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Home›Key Performance Indicators›STANDEX INTERNATIONAL CORP/DE/ Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

STANDEX INTERNATIONAL CORP/DE/ Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

By Mabel McCaw
February 4, 2022
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Statements contained in this Quarterly Report that are not based on historical
facts are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements may be
identified by the use of forward-looking terminology such as "should," "could,"
"may," "will," "expect," "believe," "estimate," "anticipate," "intend,"
"continue," or similar terms or variations of those terms or the negative of
those terms. There are many factors that affect the Company's business and the
results of its operations and that may cause the actual results of operations in
future periods to differ materially from those currently expected or
anticipated. These factors include, but are not limited to: the impact of
pandemics such as the current coronavirus on employees, our supply chain, and
the demand for our products and services around the world; materially adverse or
unanticipated legal judgments, fines, penalties or settlements; conditions in
the financial and banking markets, including fluctuations in exchange rates and
the inability to repatriate foreign cash; domestic and international economic
conditions, including the impact, length and degree of economic downturns on the
customers and markets we serve and more specifically conditions in the
automotive, construction, aerospace, defense, transportation, food service
equipment, consumer appliance, energy, oil and gas and general industrial
markets; lower-cost competition; the relative mix of products which impact
margins and operating efficiencies in certain of our businesses; the impact of
higher raw material and component costs, particularly steel, certain materials
used in electronics parts, petroleum based products, and refrigeration
components; the impact of higher transportation and logistics costs, especially
with respect to transportation of goods from Asia; the impact of inflation on
the costs of providing our products and services; an inability to realize the
expected cost savings from restructuring activities including effective
completion of plant consolidations, cost reduction efforts including procurement
savings and productivity enhancements, capital management improvements,
strategic capital expenditures, and the implementation of lean enterprise
manufacturing techniques; the potential for losses associated with the exit from
or divestiture of businesses that are no longer strategic or no longer meet our
growth and return expectations; the inability to achieve the savings expected
from global sourcing of raw materials and diversification efforts in emerging
markets; the impact on cost structure and on economic conditions as a result of
actual and threatened increases in trade tariffs; the inability to attain
expected benefits from acquisitions and the inability to effectively consummate
and integrate such acquisitions and achieve synergies envisioned by the Company;
market acceptance of our products; our ability to design, introduce and sell new
products and related product components; the ability to redesign certain of our
products to continue meeting evolving regulatory requirements; the impact of
delays initiated by our customers; our ability to increase manufacturing
production to meet demand including as a result of labor shortages; and
potential changes to future pension funding requirements. In addition, any
forward-looking statements represent management's estimates only as of the day
made and should not be relied upon as representing management's estimates as of
any subsequent date. While the Company may elect to update forward-looking
statements at some point in the future, the Company and management specifically
disclaim any obligation to do so, even if management's estimates change.



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 aggregated into five reportable
segments: Electronics, Engraving, Scientific, Engineering Technologies, and
Specialty Solutions. Three operating segments are aggregated into Specialty
Solutions. Our segments differentiate themselves by collaborating with our
customers in order to develop and deliver custom solutions or engineered
components that solve problems for our customers or otherwise meet their needs
(a business model we refer to as "Customer Intimacy"). Overall management,
strategic development and financial control are led by the executive staff at
our corporate headquarters located in Salem, New Hampshire.



Our long-term strategy is to enhance shareholder value by building larger, more
profitable focused industrial platforms through our Standex Value Creation
System that assists management in meeting specific corporate and business unit
financial and strategic performance goals in order to create, improve, and
enhance shareholder value. In so doing, we expect to focus our financial assets
and managerial resources on our higher growth and operating margin businesses
while considering divestiture of those businesses that we feel are not strategic
or do not meet our growth and return expectations.



                                       24
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The Standex Value Creation System is a methodology which provides standard work
and consistent tools used throughout the Company in order to achieve our
organization's goals. The Standex Value Creation System employs four components:
Balanced Performance Plan, Growth Disciplines, Operational Excellence, and
Talent Management. The Balanced Performance Plan process aligns annual goals
throughout the Company and provides a standard reporting, management and review
process.  It is focused on setting, tracking and reviewing annual and quarterly
targets that support our short and long-term goals.  The Growth Disciplines use
a standard playbook of tools and processes including market maps, market tests
and growth laneways to identify, explore and execute on opportunities that
expand the business organically and through acquisitions.  Operational
Excellence also employs a standard playbook of tools and processes, based on
Lean, to improve operating execution (effectiveness), eliminate waste
(efficiency) and thereby improve profitability, cash flow and customer
satisfaction.  Finally, Talent Management is an organizational development
process that provides recruitment, training, development, and succession
planning for employees throughout our worldwide organization.  Through the use
of our Standex Value Creation System, we have developed a balanced approach to
value creation.  We intend to continue investing acquisition capital in high
margin and growth businesses, and we will continue to support all of our
businesses as they enhance value through deployment of the Standex Valuation
Creation System.



It is our objective to grow larger and more profitable business units through
both organic initiatives and acquisitions.  We seek to identify and implement
organic growth initiatives such as new product development, geographic
expansion, the introduction of products and technologies into new markets, key
accounts and strategic sales channel partners, and the introduction of new
technologies into existing markets. Also, we have a long-term objective to
create sizable business platforms by adding strategically aligned or "bolt on"
acquisitions to strengthen the individual businesses, create both sales and cost
synergies with our core business platforms, and accelerate their growth and
margin improvement.  We look to create both sales and cost synergies within our
core business platforms, accelerate growth and improve margins.  We have a
particular focus on identifying and investing in opportunities that complement
our products and will increase the global presence and capabilities of our
businesses.  From time to time, we have divested, and likely will continue to
divest, businesses that we feel are not strategic or do not meet our growth and
return expectations.


As part of our ongoing strategy:

? In the third quarter of fiscal 2021, we sold Enginetics Corporation

(“Enginetics”), our jet engine components business reported within our

the engineering technologies segment, for Enjet Aero, LLCa private company

aerospace engine component manufacturing company. This assignment allows us

focus on growth and higher margin opportunities in our core business

forming a solutions company serving space, commercial aviation and

defense end markets. We received $11.7 million cash and recorded consideration

a loss on the sale of $14.6 million in the consolidated financial statements.



  ? In the first quarter of fiscal year 2021, we acquired Renco Electronics
    ("Renco"), 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 the regions

such as consumer and industrial applications are highly complementary to our

existing business with the potential to further expand the key account

relationships and capitalize on cross-selling opportunities. Renco operates

    one manufacturing facility in Florida and is supported by contract
    manufacturers in Asia.  Renco's results are reported within our
    Electronics segment.




As a result of our portfolio moves over the past several years, 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 continue benefitting
from the economic rebound associated with the emergence from the end of the
COVID-19 crisis and to use our cash flow from operations to invest selectively
in our ongoing pipeline of organic and inorganic opportunities.



We develop "Customer Intimacy" by utilizing the Standex Growth Disciplines to
partner with our customers in order to develop and deliver custom solutions or
engineered components. By partnering with our customers during long-term product
development cycles, we become an extension of their development teams. Through
this Partner, Solve, Deliver® approach, we are able to secure our position as a
preferred long-term solution provider for our products and components. This
strategy results in increased sales and operating margins that enhance
shareholder returns.



Standex Operational Excellence drives continuous improvement in the efficiency
of our businesses, both on the shop floor and in the office environment.  We
recognize that our businesses are competing in a global economy that requires us
to improve our competitive position.  We have deployed a number of management
competencies to drive improvements in the cost structure of our business units
including operational excellence through lean enterprise, the use of low-cost
manufacturing facilities, the consolidation of manufacturing facilities to
achieve economies of scale and leveraging of fixed infrastructure costs,
alternate sourcing to achieve procurement cost reductions, and capital
improvements to increase productivity.



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.



                                       25
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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
its 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, we calculate 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 such
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 indicated, references to years refer to fiscal years.

Impact of the COVID-19 pandemic on the business



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 also
resulted in increased sales of scientific refrigeration equipment to customers
within our Scientific reporting segment. More recently we have been impacted by
(i) supply chain shortages and increased costs associated with the
well-documented global logistics issues and (ii) labor shortages, especially in
North America.



We exited the second quarter of fiscal year 2022 with $147.2 million in cash and
$199.7 million of borrowings under our revolving credit facility.  Our leverage
ratio covenant, as defined in our revolving credit agreement, was 1.20 to 1 and
allowed us the capacity to borrow an additional $281.2 million at December 31,
2021. 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 all government assistance programs made available to us at each of our global locations and to participate in such programs as available and appropriate.

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Results from continuing operations


                                       Three Months Ended           Six Months Ended
                                          December 31,                December 31,
(In thousands, except percentages)     2021          2020          2021          2020
Net sales                            $ 185,709     $ 156,283     $ 361,319     $ 307,569
Gross profit margin                       37.0 %        37.1 %        37.4 %        36.7 %
Income from operations                  21,773        16,738        44,601        31,092




                                   Three Months Ended       Six Months Ended
(In thousands)                     December 31, 2021       December 31, 2021
Net sales, prior year period      $            156,283     $          307,569
Components of change in sales:
Organic sales change                            32,016                 

57,623

Effect of business divestitures                 (2,302 )               (5,338 )
Effect of exchange rates                          (288 )                1,465
Net sales, current period         $            185,709     $          361,319




Net sales increased in the second quarter of fiscal year 2022 by $29.4 million
or 18.8% when compared to the prior year quarter. Organic sales increased $32.0
million or 20.5%, primarily due to pricing actions and strong demand in our
Electronics and Scientific segments, while foreign currency had a $0.3 million
or 0.2% negative impact on sales. Sales in the prior year quarter included
revenue of $2.3 million related to our divested Enginetics business.



Net sales increased in the six months ended December 31, 2021 by $53.8 million
or 17.5% when compared to the prior year period. Organic sales increased
$57.6 million or 18.7%, primarily due to pricing actions and strong demand in
our Electronics and Scientific segments, while foreign currency had a
$1.5 million or 0.5% positive impact on sales. Sales in the prior year period
included revenue of $5.4 million related to our divested Enginetics business.



Gross Profit Margin


Our gross margin for the second quarter of fiscal 2022 was 37.0%, down slightly from the gross margin of 37.1% in the prior year quarter. This decline was primarily the result of project mix and raw material and ocean freight cost headwinds, offset by organic increases in sales and pricing and productivity initiatives in our segments.



Our gross margin for six months ended December 31, 2021 was 37.4%, which
increased from the prior year quarter's gross margin of 36.7%. This increase is
a result of organic sales increases and price and productivity initiatives,
partially offset by raw material and ocean freight cost headwinds, a one-time
project related charge at Engineering Technologies in the first quarter, along
with production decreases due to a temporary work stoppage in our Specialty
Solutions segment which was resolved during the first quarter.



Selling, general and administrative expenses



Selling, General, and Administrative ("SG&A") expenses for the second quarter of
fiscal year 2022 were $43.5 million, or 23.4% of sales, compared to $40.2
million, or 25.7% of sales, during the prior year quarter.  SG&A expenses during
the quarter were impacted by increased distribution expense of approximately
$2.1 million associated with higher organic sales volume in the quarter, as well
as increases in research and development costs and compensation related
accruals.



SG&A expenses for the six months ended December 31, 2021 were $86.3 million, or
23.9% of sales, compared to $79.1 million, or 25.7% of sales, during the six
months ended December 31, 2020.  SG&A expenses during the period were impacted
by increased distribution expense of approximately $3.3 million associated with
higher organic sales volume in the six months ended December 31, 2021, increases
in research and development costs and compensation related accruals.



Restructuring Charges



We incurred restructuring expenses of $0.8 million in the second quarter of
fiscal year 2022 and $1.3 million for the six months ended December 31, 2021,
primarily related to productivity improvements and global headcount reductions
within our Engraving segment.



We expect to incur restructuring costs of approximately $1.1 million throughout
the remainder of fiscal year 2022 as we continue to focus our efforts to reduce
cost and improve productivity across our businesses, particularly through
headcount reductions and productivity initiatives.



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Acquisition Related Expenses



We incurred acquisition related expenses of $0.9 million in the second quarter
of fiscal year 2022 and $1.1 million for the six months ended December 31, 2021.
Acquisition related expenses typically consist of due diligence, integration,
and valuation expenses incurred in connection with recent or pending
acquisitions.



Income from Operations


Operating income for the second quarter of fiscal 2022 was $21.8 millioncompared to $16.7 million during the quarter of the previous year. The increase of $5.1 millionor 30.1%, is mainly attributable to organic sales growth, productivity and cost reduction initiatives, offset by increases in material costs.

Operating result for the six months ended December 31, 2021 has been $44.6 millioncompared to $31.1 million during the quarter of the previous year. The increase of $13.5 millionor 43.4%, is primarily attributable to organic sales growth, productivity and cost reduction initiatives, offset by increased material costs.



Interest Expense



Interest expense for the second quarter of fiscal year 2022 was $1.5 million, a
4.7% decrease from interest expense of $1.6 million during the prior year
quarter. Interest expense for the six months ended December 31, 2021 was $3.2
million, a 5.2% increase from interest expense of $3.1 million during the prior
year. Our effective interest rate in the second quarter of fiscal year 2022 was
2.62%.





Income Taxes



Our effective tax rate from continuing operations for the second quarter of
fiscal year 2022 and for the six months of the fiscal year ending June 30, 2022
was 24.7% and 24.8%, respectively compared with 21.0% and 24.8% for the prior
year quarter and prior year period, respectively. The tax rate was impacted in
the current period by the following items: (i) a discrete tax benefit related to
equity compensation, (ii) the jurisdictional mix of earnings, (iii) foreign
withholding taxes, and (iv) reduction of global intangible low-taxed income.



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.





                                             As of December 31, 2021                As of December 31, 2020
                                                                Backlog                                Backlog
                                         Total Backlog        under 1 year      Total Backlog        under 1 year
Electronics                             $       153,080       $    143,485     $        77,243       $     76,190
Engraving                                        26,260             20,666              23,194             15,710
Scientific                                        7,973              7,973               9,849              9,849
Engineering Technologies                         58,532             46,681              87,984             56,495
Specialty Solutions                              48,590             45,377              17,746             14,262
Total                                   $       294,435       $    264,182     $       216,016       $    172,506






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Total backlog realizable under one year increased $91.7 million, or 53.1%, to
$264.2 million at December 31, 2021 from $172.5 million at December 31,
2020. Electronics backlog increased 98% in all geographic markets in response to
the beginning of the global recovery from the pandemic and new business
opportunities. Backlog declines in the Engineering Technologies segment are
primarily due to the divestiture of Enginetics and the weakening demand in the
commercial aviation sector due to COVID-19 pandemic related slowdowns in that
industry.


The evolution of the order book at less than one year is as follows (in thousands):

                                                 As of
(In thousands)                             December 31, 2021
Backlog under 1 year, prior year period   $           172,506
Components of change in backlog:
Organic change                                        106,226
Effect of divestiture                                 (14,550 )
Backlog under 1 year, current period      $           264,182






Segment Analysis



Overall


Looking forward to the remainder of fiscal 2022, we expect to be well positioned to capitalize on fiscal 2021 and the six months ended December 31, 2021 dynamic, with an expected year-over-year improvement in key financial metrics, supported by order growth and productivity initiatives.

In general, for fiscal year 2022, we continue to expect:

? continued end market strength in relay and reed switch products as well as

       growth in magnetics in our Electronics segment;


     ? an increase in soft trim demand in our Engraving segment;

? a decline in demand for storage of COVID-19 related vaccines in our

       segment;


     ? continued strength in the commercial aviation market and growth in the
       space market in our Engineering Technologies segment; and


     ? continued recovery in the food service market in our Specialty Solutions
       segment.




Electronics Group



                           Three Months Ended                          Six Months Ended
                              December 31,               %               December 31,               %
(In thousands, except
percentages)               2021          2020          Change         2021          2020          Change
Net sales               $   76,626     $  60,156           27.4 %   $ 152,462     $ 115,427           32.1 %
Income from
operations                  17,157         9,962           72.2 %      35,430        18,497           91.5 %
Operating income
margin                        22.4 %        16.6 %                       23.2 %        16.0 %




Net sales in the second quarter of fiscal year 2022 increased $16.5 million, or
27.4%, when compared to the prior year quarter.  Organic sales increased by
$16.8 million or 27.9%, reflecting a broad-based geographical recovery with a
strengthening in demand for all product groups including relays in renewable
energy and electric vehicle applications as well as reed switch demand in
transportation end markets and the impacts of pricing actions. The foreign
currency impact decreased sales by $0.3 million, or 0.5%.



Income from operations in the second quarter of fiscal year 2022 increased by
$7.2 million, or 72.2%, when compared to the prior year quarter. The operating
income increase was the result of organic sales growth, various price actions
and cost saving initiatives, partially offset by material and freight cost
increases.



Net sales in the six months ended December 31, 2021 increased $37.0 million, or
32.1%, when compared to the prior year period. Organic sales increased by $36.7
million or 31.8%, reflecting a broad-based geographical recovery with a
strengthening in demand for all product groups including relays in renewable
energy and electric vehicle applications as well as reed switch demand in
transportation end markets and the impact of pricing actions. The foreign
currency impact increased sales by $0.3 million, or 0.2%.



Income from operations in the six months ended December 31, 2021 increased by
$16.9 million, or 91.5% when compared to the prior year period. The operating
income increase was the result of organic sales growth, various price actions
and cost saving initiatives, partially offset by material cost increases.



                                       29
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Sequentially in the third quarter of fiscal 2022, we expect a slight increase in revenue and operating margin, primarily due to positive end market demand and associated operating leverage.



Engraving Group



                           Three Months Ended                          Six Months Ended
                              December 31,               %               December 31,               %
(In thousands, except
percentages)               2021          2020         Change          2021          2020         Change
Net sales               $   36,644     $  37,950          (3.4 %)   $  71,814     $  74,351          (3.4 %)
Income from
operations                   5,204         6,501         (20.0 %)      10,078        12,374         (18.6 %)
Operating income
margin                        14.2 %        17.1 %                       14.0 %        16.6 %




Net sales in the second quarter of fiscal year 2022 decreased by $1.3 million,
or 3.4%, when compared to the prior year quarter. Organic sales decreased by
$1.4 million, or 3.8%, as a result of timing of projects and geographic mix. The
sales decline was offset by foreign exchange impacts of $0.1 million, or 0.3%.



Income from operations in the second quarter of fiscal year 2022 decreased by
$1.3 million, when compared to the prior year quarter.  Operating income
declined during the quarter reflecting the timing of projects and geographic
mix.



Net sales in the six months ended December 31, 2021 decreased by $2.5 million,
or 3.4%, when compared to the prior year period. Organic sales decreased by $3.7
million, or 5.0% as a result of timing of projects.  The sales decline was
offset by foreign exchange impacts of $1.1 million, or 1.5%.



Income from operations in  the six months ended December 31, 2021 decreased by
$2.3 million, when compared to the prior year period.  Operating
income decreased during the period due to the volume decline, partially offset
by productivity initiatives.



Sequentially during the third quarter of fiscal year 2022, we expect revenue
and operating margin to be similar due to a decrease in project work in Asia,
associated with the Chinese New Year, offset by contribution from projects in
Europe and growth in soft trim sales.





Scientific



                           Three Months Ended                          Six Months Ended
                              December 31,               %               December 31,               %
(In thousands, except
percentages)               2021          2020          Change         2021          2020          Change
Net sales               $   24,636     $  17,893           37.7 %   $  46,165     $  34,556           33.6 %
Income from
operations                   5,490         4,234           29.7 %       9,998         8,310           20.3 %
Operating income
margin                        22.3 %        23.7 %                       21.7 %        24.0 %




Net sales in the second quarter of fiscal year 2022 and for the six month period
ended December 31, 2021 increased by $6.7 million and $11.6 million,
respectively, when compared to the prior year quarter and year to date
periods. 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.



Income from operations in the second quarter of fiscal year 2022 and for the six
month period ended December 31, 2021 increased $1.3 million and $1.7
million, respectively, when compared to the prior year quarter and year to date
periods. The increase reflects revenue growth and pricing actions partially
offset by higher freight costs and investments in new product development.



Sequentially during the third quarter of fiscal 2022, we expect a moderate decline in revenue and operating margin due to lower volumes.

                                       30
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Engineering Technologies Group



                           Three Months Ended                          Six Months Ended
                              December 31,               %               December 31,               %
(In thousands, except
percentages)               2021          2020          Change         2021          2020          Change
Net sales               $   18,095     $  17,507            3.4 %   $  35,668     $  35,140            1.5 %
Income from
operations                   2,314         1,363           69.8 %       3,213         1,831           75.5 %
Operating income
margin                        12.8 %         7.8 %                        9.0 %         5.2 %




Net sales in the second quarter of fiscal year 2022 increased by $0.6 million,
or 3.4%, compared to the prior year quarter. Sales in the prior year quarter
included revenue of $2.3 million related to our divested Enginetics business.
Excluding the impact of the divestiture, sales increased $2.9 million or 19.0%
primarily due to recovering demand in the commercial aviation industry and
growth in the power generation end market.



Operating income increased in the second quarter of Fiscal 2022 compared to the prior year period, mainly due to the recovery of commercial aviation end markets, as well as the absence of associated losses to the
Engines Business.



Net sales in the six months ended December 31, 2021 increased by $0.5 million,
or 1.5%, compared to the prior year period. Sales in the prior year period
included revenue of $5.4 million related to our divested Enginetics business.
Excluding the impact of the divestiture, sales increased $5.9 million primarily
due to recovering demand in the commercial aviation industry, growth in the
power generation end market, along with an increase in sales into the space end
market, particularly related to commercialization of space.



Income from operations increased in the six months ended December 31, 2021
compared to the prior year period primarily due to productivity and cost savings
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 during the
first quarter.



Sequentially during the third quarter of fiscal year 2022, we expect revenue to
remain similar or slightly higher due to strength in the space and medical end
markets. Operating margin is expected to increase slightly to moderately due to
end market strength and ongoing productivity initiatives.





Specialty Solutions Group



                           Three Months Ended                          Six Months Ended
                              December 31,               %               December 31,               %
(In thousands, except
percentages)               2021          2020          Change         2021          2020          Change
Net sales               $   29,708     $  22,777           30.4 %   $  55,210     $  48,095           14.8 %
Income from
operations                   3,738         3,211           16.4 %       6,553         7,117           (7.9 %)
Operating income
margin                        12.6 %        14.1 %                       11.9 %        14.8 %




Net sales in the second quarter of fiscal year 2022 increased $6.9 million or
30.4% when compared to the prior year quarter. Organic sales increased $7.1
million, or 30.0%. Increased sales volume is primarily due to positive trends in
food services, specialty retail and refuse end markets, as well as various
pricing actions.



Income from operations increased $0.5 million or 16.4% in the second quarter of
fiscal year 2022 when compared to the prior year quarter primarily as a result
of volume and pricing actions, partially offset by higher labor costs, raw
material and ocean freight costs.



Net sales in the six months ended December 31, 2021 increased $7.1 million or
14.8% when compared to the prior year period. Organic sales increased $7.3
million, or 15.2%. 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 decreased $0.6 million or 7.9% in the six months ended
December 31, 2021 when compared to the prior year period primarily as a result
of higher costs of labor, including a temporary work stoppage in the first
quarter and higher raw material and ocean freight costs, partially offset by
pricing actions.



Sequentially during the third quarter of fiscal year 2022, we expect a slight to
moderate revenue and operating margin increase reflecting strength in backlog
and end market trends.



                                       31
--------------------------------------------------------------------------------


Corporate and Other



                           Three Months Ended                         Six Months Ended
                              December 31,               %              December 31,               %
(In thousands, except
percentages)               2021          2020         Change         2021          2020         Change
Income (loss) from
operations:
Corporate               $   (8,662 )   $  (7,454 )        16.2 %   $ (16,546 )   $ (14,445 )        14.5 %
Restructuring                 (843 )        (509 )        65.6 %      (1,283 )      (1,996 )       (35.7 %)
Acquisition related
costs                         (925 )        (570 )        62.3 %      (1,142 )        (596 )        91.6 %
Other income
(expense), net              (1,700 )           -         100.0 %      (1,700 )           -         100.0 %



Corporate office expenses in the second quarter of fiscal 2022 increased by 16.2% compared to the prior year quarter. The increase reflects higher employee-related compensation and research and development costs.

Head office expenses during the six months ended December 31, 2021 increased by 14.5% compared to the same period of the previous year. The increase reflects higher employee-related compensation and research and development costs.

Restructuring and acquisition-related costs were discussed above in the Company Overview. The increase in other expenses reflects a $1.7 million
litigation payable in the second quarter of fiscal 2022.


Discontinued Operations



In pursuing 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. Net loss from discontinued operations was
$0.0 million and $0.6 million for the three months ended December 31, 2021 and
December 31, 2020 respectively. Net loss from discontinued operations was
$0.0 million and $1.3 million for the six months ended December 31, 2021 and
December 31, 2020 respectively.





Cash and capital resources



At December 31, 2021, our total cash balance was $147.2 million, of which
$100.0 million was held by foreign subsidiaries.  During the second quarter and
in the first six months of fiscal year 2022, we repatriated $15.9 million to the
United States from our foreign subsidiaries. We expect to repatriate between
$15.0 million and $20.0 million during the second half of fiscal year 2022,
however, the amount and timing of cash repatriation during the fiscal year will
be dependent upon each business unit's operational needs including requirements
to fund working capital, capital expenditures, 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.



Net cash provided by continuing operating activities for the six months ended
December 31, 2021, was $36.7 million compared to net cash provided by continuing
operating activities of $31.5 million in the prior year.  We generated $20.2
million from income statement activities and used $14.3 million of cash to fund
working capital and other balance sheet increases.  Cash flow used in investing
activities for the six months ended December 31, 2021 totaled $8.1 million and
primarily consisted of $9.7 million used for capital expenditures and $1.6
million generated by sales of property, plant, and equipment. Cash used by
financing activities for the six months ended December 31, 2021 was $15.6
million and consisted primarily of purchases of stock of $9.5 million, cash paid
for dividends of $6.0 million, and contingent consideration payments due to the
seller of the Renco business of $1.2 million.



During the second quarter of fiscal year 2019, we entered into a five-year
Amended and Restated Credit Agreement ("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 pay a variable rate of interest and a
commitment fee on borrowed amounts as well as a commitment fee on unused amounts
under the facility.  The amount of the commitment fee depends 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.  As our funded debt to EBITDA ratio increases, the commitment
fee increases.



                                       32
--------------------------------------------------------------------------------




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 December 31, 2021, the Company
used $6.1 million against the letter of credit sub-facility and had the ability
to borrow $281.2 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:



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 also allows for unlimited non-cash charges including purchase
accounting and goodwill adjustments.  At December 31, 2021, the Company's
Interest Coverage Ratio was 14.7.



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 December 31, 2021, the Company's Leverage
Ratio was 1.20.



As of December 31, 2021, we had borrowings under our facility of $200.0 million.
In order to manage our interest rate exposure on these borrowings, we are party
to $200.0 million of active floating to fixed rate swaps.  These swaps convert
our interest payments from LIBOR to a weighted average fixed rate of 1.27%. 

the

the effective interest rate on our outstanding borrowings, including the impact of interest rate swaps, was 2.62%.



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 for these requirements are cash flows
from continuing operations and borrowings under the facility.  We expect fiscal
year 2022 capital spending to be between $25.0 million and $30.0 million which
includes amounts not spent in fiscal year 2021.  We also expect that fiscal year
2022 depreciation and amortization expense will be an estimated $21.0 million
and $12.0 million, respectively.



The following table presents our capitalization:




(In thousands)                    December 31, 2021       June 30, 2021
Long-term debt                   $           199,660     $       199,490
Less cash and cash equivalents              (147,155 )          (136,367 )
Net debt                                      52,505              63,123
Stockholders' equity                         523,450             506,425
Total capitalization             $           575,955     $       569,548



We sponsor a number of defined benefit and defined contribution pension plans. the we pension plan is frozen for almost all participants.

We

assessed the current and long-term cash requirements of these plans, and our existing sources of cash should be sufficient to cover the contributions required under ERISA and other applicable regulations.



The fair value of the Company's U.S. defined benefit pension plan assets
was $211.5 million at December 31, 2021, as compared to $212.6 million at the
most recent measurement date, which occurred as of June 30, 2021. The next
measurement date to determine plan assets and benefit obligations will be on
June 30, 2022.



The Company expects to pay $0.5 million in contributions to its defined benefit
plans during the remainder of fiscal year 2022. Contributions of $0.1 million
and $0.1 million were made during the three and six months ended December 31,
2021 compared to $4.8 million and $4.9 million during the three and six months
ended December 31, 2020, respectively. The Company does not expect to make
additional contributions during fiscal year 2022 to its U.S. defined benefit
plan.  The Company expects to make contributions during fiscal year 2022 of $0.1
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 an insurance program in place to fund supplemental retirement income
benefits for four retired executives.  Current executives and new hires are not
eligible for this program.  At December 31, 2021, the underlying policies had a
cash surrender value of $10.6 million and are reported net of loans of $9.1
million for which we have the legal right of offset, these amounts are reported
net on our balance sheet.



                                       33
--------------------------------------------------------------------------------


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. 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 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, mortality rates, and
assumed rates of returns.  The Company's pension plan is frozen for
substantially 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 diverse business with generally low levels of seasonality.



Employee Relations - The Company has labor agreements with several union locals
in the United States and several European employees belong to European trade
unions.





Critical Accounting Policies



The condensed consolidated financial statements include the accounts of Standex
International Corporation and all of its 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 condensed
consolidated financial statements.  Although we believe that materially
different amounts would not be reported due to the accounting policies adopted,
the application of certain 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.  Our Annual Report on Form 10-K for
the year ended June 30, 2021 lists a number of accounting policies which we
believe to be the most critical.



                                       34

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