STANDEX INTERNATIONAL CORP/DE/ (SXI)

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:

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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.

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Consolidated Results from Continuing Operations (in thousands):

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.

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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.

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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.

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Backlog orders are as follows (in thousands):

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):

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:

Electronics

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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

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

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.

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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

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

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.

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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

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):

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.

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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:

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Interest Coverage Ratio - The Company is required to maintain a ratio of Earnings Before Interest and Taxes, as Adjusted (“Adjusted EBIT per the Credit Facility”), to interest expense for the trailing twelve months of at least 2.75:1. Adjusted EBIT per the Credit Facility specifically excludes extraordinary and certain other defined items such as cash restructuring and acquisition related charges up to the lower of $20.0 million or 10% of EBITDA. The facility allows for unlimited non-cash charges including purchase accounting and goodwill adjustments. At June 30, 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:

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.

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Other Matters

Inflation – Certain of our expenses, such as wages and benefits, occupancy costs, freight and equipment repair and replacement, are subject to normal inflationary pressures. Inflation for medical costs can impact both our employee benefit costs as well as our reserves for workers' compensation claims. We monitor the inflationary rate and make adjustments to reserves whenever it is deemed necessary. Our ability to control worker compensation insurance medical cost inflation is dependent upon our ability to manage claims and purchase insurance coverage to limit the maximum exposure for us. Each of our segments is subject to the effects of changing raw material costs caused by the underlying commodity price movements. In the past year, we have experienced price fluctuations for a number of materials including rhodium, steel, and other metal commodities.  These materials are some of the key elements in the products manufactured in these segments.  Wherever possible, we will implement price increases to offset the impact of changing prices.  The ultimate acceptance of these price increases, if implemented, will be impacted by our affected divisions’ respective competitors and the timing of their price increases. In general, we do not enter into purchase contracts that extend beyond one operating cycle. While Standex considers our relationship with our suppliers to be good, there can be no assurances that we will not experience any supply shortage.

Foreign Currency Translation – Our primary functional currencies used by our non-U.S. subsidiaries are the Euro, British Pound Sterling (Pound), Japanese (Yen), 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.

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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.

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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.

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:

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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.

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Consolidated Results from Continuing Operations (in thousands):

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%.

Net sales increased for fiscal year 2022 by $79.1 million or 12.1% when compared to the prior year. Organic sales increased $96.3 million or 14.7% primarily due to pricing actions and strong demand in our Electronics segment, acquisitions had a $1.9 million impact on sales, and foreign currency had a $9.9 million or 1.5% negative impact on sales. Net sales in the prior year included revenue of $9.2 million related to our divested Enginetics business.

We discuss our results and outlook for each segment below.

Gross Profit

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.

Gross profit in fiscal year 2022 increased to $269.9 million, or a gross margin of 36.7% as compared to $241.3 million, or a gross margin of 36.8% in fiscal year 2021. This increase was a result of organic sales increases of $96.3 million, productivity initiatives and targeted prices increases to offset approximately $38 million of inflationary impacts in the areas of ocean freight, raw material, and labor. Organic sales increases were partially a result of an approximate $20 million increase in sales to fast growth markets such as electric vehicles, green energy, and the commercialization of space. Gross profit increases were partially offset by increased costs of sales of $50.4 million which included a one-time project related charge at Engineering Technologies of $0.8 million, along with production decreases due to a temporary work stoppage in our Specialty Solutions segment which was resolved during the first quarter.

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Selling, General, and Administrative Expenses

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.

Selling, general, and administrative expenses, (“SG&A”) for the fiscal year 2022 were $169.9 million, or 23.1% of sales compared to $163.1 million, or 24.8% of sales during the prior year. SG&A expenses during this period were primarily impacted by increased distribution expenses associated with the customer mix and higher organic sales volume and increased research and development spending to drive future product initiatives.

Restructuring Costs

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.

During fiscal year 2022, we incurred restructuring expenses of $4.4 million, primarily related to productivity improvements, facility rationalization activities, and global headcount reductions within our Engraving and Electronics segments.

(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 a pre-tax loss on sale of the Enginetics business of $14.6 million for fiscal year 2021. The loss included a $7.6 million impairment of goodwill assigned to the entirety of the Engineering Technologies segment and a $5.4 million write-down of intangible assets.

Acquisition Related Costs

We incurred acquisition related expenses of $0.6 million and $1.6 million in fiscal year 2023 and 2022, 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 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 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.

Income from operations for the fiscal year 2022 was $88.3 million, compared to $59.2 million during the prior year. The $29.1 million increase, or 49.2% is primarily due to the loss on sale of the Enginetics business of $14.6 million in the prior year, income from organic sales increases and pricing actions, along with cost reduction activities and productivity improvement initiatives implemented in all of our businesses, partially offset by material inflation, logistics and labor costs as well as the impact of the COVID-19 lockdown in China in the fourth fiscal quarter of 2022 and a litigation charge of $5.7 million.

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 2023 was $5.4 million a decrease of $0.5 million as compared to the prior year. Our effective interest rate was 2.97%. Interest expense for fiscal year 2022 was $5.9 million a decrease of $0.1 million as compared to the prior year.

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Income Taxes

The income tax provision from continuing operations for the fiscal year ended June 30, 2023 was $24.8 million, or an effective rate of 15.1%, compared to $19.8 million, or an effective rate of 24.4%, for the year ended June 30, 2022, and $14.2 million, or an effective rate of 26.9%, for the year ended June 30, 2021. 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, 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.

The income tax provision from continuing operations for the fiscal year ended June 30, 2021 was impacted by the following items: (i) a tax provision of $5.1 million due to the mix of income in various jurisdictions, (ii) a tax benefit of $1.0 million from our 2019 and 2020 tax losses that the CARES Act allows to be carried back to 2014 and 2015, when the U.S. federal income tax rate was 35%, (iii) a tax benefit of $0.8 million related to Federal R&D credit and Foreign Tax Credit, (iv) a tax benefit of $1.7 million related to return-to-accrual adjustments to true-up up prior-period provision amounts, and (v) the tax expense of $1.2 million attributable to the divestiture of the Enginetics Corporation during the year.

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 2023, capital expenditures were $24.3 million or 3.3% of net sales, as compared to $23.9 million, or 3.2%, of net sales in the prior year. We expect 2024 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.

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Backlog orders are as follows (in thousands):

Total backlog realizable within one year decreased $18.2 million, or 7.1% to $238.1 million at June 30, 2023 from $256.3 million at June 30, 2022.  Changes in backlog under 1 year are as follows (in thousands):

Segment Analysis (in thousands)

Overall Outlook

Looking forward to fiscal year 2024, we expect to be well-positioned, with anticipated continued improvement in key financial metrics, supported by productivity initiatives.

In general, for fiscal year 2024, we expect:

Electronics

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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.

In the first quarter of fiscal year 2024, on a sequential basis, we expect slightly higher revenue primarily due to the recently announced acquisition and continued strength in our fast growth end markets, partially offset by continued slow recovery in China and Europe. Sequentially, we expect similar operating margin.

Net sales in fiscal year 2022 increased 50.9 million, or 20.1%, when compared to the prior year. Organic sales increased $56.1 million, or 22.2%, reflecting a broad-based geographical recovery with continued strong demand for all product groups as well as new business opportunities, including the impact of a COVID-19 lockdown in China in the fourth fiscal quarter. Acquisitions in fiscal year 2022 added $1.9 million, or 0.8% in sales. The foreign currency impact decreased sales by $7.1 million, or 2.8%.

Income from operations in the fiscal year 2022 increased $23.8 million, or 51.1% when compared to the prior year. The operating income increase was the result of organic sales growth, various pricing actions and cost saving initiatives, partially offset by material and freight cost increases.

Engraving

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.

In the first quarter of fiscal year 2024, we expect slightly lower revenue reflecting timing of customer projects and slightly higher operating margin.

Net sales in fiscal year 2022 decreased by $0.8 million or 0.5% compared to the prior year. Organic sales increased by $0.9 million, or 0.6%, as a result of timing of projects. The sales increase was offset by foreign exchange impacts of $1.6 million, or 1.1%.

Income from operations in fiscal year 2022 decreased by $0.7 million, or 3.0%, when compared to the prior year. The decrease reflected geographic mix, partially offset by productivity initiatives.

Scientific

Net sales in fiscal year 2023 decreased 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.

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Income from operations in fiscal year 2023 decreased by $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.

In the first quarter of fiscal year 2024, on a sequential basis, we expect similar revenue and operating margin.

Net sales in fiscal year 2022 increased by $4.4 million, or 5.6% when compared to the prior year. The net sales increase reflected 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 fiscal year 2022 decreased $0.4 million or 2.1%, reflected higher freight costs and investments in new product development, offset by revenue growth and pricing actions.

Engineering Technologies

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.

In the first quarter of fiscal year 2024, on a sequential basis, we expect a significant decrease in revenue reflecting timing of projects and a slight to moderate decrease in operating margin, with productivity initiatives mostly offsetting the impact of volume decline and higher mix of development projects. The long-term demand remains robust with the current backlog and new platform development funnel expected to provide solid foundation for growth in the second half of fiscal year 2024 and beyond.

Net sales in fiscal year 2022 decreased $2.6 million, or 3.4%, when compared to the prior year. Sales distribution by market in 2022 was as follows: 40% space, 23% aviation, 19% defense, 7% energy, and 11% other markets. Sales in the prior year period included revenue of $9.2 million related to our divested Enginetics business. Excluding the impact of the divestiture, sales increased $11.8 million primarily due to customer demand in the commercial aviation market, along with an increase in sales into the space end market, particularly related to commercialization of space and a medical market customer demand surge.

Income from operations in fiscal year 2022 increased $2.6 million, or 42.4%, when compared to the prior year. The increase was primarily due to cost saving measures implemented during the pandemic and maintained as economic activity resumed along with the absences of losses associated with the Enginetics business, offset by a $1.1 million one-time project-related charge.

Specialty Solutions

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.

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In the first quarter of fiscal year 2024, on a sequential basis, we expect a slight decrease in revenue and operating margin.

Net sales for fiscal year 2022 increased $22.0 million, or 21.8%, when compared to the prior year. Organic sales increased $22.9 million, or 22.7%. Increased sales volume was primarily due to a continued recovery in the Pumps and Merchandising businesses and pricing actions, partially offset by the impact of a temporary work stoppage which was resolved during the first quarter.

Income from operations for fiscal year 2022 increased $1.2 million, or 8.5%, when compared to the prior year primarily as a result of increased sales volume in the Pumps and Merchandising businesses, partially offset by higher costs of labor, including the temporary work stoppage in the first quarter and higher raw material and ocean freight costs.

Corporate, Restructuring and Other

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.

Corporate expenses in fiscal year 2022 increased $4.7 million, or 16%, when compared to the prior year, primarily due to employee related compensation accruals and research and development costs.

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):

Liquidity and Capital Resources

At June 30, 2023, our total cash balance was $195.7 million, of which $98.6 million was held outside of the United States.  During fiscal years 2023, 2022 and 2021, we repatriated $29.1 million, $30.8 million, and $37.6 million of our cash previously held outside of the United States, respectively.  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.

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Cash Flow

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.

Net cash provided by continuing operating activities for the year ended June 30, 2022 was $78.1 million compared to net cash provided by continuing operating activities of $81.9 million in the prior year. We generated $101.7 million from income statement activities and used $23.1 million of cash to fund working capital increases. Cash flow used in investing activities for the year ended June 30, 2022 totaled $31.0 million. Uses of investing cash consisted primarily of capital expenditures of $23.9 million, $13.0 million for the acquisitions, $1.0 million used in other investing activities, offset by $5.0 million generated by proceeds from a life insurance policy related to the death of a retired Company executive and $1.8 million generated by sales of property, plant, and equipment. Cash used by financing activities for the year ended June 30, 2022 were $69.4 million and included stock repurchases of $31.4 million, repayments of debt of $25.0 million, cash paid for dividends of $12.2 million, and contingent consideration payments due to the seller of the Renco business of $2.2 million.

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 $142.1 million at June 30, 2023, as compared to $157.9 million as of June 30, 2022. We participate in two multi-employer pension plans and sponsor five defined benefit plans including two in the U.S. and one each in the U.K., Germany and Japan.  The Company’s pension plan is frozen for U.S. employees and participants in the plan ceased accruing future benefits.  Our primary U.S. defined benefit plan is not 100% funded under ERISA rules at June 30, 2023. Obligations under our defined benefit plan operated in Ireland have been transferred to the buyer of the Procon business as part of the divestiture.

U.S. defined benefit plan contributions of $0.2 million were made during fiscal year 2023 compared to $0.2 million during fiscal year 2022. There are required contributions of $9.8 million to the United States funded pension plan for fiscal year 2024. The Company expects to make contributions during fiscal year 2024 of $0.2 million and $0.2 million to its unfunded defined benefit plans in the U.S. and Germany, respectively. Any subsequent plan contributions will depend on the results of future actuarial valuations.

We have evaluated the current and long-term cash requirements of our defined benefit and defined contribution plans as of June 30, 2023 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, 2023, the underlying policies had a cash surrender value of $11.7 million and are reported net of loans of $5.0 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, 2023, the Company has used $3.0 million against the letter of credit sub-facility and had the ability to borrow $371.5 million under the facility based on our current trailing twelve-month EBITDA. The facility contains customary representations, warranties and restrictive covenants, as well as specific financial covenants. The Company’s current financial covenants under the facility are as follows:

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Interest Coverage Ratio - The Company is required to maintain a ratio of Earnings Before Interest and Taxes, as Adjusted (“Adjusted EBIT per the Credit Facility”), to interest expense for the trailing twelve months of at least 2.75:1. Adjusted EBIT per the Credit Facility specifically excludes extraordinary and certain other defined items such as cash restructuring and acquisition related charges up to the lower of $20.0 million or 10% of EBITDA. The facility allows for unlimited non-cash charges including purchase accounting and goodwill adjustments. At June 30, 2023, the Company’s Interest Coverage Ratio was 20.61:1.

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, 2023, the Company’s Leverage Ratio was 0.84:1.

As of June 30, 2023, we had borrowings under our facility of $175.0 million.  In order to manage our interest rate exposure on these borrowings, we are party to $175.0 million of active floating to fixed rate swaps.  These swaps convert our interest payments from SOFR to a weighted average rate of 1.13%.  The effective rate of interest for our outstanding borrowings, including the impact of the interest rate swaps, was 2.97%.  Our primary cash requirements in addition to day-to-day operating needs include interest payments, capital expenditures, acquisitions, share repurchases, and dividends.

In connection with the acquisition of Renco, we assumed $0.7 million of debt under the Paycheck Protection Program, within the United States Coronavirus Aid, Relief, and Economic Security ("CARES") Act. These borrowings were forgiven in June 2021.

Our primary sources of cash are cash flows from continuing operations and borrowings under the facility.  We expect that fiscal year 2024 depreciation and amortization expense will be between $22.0 million and $24.0 million and $8.0 million and $10.0 million, respectively.

The following table sets forth our capitalization at June 30:

Stockholders’ equity increased year over year by $108.1 million, primarily as a result of current year net income of $139.0 million offset by $38.5 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 (3.8)% as of June 30, 2023 from 12.3% in the prior year.

At June 30, 2023, we expect to pay estimated interest payments of $7.9 million within the next five years. This estimate is based upon effective interest rates as of June 30, 2023 and excludes any interest rate swaps which are assets to us. See Item 7A for further discussions surrounding interest rate exposure on our variable rate borrowings.

Post-retirement benefits and pension plan contribution payments represents future pension payments to comply with local funding requirements. Our policy is to fund domestic pension liabilities in accordance with the minimum and maximum limits imposed by the Employee Retirement Income Security Act of 1974 ("ERISA"), federal income tax laws and the funding requirements of the Pension Protection Act of 2006. At June 30, 2023, we expect to pay estimated post-retirement benefit payments of $10.2 million during fiscal year 2024. See "Item 8. Financial Statements and Supplementary Data, Note 16. Employee Benefit Plans" for additional information regarding these obligations.

At June 30, 2023, we had $33.8 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, 2023, we had $9.5 million of non-current liabilities for uncertain tax positions. We are not able to provide a reasonable estimate of the timing of future payments related to these obligations.

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Other Matters

Inflation – Certain of our expenses, such as wages and benefits, occupancy costs, freight and equipment repair and replacement, are subject to normal inflationary pressures. Inflation for medical costs can impact both our employee benefit costs as well as our reserves for workers' compensation claims. We monitor the inflationary rate and make adjustments to reserves whenever it is deemed necessary. Our ability to control worker compensation insurance medical cost inflation is dependent upon our ability to manage claims and purchase insurance coverage to limit the maximum exposure for us. Each of our segments is subject to the effects of changing raw material costs caused by the underlying commodity price movements. In the past year, we have experienced price fluctuations for a number of materials including rhodium, steel, and other metal commodities.  These materials are some of the key elements in the products manufactured in these segments.  Wherever possible, we will implement price increases to offset the impact of changing prices.  The ultimate acceptance of these price increases, if implemented, will be impacted by our affected divisions’ respective competitors and the timing of their price increases. In general, we do not enter into purchase contracts that extend beyond one operating cycle. While Standex considers our relationship with our suppliers to be good, there can be no assurances that we will not experience any supply shortage.

Foreign Currency Translation – Our primary functional currencies used by our non-U.S. subsidiaries are the Euro, British Pound Sterling (Pound), Japanese (Yen), and Chinese (Yuan).

Defined Benefit Pension Plans – We record expenses related to these plans based upon various actuarial assumptions such as discount rates and assumed rates of returns.  The Company’s pension plan is frozen for all eligible U.S. employees and participants in the plan ceased accruing future benefits.

Environmental Matters – To the best of our knowledge, we believe that we are presently in substantial compliance with all existing applicable environmental laws and regulations and do not anticipate any instances of non-compliance that will have a material effect on our future capital expenditures, earnings or competitive position.

Seasonality – We are a diversified business with generally low levels of seasonality.

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

Critical Accounting Policies

The Consolidated Financial Statements include accounts of the Company and all of our subsidiaries.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Consolidated Financial Statements.  Although, we believe that materially different amounts would not be reported due to the accounting policies described below, the application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.  We have listed a number of accounting policies which we believe to be the most critical.

Revenue Recognition – Most of the Company’s contracts have a single performance obligation which represents, the product or service being sold to the customer. Some contracts include multiple performance obligations such as a product and the related installation and/or extended warranty. Additionally, most of the Company’s contracts offer assurance type warranties in connection with the sale of a product to customers. Assurance type warranties provide a customer with assurance that the product complies with agreed-upon specifications. Assurance type warranties do not represent a separate performance obligation.

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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 11.5%.  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 2023, 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 2023.

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 6.5% 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.

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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 $0.5 million per year.  A twenty-five-basis point change in our discount rate, holding all other assumptions constant, would have no impact on 2023 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, 2023.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a diversified industrial manufacturer with leading positions in a variety of products and services that are used in diverse commercial and industrial markets. We have seven operating segments that aggregate to five reportable segments. Please refer to Item 1. Business, above, for additional information regarding our segment structure and management strategy.

As part of our ongoing strategy:

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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.

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Impact of COVID-19 Pandemic on the Company

Given the global nature of our business and the number of our facilities worldwide, we continue to be impacted globally by COVID-19 related issues. We have taken effective action around the world to protect our health and safety, continue to serve our customers, support our communities and manage our cash flows.  Our priority was and remains the health and safety of all of our employees.  Each of our facilities is following safe practices as defined in their local jurisdictions as well as sharing experiences and innovative ways of overcoming challenges brought on by the crisis during updates with global site leaders.  We are rigorously following health protocols in our plants, including changing work cell configurations and revising shift schedules when appropriate, in order to do our best to maintain operations.  Initially, we experienced revenue reductions in many of our businesses due to the impact that the pandemic had on our customers. Conversely, public and private sector responses to COVID-19 vaccine distribution, especially in the United States, have resulted in increased sales of scientific refrigeration equipment to customers within our Scientific reporting segment. While overall customer demand has rebounded from the impact of the pandemic, more recently we have been impacted by (i) supply chain shortages, (ii) increased material costs, (iii) labor shortages, especially in North America, and (iv) lockdowns implemented by the Chinese government in select cities in which we operate. Like other industrial manufacturers, we are impacted by rising inflation which we attempt to manage through appropriate pricing actions and enhanced production efficiency measures.

We exited the fourth quarter of 2022 with $104.8 million in cash and $175.0 million of borrowings under our revolving credit facility.  Our leverage ratio covenant, as defined in our revolving credit agreement, was 0.98 to 1 and allowed us the capacity to borrow an additional $312.6 million at June 30, 2022.  We believe that we have sufficient liquidity around the world and access to financing to execute on our short and long-term strategic plans.

Finally, we continue to monitor our ability to participate in any governmental assistance programs available to us in each of our global locations and participate in these programs as available and appropriate.

Consolidated Results from Continuing Operations (in thousands):

Net sales increased for fiscal year 2022 by $79.1 million or 12.1% when compared to the prior year. Organic sales increased $96.3 million or 14.7% primarily due to pricing actions and strong demand in our Electronics segment, acquisitions had a $1.9 million impact on sales, and foreign currency had a $9.9 million or 1.5% negative impact on sales. Net sales in the prior year included revenue of $9.2 million related to our divested Enginetics business. We discuss our results and outlook for each segment below.

Net sales increased for fiscal year 2021 by $51.7 million or 8.6% when compared to the prior year end. The acquisition of Renco contributed $25.6 million or 4.2% to overall sales growth. Organic sales increased $15.3 million or 2.5% primarily as a result of impacts from the COVID-19 pandemic economic recovery, and foreign currency had a $14.5 million or 2.4% positive impact on sales. These increases were offset by a $3.6 million impact on sales due to the divestiture of Enginetics in the third quarter of fiscal year 2021.

Gross Profit

Gross profit in fiscal year 2022 increased to $269.9 million, or a gross margin of 36.7% as compared to $241.3 million, or a gross margin of 36.8% in fiscal year 2021. This increase is a result of organic sales increases, productivity initiatives and targeted prices increases, partially offset by raw material and ocean freight cost headwinds, a one-time project related charge at Engineering Technologies, along with production decreases due to a temporary work stoppage in our Specialty Solutions segment which was resolved during the first quarter.

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Gross profit in fiscal year 2021 increased to $241.3 million, or a gross margin of 36.8% as compared to $215.5 million, or a gross margin of 35.6% in fiscal year 2020. This increase is a result of organic sales increases, productivity initiatives and targeted prices increases, offset by raw material and ocean freight cost headwinds, along with business mix.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses, (“SG&A”) for the fiscal year 2022 were $169.9 million, or 23.1% of sales compared to $163.1 million, or 24.8% of sales during the prior year. SG&A expenses during this period were primarily impacted by increased distribution expenses associated with the customer mix and higher organic sales volume and increased research and development spending to drive future product initiatives.

Selling, general, and administrative expenses, (“SG&A”) for the fiscal year 2021 were $163.1 million, or 24.8% of sales compared to $148.5 million, or 24.6% of sales during the prior year. SG&A expenses during this period were impacted by approximately $4.8 million of SG&A expenses related to the Renco acquisition, increased distribution expenses of $2.0 million as a result of increased organic sales, an increase in research and development spending to drive future product initiatives, and general wage inflation, offset by productivity and cost out actions.

Restructuring Charges

During fiscal year 2022, we incurred restructuring expenses of $4.4 million, primarily related to productivity improvements, facility rationalization activities, and global headcount reductions within our Engraving and Electronics segments.

During fiscal year 2021, we incurred restructuring expenses of $3.5 million, primarily related to productivity improvements, facility rationalization activities, and global headcount reductions within our Engraving and Specialty Solutions segments.

Loss on Sale of Business

We recorded a pre-tax loss on sale of the Enginetics business of $14.6 million for fiscal year 2021. The loss included a $7.6 million impairment of goodwill assigned to the entirety of the Engineering Technologies segment and a $5.4 million write-down of intangible assets.

Acquisition Related Expenses

We incurred acquisition related expenses of $1.6 million and $0.9 million in fiscal year 2022 and 2021, respectively. Acquisition related expenses typically consist of due diligence, integration, and valuation expenses incurred in connection with recent or pending acquisitions.

Other Operating Expense

We incurred expense of $5.7 million in fiscal year 2022 related to a litigation accrual. Refer to Part II, Item 8, Note 12, "CONTINGENCIES," in the Notes to the Consolidated Financial Statements for details.

Income from Operations

Income from operations for the fiscal year 2022 was $88.3 million, compared to $59.2 million during the prior year. The $29.1 million increase, or 49.2% is primarily due to the loss on sale of the Enginetics business of $14.6 million in the prior year, income from organic sales increases and pricing actions, along with cost reduction activities and productivity improvement initiatives implemented in all of our businesses, partially offset by material inflation, logistics and labor costs as well as the impact of the COVID-19 lockdown in China in the fourth fiscal quarter of 2022 and a litigation charge of $5.7 million.

Income from operations for the fiscal year 2021 was $59.2 million, compared to $60.5 million during the prior year. The $1.4 million decrease, or 2.3% is primarily due to the loss on sale of the Enginetics business of $14.6 million along with material inflation, partially offset by income from organic sales increases and pricing actions, along with cost reduction activities and productivity improvement initiatives implemented in all of our businesses.

Discussion of the performance of each of our reportable segments is fully explained in the segment analysis that follows.

Interest Expense

Interest expense for the fiscal year 2022 was $5.9 million a decrease of $0.1 million as compared to the prior year. Interest expense for the fiscal year 2021 was $6.0 million, a decrease of $1.5 million as compared to the prior year.

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Income Taxes

On March 27, 2020, the CARES Act was enacted to address the economic impact of the COVID-19 pandemic in the United States. Among other things, the CARES Act allows a five-year carryback period for tax losses generated in 2019 through 2021. The June 30, 2021 tax provision includes benefits of $0.2 million and $0.8 million from tax losses in the years ended June 30, 2019 and June 30, 2020, respectively, that the CARES Act allows to be carried back to the years ended June 30, 2014 and June 30, 2015, when the U.S. federal income tax rate was 35%.

The income tax provision from continuing operations for the fiscal year ended June 30, 2022 was $19.8 million, or an effective rate of 24.4% compared to $14.2 million, or an effective rate of 26.9% for the year ended June 30, 2021, and $13.1 million, or an effective rate of 24.2% for the year ended June 30, 2020. Changes in the effective tax rates from period to period may be significant as they depend on many factors including, but not limited to, the amount of our income or loss, the mix of income earned in the US versus outside the US, the effective tax rate in each of the countries in which we earn income, and any one-time tax issues which occur during the period.

The income tax provision from continuing operations for the fiscal year ended June 30, 2022 was impacted by the following items: (i) a tax provision of $4.3 million due to the mix of income in various jurisdictions, (ii) a tax benefit of $2.2 million related to Federal R&D credit and Foreign Tax credit (iii) a tax benefit of $1.3 million related to return-to-accrual adjustments to true up prior-period provision amounts, and (iv) a tax expense of $1.0 million related to uncertain tax position.

The income tax provision from continuing operations for the fiscal year ended June 30, 2021 was impacted by the following items: (i) a tax provision of $5.1 million due to the mix of income in various jurisdictions, (ii) a tax benefit of $1.0 million from our 2019 and 2020 tax losses that the CARES Act allows to be carried back to 2014 and 2015, when the U.S. federal income tax rate was 35%, (iii) a tax benefit of $0.8 million related to Federal R&D credit and Foreign Tax Credit, (iv) a tax benefit of $1.7 million related to return-to-accrual adjustments to true-up up prior-period provision amounts, and (v) the tax expense of $1.2 million attributable to the divestiture of the Enginetics Corporation during the year.

The income tax provision from continuing operations for the fiscal year ended June 30, 2020 was impacted by the following items: (i) a tax benefit of $1.2 million related to the Federal R&D credit, (ii) a tax provision of $1.4 million due to the mix of income in various jurisdictions, (iii) a tax benefit of $0.7 million related to the release of uncertain tax provision reserves, and (iv) a tax provision of $0.8 million related to GILTI.

Capital Expenditures

Our capital spending is focused on growth initiatives, cost reduction activities, and upgrades to extend the capabilities of our capital assets.  In general, we anticipate our capital expenditures over the long-term will be approximately 3% to 5% of net sales.

During fiscal year 2022, capital expenditures were $23.9 million or 3.2% of net sales, as compared to $21.4 million, or 3.3%, of net sales in the prior year. We expect 2023 capital spending to be between $35 million and $40 million.

Backlog

Backlog includes all active or open orders for goods and services.  Backlog also includes any future deliveries based on executed customer contracts, so long as such deliveries are based on agreed upon delivery schedules. Backlog orders are not necessarily an indicator of future sales levels because of variations in lead times and customer production demand pull systems, with the exception of Engineering Technologies. Customers may delay delivery of products or cancel orders prior to shipment, subject to possible cancellation penalties. Due to the nature of long-term agreements in the Engineering Technologies segment, the timing of orders and delivery dates can vary considerably resulting in significant backlog changes from one period to another.

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Backlog orders are as follows (in thousands):

Total backlog realizable within one year increased $45.8 million, or 21.7% to $256.3 million at June 30, 2022 from $210.5 million at June 30, 2021.  Electronics total backlog increased 46% due to demand in all geographic markets in response to the beginning of the global recovery from the pandemic, new business opportunities, plus an additional $2.3 million due to the acquisition of Sensor Solutions. Backlog declines in the Engineering Technologies segment are primarily due to project related timing, particularly in the space end market.

Changes in backlog under 1 year are as follows (in thousands):

Segment Analysis (in thousands)

Overall Outlook

Looking forward to fiscal year 2023, we expect to be well-positioned, with anticipated continued improvement in key financial metrics, supported by productivity initiatives.

In general, for fiscal year 2023, we expect:

Electronics

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Net sales in fiscal year 2022 increased $50.9 million, or 20.1%, when compared to the prior year. Organic sales increased $56.1 million, or 22.2%, reflecting a broad-based geographical recovery with continued strong demand for all product groups as well as new business opportunities, including the impact of a COVID-19 lockdown in China in the fourth fiscal quarter. Acquisitions in fiscal year 2022 added $1.9 million, or 0.8% in sales. The foreign currency impact decreased sales by $7.1 million, or 2.8%.

Income from operations in the fiscal year 2022 increased $23.8 million, or 51.1%, when compared to the prior year. The operating income increase was the result of organic sales growth, various pricing actions and cost saving initiatives, partially offset by material and freight cost increases.

In the first quarter of fiscal year 2023, on a sequential basis, we expect a moderate increase in revenue due to continued positive end market demand trends and some recovery of sales deferred due to the COVID-19 lockdown in China. We also expect a slight sequential increase in operating margin reflecting the sales increase partially offset by product mix.

Net sales in fiscal year 2021 increased 68.1 million, or 36.7%, when compared to the prior year as organic sales increased $35.9 million, or 3.6%. The Renco Electronics acquisition added $25.6 million or 13.8%. The foreign currency impacted increased sales by $6.6 million, or $6.5%. Organic sales growth was positive in all geographic areas as well as the product groups of magnetics, sensors and switching technologies supported by the rebound from the COVID-19 pandemic impact.

Income from operations in the fiscal year 2021 increased $16.9 million, or 56.6% when compared to the prior year. The operating income increase was the result of organic sales growth, product line mix, various cost savings initiatives, and the impact of the Renco acquisition, offset by inflationary material cost increases.

Engraving

Net sales in fiscal year 2022 decreased by $0.8 million, or 0.5%, compared to the prior year. Organic sales increased by $0.9 million, or 0.6%, as a result of timing of projects. The sales increase was offset by foreign exchange impacts of $1.6 million, or 1.1%.

Income from operations in fiscal year 2022 decreased by $0.7 million, or 3.0%, when compared to the prior year, reflecting geographic mix, partially offset by productivity initiatives.

In the first quarter of fiscal year 2023, we expect a slight sequential decrease in revenue and operating margin due to project mix partially offset by operational improvements.

Net sales in fiscal year 2021 increased by $3.3 million or 2.3% compared to the prior year. Favorable foreign exchange impacts of $6.6 million, or 4.6%, for the period were offset by organic sales declines of $3.3 million, or 2.3%, as a result of the regional timing of automotive projects.

Income from operations in fiscal year 2021 increased by $2.0 million, or 9.8%, when compared to the prior year. The increase was primarily a result of cost savings initiatives partially offset by organic sales declines for the year.

Scientific

Net sales in fiscal year 2022 increased by $4.4 million, or 5.6% when compared to the prior year.  The net sales increase reflects overall growth in end markets, such as pharmaceutical channels, clinical settings, and academic laboratories, including continued strong demand for cold storage surrounding COVID-19 vaccine distribution and the general market recovery as well as pricing actions.

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Income from operations in fiscal year 2022 decreased by $0.4 million, or 2.1%, reflecting higher freight costs and investments in new product development, offset by revenue growth and pricing actions.

In the first quarter of fiscal year 2023, on a sequential basis, we expect slight revenue and operating margin decrease due to lower COVID vaccine storage demand.

Net sales in fiscal year 2021 remained relatively flat compared to the prior year. The net sales increase reflects overall growth in end markets including pharmaceutical channels, clinical laboratories, and academic institutions, primarily in response to customer needs for cold storage surrounding COVID-19 vaccine distribution.

Income from operations in fiscal year 2021 increased $4.5 million or 32.8%, reflecting revenue growth, partially offset by reinvestments in the business for future growth opportunities and increased freight costs.

Engineering Technologies

Net sales in fiscal year 2022 increased $2.6 million or 3.4% when compared to the prior year. Sales distribution by market in 2022 was as follows: 40% space, 23% aviation, 19% defense, 7% energy, and 11% other markets. Sales in the prior year period included revenue of $9.2 million related to our divested Enginetics business. Excluding the impact of the divestiture, sales increased $11.8 million primarily due to customer demand in the commercial aviation market, along with an increase in sales into the space end market, particularly related to commercialization of space and a medical market customer demand surge.

Income from operations in fiscal year 2022 increased $2.6 million or 42.4% when compared to the prior year. The increase was primarily due to cost saving measures implemented during the pandemic and maintained as economic activity resumed along with the absences of losses associated with the Enginetics business, offset by a $1.1 million one-time project-related charge.

In the first quarter of fiscal year 2023, on a sequential basis, we expect a moderate to significant decrease in revenue reflecting timing of projects and a slight decrease in operating margin, with productivity initiatives mostly offsetting the impact of the volume decline.

Net sales in fiscal year 2021 decreased $28.5 million or 27.4% when compared to the prior year. Sales distribution by market in 2021 was as follows: 40% space, 26% aviation, 19% defense, 7% energy, and 8% other markets. The decline was primarily due to the impact of COVID-19 on the commercial aviation segment, especially engine parts manufacturing, along with the divestiture of our Enginetics business.

Income from operations in fiscal year 2021 decreased $7.9 million or 56.1% when compared to the prior year. The decrease was primarily due to lower volume in the commercial aviation segment along with project timing in the energy markets. These declines were partially offset by higher defense segment sales, improvements in manufacturing efficiencies, and cost reductions in response to the reduced volume levels.

Specialty Solutions

Net sales for fiscal year 2022 increased $22.0 million, or 21.8% when compared to the prior year. Organic sales increased $22.9 million, or 22.7%. Increased sales volume is primarily due to a continued recovery in the Pumps and Merchandising businesses and pricing actions, partially offset by the impact of a temporary work stoppage which was resolved during the first quarter.

Income from operations for fiscal year 2022 increased $1.2 million, or 8.5%, when compared to the prior year primarily as a result of increased sales volume in the Pumps and Merchandising businesses, partially offset by higher costs of labor, including the temporary work stoppage in the first quarter and higher raw material and ocean freight costs.

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In the first quarter of fiscal year 2023, on a sequential basis, we expect revenue to be similar and operating margin to slightly increase reflecting end market demand trends and the impact of pricing and productivity initiatives.

Net sales for fiscal year 2021 decreased $13.1 million, or 11.5% when compared to the prior year. Organic sales declined $13.6 million, or 11.9%, partially offset by positive foreign exchange impacts of $0.5 million, or 0.5%. Decreased sales volume is primarily due to the impact of the COVID-19 pandemic earlier in the year, which created market downturns in the beverage, food service, and OEM equipment markets.

Income from operations for fiscal year 2021 decreased $4.2 million, or 22.6%, when compared to the prior year. The decrease during the period is primarily due to reduced sales volume in each of our businesses and increased raw material costs in the OEM equipment market, particularly for steel, partially offset by productivity and cost out actions.

Corporate, Restructuring and Other

Corporate expenses in fiscal year 2022 increased $4.7 million, or 16% when compared to the prior year, primarily due to employee related compensation accruals and research and development costs.

Corporate expenses remained flat in fiscal year 2021 primarily due to general wage inflation and benefit increases offset by cost saving reductions compared to the prior year.

The loss on sale of business, restructuring, and acquisition related expenses have been discussed above in the Company Overview. The increase in other operating expense in fiscal year 2022 reflects a $5.7 million litigation accrual.

Discontinued Operations

In pursing our business strategy, the Company may divest certain businesses. Future divestitures may be classified as discontinued operations based on their strategic significance to the Company. Results of the Refrigerated Solutions Group and Cooking Solutions Group in current and prior periods have been classified as discontinued operations in the Consolidated Financial Statements and excluded from the results of continuing operations. Activity related to discontinued operations is as follows (in thousands):

Liquidity and Capital Resources

At June 30, 2022, our total cash balance was $104.8 million, of which $94.2 million was held outside of the United States.  In the fourth quarter of fiscal year 2022, we paid $25.0 million of our outstanding borrowings under the credit facility. During fiscal years 2022, 2021 and 2020, we repatriated $30.8 million, $37.6 million, and $39.2 million of our cash previously held outside of the United States, respectively.  During fiscal year 2023, we anticipate returning $30.0 million to $35.0 million of foreign cash, however, the amount and timing of cash repatriation during 2023 will be dependent upon foreign exchange rates and each business unit’s operational needs including requirements to fund working capital, capital expenditure, and jurisdictional tax payments.  The repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences or be subject to capital controls; however, those balances are generally available without legal restrictions to fund ordinary business operations.

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Cash Flow

Net cash provided by continuing operating activities for the year ended June 30, 2022 was $78.1 million compared to net cash provided by continuing operating activities of $81.9 million in the prior year. We generated $101.7 million from income statement activities and used $23.1 million of cash to fund working capital increases. Cash flow used in investing activities for the year ended June 30, 2022 totaled $31.0 million. Uses of investing cash consisted primarily of capital expenditures of $23.9 million, $13.0 million for the acquisitions, $1.0 million used in other investing activities, offset by $5.0 million generated by proceeds from a life insurance policy related to the death of a retired Company executive and $1.8 million generated by sales of property, plant, and equipment. Cash used by financing activities for the year ended June 30, 2022 were $69.4 million and included stock repurchases of $31.4 million, repayments of debt of $25.0 million, cash paid for dividends of $12.2 million, and contingent consideration payments due to the seller of the Renco business of $2.2 million.

Net cash provided by continuing operating activities for the year ended June 30, 2021 was $81.9 million compared to net cash provided by continuing operating activities of $54.7 million in the prior year. We generated $94.7 million from income statement activities and generated $4.4 million of cash to fund working capital decreases. Cash flow used in investing activities for the year ended June 30, 2021 totaled $39.1 million.  Uses of investing cash consisted primarily of $27.4 million for the acquisition of Renco and capital expenditures of $21.75 million offset by $11.7 million of proceeds from the sale of the Enginetics business. Cash used by financing activities for the year ended June 30, 2021 were $31.7 million and included stock repurchases of $21.2 million and cash paid for dividends of $11.4 million.

We sponsor a number of defined benefit and defined contribution retirement plans.  The U.S. pension plan is frozen for all participants.  We have evaluated the current and long-term cash requirements of these plans, and our existing sources of liquidity are expected to be sufficient to cover required contributions under ERISA and other governing regulations.

The fair value of the Company's U.S. defined benefit pension plan assets was $157.9 million at June 30, 2022, as compared to $212.6 million as of June 30, 2021. We participate in two multi-employer pension plans and sponsor six defined benefit plans including two in the U.S. and one in the U.K., Germany, Ireland, and Japan.  The Company’s pension plan is frozen for U.S. employees and participants in the plan ceased accruing future benefits.  Our primary U.S. defined benefit plan is not 100% funded under ERISA rules at June 30, 2022.

U.S. defined benefit plan contributions of $0.2 million were made during fiscal year 2022 compared to $7.8 million during fiscal year 2021.There are no required contributions to the United States funded pension plan for fiscal year 2023. The Company expects to make contributions during fiscal year 2023 of $0.2 million and $0.2 million to its unfunded defined benefit plans in the U.S. and Germany, respectively. Any subsequent plan contributions will depend on the results of future actuarial valuations.

We have evaluated the current and long-term cash requirements of our defined benefit and defined contribution plans as of June 30, 2022 and determined our operating cash flows from continuing operations and available liquidity are expected to be sufficient to cover the required contributions under ERISA and other governing regulations.

We have an insurance program in place to fund supplemental retirement income benefits for three retired executives.  Current executives and new hires are not eligible for this program. At June 30, 2022, the underlying policies had a cash surrender value of $11.1 million and are reported net of loans of $5.1 million for which we have the legal right of offset. These amounts are reported net on our balance sheet.

Capital Structure

During the second quarter of fiscal year 2019, the Company entered into a five-year Amended and Restated Credit Agreement (“credit agreement”, or “facility”). The facility has a borrowing limit of $500 million and can be increased by an amount of up to $250 million, in accordance with specified conditions contained in the agreement. The facility also includes a $10 million sublimit for swing line loans and a $35 million sublimit for letters of credit.

Under the terms of the Credit Facility, we will pay a variable rate of interest and a fee on borrowed amounts as well as a commitment fee on unused amounts under the facility. The amount of the commitment fee will depend upon both the undrawn amount remaining available under the facility and the Company’s funded debt to EBITDA (as defined in the agreement) ratio at the last day of each quarter.

Funds borrowed under the facility may be used for the repayment of debt, working capital, capital expenditures, acquisitions (so long as certain conditions, including a specified funded debt to EBITDA leverage ratio is maintained), and other general corporate purposes. As of June 30, 2022, the Company has used $5.1 million against the letter of credit sub-facility and had the ability to borrow $312.6 million under the facility based on our current trailing twelve-month EBITDA. The facility contains customary representations, warranties and restrictive covenants, as well as specific financial covenants. The Company’s current financial covenants under the facility are as follows:

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Interest Coverage Ratio - The Company is required to maintain a ratio of Earnings Before Interest and Taxes, as Adjusted (“Adjusted EBIT per the Credit Facility”), to interest expense for the trailing twelve months of at least 2.75:1. Adjusted EBIT per the Credit Facility specifically excludes extraordinary and certain other defined items such as cash restructuring and acquisition related charges up to the lower of $20.0 million or 10% of EBITDA. The facility allows for unlimited non-cash charges including purchase accounting and goodwill adjustments. At June 30, 2022, the Company’s Interest Coverage Ratio was 16.03:1.

Leverage Ratio- The Company’s ratio of funded debt to trailing twelve month Adjusted EBITDA per the Credit Facility, calculated as Adjusted EBIT per the Credit Facility plus depreciation and amortization, may not exceed 3.5:1. Under certain circumstances in connection with a Material Acquisition (as defined in the Facility), the Facility allows for the leverage ratio to go as high as 4.0:1 for a four-fiscal quarter period. At June 30, 2022, the Company’s Leverage Ratio was 0.98:1.

As of June 30, 2022, we had borrowings under our facility of $175.0 million.  In order to manage our interest rate exposure on these borrowings, we are party to $175.0 million of active floating to fixed rate swaps.  These swaps convert our interest payments from LIBOR to a weighted average rate of 1.18%.  The effective rate of interest for our outstanding borrowings, including the impact of the interest rate swaps, was 2.53%.  Our primary cash requirements in addition to day-to-day operating needs include interest payments, capital expenditures, acquisitions, share repurchases, and dividends.

In connection with the acquisition of Renco, we assumed $0.7 million of debt under the Paycheck Protection Program, within the United States Coronavirus Aid, Relief, and Economic Security ("CARES") Act. These borrowings were forgiven in June 2021.

Our primary sources of cash are cash flows from continuing operations and borrowings under the facility.  We expect that fiscal year 2023 depreciation and amortization expense will be between $20.0 and $21.0 million and $7.0 and $9.0 million, respectively.

The following table sets forth our capitalization at June 30:

Stockholders’ equity decreased year over year by $7.1 million, primarily as a result of $43.6 million of cash returned to shareholders in the form of dividends and stock repurchases, offset by current year net income of $61.4 million. The Company's net debt to capital percentage changed to 12.3% as of June 30, 2022 from 11.1% in the prior year.

At June 30, 2022, we expect to pay estimated interest payments of $10.8 million within the next five years. This estimate is based upon effective interest rates as of June 30, 2022 and excludes any interest rate swaps which are assets to us. See Item 7A for further discussions surrounding interest rate exposure on our variable rate borrowings.

Post-retirement benefits and pension plan contribution payments represents future pension payments to comply with local funding requirements. Our policy is to fund domestic pension liabilities in accordance with the minimum and maximum limits imposed by the Employee Retirement Income Security Act of 1974 ("ERISA"), federal income tax laws and the funding requirements of the Pension Protection Act of 2006. At June 30, 2022, we expect to pay estimated post-retirement benefit payments of $170.4 million. See "Item 8. Financial Statements and Supplementary Data, Note 16. Employee Benefit Plans" for additional information regarding these obligations.

At June 30, 2022, we had $39.2 million of operating lease obligations. See "Item 8. Financial Statements and Supplementary Data, Note 20. Leases" for additional information regarding these obligations.

At June 30, 2022, we had $9.6 million of non-current liabilities for uncertain tax positions. We are not able to provide a reasonable estimate of the timing of future payments related to these obligations.

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Other Matters

Inflation – Certain of our expenses, such as wages and benefits, occupancy costs, freight and equipment repair and replacement, are subject to normal inflationary pressures. Inflation for medical costs can impact both our employee benefit costs as well as our reserves for workers' compensation claims. We monitor the inflationary rate and make adjustments to reserves whenever it is deemed necessary. Our ability to control worker compensation insurance medical cost inflation is dependent upon our ability to manage claims and purchase insurance coverage to limit the maximum exposure for us. Each of our segments is subject to the effects of changing raw material costs caused by the underlying commodity price movements. In the past year, we have experienced price fluctuations for a number of materials including rhodium, steel, and other metal commodities.  These materials are some of the key elements in the products manufactured in these segments.  Wherever possible, we will implement price increases to offset the impact of changing prices.  The ultimate acceptance of these price increases, if implemented, will be impacted by our affected divisions’ respective competitors and the timing of their price increases. In general, we do not enter into purchase contracts that extend beyond one operating cycle. While Standex considers our relationship with our suppliers to be good, there can be no assurances that we will not experience any supply shortage.

Foreign Currency Translation – Our primary functional currencies used by our non-U.S. subsidiaries are the Euro, British Pound Sterling (Pound), Japanese (Yen), and Chinese (Yuan).

Defined Benefit Pension Plans – We record expenses related to these plans based upon various actuarial assumptions such as discount rates and assumed rates of returns.  The Company’s pension plan is frozen for all eligible U.S. employees and participants in the plan ceased accruing future benefits.

Environmental Matters – To the best of our knowledge, we believe that we are presently in substantial compliance with all existing applicable environmental laws and regulations and do not anticipate any instances of non-compliance that will have a material effect on our future capital expenditures, earnings or competitive position.

Seasonality – We are a diversified business with generally low levels of seasonality.

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

Critical Accounting Policies

The Consolidated Financial Statements include accounts of the Company and all of our subsidiaries.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Consolidated Financial Statements.  Although, we believe that materially different amounts would not be reported due to the accounting policies described below, the application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.  We have listed a number of accounting policies which we believe to be the most critical.

Revenue Recognition – Most of the Company’s contracts have a single performance obligation which represents, the product or service being sold to the customer. Some contracts include multiple performance obligations such as a product and the related installation and/or extended warranty. Additionally, most of the Company’s contracts offer assurance type warranties in connection with the sale of a product to customers. Assurance type warranties provide a customer with assurance that the product complies with agreed-upon specifications. Assurance type warranties do not represent a separate performance obligation.

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In general, the Company recognizes revenue at the point in time control transfers to their customer based on predetermined shipping terms. Revenue is recognized over time under certain long-term contracts within the Engineering Technologies and Engraving groups for highly customized customer products that have no alternative use and in which the contract specifies the Company has a right to payment for its costs, plus a reasonable margin. For products recognized over time, the transfer of control is measured pro rata, based upon current estimates of costs to complete such contracts. Losses on contracts are fully recognized in the period in which the losses become determinable. Revisions in profit estimates are reflected on a cumulative basis in the period in which the basis for such revision becomes known.

Collectability of Accounts Receivable – Accounts Receivable are reduced by an allowance for amounts that represent management's best estimate of estimated losses over the life of the underlying asset. Our estimate for the allowance for credit loss accounts related to trade receivables includes evaluation of specific accounts where we have information that the customer may have an inability to meet its financial obligation together with a detailed review of the collectability of pooled assets based on a combination of qualitative and quantitative factors.

Realizability of Inventories – Inventories are valued at the lower of cost or market.  The Company regularly reviews inventory values on hand using specific aging categories and records a write down for obsolete and excess inventory based on historical usage and estimated future usage.  As actual future demand or market conditions may vary from those projected by management, adjustments to inventory valuations may be required.

Realization of Goodwill – Goodwill and certain indefinite-lived intangible assets are not amortized, but instead are tested for impairment at least annually and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than its carrying amount of the asset.  The Company’s annual test for impairment is performed using a May 31st measurement date. We have identified seven reporting units for impairment testing: Electronics, Engraving, Scientific, Engineering Technologies, Procon, Federal, and Hydraulics.

As quoted market prices are not available for the Company’s reporting units, the fair value of the reporting units is determined using a discounted cash flow model (income approach).  This method uses various assumptions that are specific to each individual reporting unit in order to determine the fair value.  In addition, the Company compares the estimated aggregate fair value of its reporting units to its overall market capitalization.

Our annual impairment testing at each reporting unit relied on assumptions surrounding general market conditions, short-term growth rates, a terminal growth rate of 2.5%, and detailed management forecasts of future cash flows prepared by the relevant reporting unit.  Fair values were determined primarily by discounting estimated future cash flows at a weighted average cost of capital of 10.4%.  During our annual impairment testing, we evaluated the sensitivity of our most critical assumption, the discount rate, and determined that a 100-basis point change in the discount rate selected would not have impacted the test results.  Additionally, the Company could reduce the terminal growth rate from its current 2.5% to 1.0% and the fair value of all reporting units would still exceed their carrying value.

While we believe that our estimates of future cash flows are reasonable, changes in assumptions could significantly affect our valuations and result in impairments in the future.  The most significant assumption involved in the Company’s determination of fair value is the cash flow projections of each reporting unit.

As a result of our annual assessment in the fourth quarter of fiscal year 2022, the Company determined that the fair value of the seven reporting units substantially exceeded their respective carrying values.  Therefore, no impairment charges were recorded in connection with our annual assessment during the fourth quarter of fiscal year 2022.

Cost of Employee Benefit Plans – We provide a range of benefits to certain retirees, including pensions and some postretirement benefits.  We record expenses relating to these plans based upon various actuarial assumptions such as discount rates, assumed rates of return, compensation increases and turnover rates.  The expected return on plan assets assumption of 6.7% in the U.S. is based on our expectation of the long-term average rate of return on assets in the pension funds and is reflective of the current and projected asset mix of the funds and considers the historical returns earned on the funds.  We have analyzed the rates of return on assets used and determined that these rates are reasonable based on the plans’ historical performance relative to the overall markets as well as our current expectations for long-term rates of returns for our pension assets.  The U.S. discount rate of 5.0% reflects the current rate at which pension liabilities could be effectively settled at the end of the year.  The discount rate is determined by matching our expected benefit payments from a stream of AA- or higher bonds available in the marketplace, adjusted to eliminate the effects of call provisions.  We review our actuarial assumptions, including discount rate and expected long-term rate of return on plan assets, on at least an annual basis and make modifications to the assumptions based on current rates and trends when appropriate.  Based on information provided by our actuaries and other relevant sources, we believe that our assumptions are reasonable.

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The cost of employee benefit plans includes the selection of assumptions noted above.  A twenty-five-basis point change in the U.S. expected return on plan assets assumptions, holding our discount rate and other assumptions constant, would increase or decrease pension expense by approximately $0.4 million per year.  A twenty-five-basis point change in our discount rate, holding all other assumptions constant, would have no impact on 2022 pension expense as changes to amortization of net losses would be offset by changes to interest cost.  In future years, the impact of discount rate changes could yield different sensitivities. See the Notes to the Consolidated Financial Statements for further information regarding pension plans.

Business Combinations - The accounting for business combinations requires estimates and judgments as to expectations for future cash flows of the acquired business and the allocation of those cash flows to identifiable intangible assets in determining the estimated fair values for assets acquired and liabilities assumed.  The fair values assigned to tangible and intangible assets acquired and liabilities assumed, are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. If the actual results differ from the estimates and judgments used in these fair values, the amounts recorded in the consolidated financial statements could result in a possible impairment of the intangible assets and goodwill or require acceleration of the amortization expense of finite-lived intangible assets.

Allocations of the purchase price for acquisitions are based on estimates of the fair value of the net assets acquired and are subject to adjustment upon finalization of the purchase price allocation. During this measurement period, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date.  All changes that do not qualify as measurement period adjustments are included in current period earnings.

Recently Issued Accounting Pronouncements

See "Item 8. Financial Statements and Supplementary Data, Note 1. Summary of Accounting Policies” for information regarding the effect of recently issued accounting pronouncements on our consolidated statements of operations, comprehensive income, stockholders’ equity, cash flows, and notes for the year ended June 30, 2022.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a diversified industrial manufacturer with leading positions in a variety of products and services that are used in diverse commercial and industrial markets. We have seven operating segments that aggregate to five reportable segments. Please refer to Item 1. Business, above, for additional information regarding our segment structure and management strategy.

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, and the introduction of products and technologies into new markets, key accounts and strategic sales channel partners.  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: