CARES Act allows to be carried back to 2014 and 2015, when the U.S. federal income tax rate was 35%, (iii) a tax benefit of $0.8 million related to Federal R&D credit and Foreign Tax Credit, (iv) a tax benefit of $1.7 million related to return-to-accrual adjustments to true-up up prior-period provision amounts, and (v) the tax expense of $1.2 million attributable to the divestiture of the Enginetics Corporation during the year.
 
The income tax provision from continuing operations for the fiscal year ended June 30, 2020 was impacted by the following items: (i) a tax benefit of $1.2 million related to the Federal R&D credit, (ii) a tax provision of $1.4 million due to the mix of income in various jurisdictions, (iii) a tax benefit of $0.7 million related to the release of uncertain tax provision reserves, and (iv) a tax provision of $0.8 million related to GILTI.
 
 
Capital Expenditures
 
Our capital spending is focused on growth initiatives, cost reduction activities, and upgrades to extend the capabilities of our capital assets.  In general, we anticipate our capital expenditures over the long-term will be approximately 3% to 5% of net sales. 
 
During fiscal year 2022, capital expenditures were $23.9 million or 3.2% of net sales, as compared to $21.4 million, or 3.3%, of net sales in the prior year. We expect 2023 capital spending to be between $35 million and $40 million.
 
Backlog
 
Backlog includes all active or open orders for goods and services.  Backlog also includes any future deliveries based on executed customer contracts, so long as such deliveries are based on agreed upon delivery schedules. Backlog orders are not necessarily an indicator of future sales levels because of variations in lead times and customer production demand pull systems, with the exception of Engineering Technologies. Customers may delay delivery of products or cancel orders prior to shipment, subject to possible cancellation penalties. Due to the nature of long-term agreements in the Engineering Technologies segment, the timing of orders and delivery dates can vary considerably resulting in significant backlog changes from one period to another. 
 
22
 
Backlog orders are as follows (in thousands): 
 
 
 
As of June 30, 2022
 
 
As of June 30, 2021
 
 
 
Total
 
 
Backlog under
 
 
Total
 
 
Backlog under
 
 
 
Backlog
 
 
1 year
 
 
Backlog
 
 
1 year
 
Electronics
 
$
179,778
 
 
$
149,247
 
 
$
121,488
 
 
$
118,322
 
Engraving
 
 
19,794
 
 
 
14,250
 
 
 
20,076
 
 
 
13,401
 
Scientific
 
 
4,356
 
 
 
4,356
 
 
 
5,872
 
 
 
5,871
 
Engineering Technologies
 
 
49,990
 
 
 
43,644
 
 
 
68,375
 
 
 
46,350
 
Specialty Solutions
 
 
47,569
 
 
 
44,751
 
 
 
31,356
 
 
 
26,547
 
Total
 
$
301,487
 
 
$
256,248
 
 
$
247,167
 
 
$
210,491
 
 
Total backlog realizable within one year increased $45.8 million, or 21.7% to $256.3 million at June 30, 2022 from $210.5 million at June 30, 2021.  Electronics total backlog increased 46% due to demand in all geographic markets in response to the beginning of the global recovery from the pandemic, new business opportunities, plus an additional $2.3 million due to the acquisition of Sensor Solutions. Backlog declines in the Engineering Technologies segment are primarily due to project related timing, particularly in the space end market.
 
Changes in backlog under 1 year are as follows (in thousands):
 
 
 
As of June 30, 2022
 
Backlog under 1 year, prior year period
 
$
210,491
 
Components of change in backlog:
 
 
 
 
Organic change
 
 
43,504
 
Effect of acquisitions
 
 
2,253
 
Backlog under 1 year, current period
 
$
256,248
 
 
Segment Analysis (in thousands)
 
Overall Outlook
 
Looking forward to fiscal year 2023, we expect to be well-positioned, with anticipated continued improvement in key financial metrics, supported by productivity initiatives.
 
In general, for fiscal year 2023, we expect:
 
 
●
continued growth in transportation markets from electric vehicle programs, both the ramp up of existing business and new business opportunities, including sensors for chargers plugs and soft trim growth;
 
●
vaccine storage demand to decline after record COVID-19 related surge in fiscal year 2021 and early fiscal year 2022, countered by a return of demand from universities and research institutions;
 
●
commercial aviation and defense end markets to remain strong with double digit sales increase from the prior year based on current program expectations;
 
●
space markets to remain attractive, with an anticipated moderate volume decline due to timing of production versus launch;
 
●
refuse and dump end markets to remain stable while being supported by investments in the U.S. infrastructure bill;
 
●
strong Merchandising and Pumps business to benefit from return to pre-COVID-19 demand levels in food service equipment markets. 
 
Electronics
 
 
2022 compared to 2021
 
 
2021 compared to 2020
 
(in thousands except
 
 
 
 
 
 
 
%
 
 
 
 
 
 
 
 
%
 
percentages)
 
2022
 
 
2021
 
 
Change
 
 
2021
 
 
2020
 
 
Change
 
Net sales
 
$304,290
 
 
$253,369
 
 
20.1%
 
 
$253,369
 
 
$185,294
 
 
36.7%
 
Income from operations
 
70,428
 
 
46,600
 
 
51.1%
 
 
46,600
 
 
29,749
 
 
56.6%
 
Operating income margin
 
23.1%
 
 
18.4%
 
 
 
 
 
18.4%
 
 
16.1%
 
 
 
 
 
23
 
 
Net sales in fiscal year 2022 increased $50.9 million, or 20.1%, when compared to the prior year. Organic sales increased $56.1 million, or 22.2%, reflecting a broad-based geographical recovery with continued strong demand for all product groups as well as new business opportunities, including the impact of a COVID-19 lockdown in China in the fourth fiscal quarter. Acquisitions in fiscal year 2022 added $1.9 million, or 0.8% in sales. The foreign currency impact decreased sales by $7.1 million, or 2.8%. 
 
Income from operations in the fiscal year 2022 increased $23.8 million, or 51.1%, when compared to the prior year. The operating income increase was the result of organic sales growth, various pricing actions and cost saving initiatives, partially offset by material and freight cost increases.
 
In the first quarter of fiscal year 2023, on a sequential basis, we expect a moderate increase in revenue due to continued positive end market demand trends and some recovery of sales deferred due to the COVID-19 lockdown in China. We also expect a slight sequential increase in operating margin reflecting the sales increase partially offset by product mix. 
 
Net sales in fiscal year 2021 increased 68.1 million, or 36.7%, when compared to the prior year as organic sales increased $35.9 million, or 3.6%. The Renco Electronics acquisition added $25.6 million or 13.8%. The foreign currency impacted increased sales by $6.6 million, or $6.5%. Organic sales growth was positive in all geographic areas as well as the product groups of magnetics, sensors and switching technologies supported by the rebound from the COVID-19 pandemic impact. 
 
Income from operations in the fiscal year 2021 increased $16.9 million, or 56.6% when compared to the prior year. The operating income increase was the result of organic sales growth, product line mix, various cost savings initiatives, and the impact of the Renco acquisition, offset by inflationary material cost increases.
 
Engraving
 
 
2022 compared to 2021
 
 
2021 compared to 2020
 
(in thousands except
 
 
 
 
 
 
 
%
 
 
 
 
 
 
 
 
%
 
percentages)
 
2022
 
 
2021
 
 
Change
 
 
2021
 
 
2020
 
 
Change
 
Net sales
 
$146,255
 
 
$147,016
 
 
(0.5%)
 
 
$147,016
 
 
$143,736
 
 
2.3%
 
Income from operations
 
21,825
 
 
22,510
 
 
(3.0%)
 
 
22,510
 
 
20,493
 
 
9.8%
 
Operating income margin
 
14.9%
 
 
15.3%
 
 
 
 
 
15.3%
 
 
14.3%
 
 
 
 
 
Net sales in fiscal year 2022 decreased by $0.8 million, or 0.5%, compared to the prior year. Organic sales increased by $0.9 million, or 0.6%, as a result of timing of projects. The sales increase was offset by foreign exchange impacts of $1.6 million, or 1.1%.
 
Income from operations in fiscal year 2022 decreased by $0.7 million, or 3.0%, when compared to the prior year, reflecting geographic mix, partially offset by productivity initiatives.
 
In the first quarter of fiscal year 2023, we expect a slight sequential decrease in revenue and operating margin due to project mix partially offset by operational improvements.
 
Net sales in fiscal year 2021 increased by $3.3 million or 2.3% compared to the prior year. Favorable foreign exchange impacts of $6.6 million, or 4.6%, for the period were offset by organic sales declines of $3.3 million, or 2.3%, as a result of the regional timing of automotive projects.
 
Income from operations in fiscal year 2021 increased by $2.0 million, or 9.8%, when compared to the prior year. The increase was primarily a result of cost savings initiatives partially offset by organic sales declines for the year. 
 
Scientific
 
 
 
2022 compared to 2021
 
 
2021 compared to 2020
 
(in thousands except
 
 
 
 
 
 
 
%
 
 
 
 
 
 
 
 
%
 
percentages)
 
2022
 
 
2021
 
 
Change
 
 
2021
 
 
2020
 
 
Change
 
Net sales
 
$83,850
 
 
$79,421
 
 
5.6%
 
 
$79,421
 
 
$57,523
 
 
38.1%
 
Income from operations
 
17,861
 
 
18,240
 
 
(2.1%)
 
 
18,240
 
 
13,740
 
 
32.8%
 
Operating income margin
 
21.3%
 
 
23.0%
 
 
 
 
 
23.0%
 
 
23.9%
 
 
 
 
 
Net sales in fiscal year 2022 increased by $4.4 million, or 5.6% when compared to the prior year.  The net sales increase reflects overall growth in end markets, such as pharmaceutical channels, clinical settings, and academic laboratories, including continued strong demand for cold storage surrounding COVID-19 vaccine distribution and the general market recovery as well as pricing actions.
 
24
 
 
Income from operations in fiscal year 2022 decreased by $0.4 million, or 2.1%, reflecting higher freight costs and investments in new product development, offset by revenue growth and pricing actions.
 
In the first quarter of fiscal year 2023, on a sequential basis, we expect slight revenue and operating margin decrease due to lower COVID vaccine storage demand. 
 
Net sales in fiscal year 2021 remained relatively flat compared to the prior year. The net sales increase reflects overall growth in end markets including pharmaceutical channels, clinical laboratories, and academic institutions, primarily in response to customer needs for cold storage surrounding COVID-19 vaccine distribution.
 
Income from operations in fiscal year 2021 increased $4.5 million or 32.8%, reflecting revenue growth, partially offset by reinvestments in the business for future growth opportunities and increased freight costs. 
 
Engineering Technologies
 
 
 
2022 compared to 2021
 
 
2021 compared to 2020
 
(in thousands except
 
 
 
 
 
 
 
%
 
 
 
 
 
 
 
 
%
 
percentages)
 
2022
 
 
2021
 
 
Change
 
 
2021
 
 
2020
 
 
Change
 
Net sales
 
$78,117
 
 
$75,562
 
 
3.4%
 
 
$75,562
 
 
$104,047
 
 
(27.4%)
 
Income from operations
 
8,776
 
 
6,164
 
 
42.4%
 
 
6,164
 
 
14,027
 
 
(56.1%)
 
Operating income margin
 
11.2%
 
 
8.2%
 
 
 
 
 
8.2%
 
 
13.5%
 
 
 
 
 
Net sales in fiscal year 2022 increased $2.6 million or 3.4% when compared to the prior year. Sales distribution by market in 2022 was as follows: 40% space, 23% aviation, 19% defense, 7% energy, and 11% other markets. Sales in the prior year period included revenue of $9.2 million related to our divested Enginetics business. Excluding the impact of the divestiture, sales increased $11.8 million primarily due to customer demand in the commercial aviation market, along with an increase in sales into the space end market, particularly related to commercialization of space and a medical market customer demand surge. 
 
Income from operations in fiscal year 2022 increased $2.6 million or 42.4% when compared to the prior year. The increase was primarily due to cost saving measures implemented during the pandemic and maintained as economic activity resumed along with the absences of losses associated with the Enginetics business, offset by a $1.1 million one-time project-related charge.
 
In the first quarter of fiscal year 2023, on a sequential basis, we expect a moderate to significant decrease in revenue reflecting timing of projects and a slight decrease in operating margin, with productivity initiatives mostly offsetting the impact of the volume decline.
 
Net sales in fiscal year 2021 decreased $28.5 million or 27.4% when compared to the prior year. Sales distribution by market in 2021 was as follows: 40% space, 26% aviation, 19% defense, 7% energy, and 8% other markets. The decline was primarily due to the impact of COVID-19 on the commercial aviation segment, especially engine parts manufacturing, along with the divestiture of our Enginetics business.
 
Income from operations in fiscal year 2021 decreased $7.9 million or 56.1% when compared to the prior year. The decrease was primarily due to lower volume in the commercial aviation segment along with project timing in the energy markets. These declines were partially offset by higher defense segment sales, improvements in manufacturing efficiencies, and cost reductions in response to the reduced volume levels. 
 
Specialty Solutions
 
 
 
2022 compared to 2021
 
 
2021 compared to 2020
 
(in thousands except
 
 
 
 
 
 
 
%
 
 
 
 
 
 
 
 
%
 
percentages)
 
2022
 
 
2021
 
 
Change
 
 
2021
 
 
2020
 
 
Change
 
Net sales
 
$122,827
 
 
$100,864
 
 
21.8%
 
 
$100,864
 
 
$113,935
 
 
(11.5%)
 
Income from operations
 
15,579
 
 
14,358
 
 
8.5%
 
 
14,358
 
 
18,546
 
 
(22.6%)
 
Operating income margin
 
12.7%
 
 
14.2%
 
 
 
 
 
14.2%
 
 
16.3%
 
 
 
 
 
Net sales for fiscal year 2022 increased $22.0 million, or 21.8% when compared to the prior year. Organic sales increased $22.9 million, or 22.7%. Increased sales volume is primarily due to a continued recovery in the Pumps and Merchandising businesses and pricing actions, partially offset by the impact of a temporary work stoppage which was resolved during the first quarter.
 
Income from operations for fiscal year 2022 increased $1.2 million, or 8.5%, when compared to the prior year primarily as a result of increased sales volume in the Pumps and Merchandising businesses, partially offset by higher costs of labor, including the temporary work stoppage in the first quarter and higher raw material and ocean freight costs.
 
25
 
 
In the first quarter of fiscal year 2023, on a sequential basis, we expect revenue to be similar and operating margin to slightly increase reflecting end market demand trends and the impact of pricing and productivity initiatives. 
 
Net sales for fiscal year 2021 decreased $13.1 million, or 11.5% when compared to the prior year. Organic sales declined $13.6 million, or 11.9%, partially offset by positive foreign exchange impacts of $0.5 million, or 0.5%. Decreased sales volume is primarily due to the impact of the COVID-19 pandemic earlier in the year, which created market downturns in the beverage, food service, and OEM equipment markets.
 
Income from operations for fiscal year 2021 decreased $4.2 million, or 22.6%, when compared to the prior year. The decrease during the period is primarily due to reduced sales volume in each of our businesses and increased raw material costs in the OEM equipment market, particularly for steel, partially offset by productivity and cost out actions.
 
Corporate, Restructuring and Other
 
 
 
2022 compared to 2021
 
 
2021 compared to 2020
 
(in thousands except
 
 
 
 
 
 
 
%
 
 
 
 
 
 
 
 
%
 
percentages)
 
2022
 
 
2021
 
 
Change
 
 
2021
 
 
2020
 
 
Change
 
Corporate
 
$ (34,413)
 
 
$ (29,674)
 
 
16.0%
 
 
$ (29,674)
 
 
$ (29,599)
 
 
0.3%
 
Loss on sale of business
 
-
 
 
(14,624)
 
 
(100.0%)
 
 
(14,624)
 
 
-
 
 
100.0%
 
Restructuring
 
(4,399)
 
 
(3,478)
 
 
26.5%
 
 
(3,478)
 
 
(4,669)
 
 
(25.5%)
 
Acquisition related expenses
 
(1,618)
 
 
(931)
 
 
73.8%
 
 
(931)
 
 
(1,759)
 
 
(47.1%)
 
Other operating expense
 
(5,745)
 
 
-
 
 
100.0%
 
 
-
 
 
-
 
 
-
 
 
Corporate expenses in fiscal year 2022 increased $4.7 million, or 16% when compared to the prior year, primarily due to employee related compensation accruals and research and development costs.
 
Corporate expenses remained flat in fiscal year 2021 primarily due to general wage inflation and benefit increases offset by cost saving reductions compared to the prior year.
 
The loss on sale of business, restructuring, and acquisition related expenses have been discussed above in the Company Overview. The increase in other operating expense in fiscal year 2022 reflects a $5.7 million litigation accrual. 
 
 
Discontinued Operations
 
In pursing our business strategy, the Company may divest certain businesses. Future divestitures may be classified as discontinued operations based on their strategic significance to the Company. Results of the Refrigerated Solutions Group and Cooking Solutions Group in current and prior periods have been classified as discontinued operations in the Consolidated Financial Statements and excluded from the results of continuing operations. Activity related to discontinued operations is as follows (in thousands):
 
 
 
Year Ended June 30,
 
 
 
2022
 
 
2021
 
 
2020
 
Net sales
 
$
-
 
 
$
-
 
 
$
111,841
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on sale of business
 
$
-
 
 
$
-
 
 
$
(19,996
)
Transaction fees
 
 
-
 
 
 
-
 
 
 
(1,933
)
Profit (loss) before taxes
 
$
(113
)
 
$
(2,620
)
 
$
(23,439
)
Benefit (provision) for taxes
 
 
24
 
 
 
550
 
 
 
2,613
 
Net income (loss) from discontinued operations
 
$
(89
)
 
$
(2,070
)
 
$
(20,826
)
 
Liquidity and Capital Resources
 
At June 30, 2022, our total cash balance was $104.8 million, of which $94.2 million was held outside of the United States.  In the fourth quarter of fiscal year 2022, we paid $25.0 million of our outstanding borrowings under the credit facility. During fiscal years 2022, 2021 and 2020, we repatriated $30.8 million, $37.6 million, and $39.2 million of our cash previously held outside of the United States, respectively.  During fiscal year 2023, we anticipate returning $30.0 million to $35.0 million of foreign cash, however, the amount and timing of cash repatriation during 2023 will be dependent upon foreign exchange rates and each business unit’s operational needs including requirements to fund working capital, capital expenditure, and jurisdictional tax payments.  The repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences or be subject to capital controls; however, those balances are generally available without legal restrictions to fund ordinary business operations.
 
26
 
 
Cash Flow
 
Net cash provided by continuing operating activities for the year ended June 30, 2022 was $78.1 million compared to net cash provided by continuing operating activities of $81.9 million in the prior year. We generated $101.7 million from income statement activities and used $23.1 million of cash to fund working capital increases. Cash flow used in investing activities for the year ended June 30, 2022 totaled $31.0 million. Uses of investing cash consisted primarily of capital expenditures of $23.9 million, $13.0 million for the acquisitions, $1.0 million used in other investing activities, offset by $5.0 million generated by proceeds from a life insurance policy related to the death of a retired Company executive and $1.8 million generated by sales of property, plant, and equipment. Cash used by financing activities for the year ended June 30, 2022 were $69.4 million and included stock repurchases of $31.4 million, repayments of debt of $25.0 million, cash paid for dividends of $12.2 million, and contingent consideration payments due to the seller of the Renco business of $2.2 million.
 
Net cash provided by continuing operating activities for the year ended June 30, 2021 was $81.9 million compared to net cash provided by continuing operating activities of $54.7 million in the prior year. We generated $94.7 million from income statement activities and generated $4.4 million of cash to fund working capital decreases. Cash flow used in investing activities for the year ended June 30, 2021 totaled $39.1 million.  Uses of investing cash consisted primarily of $27.4 million for the acquisition of Renco and capital expenditures of $21.75 million offset by $11.7 million of proceeds from the sale of the Enginetics business. Cash used by financing activities for the year ended June 30, 2021 were $31.7 million and included stock repurchases of $21.2 million and cash paid for dividends of $11.4 million.
 
We sponsor a number of defined benefit and defined contribution retirement plans.  The U.S. pension plan is frozen for all participants.  We have evaluated the current and long-term cash requirements of these plans, and our existing sources of liquidity are expected to be sufficient to cover required contributions under ERISA and other governing regulations. 
 
The fair value of the Company's U.S. defined benefit pension plan assets was $157.9 million at June 30, 2022, as compared to $212.6 million as of June 30, 2021. We participate in two multi-employer pension plans and sponsor six defined benefit plans including two in the U.S. and one in the U.K., Germany, Ireland, and Japan.  The Company’s pension plan is frozen for U.S. employees and participants in the plan ceased accruing future benefits.  Our primary U.S. defined benefit plan is not 100% funded under ERISA rules at June 30, 2022. 
 
U.S. defined benefit plan contributions of $0.2 million were made during fiscal year 2022 compared to $7.8 million during fiscal year 2021.There are no required contributions to the United States funded pension plan for fiscal year 2023. The Company expects to make contributions during fiscal year 2023 of $0.2 million and $0.2 million to its unfunded defined benefit plans in the U.S. and Germany, respectively. Any subsequent plan contributions will depend on the results of future actuarial valuations.
 
We have evaluated the current and long-term cash requirements of our defined benefit and defined contribution plans as of June 30, 2022 and determined our operating cash flows from continuing operations and available liquidity are expected to be sufficient to cover the required contributions under ERISA and other governing regulations. 
 
We have an insurance program in place to fund supplemental retirement income benefits for three retired executives.  Current executives and new hires are not eligible for this program. At June 30, 2022, the underlying policies had a cash surrender value of $11.1 million and are reported net of loans of $5.1 million for which we have the legal right of offset. These amounts are reported net on our balance sheet.
 
Capital Structure
 
During the second quarter of fiscal year 2019, the Company entered into a five-year Amended and Restated Credit Agreement (“credit agreement”, or “facility”). The facility has a borrowing limit of $500 million and can be increased by an amount of up to $250 million, in accordance with specified conditions contained in the agreement. The facility also includes a $10 million sublimit for swing line loans and a $35 million sublimit for letters of credit.
 
Under the terms of the Credit Facility, we will pay a variable rate of interest and a fee on borrowed amounts as well as a commitment fee on unused amounts under the facility. The amount of the commitment fee will depend upon both the undrawn amount remaining available under the facility and the Company’s funded debt to EBITDA (as defined in the agreement) ratio at the last day of each quarter.
 
Funds borrowed under the facility may be used for the repayment of debt, working capital, capital expenditures, acquisitions (so long as certain conditions, including a specified funded debt to EBITDA leverage ratio is maintained), and other general corporate purposes. As of June 30, 2022, the Company has used $5.1 million against the letter of credit sub-facility and had the ability to borrow $312.6 million under the facility based on our current trailing twelve-month EBITDA. The facility contains customary representations, warranties and restrictive covenants, as well as specific financial covenants. The Company’s current financial covenants under the facility are as follows:
 
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Interest Coverage Ratio - The Company is required to maintain a ratio of Earnings Before Interest and Taxes, as Adjusted (“Adjusted EBIT per the Credit Facility”), to interest expense for the trailing twelve months of at least 2.75:1. Adjusted EBIT per the Credit Facility specifically excludes extraordinary and certain other defined items such as cash restructuring and acquisition related charges up to the lower of $20.0 million or 10% of EBITDA. The facility allows for unlimited non-cash charges including purchase accounting and goodwill adjustments. At June 30, 2022, the Company’s Interest Coverage Ratio was 16.03:1.
 
Leverage Ratio - The Company’s ratio of funded debt to trailing twelve month Adjusted EBITDA per the Credit Facility, calculated as Adjusted EBIT per the Credit Facility plus depreciation and amortization, may not exceed 3.5:1. Under certain circumstances in connection with a Material Acquisition (as defined in the Facility), the Facility allows for the leverage ratio to go as high as 4.0:1 for a four-fiscal quarter period. At June 30, 2022, the Company’s Leverage Ratio was 0.98:1.
 
As of June 30, 2022, we had borrowings under our facility of $175.0 million.  In order to manage our interest rate exposure on these borrowings, we are party to $175.0 million of active floating to fixed rate swaps.  These swaps convert our interest payments from LIBOR to a weighted average rate of 1.18%.  The effective rate of interest for our outstanding borrowings, including the impact of the interest rate swaps, was 2.53%.  Our primary cash requirements in addition to day-to-day operating needs include interest payments, capital expenditures, acquisitions, share repurchases, and dividends. 
 
In connection with the acquisition of Renco, we assumed $0.7 million of debt under the Paycheck Protection Program, within the United States Coronavirus Aid, Relief, and Economic Security ("CARES") Act. These borrowings were forgiven in June 2021. 
 
Our primary sources of cash are cash flows from continuing operations and borrowings under the facility.  We expect that fiscal year 2023 depreciation and amortization expense will be between $20.0 and $21.0 million and $7.0 and $9.0 million, respectively.
 
The following table sets forth our capitalization at June 30:
 
 
2022
 
 
2021
 
Long-term debt
 
$
174,830
 
 
$
199,490
 
Less cash and cash equivalents
 
 
104,844
 
 
 
136,367
 
Net debt
 
 
69,986
 
 
 
63,123
 
Stockholders' equity
 
 
499,343
 
 
 
506,425
 
Total capitalization
 
$
569,329
 
 
$
569,548
 
 
Stockholders’ equity decreased year over year by $7.1 million, primarily as a result of $43.6 million of cash returned to shareholders in the form of dividends and stock repurchases, offset by current year net income of $61.4 million. The Company's net debt to capital percentage changed to 12.3% as of June 30, 2022 from 11.1% in the prior year. 
 
At June 30, 2022, we expect to pay estimated interest payments of $10.8 million within the next five years. This estimate is based upon effective interest rates as of June 30, 2022 and excludes any interest rate swaps which are assets to us. See Item 7A for further discussions surrounding interest rate exposure on our variable rate borrowings.
 
Post-retirement benefits and pension plan contribution payments represents future pension payments to comply with local funding requirements. Our policy is to fund domestic pension liabilities in accordance with the minimum and maximum limits imposed by the Employee Retirement Income Security Act of 1974 ("ERISA"), federal income tax laws and the funding requirements of the Pension Protection Act of 2006. At June 30, 2022, we expect to pay estimated post-retirement benefit payments of $170.4 million. See "Item 8. Financial Statements and Supplementary Data, Note 16. Employee Benefit Plans" for additional information regarding these obligations.
 
At June 30, 2022, we had $39.2 million of operating lease obligations. See "Item 8. Financial Statements and Supplementary Data, Note 20. Leases" for additional information regarding these obligations. 
 
At June 30, 2022 , we had $9.6 million of non-current liabilities for uncertain tax positions. We are not able to provide a reasonable estimate of the timing of future payments related to these obligations.
 
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Other Matters
 
Inflation – Certain of our expenses, such as wages and benefits, occupancy costs, freight and equipment repair and replacement, are subject to normal inflationary pressures. Inflation for medical costs can impact both our employee benefit costs as well as our reserves for workers' compensation claims. We monitor the inflationary rate and make adjustments to reserves whenever it is deemed necessary. Our ability to control worker compensation insurance medical cost inflation is dependent upon our ability to manage claims and purchase insurance coverage to limit the maximum exposure for us. Each of our segments is subject to the effects of changing raw material costs caused by the underlying commodity price movements. In the past year, we have experienced price fluctuations for a number of materials including rhodium, steel, and other metal commodities.  These materials are some of the key elements in the products manufactured in these segments.  Wherever possible, we will implement price increases to offset the impact of changing prices.  The ultimate acceptance of these price increases, if implemented, will be impacted by our affected divisions’ respective competitors and the timing of their price increases. In general, we do not enter into purchase contracts that extend beyond one operating cycle. While Standex considers our relationship with our suppliers to be good, there can be no assurances that we will not experience any supply shortage.
 
Foreign Currency Translation – Our primary functional currencies used by our non-U.S. subsidiaries are the Euro, British Pound Sterling (Pound), Japanese (Yen), and Chinese (Yuan).
 
Defined Benefit Pension Plans – We record expenses related to these plans based upon various actuarial assumptions such as discount rates and assumed rates of returns.  The Company’s pension plan is frozen for all eligible U.S. employees and participants in the plan ceased accruing future benefits. 
 
Environmental Matters – To the best of our knowledge, we believe that we are presently in substantial compliance with all existing applicable environmental laws and regulations and do not anticipate any instances of non-compliance that will have a material effect on our future capital expenditures, earnings or competitive position.
 
Seasonality – We are a diversified business with generally low levels of seasonality.
 
Employee Relations – The Company has labor agreements with four union locals in the United States and various European employees belong to European trade unions. 
 
Critical Accounting Policies
 
The Consolidated Financial Statements include accounts of the Company and all of our subsidiaries.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Consolidated Financial Statements.  Although, we believe that materially different amounts would not be reported due to the accounting policies described below, the application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.  We have listed a number of accounting policies which we believe to be the most critical. 
 
Revenue Recognition – Most of the Company’s contracts have a single performance obligation which represents, the product or service being sold to the customer. Some contracts include multiple performance obligations such as a product and the related installation and/or extended warranty. Additionally, most of the Company’s contracts offer assurance type warranties in connection with the sale of a product to customers. Assurance type warranties provide a customer with assurance that the product complies with agreed-upon specifications. Assurance type warranties do not represent a separate performance obligation. 
 
29
 
 
In general, the Company recognizes revenue at the point in time control transfers to their customer based on predetermined shipping terms. Revenue is recognized over time under certain long-term contracts within the Engineering Technologies and Engraving groups for highly customized customer products that have no alternative use and in which the contract specifies the Company has a right to payment for its costs, plus a reasonable margin. For products recognized over time, the transfer of control is measured pro rata, based upon current estimates of costs to complete such contracts. Losses on contracts are fully recognized in the period in which the losses become determinable. Revisions in profit estimates are reflected on a cumulative basis in the period in which the basis for such revision becomes known.
 
Collectability of Accounts Receivable – Accounts Receivable are reduced by an allowance for amounts that represent management's best estimate of estimated losses over the life of the underlying asset. Our estimate for the allowance for credit loss accounts related to trade receivables includes evaluation of specific accounts where we have information that the customer may have an inability to meet its financial obligation together with a detailed review of the collectability of pooled assets based on a combination of qualitative and quantitative factors.
 
Realizability of Inventories – Inventories are valued at the lower of cost or market.  The Company regularly reviews inventory values on hand using specific aging categories and records a write down for obsolete and excess inventory based on historical usage and estimated future usage.  As actual future demand or market conditions may vary from those projected by management, adjustments to inventory valuations may be required.
 
Realization of Goodwill – Goodwill and certain indefinite-lived intangible assets are not amortized, but instead are tested for impairment at least annually and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than its carrying amount of the asset.  The Company’s annual test for impairment is performed using a May 31st measurement date. We have identified seven reporting units for impairment testing: Electronics, Engraving, Scientific, Engineering Technologies, Procon, Federal, and Hydraulics.
 
As quoted market prices are not available for the Company’s reporting units, the fair value of the reporting units is determined using a discounted cash flow model (income approach).  This method uses various assumptions that are specific to each individual reporting unit in order to determine the fair value.  In addition, the Company compares the estimated aggregate fair value of its reporting units to its overall market capitalization.
 
Our annual impairment testing at each reporting unit relied on assumptions surrounding general market conditions, short-term growth rates, a terminal growth rate of 2.5%, and detailed management forecasts of future cash flows prepared by the relevant reporting unit.  Fair values were determined primarily by discounting estimated future cash flows at a weighted average cost of capital of 10.4%.  During our annual impairment testing, we evaluated the sensitivity of our most critical assumption, the discount rate, and determined that a 100-basis point change in the discount rate selected would not have impacted the test results.  Additionally, the Company could reduce the terminal growth rate from its current 2.5% to 1.0% and the fair value of all reporting units would still exceed their carrying value.
 
While we believe that our estimates of future cash flows are reasonable, changes in assumptions could significantly affect our valuations and result in impairments in the future.  The most significant assumption involved in the Company’s determination of fair value is the cash flow projections of each reporting unit. 
 
As a result of our annual assessment in the fourth quarter of fiscal year 2022, the Company determined that the fair value of the seven reporting units substantially exceeded their respective carrying values.  Therefore, no impairment charges were recorded in connection with our annual assessment during the fourth quarter of fiscal year 2022. 
 
Cost of Employee Benefit Plans – We provide a range of benefits to certain retirees, including pensions and some postretirement benefits.  We record expenses relating to these plans based upon various actuarial assumptions such as discount rates, assumed rates of return, compensation increases and turnover rates.  The expected return on plan assets assumption of 6.7% in the U.S. is based on our expectation of the long-term average rate of return on assets in the pension funds and is reflective of the current and projected asset mix of the funds and considers the historical returns earned on the funds.  We have analyzed the rates of return on assets used and determined that these rates are reasonable based on the plans’ historical performance relative to the overall markets as well as our current expectations for long-term rates of returns for our pension assets.  The U.S. discount rate of 5.0% reflects the current rate at which pension liabilities could be effectively settled at the end of the year.  The discount rate is determined by matching our expected benefit payments from a stream of AA- or higher bonds available in the marketplace, adjusted to eliminate the effects of call provisions.  We review our actuarial assumptions, including discount rate and expected long-term rate of return on plan assets, on at least an annual basis and make modifications to the assumptions based on current rates and trends when appropriate.  Based on information provided by our actuaries and other relevant sources, we believe that our assumptions are reasonable.
 
30
 
 
The cost of employee benefit plans includes the selection of assumptions noted above.  A twenty-five-basis point change in the U.S. expected return on plan assets assumptions, holding our discount rate and other assumptions constant, would increase or decrease pension expense by approximately $0.4   million per year.  A twenty-five-basis point change in our discount rate, holding all other assumptions constant, would have no impact on 2022 pension expense as changes to amortization of net losses would be offset by changes to interest cost.  In future years, the impact of discount rate changes could yield different sensitivities. See the Notes to the Consolidated Financial Statements for further information regarding pension plans.
 
Business Combinations - The accounting for business combinations requires estimates and judgments as to expectations for future cash flows of the acquired business and the allocation of those cash flows to identifiable intangible assets in determining the estimated fair values for assets acquired and liabilities assumed.  The fair values assigned to tangible and intangible assets acquired and liabilities assumed, are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. If the actual results differ from the estimates and judgments used in these fair values, the amounts recorded in the consolidated financial statements could result in a possible impairment of the intangible assets and goodwill or require acceleration of the amortization expense of finite-lived intangible assets.
 
Allocations of the purchase price for acquisitions are based on estimates of the fair value of the net assets acquired and are subject to adjustment upon finalization of the purchase price allocation. During this measurement period, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date.  All changes that do not qualify as measurement period adjustments are included in current period earnings.
 
  Recently Issued Accounting Pronouncements
 
See "Item 8. Financial Statements and Supplementary Data, Note 1. Summary of Accounting Policies” for information regarding the effect of recently issued accounting pronouncements on our consolidated statements of operations, comprehensive income, stockholders’ equity, cash flows, and notes for the year ended June 30, 2022.
 
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
 
Risk Management
 
We are exposed to market risks from changes in interest rates, commodity prices and changes in foreign currency exchange.  To reduce these risks, we selectively use, from time to time, financial instruments and other proactive management techniques.  We have internal policies and procedures that place financial instruments under the direction of the Treasurer and restrict all derivative transactions to those intended for hedging purposes only.  The use of financial instruments for trading purposes (except for certain investments in connection with the non-qualified defined contribution plan) or speculation is strictly prohibited.  The Company has no majority-owned subsidiaries that are excluded from the consolidated financial statements.  Further, we have no interests in or relationships with any special purpose entities. 
 
Exchange Risk
 
We are exposed to both transactional risk and translation risk associated with exchange rates.  The transactional risk is mitigated, in large part, by natural hedges developed with locally denominated debt service on intercompany accounts and the fact that most of our foreign currency sales are transacted in their functional currency.  We also mitigate certain of our foreign currency exchange rate risks by entering into forward foreign currency contracts from time to time.  The contracts are used as a hedge against anticipated foreign cash flows, such as loan payments, customer remittances, and materials purchases, and are not used for trading or speculative purposes.  The fair values of the forward foreign currency exchange contracts are sensitive to changes in foreign currency exchange rates, as an adverse change in foreign currency exchange rates from market rates would decrease the fair value of the contracts.  However, any such losses or gains would generally be offset by corresponding gains and losses, respectively, on the related hedged asset or liability.  At June 30, 2022 and 2021, the fair value, in the aggregate, of the Company’s open foreign exchange contracts was a liability of $0.6 million and $2.8 million respectively. 
 
Our primary translation risk is with the Euro, British Pound Sterling, Peso, Japanese Yen and Chinese Yuan.  A hypothetical 10% appreciation or depreciation of the value of any these foreign currencies to the U.S. Dollar at June 30, 2022, would not result in a material change in our operations, financial position, or cash flows.  We hedge our most significant foreign currency translation risks primarily through cross currency swaps and other instruments, as appropriate.
 
31
 
 
Interest Rate
 
The Company’s effective interest rate on borrowings was 2.53% and 2.59% at June 30, 2022 and 2021, respectively.  Our interest rate exposure is limited primarily to interest rate changes on our variable rate borrowings and is mitigated by our use of interest rate swap agreements to modify our exposure to interest rate movements.  At June 30, 2022, we have $175.0 million of active floating to fixed rate swaps with terms ranging from one to four years.  These swaps convert our interest payments from LIBOR to a weighted average rate of 1.18%.  At June 30, 2022, the fair value, in the aggregate, of the Company’s interest rate swaps were assets of $8.4 million. At June 30, 2021, the fair value, in the aggregate, of the Company’s interest rate swaps were liabilities of $3.1 million. A 25-basis point increase in interest rates would not change our annual interest expense as all of our outstanding debt is currently converted to fixed rate debts by means of interest rate swaps.
 
 
Concentration of Credit Risk
 
We have a diversified customer base.  As such, the risk associated with concentration of credit risk is inherently minimized.  As of June 30, 2022, no one customer accounted for more than 5% of our consolidated outstanding receivables or of our sales.
 
Commodity Prices
 
The Company is exposed to fluctuating market prices for all commodities used in its manufacturing processes.  Each of our segments is subject to the effects of changing raw material costs caused by the underlying commodity price movements.  In general, we do not enter into purchase contracts that extend beyond one operating cycle.  While Standex considers our relationship with our suppliers to be good, there can be no assurances that we will not experience any supply shortage.
 
The Engineering Technologies, Specialty Solutions, and Electronics segments are all sensitive to price increases for steel and aluminum products, other metal commodities such as rhodium and copper, and petroleum-based products.  In the past year, we have experienced price fluctuations for a number of materials including rhodium, steel, and other metal commodities.  These materials are some of the key elements in the products manufactured in these segments.  Wherever possible, we will implement price increases to offset the impact of changing prices.  The ultimate acceptance of these price increases, if implemented, will be impacted by our affected divisions’ respective competitors and the timing of their price increases.
 
32