Earnings Call Transcript - SXI Q1 2026

Operator, Operator

Good morning, ladies and gentlemen, and welcome to Standex International Fiscal First Quarter 2026 Financial Results Conference Call. Note that this call is being recorded on Friday, October 31, 2025. And now I would like to turn the conference over to Christopher Howe, Director of Investor Relations. Please go ahead, sir.

Christopher Howe, Director of Investor Relations

Thank you, operator, and good morning. Please note that the presentation accompanying management's remarks can be found on the Investor Relations portion of the company's website at www.standex.com. Please refer to Standex's safe harbor statement on Slide 2. Matters that Standex management will discuss on today's conference call include predictions, estimates, expectations and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially. You should refer to Standex's most recent annual report on Form 10-K as well as other SEC filings and public announcements for a detailed list of risk factors. In addition, I'd like to remind you that today's discussion will include references to the non-GAAP measures of EBIT, which is earnings before interest and taxes, adjusted EBIT, EBITDA, which is earnings before interest, taxes, depreciation and amortization, adjusted EBITDA, EBITDA margin and adjusted EBITDA margin. We will also refer to other non-GAAP measures, including adjusted net income, adjusted operating income, adjusted net income from continuing operations, adjusted earnings per share, adjusted operating margin, free operating cash flow and pro forma net debt to EBITDA. Adjusted measures exclude the impact of restructuring, purchase accounting, amortization from acquired intangible assets, acquisition-related expenses and one-time items. These non-GAAP financial measures are intended to serve as a complement to results provided in accordance with accounting principles generally accepted in the United States. Standex believes that such information provides an additional measurement and consistent historical comparison of the company's financial performance. On the call today is Standex's Chairman, President and Chief Executive Officer, David Dunbar; and Chief Financial Officer and Treasurer, Ademir Sarcevic.

David Dunbar, CEO

Thank you, Chris. Good morning, and welcome to our fiscal first quarter 2026 conference call. Following record operating performance in fiscal year 2025, our first quarter performance provided a strong start to the fiscal year, positioning us well to exceed our previously provided guidance of greater than $100 million of incremental sales in fiscal year 2026, which includes organic growth in our core businesses as well as the full year impact of acquisitions. First, I would like to thank our employees, our executives and the Board of Directors for their efforts and continued dedication and support that drove our solid fiscal first quarter 2026 results. Now let's take a look at the results beginning on Slide 3. In the first quarter, sales increased 27.6%, contributing to this growth were new product sales and sales in the fast growth markets. New product sales grew more than 35% to approximately $14.5 million. Sales in the fast-growth markets were approximately $62 million or 30% of total sales. Orders of approximately $226 million were the highest quarterly intake ever, setting us up nicely for the balance of the year. Despite Electronics showing an organic decline in the quarter, its book-to-bill ratio remains above 1 and organic orders were up approximately 8% year-on-year. We remain on track for mid- to high single-digit organic growth in Electronics in fiscal 2026. The Amran/Narayan Group continues to perform ahead of our expectations. In the quarter, it delivered record sales of greater than $35 million. I'm excited to announce that in the quarter, we kicked off operations in Croatia and Mexico. Adjusted operating margin of 19.1% was up 210 basis points year-on-year. This operating performance, along with our cash generation and cash repatriation enabled us to lower our net leverage ratio to 2.4x. We are raising our fiscal year 2026 sales outlook. Barring unforeseen economic, global trade or tariffs-related disruptions we now expect revenue to grow by over $110 million, $10 million more than we communicated last quarter. The drivers of this increase are the strong momentum we are seeing from new product sales and sales into fast-growth markets. In particular from the Amran/Narayan Group, which we now expect to grow more than 20% year-on-year in fiscal 2026. In fiscal year 2026, we expect new product sales to contribute approximately 300 basis points of incremental sales growth. We launched 4 new products in the first quarter and remain on track to release more than 15 new products in fiscal 2026. Sales from fast-growth markets are now expected to grow over 45% year-on-year and exceed $270 million.

Ademir Sarcevic, CFO

Thank you, David, and good morning, everyone. Let's turn to Slide 5, first quarter 2026 summary. On a consolidated basis, total revenue increased approximately 27.6% year-on-year to $217.4 million. This reflected a 26.6% benefit from recent acquisitions, organic growth of 0.6% and a 0.4% benefit from foreign currency. First quarter 2026 adjusted operating margin increased 210 basis points year-on-year to 19.1%. In the fiscal first quarter, adjusted operating income increased 43.3% on a 27.6% consolidated revenue increase year-on-year. Adjusted earnings per share increased 8.2% year-on-year to $1.99. Net cash provided by operating activities was $16.8 million in the first quarter of fiscal 2026 compared to $17.5 million a year ago. Capital expenditures were $6.4 million compared to $6.7 million a year ago. As a result, we generated fiscal first quarter free cash flow of $10.4 million compared to $10.8 million a year ago. Now please turn to Slide 6, and I will begin to discuss our segment performance and outlook, beginning with Electronics. Segment revenue of $110.6 million increased 42.2% year-on-year driven by a 45.5% benefit from acquisitions, partially offset by an organic decline of 3.1% and a 0.1% impact from foreign currency. The organic decline was primarily due to the closure of one of our facilities and customer delays for alternate site approvals. Adjusted operating margin of 28.8% in fiscal first quarter 2026 increased 510 basis points year-on-year due to contribution from recent Amran/Narayan Group acquisition, pricing and productivity initiatives. Our book-to-bill in fiscal first quarter was 1.06 with orders of approximately $117 million. Organic bookings grew approximately 8% year-on-year. Sequentially, in fiscal second quarter 2026 we expect slightly higher revenue, reflecting higher contribution from the core business, partially offset by lower Amran/Narayan Group sales due to holidays in India. On a year-on-year basis, we expect mid- to high single-digit organic growth. We expect similar adjusted operating margin sequentially driven by product mix and continued strategic growth investments. Operations have kicked off in Croatia to serve our customers in Europe and support growing power requirements for data centers and grid expansion and upgrades in the region.

David Dunbar, CEO

Please turn to Slide 7 for a discussion of the Engineering Technologies and Scientific segments. Engineering Technologies revenue increased 45.6% to $29.9 million driven by a 32.4% benefit from recent McStarlite acquisition, organic growth of 12.7% and a 0.5% benefit from foreign currency. Organic growth was due to strong demand across space, defense and aviation end markets. Adjusted operating margin of 16.8% decreased 270 basis points year-on-year primarily due to lower margins from a favorable project mix in our recent acquisition. Sequentially, we expect moderately higher revenue due to growth in new product sales and similar adjusted operating margin. Scientific revenue increased 9.9% to $19.5 million due to an 18.6% benefit from recent acquisition, partially offset by organic decline of 8.7% primarily due to lower demand from academic and research institutions that were impacted by NIH funding cuts. Adjusted operating margin of 25.3% decreased 300 basis points year-on-year due to organic decline. Sequentially, we expect similar revenue and slightly lower adjusted operating margin due to higher contribution from Custom Biogenic Systems acquisition and increased tariff costs.

Ademir Sarcevic, CFO

Now turn to Slide 8 for a discussion of the Engraving and Specialty Solutions segments. Engraving revenue increased 7.4% to $35.8 million, driven by organic growth of 5.6% from improved demand in Europe and a 1.9% benefit from foreign currency. Adjusted operating margin of 19.1% in fiscal first quarter 2026 increased 50 basis points year-on-year due to higher sales and realization of productivity initiatives and restructuring actions. During the fiscal first quarter, we announced the closure of 4 sites, optimizing the footprint in the United Kingdom, United States, Italy and China resulting in approximately $5 million of restructuring charges. These actions are projected to yield approximately $5 million in annualized cost savings once fully implemented, and we expect to start realizing savings during the second half of fiscal year 2026. The segment is now substantially done with restructuring activities and is well positioned to serve its customers. In our next fiscal quarter, on a sequential basis, we expect moderately lower revenue and slightly lower adjusted operating margin due to project timing. Specialty Solutions segment revenue of $21.7 million increased 2.6% year-on-year, primarily due to slightly improved demand in Hydraulics. Operating margin of 13.3% decreased 350 basis points year-on-year. Sequentially, we expect slightly higher revenue and operating margin. Next, please turn to Slide 9 for a summary of Standex's liquidity statistics and capitalization structure. Our current available liquidity is approximately $198 million. At the end of the first quarter, Standex had net debt of $446 million compared to net cash of $15.6 million at the end of the fiscal first quarter 2025. Our net leverage ratio currently stands at 2.4x. We paid down our debt by approximately $8 million during the fiscal first quarter 2026. In fiscal second quarter 2026, we expect interest expense between $8 million and $8.5 million. Standex's long-term debt at the end of fiscal first quarter 2026 was $544.6 million. Cash and cash equivalents totaled $98.7 million. We declared our 245th quarterly consecutive cash dividend of $0.34 per share and approximately 6.3% increase year-on-year. In fiscal 2026, we expect capital expenditures between $33 million and $38 million. Relative to our debt leverage, we will continue to focus on paying down debt and anticipate our leverage ratio will further decline through fiscal year 2026.

David Dunbar, CEO

I will now turn the call over to David for concluding remarks. Thank you, Ademir. Please turn to Slide 10. I'm very pleased to see continued momentum in the top line in the first quarter as new product sales grew more than 35% and as fast growth markets constitute a growing portion of our revenue. The first year performance of Amran/Narayan Group now renamed as Standex Electronics Grid was above expectations and is expected to grow more than 20% in fiscal 2026. The growth within grid and from new product sales helped support a record order book in the fiscal first quarter, leading us to raise our sales outlook for fiscal 2026. We remain on track to achieve our fiscal 2028 long-term targets. We will now open the line for questions.

Operator, Operator

And your first question will be from Chris Moore of CJS Securities.

Christopher Moore, Analyst

Congrats on another good quarter. It looks good. At some point, I don't know, either Q3 or Q4 call, you talked about Standex being roughly 2/3 of the way in this optimization journey other than potentially selling 1 of the business segments, what are the biggest areas of focus to help this further on the optimization journey?

David Dunbar, CEO

We have two main focus areas. One is ongoing portfolio work, but the bigger opportunity lies in harnessing the potential of our organic growth initiatives. It has taken years to advance new product development, and we are beginning to see new products emerge. We've also shifted our business towards faster-growing markets. This year, $340 million of our sales will be generated from these new products and markets, which is significant enough to help us navigate any irregularities in our core markets. In terms of refining our business model, we are well positioned for growth in various conditions. I believe we are close to achieving our goals, and within the next year, that momentum will propel us forward. Regarding portfolio optimization, we only have strong businesses in our portfolio, and if the right opportunity arises for simplification, we will pursue it as we have done previously.

Ademir Sarcevic, CFO

Yes. And Chris, as you know, a track record, we'll continue doing what we have done in the past, and we have some really exciting platforms. And to David's point, some really good assets that at some point in the future, we may look to monetize, but we like what we have.

Christopher Moore, Analyst

Got it. Very helpful. You mentioned new products a few times, 15 this year. Are there a few that really stand out among those being introduced this year?

David Dunbar, CEO

We have some exciting products in electronics. We released a couple in the first quarter that will be used in relays and test and measurement applications. Test and measurement is an end market we don’t discuss frequently, but it is influenced by electrification, the grid, and data centers. Whenever new generation chips or electric vehicles are produced, test equipment is required for production testing, and a significant amount of relays are incorporated in this equipment. Many of these relays are produced by us. This quarter, we introduced two new products for that end market. Additionally, we are excited about the release of the ultra-low temperature freezer in our Scientific division. The first version was launched last quarter, and we plan to expand this product line, which serves the largest end market of our scientific business.

Christopher Moore, Analyst

Perfect. And maybe just one last question for me. Amran/Narayan is performing exceptionally well with 30% growth, and you're forecasting 20% for this year. I understand you want to be cautious. Are you noticing any slowdown in growth at this point? Also, you just opened in Croatia, which seems to present many opportunities?

David Dunbar, CEO

Well, Chris, I can assure you that we are not experiencing a slowdown in growth. While we maintain a cautious outlook, we have numerous meetings scheduled with customers in the upcoming quarter. Our Croatia site is ramping up, and we've optimized space in our Mexico operations to focus on production for Amran, which will enhance our capacity. Over the next few months, we will gain a clearer understanding of the outlook, and we will provide updates during our next earnings release in February. The end market remains robust, fueled by electrification, grid modernization, and ongoing investments in data centers. Therefore, we do not see any slowdown at this time.

Ademir Sarcevic, CFO

Yes. And Chris, the bookings are very strong. We just posted the highest sales quarter in Amran/Narayan or Grid, as we call it today, of $35 million. The bookings were still over 1. Over 1 book-to-bill. So the momentum continues.

Ross Sparenblek, Analyst

Sticking with electronics here. Can you maybe just help us think about some of the momentum you're seeing, particularly in the legacy business, what end markets, what stands out, it looks like from what we can tell those orders have really started to pick up the last 5 quarters, but again...

David Dunbar, CEO

Yes, just a couple of things. We communicated the book-to-bill and the bookings in the quarter were both very good. And remember, about 80% of what we sell in electronics goes to OEMs. So there's a longer cycle to convert the bookings to shipments. Strong bookings in defense in the legacy magnetics business. In the switches and sensors business, we're seeing strength in North America and Asia geographically. We're seeing strength in test and measurement end markets and also the distribution market is up, which is kind of a reflection of general kind of general end markets.

Ross Sparenblek, Analyst

Yes. I mean distribution feels like it's been doing well for a while. When we think about kind of the mix profile the backlog is magnetic the biggest piece of growth being the lower mix product line?

David Dunbar, CEO

I don't believe that's the case. I think the order growth for both SST and magnetics was quite similar.

Ademir Sarcevic, CFO

Yes. I think, Ross, if you look at magnetics or sensors and switches or Amran/Narayan, the book-to-bill for all of those businesses has been over 1. September was actually the strongest booking month we had in a very long time across all three businesses, and October is coming in very strong as well. So the strength is evident across the board right now. When we discuss having mid- to high single-digit organic growth this quarter in Electronics, it will really stem from all parts of the business.

Ross Sparenblek, Analyst

Okay. That's great to hear. I mean we think about kind of the lead times on converting this and then maybe the incrementals and the type of operating leverage we should expect for the legacy business given the prior cost out as we think about the second half of 2026?

David Dunbar, CEO

Yes. In general, if you think about the legacy business, if you just lump together on average, the switches and sensors and magnetics business. Orders in the quarter about 30% convert within 3 months and then maybe another 30% in the following quarter and the remainder beyond Q3 and beyond?

Ademir Sarcevic, CFO

Yes. And I think, Ross, from a margin standpoint, which I think was.

David Dunbar, CEO

It was the second part.

Ademir Sarcevic, CFO

In response to the second part of your question, we expect some margin improvement as the year progresses. However, we are also making investments. For instance, we have recently launched the site in Croatia, which will require initial investments before it becomes fully operational. While we anticipate margin improvements, these will be balanced by the growth investments necessary to ensure that our business continues to expand at a strong organic growth rate moving forward.

Ross Sparenblek, Analyst

Yes. I definitely appreciate that. But if I recall, you guys have taken out like something like $7 million or $9 million of prior cost out actions that we haven't really seen because of the destocking over the last couple of years. So there should be some natural lift there, right?

Ademir Sarcevic, CFO

Correct.

Operator, Operator

The next question will be from Mike Shlisky at D.A. Davidson.

Michael Shlisky, Analyst

I have noticed on social media that the Grid brand was recently launched. Is your effort really focused solely on Amran, or is it the entire electronics segment? Is there one brand being presented to all customers? I wasn't certain if it extends beyond just Amran. Can you share your plans for this?

David Dunbar, CEO

I'm glad you asked that, Mike. I want to clarify that after we acquired Amran/Narayan, we recognized the potential for further development in that market. Referring to it simply as Amran/Narayan felt too limiting, even though it's a well-known name among customers. Internally, we started referring to it as Grid technologies to reflect our broader ambitions and future acquisitions. We have product development efforts that will expand us into new segments, making Grid a more suitable name for the business. We also evaluated the names of our other businesses; for instance, the switches and sensor business (SST) may not be self-explanatory, and the name for the magnetics business is less accurate. So, we decided to use Grid for the former Amran/Narayan business as we evolve it into something larger. The term Edge is commonly associated with the conversion of electricity into functional outputs, which describes our magnetic business focused on power conversion and management for OEMs. Detect signifies the functionality of our switches and sensors, which are primarily used in proximity and level sensing devices. Moving forward, you will hear us refer to these businesses as Detect, Edge, and Grid.

Michael Shlisky, Analyst

Got it. That's very helpful. Perhaps we could discuss the various smaller sectors, such as academic research institutions, space, or airports. Can you provide a broader perspective on how the government shutdown impacts your business? It would be great if you could address both specific areas and broader implications. Is there a figure we can reference regarding how this might currently affect your business?

David Dunbar, CEO

Yes. I can't think of any recent rapid changes in the prospects of any of our businesses due to the shutdown. However, some of our North American businesses are facing uncertainty with their customers. Our federal, hydraulics, and scientific sectors have been impacted by the decline in spending at the NIH. While this is not directly linked to the recent shutdown, it does relate to government policy. Therefore, our North American business is affected. Ademir, do you have any recent updates to add?

Ademir Sarcevic, CFO

No, I think you summarized it well.

David Dunbar, CEO

Except there's me. I've got some travel plans in the next few weeks. I hope I can make it. But that won't affect our business results.

Michael Shlisky, Analyst

Hopefully, you can just switch it over to Zoom if necessary. The last question was about the potential for repatriation to pay down debt. Ademir, can you tell us if there was any one-time tax associated with the cash repatriation?

Ademir Sarcevic, CFO

No, that's not the reason. Sometimes, when you move money out of foreign jurisdictions, there is a bit of a holding tax you need to pay. However, much of our cash is actually held in international locations, and we have a process to repatriate as much as we can on a quarterly basis, and we will continue to do that. There is no significant tax impact.

Operator, Operator

Next question will be from Gary Prestopino of Barrington Research.

Gary Prestopino, Analyst

A couple of things here. The growth in sales, particularly from new products and fast-growth markets. Is it safe to assume that most of this is due to products being used in data centers, grid modernization, and similar areas? Or is it more evenly distributed across those five fast-growth markets that you frequently mention?

David Dunbar, CEO

The Amran/Narayan acquisition has resulted in a significant increase in sales within the fast growth data center sector. This year, out of the $270 million attributed to fast growth, approximately half is derived from the data center business, as well as electrification and grid operations related to Amran/Narayan. Additionally, we maintain a strong space business, and our defense segment is performing well. Surprisingly, the Electric Vehicles segment is also experiencing growth, though it's a smaller portion of our total sales. Overall, the growth is fairly well distributed. Regarding new products, we achieved $77 million in sales from items launched in recent years, though most of these sales fall outside the fast growth markets. The new products scheduled for release this year and beyond will have a greater emphasis on fast growth sectors, resulting in minimal overlap with this year’s figures.

Gary Prestopino, Analyst

Okay. And then just in terms of your plant in Croatia or the initiation of production there, can you provide some insight into the production capacity at that facility? I assume it will support the growth prospects you see in Europe.

David Dunbar, CEO

Yes. We are collaborating with our European customers to plan capacity for our operations. In previous calls, we mentioned that in the next 3 to 5 years, we anticipate reaching $60 million in sales based on current customer plans and our existing capacity. However, we have the potential to expand beyond that. As time progresses, we will have a clearer understanding of the ultimate capacity, and there is room for expansion if necessary. We can also add extra shifts or machinery. Overall, $60 million is a reasonable conservative estimate of our potential.

Gary Prestopino, Analyst

Okay. And then just lastly, on Slide 3, I want to clarify that when you mention the 15 product launches and the figures to the right of that being $55 million and $78 million, those represent the actual sales you anticipate from the new product?

David Dunbar, CEO

Yes, we should have included the dollar symbol. It's $55 million in sales last year and $78 million this year. Good catch.

Operator, Operator

Next question will be from Matt Koranda of ROTH Capital.

Matt Koranda, Analyst

So the confidence in Amran/Narayan or Grid, I guess, recalling now, sounds as high as ever. But if I back into the book-to-bill for Amran/Narayan, it looks like it's just about 1x. Maybe just can you talk about order trends that you're currently seeing them or as you currently see them and then just how that informs the view on the 20% growth this year?

David Dunbar, CEO

Yes. If you look at the numbers, it's more than 1, around 1.05 to 1.07. The book-to-bill ratio this quarter supports the growth rate we've experienced over the past few years, which is close to 30%.

Ademir Sarcevic, CFO

And Matt, 1 thing the Amran/Narayan posted a record sales quarter of over $35 million in Q1, I think 35.5% and the book-to-bill was over 1 to David's point. So it continues to kind of grow and compound. So we continue to see those strong orders. They are not slowing down.

Operator, Operator

Next is a follow-up from Ross Sparenblek at William Blair. The book-to-bill ratio for the quarter supports the growth rate we've experienced over the last few years for this business, which is nearly 30%. Ademir Sarcevic, our CFO, mentioned that Amran/Narayan achieved record sales of over $35 million in Q1, specifically 35.5%, and the book-to-bill ratio was above 1. This indicates ongoing growth and compounding, and we are still seeing strong orders that are not slowing down.

Ross Sparenblek, Analyst

Just wanted to quickly touch on the Engraving again. It looks like that pipeline is showing some signs of activity. I mean, we don't need a lot of volume to come back in there to get to normalized levels. Just wanted your thoughts. And then the second piece is prior cost out with the new efficiencies or productivity of the shutdowns. It feels like 20% margin is no longer the ceiling? How quickly do you think we can get there is a little bit of a volume?

Ademir Sarcevic, CFO

The engraving market, particularly in North America, has been quite weak for some time but has now bottomed out. The market is stabilizing and starting to show improvement, with signs of recovery in Europe and Asia as well. Over the past couple of years, we closed approximately 15 sites, and with our recent announcement, we believe we will begin to realize savings from these shutdowns in the third and fourth quarters of this fiscal year. The 20% margin you mentioned is achievable, and we are confident that as the market strengthens, we will be able to exceed that 20% margin.

Operator, Operator

At this time, it appears we have no further questions. I would like to turn the conference back over to Mr. David Dunbar, CEO.

David Dunbar, CEO

Yes. Thank you. I'd like to thank everybody for joining us for the call. We do enjoy reporting on our progress here at Standex. Thank you again also to our employees and shareholders for your continued support and contributions. I'm very excited about the company's potential in fiscal year '26 and look forward to speaking with you again in our fiscal second quarter 2026 call.

Operator, Operator

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines. Have a good weekend.