Item 7. Management’s Discussion and Analysis
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 six 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
On May 3, 2024, we acquired Sanyu Electric Pte Ltd, or SEPL, a privately held distributor of reed relays. Its results are reported in the Electronics segment.
o
On February 19, 2024, we acquired, through our subsidiary Standex Electronics Japan Corporation, privately-held, Japanese-based Sanyu Switch Co., Ltd (Sanyu). Sanyu designs and manufactures reed relays, test sockets, testing systems for semiconductor and other electronics manufacturing, and other switching applications. Its results are reported in the Electronics segment.
o
On July 31, 2023, we acquired Minntronix, a privately held company. Minntronix designs and manufactures customized as well as standard magnetics components and products including transformers, inductors, current sensors, coils, chokes, and filters. The products are used in applications across cable fiber, smart meters, industrial control and lighting, electric vehicles, and home security markets. Its results will be reported in the Electronics segment.
o
In the third quarter of fiscal year 2023, we divested our Procon business for $75.0 million. This transaction reflects the continued simplification of our portfolio and enables greater focus on managing our larger platforms and pursuing growth opportunities. Proceeds will be deployed towards organic and inorganic initiatives and returning capital to shareholders. Its results are reported within our Specialty Solutions segment. In fiscal year 2023, we received $67.0 million cash consideration and recorded a pre-tax gain on the sale of $62.1 million in the Consolidated Financial Statements. Cash consideration received at closing excludes amounts held in escrow and was net of closing cash.
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.
19
Table of Contents
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.
20
Table of Contents
Consolidated Results from Continuing Operations (in thousands):
2024
2023
2022
Net sales
$
720,635
$
741,048
$
735,339
Gross profit margin
39.1
%
38.5
%
36.7
%
Restructuring costs
8,206
3,831
4,399
Acquisition related expenses
2,622
557
1,618
Other operating (income) expense, net
110
(611
)
5,745
(Gain) loss on sale of business
(274
)
(62,105
)
-
Income from operations
101,738
171,089
88,294
Backlog (realizable within 1 year)
$
185,296
$
274,902
$
256,248
2024
2023
2022
Net sales
$
720,635
$
741,048
$
735,339
Components of change in sales:
Effect of acquisitions
40,427
1,919
1,918
Effect of exchange rates
(1,842
)
(23,902
)
(9,874
)
Effect of business divestitures
(21,259
)
(11,947
)
(9,239
)
Organic sales change
(37,739
)
39,639
96,302
Net sales decreased for fiscal year 2024 by $20.4 million, or 2.8%, when compared to the prior year period. Organic sales decreased by $37.7 million, or 5.1%, due to transitory headwinds in several of our end markets, primarily due to lower demand in our Electronics, Specialty and Scientific segments, partially offset by project timing in our Engineering Technologies group. Organic sales included $94.0 million in the period attributed to fast growth markets. Acquisitions had a $40.4 million, or 5.5%, positive impact on sales, offset by negative impacts on sales for divestitures of $21.3 million, or 2.9%, and foreign currency of $1.8 million, or 0.3%.
Net sales increased for fiscal year 2023 by $5.7 million, or 0.8%, when compared to the prior year period. Organic sales increased by $39.6 million, or 5.7% excluding the impact of the Procon divestiture, primarily due to pricing actions and strong demand in our Engraving, Specialty and ETG segments. Acquisitions had a $1.9 million, or 0.3%, positive impact on sales, offset by negative impacts on sales for divestitures of $11.9 million, or 1.9%, and foreign currency of $23.9 million, or 3.3%.
We discuss our results and outlook for each segment below.
Gross Profit
Gross profit in fiscal year 2024 decreased to $282.0 million, or a gross margin of 39.1%, as compared to $285.1 million, or a gross margin of 38.5%, for the prior year period. This decrease was a result of organic sales decreases of $37.6 million, approximately $2.8 million of net inflationary impacts in the areas of labor and raw material and by the divestiture of the Procon business. The decreases were partially offset by contributions from the Minntronix acquisition, pricing actions and productivity initiatives.
Gross profit in fiscal year 2023 increased to $285.1 million, or a gross margin of 38.5%, as compared to $269.9 million, or a gross margin of 36.7%, for the prior year period. This increase was a result of organic sales increases of $39.6 million and productivity initiatives, which offset approximately $11.4 million of inflationary impacts in the areas of raw material and labor. Organic sales increases were attributed to $82.5 million to fast growth markets, targeted pricing initiatives in most of our businesses and volume in each business, with the exception of Scientific. Gross profit was also negatively impacted by the divestiture of the Procon business.
21
Table of Contents
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses, (“SG&A”) for the fiscal year 2024 were $169.6 million, or 23.5% of sales, compared to $172.3 million, or 23.3% of sales, during the prior year period. SG&A expenses during the period were impacted by a reduction in general and administrative expenses partially offset by increased research and development spending.
Selling, general, and administrative expenses, (“SG&A”) for the fiscal year 2023 were $172.3 million, or 23.3% of sales, compared to $169.9 million, or 23.1% of sales, during the prior year period. SG&A expenses during the period were primarily impacted by increased research and development spending to drive future product initiatives.
Restructuring Costs
During fiscal year 2024, we incurred restructuring expenses of $8.2 million, primarily related to facility rationalization activities, and global headcount reductions primarily within our Engraving, Electronics and Engineering Technologies segments and as well as the Corporate headquarters.
During fiscal year 2023, we incurred restructuring expenses of $3.8 million, primarily related to productivity improvements, facility rationalization activities, and global headcount reductions primarily within our Engraving and Electronics segments and Corporate headquarters.
(Gain) Loss on Sale of Business
We recorded a pre-tax gain on sale of the Procon business of $62.1 million for fiscal year 2023. The goodwill balance of $0.2 million was written off as a part of the transaction. The sale transaction and financial results of Procon are classified as continuing operations in the Consolidated Financial Statements.
We recorded an additional pre-tax gain on sale of the Procon business of $0.3 million for fiscal year 2024 due to closing cash adjustments.
Acquisition Related Costs
We incurred acquisition related expenses of $2.6 million and $0.6 million in fiscal year 2024 and 2023, respectively. Acquisition related costs typically consist of due diligence, integration, and valuation expenses incurred in connection with recent or pending acquisitions.
Other Operating (Income) Expense, Net
We recorded a charge of $0.1 million for settlement of an environmental remediation claim in the third quarter of fiscal year 2024.
We incurred expense of $5.7 million in fiscal year 2022 related to a litigation accrual. In the third quarter of fiscal year 2023, we received $1.0 million from our insurance provider as recoupment related to this litigation matter. 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 2024 was $101.7 million, compared to $171.1 million during the prior year. The decrease of $69.4 million, or 40.5%, is primarily due to the gain on the divestiture of Procon in the third quarter of the fiscal year 2023, organic sales decreases and increased investment in research and development spending, restructuring and acquisition related costs. The decreases are partially offset by cost reduction activities and productivity improvement initiatives.
Income from operations for the fiscal year 2023 was $171.1 million, compared to $88.3 million during the prior year. The increase of $82.8 million, or 93.8%, is primarily due to the divestiture of the Procon business for a gain of $62.1 million as well as income from organic sales increases and pricing actions, along with cost reduction activities and productivity improvement initiatives, partially offset by foreign currency, material inflation, and increased logistics and labor costs.
Discussion of the performance of each of our reportable segments is fully explained in the segment analysis that follows.
Interest Expense
Interest expense for fiscal year 2024 was $4.5 million, a decrease of $0.9 million as compared to the prior year. Our effective interest rate was 2.46%. Interest expense for fiscal year 2023 was $5.4 million, a decrease of $0.5 million as compared to the prior year.
22
Table of Contents
Income Taxes
The income tax provision from continuing operations for the fiscal year ended June 30, 2024 was $21.5 million, or an effective rate of 22.6%, compared to $24.8 million, or an effective rate of 15.1%, for the year ended June 30, 2023, and $19.8 million, or an effective rate of 24.4%, for the year ended June 30, 2022. 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 U.S. versus outside the U.S., 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, 2024 was impacted by the following items: (i) a tax provision of $3.1 million due to the mix of income in various jurisdictions, (ii) tax benefits of $2.8 million related to foreign tax credits of $0.7 million, as well as Federal R&D tax credits of $2.1 million, (iii) a tax provision of $3.8 million related to officers’ compensation, and (iv) a tax benefit of $3.9 million relating to share-based compensation.
The income tax provision from continuing operations for the fiscal year ended June 30, 2023 was impacted by the following items: (i) a tax benefit of $4.3 million due to the mix of income in various jurisdictions, (ii) tax benefits of $14.3 million primarily related to foreign tax credits of $11.6 million, as well as Federal R&D tax credits of $2.7 million, (iii) a tax provision of $11.3 million related to the U.S. tax effects of international operations, and (iv) a tax benefit of $5.0 million relating to the partial release of the valuation allowance on capital loss carryforwards, which were utilized against the capital gain recognized on the divestiture of the Procon business.
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.
In December 2021, the Organization for Economic Cooperation and Development (“OECD”) published a proposal for the establishment of a global minimum tax rate of 15% (the “Pillar Two rule”). The OECD has recommended that the Pillar Two rule become effective for fiscal years beginning after January 1, 2024. To date, member states are in various stages of implementation and the OECD continues to refine technical guidance. We are closely monitoring developments of the Pillar Two rule and are currently evaluating the potential impacts in each of the countries in which we operate; however, we currently do not expect the Pillar Two rule to have a material impact on our effective tax rate.
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 2024, capital expenditures were $20.3 million or 2.8% of net sales, as compared to $24.3 million, or 3.3%, of net sales in the prior year. We expect 2025 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.
23
Table of Contents
Backlog orders are as follows (in thousands):
As of June 30, 2024
As of June 30, 2023
Total
Backlog under
Total
Backlog under
Backlog
1 year
Backlog
1 year
Electronics
$
107,006
$
94,982
$
150,061
$
129,911
Engraving
22,483
20,874
36,817
31,434
Scientific
2,646
2,646
2,506
2,506
Engineering Technologies
64,592
50,122
63,769
52,565
Specialty Solutions
16,691
16,672
21,749
21,634
Total
$
213,418
$
185,296
$
274,902
$
238,050
Total backlog realizable within one year decreased $52.8 million, or 22.2% to $185.2 million at June 30, 2024 from $238.1 million at June 30, 2023. Changes in backlog under 1 year are as follows (in thousands):
As of June 30, 2024
Backlog under 1 year, prior year period
$
238,050
Components of change in backlog:
Organic change
(68,898
)
Effect of acquisitions
16,144
Backlog under 1 year, current period
$
185,296
Segment Analysis (in thousands)
Overall Outlook
Looking forward to fiscal year 2025, we expect to be well-positioned for growth in the second half of the year, with anticipated continued improvement in general market conditions supported by planned new product releases in each segment throughout the year.
In general, for fiscal year 2025, we expect:
●
continued growth in transportation markets from hybrid and electric vehicle program with a ramp up of new business opportunities;
●
soft trim end market growth in APAC;
●
vaccine and cold storage demand to remain stable;
●
commercial aviation, space and defense end markets demand to increase based on current program expectations and new product development;
●
space markets to remain attractive, with volume to slightly increase from fiscal year 2023 due to new product development for existing customers;
●
refuse and dump end markets to remain stable while being supported by future investments in the U.S. infrastructure bill;
●
stable demand levels in food service equipment markets.
Electronics
2024 compared to 2023
2023 compared to 2022
(in thousands except
%
%
percentages)
2024
2023
Change
2023
2022
Change
Net sales
$321,956
$305,872
5.3%
$305,872
$304,290
0.5%
Income from operations
64,030
68,979
(7.2%)
68,979
70,428
(2.1%)
Operating income margin
19.9%
22.6%
22.6%
23.1%
24
Table of Contents
Net sales in fiscal year 2024 increased $16.1 million, or 5.3%, when compared to the prior year. Organic sales decreased by $22.7 million, or 7.4%, due to continued softness in China and Europe, primarily in appliances and general industrial end markets. The foreign currency impact decreased sales by $1.6 million, or 0.5%, partially offset by the Minntronix, Sanyu and SEPL acquisitions in fiscal year 2024, which contributed $40.4 million, or 13.2%, in sales for the period.
Income from operations in the fiscal year 2024 decreased $4.9 million, or 7.2%, when compared to the prior year. The operating income decrease was the result of lower sales, a change in product mix and foreign currency impacts, partially offset by contributions from the recent acquisitions, and realization of pricing and productivity initiatives.
In the first quarter of fiscal year 2025, on a sequential basis, we expect similar to slightly higher revenue, driven by higher sales into fast growth end markets, and similar operating margin, as higher investments in selling, marketing and R&D offset pricing and productivity initiatives.
Net sales in fiscal year 2023 increased 1.6 million, or 0.5%, when compared to the prior year. Organic sales increased by $13.7 million, or 4.5%, reflecting positive trends in end markets like industrial applications, power management, renewable energy technologies, and electric vehicle related applications. Sensor Solutions was acquired in the third quarter of fiscal year 2022, adding $1.9 million, or 0.6%, in sales for the period. The foreign currency impact decreased sales by $14.0 million, or 4.6%.
Income from operations in the fiscal year 2023 decreased $1.4 million, or 2.1% when compared to the prior year. The operating income decrease was the result of inflationary impacts, mix and foreign exchange offset partially by organic sales growth and various cost saving initiatives.
Engraving
2024 compared to 2023
2023 compared to 2022
(in thousands except
%
%
percentages)
2024
2023
Change
2023
2022
Change
Net sales
$150,685
$152,067
(0.9%)
$152,067
$146,255
4.0%
Income from operations
26,708
25,462
4.9%
25,462
21,825
16.7%
Operating income margin
17.7%
16.7%
16.7%
14.9%
Net sales in fiscal year 2024 decreased by $1.4 million, or 0.9%, compared to the prior year. Organic sales decreased by $1.0 million, or 0.7%, as a result of delays in new platform rollouts in North America. Foreign exchange impacts were $0.4 million, or 0.2%.
Income from operations in fiscal year 2024 increased by $1.2 million, or 4.9%, when compared to the prior year. Operating income increased during the period reflecting productivity actions, offsetting slower demand in North America sales.
In the first quarter of fiscal year 2025, we expect moderately higher revenue and operating margin due to more favorable project timing in Europe and Asia.
Net sales in fiscal year 2023 increased by $5.8 million or 4.0% compared to the prior year. Organic sales increased by $14.3 million, or 9.8%, as a result of timing of customer projects. The organic sales increase was partially offset by foreign exchange impacts of $8.5 million, or 5.8%.
Income from operations in fiscal year 2023 increased by $3.6 million, or 16.7%, when compared to the prior year. Operating income increased during the period reflecting the organic sales increase and productivity actions, offsetting the foreign exchange impacts.
Scientific
2024 compared to 2023
2023 compared to 2022
(in thousands except
%
%
percentages)
2024
2023
Change
2023
2022
Change
Net sales
$68,931
$74,924
(8.0%)
$74,924
$83,850
(10.6%)
Income from operations
19,000
17,109
11.1%
17,109
17,861
(4.2%)
Operating income margin
27.6%
22.8%
22.8%
21.3%
Net sales in fiscal year 2024 decreased by $6.0 million, or 8.0% when compared to the prior year. Net sales decreased reflecting general market softness, including purchases by retail pharmacies.
25
Table of Contents
Income from operations in fiscal year 2024 increased by $1.9 million, or 11.1%, when compared to the prior year. Operating income increase reflects productivity initiatives and lower freight costs, partially offset by lower volume.
In the first quarter of fiscal year 2025, on a sequential basis, we expect similar revenue and slightly lower operating margin due to investments in research and development and higher freight cost.
Net sales in fiscal year 2023 increased by $8.9 million, or 10.6% when compared to the prior year. Net sales decreased as expected due to lower demand for cold storage surrounding COVID-19 vaccine distribution partially offset by pricing actions.
Income from operations in fiscal year 2023 decreased $0.8 million or 4.2%, when compared to the prior year. Operating income decrease reflects lower sales volume, partially offset by pricing and productivity actions and lower oceanic freight costs.
Engineering Technologies
2024 compared to 2023
2023 compared to 2022
(in thousands except
%
%
percentages)
2024
2023
Change
2023
2022
Change
Net sales
$83,476
$81,079
3.0%
$81,079
$78,117
3.8%
Income from operations
15,216
11,050
37.7%
11,050
8,776
25.9%
Operating income margin
18.2%
13.6%
13.6%
11.2%
Net sales in fiscal year 2024 increased $2.4 million, or 3.0%, when compared to the prior year. The organic sales increase was driven by improvement in the aviation and space end markets, more favorable project timing, and growth in new applications.
Income from operations in fiscal year 2024 increased $4.2 million, or 37.7%, when compared to the prior year. The increase was primarily due to the impact of pricing and productivity initiatives, partially offset by research and development.
In the first quarter of fiscal year 2025, on a sequential basis, we expect moderately to significantly lower revenue and slightly lower operating margin due to unfavorable project timing.
Net sales in fiscal year 2023 increased $3.0 million, or 3.8%, when compared to the prior year. Organic sales increased by $4.1 million, or 5.3%, offset by foreign currency impacts of $1.1 million, or 1.5%, as compared to the prior year period. Organic sales change was primarily due to increases in new product development of new solutions provided to customers in the aerospace and defense markets.
Income from operations in fiscal year 2023 increased $2.3 million, or 25.9%, when compared to the prior year. The increase was primarily due to productivity initiatives, volume increases and the impact of a one-time project related charge in first quarter of fiscal year 2022 that did not repeat.
Specialty Solutions
2024 compared to 2023
2023 compared to 2022
(in thousands except
%
%
percentages)
2024
2023
Change
2023
2022
Change
Net sales
$95,587
$127,106
(24.8%)
$127,106
$122,827
3.5%
Income from operations
19,631
25,368
(22.6%)
25,368
15,579
62.8%
Operating income margin
20.5%
20.0%
20.0%
12.7%
Net sales for fiscal year 2024 decreased $31.5 million, or 24.8% when compared to the prior year. Organic sales for the group decreased $10.3 million, or 8.1%, as compared to the prior year period, reflecting organic growth decreases in the Display Merchandising business and the Hydraulics business, due to an ongoing industry-wide chassis shortage. The divestiture of Procon in the third quarter of fiscal year 2023 negatively impacted the group by $21.3 million, or 16.7%.
Income from operations for fiscal year 2024 decreased $5.7 million, or 22.6%, when compared to the prior year. The decrease is due to the Procon divestiture and lower volume in the Display Merchandising and Hydraulics business, partially offset by improved operating performance in the Display Merchandising business.
26
Table of Contents
In the first quarter of fiscal year 2025, on a sequential basis, we expect similar revenue and operating margin.
Net sales for fiscal year 2023 increased $4.3 million, or 3.5%, when compared to the prior year. Organic sales increased $16.7 million, or 13.6% excluding Procon, as compared to the prior year period. The increased sales volume is primarily due to pricing realization, strong market demand and the absence of the labor work stoppage in two plants during the prior year. The impact of the Procon divestiture partially offset the organics sales increase.
Income from operations for fiscal year 2023 increased $9.8 million, or 62.8%, when compared to the prior year. Operating income increased due to sales increases in Display Merchandising, pricing actions and the impact of the labor work stoppage in two plants during the prior year.
Corporate, Restructuring and Other
2024 compared to 2023
2023 compared to 2022
(in thousands except
%
%
percentages)
2024
2023
Change
2023
2022
Change
Corporate
$ (32,183)
$ (35,207)
(8.6%)
$ (35,207)
$ (34,413)
2.3%
Gain (loss) on sale of business
274
62,105
(99.6%)
62,105
-
100.0%
Restructuring costs
(8,206)
(3,831)
114.2%
(3,831)
(4,399)
(12.9%)
Acquisition related costs
(2,622)
(557)
370.7%
(557)
(1,618)
(65.6%)
Other operating income (expense), net
(110)
611
(118.0%)
611
(5,745)
(110.6%)
Corporate expenses in fiscal year 2024 decreased $3.0 million, or 8.6%, when compared to the prior year. Corporate expenses in fiscal year 2024 reflect reductions in professional service fees and incentive compensation.
Corporate expenses in fiscal year 2023 increased $0.8 million, or 2.3%, when compared to the prior year, primarily due to employee related compensation accruals and research and development costs.
The gain on sale of business, restructuring costs, acquisition related costs and other operating income (expense), net have been discussed above in the Company Overview.
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. Activity related to discontinued operations is as follows (in thousands):
Year Ended June 30,
2024
2023
2022
(Loss) before taxes
$
(654
)
$
(204
)
$
(113
)
Benefit for taxes
137
43
24
Net (loss) from discontinued operations
$
(517
)
$
(161
)
$
(89
)
Liquidity and Capital Resources
At June 30, 2024, our total cash balance was $154.2 million, of which $128.1 million was held outside of the United States. The amount and timing of cash repatriation is 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.
27
Table of Contents
Cash Flow
Net cash provided by continuing operating activities for the year ended June 30, 2024 was $93.3 million compared to net cash provided by continuing operating activities of $90.8 million in the prior year. We generated $111.4 million from income statement activities and used $5.1 million of cash to fund working capital and other balance sheet account increases. Cash flow used in investing activities for the year ended June 30, 2024 totaled $61.6 million. We used $48.8 million for the purchase of acquisitions in the fiscal year and $20.3 million was used for capital expenditures. We generated $7.8 million in the fiscal year of proceeds from the divestiture of the Procon business. Cash used by financing activities for the year ended June 30, 2024 was $69.2 million and included stock repurchases of $31.8 million, repayments of debt of $25.0 million and cash paid for dividends of $13.9 million.
Net cash provided by continuing operating activities for the year ended June 30, 2023 was $90.8 million compared to net cash provided by continuing operating activities of $78.1 million in the prior year. We generated $116.6 million from income statement activities and used $18.2 million of cash to fund working capital and other balance sheet account increases. Cash flow provided by investing activities for the year ended June 30, 2023 totaled $41.6 million. We generated $67.0 million in proceeds from the divestiture of the Procon business and $24.3 million was used for capital expenditures. Cash used by financing activities for the year ended June 30, 2023 was $40.0 million and included stock repurchases of $25.5 million, cash paid for dividends of $13.0 million, contingent consideration payments to the sellers of the Renco business of $1.2 million and debt modification costs of $1.7 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 $142.3 million at June 30, 2024, as compared to $142.1 million as of June 30, 2023. We participate in two multi-employer pension plans and sponsor six defined benefit plans including two in the U.S. and Japan and one each in the U.K. and Germany. 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, 2024.
U.S. defined benefit plan contributions of $10.0 million were made during fiscal year 2024 compared to $0.2 million during fiscal year 2023. There are required contributions of $5.8 million to the United States funded pension plan for fiscal year 2025. The Company expects to make contributions during fiscal year 2025 of $0.2 million and $0.3 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, 2024 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, 2024, the underlying policies had a cash surrender value of $11.7 million and are reported net of loans of $4.9 million for which we have the legal right of offset. These amounts are reported net on our balance sheet.
Capital Structure
During the third quarter of fiscal year 2023, the Company entered into a Third Amended & Restated Credit Agreement which renewed the existing Credit Agreement for an additional five-year period (“credit agreement”, or “facility”) with a borrowing limit of $500 million. The facility 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, 2024, the Company has used $2.7 million against the letter of credit sub-facility and had the ability to borrow $347.3 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:
28
Table of Contents
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, 2024, the Company’s Interest Coverage Ratio was 25.15.: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, 2024, the Company’s Leverage Ratio was 0.65:1.
As of June 30, 2024, we had borrowings under our facility of $150.0 million. In order to manage our interest rate exposure on these borrowings, we are party to $150.0 million of active floating to fixed rate swaps. These swaps convert our interest payments from SOFR to a weighted average rate of 0.85%. The effective rate of interest for our outstanding borrowings, including the impact of the interest rate swaps, was 2.46%. Our primary cash requirements in addition to day-to-day operating needs include interest payments, capital expenditures, acquisitions, share repurchases, and dividends.
Our primary sources of cash are cash flows from continuing operations and borrowings under the facility. We expect that fiscal year 2025 depreciation and amortization expense will be between $24.0 million and $28.0 million and $8.0 million and $10.0 million, respectively.
The following table sets forth our capitalization at June 30:
2024
2023
Long-term debt
$
148,876
$
173,441
Less cash and cash equivalents
154,203
195,706
Net (cash) debt
(5,327
)
(22,265
)
Stockholders' equity
621,503
607,449
Total capitalization
$
616,176
$
585,184
Stockholders’ equity increased year over year by $14.0 million, primarily as a result of current year net income of $73.1 million offset by $45.7 million of cash returned to shareholders in the form of dividends and stock repurchases. The Company's net (cash) debt to capital percentage changed to (0.9)% as of June 30, 2024 from (3.8)% in the prior year.
At June 30, 2024, we expect to pay estimated interest payments of $2.8 million within the next five years. This estimate is based upon effective interest rates as of June 30, 2024 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 represent 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, 2024, we expect to pay estimated post-retirement benefit payments of $6.0 million during fiscal year 2025. See "Item 8. Financial Statements and Supplementary Data, Note 16. Employee Benefit Plans" for additional information regarding these obligations.
At June 30, 2024, we had $39.0 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, 2024 , we had $ 9.8 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.
29
Table of Contents
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), Peso 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.
30
Table of Contents
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 six reporting units for impairment testing: Electronics, Engraving, Scientific, Engineering Technologies, 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 11.0%. 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 2024, the Company determined that the fair value of the six 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 2024.
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 6.4% 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 5.6% 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.
31
Table of Contents
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 2024 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, 2024.