Good morning, and welcome to the Standex International second quarter fiscal 2022 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Gary Farber of ClearView Advisors. Please go ahead.
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 two. 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 of 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, which is EBIT excluding restructuring, purchase accounting, acquisition-related expenses, and one-time items. EBITDA, which is earnings before interest, taxes, depreciation, and amortization. Adjusted EBITDA, which is EBITDA excluding restructuring, purchase accounting, acquisition-related expenses, and one-time items. 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. 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 performance. On the call today is Standex's Chairman, President, and Chief Executive Officer, David Dunbar, and Chief Financial Officer and Treasurer, Ademir Sarcevic.
Thank you, Gary. Good morning, and welcome to our fiscal second quarter 2022 conference call. I'm very pleased with our strong second quarter results, which were above our expectations with record performance in several areas. Our success reflects the significant repositioning of our portfolio around high-growth end markets, where our expertise and innovative solutions provide compelling customer value propositions. We are excited about the growing number of new business opportunities in front of us and are in the early innings of further driving the trajectory of the next leg of our growth strategy. I want to thank our employees, executive teams, and the board of directors for their continued dedication and support. Now, if everyone can turn to slide 3, Key Messages. Both revenue and consolidated adjusted operating margin increased significantly year-on-year in the second quarter.
Record sales at both our Electronics and Scientific segments in the quarter were key drivers of organic revenue growth, which was 20% year-over-year. Electronics segment revenue grew approximately 27% year-over-year, with broad-based strength across all geographic regions and end markets, such as electric transportation, solar, military aerospace, and semiconductor, all platforms for significant future growth. Scientific segment revenue increased approximately 38% year-over-year, with positive trends in our core markets, complemented by ongoing demand for COVID-19 vaccine storage refrigeration. For the third consecutive quarter, we reported our highest adjusted consolidated operating margin in Standex history, 13.6%, representing a 220 basis points year-over-year increase. This reflected strength in end-market product demand, complemented by market share gains, productivity, and price realization initiatives.
We are entering the second half of fiscal 2022 with a very robust pipeline of new business opportunities in high-growth end markets. We are also further leveraging our business units through highly targeted investment in research and development, strengthening our foundation and outlook for future growth. Total company backlog realizable in under one year increased approximately 11% sequentially in the quarter and 53% year-over-year, with record backlog levels at the Electronics and Specialty Solutions segments. In addition, our Electronics segment new business opportunity pipeline of $64 million represented a 14% year-over-year increase and is expected to contribute $19 million in sales in fiscal 2022, approximately 25% above the previous year. We also achieved an important milestone in our project with Enel, a global energy company, delivering full-size prototype solar modules in December.
We highlighted this opportunity on our fiscal fourth quarter call in August and are now expected to move to design and construction of a pilot plant, further expanding Standex's potential avenues for growth. Our operating approach globally remains highly collaborative and well-coordinated across business segments and leadership teams. A significant portion of our client base is in the same region where materials are sourced and products are manufactured, minimizing supply chain issues. We continue to drive supply chain productivity through proactive and strategic material sourcing and logistics management. We continue to execute on standardized operating disciplines across business units, including new lean programs and highly focused sales, inventory, and operations planning processes. In regard to inflationary trends, we have implemented new processes and systems combined with collaborative efforts among segment engineering, sales, and purchasing personnel to effectively implement price realization actions.
In addition, at the Electronics segment, by the end of fiscal 2022, we expect to substantially complete the expansion of our ruthenium-based reed switch production. We are now able to offer customers a choice of switches with rhodium or other materials, reducing our exposure to future rhodium inflation. In the second quarter, we also further strengthened our balance sheet and liquidity position, supported by continued solid cash generation, and have substantial financial flexibility to further expand the number of high return organic and inorganic opportunities across our business units. Ademir will discuss our financial performance in greater detail later in the call. Regarding our financial outlook, we expect our momentum to continue in fiscal 2022, with stronger financial performance in the second half of our fiscal year, both year-on-year and compared to the first half of fiscal 2022.
Specifically, on a sequential basis in the fiscal third quarter, we expect revenue to be similar to slightly higher and operating margin to be slightly higher sequentially, with a significant overall increase year-on-year compared to fiscal third quarter 2022. We are also pacing ahead of the long-term financial targets we provided a year ago. As before, our outlook assumes a continued macroeconomic recovery. Now please turn to slide 4, and I will begin to discuss our segment financial performance and outlook, beginning with Electronics. At the Electronics segment, our record second quarter revenue performance, growing new business pipeline, and fiscal third quarter outlook reflect the volume ramp of the previous year's new business opportunity awards, strength in our end markets and product demand complemented by continued market share gains.
Segment revenue of $76.6 million represented an increase of $16.8 million and a 27.9% organic growth year-on-year. This growth reflected positive trends across all markets and geographies, including in electric transportation, solar, military/aerospace, and semiconductor markets. Operating income grew approximately 72.2% year-on-year to $17.2 million, as we effectively leveraged organic sales growth, pricing actions, and productivity initiatives, partially offset by increased raw material and freight costs. Electronics backlog realizable under a year of approximately $143 million increased 9% sequentially and 88% year-on-year. Our new business opportunity pipeline of $64 million reflects the broad expansion we are seeing, including in electric vehicle and renewable energy end markets and share gain in the military/aerospace sector.
As highlighted in the picture on slide four, our current NBO funnel includes strong demand for new renewable energy programs that are quickly ramping up in both Europe and Asia. For our fiscal third quarter 2022 outlook, we expect a slight increase in revenue and operating margin as we execute on our solid backlog position. We expect strong demand to continue across all product categories and regions, with military/aerospace programs continuing to ramp up for Magnetics' products demand. Please turn to slide 5 for a discussion of the Engraving segment. Revenue of $36.6 million in the quarter and operating income of $5.2 million represented a 3.4% and 20% decrease year-on-year, respectively, due to the timing of projects and geographic mix.
Engraving sales of $15.7 million increased approximately 14% year-on-year, with positive trends in soft trim tools, laser engraving, and tool finishing product categories. Engraving backlog realizable under a year increased 7% sequentially in fiscal second quarter 2022. The picture on slide 5 highlights a recent customer win for the new Ford Ranger P703 model, a global three-year tool texturizing program for vehicles to be assembled in the U.S., India, Thailand, South Africa, and Argentina. Our ability to offer a comprehensive approach through the full value chain from design, prototyping, and execution of a final product on a global basis remains a key competitive differentiator, particularly for leading multinational manufacturers.
In our fiscal third quarter, we expect sales and operating margin to be similar to the second quarter, with an expected decrease in project work in Asia associated with the Chinese New Year, offset by contributions from projects in Europe and growth in soft trim sales. Turning to slide 6, the Scientific segment. Record quarterly revenue of $24.6 million represented an increase of 37.7% year-on-year, with growth in pharmaceutical, clinical laboratories, and academic institution markets, complemented by strong demand for COVID-19 vaccine storage. Operating income of $5.5 million increased 29.7% year-on-year, reflecting volume growth and pricing initiatives to partially offset higher freight costs as well as increased investments to support additional new products development. Sequentially, backlog realizable under a year increased 7%.
As pictured on the slide, our Scientific segment is the first in the industry to provide customers with equipment certified to the NSF/ANSI 456 standard developed by the U.S. Centers for Disease Control and Prevention and the National Sanitation Foundation. These new equipment standards focus on maintaining ideal vaccine storage conditions and address the potential high cost of failure, which can reach millions of dollars of client losses on ineffectively refrigerated medication. In our fiscal third quarter, we expect a moderate sequential decrease in revenue and operating margin due to expected lower demand for COVID vaccine storage. Our new product development effort remains very active, as reflected in the growing level of intellectual property into new product categories. Turning to the Engineering Technologies segment on slide 7.
Revenue and operating performance in the quarter reflected recovery in commercial aviation end markets, in the absence of the previously divested Enginetics business in the fiscal third quarter of 2021. Sales increased 3.4% year-on-year to $18.1 million, and operating income grew approximately 69.8% to $2.3 million. In the second quarter, backlog realizable under a year increased 8%. As highlighted on the picture on slide 7, our market reach is broad, and we're well-positioned to capture a wide range of emerging growth opportunities from the commercialization of space to collaborating with commercial airframers on net zero carbon aviation applications, as well as defense programs globally.
Regarding our outlook for the fiscal third quarter, we expect revenue to be sequentially similar to slightly higher, primarily due to growth in space and medical end markets, with a slight to moderate increase in operating margin reflecting end market strength and productivity initiatives. Please turn to slide 8, Specialty Solutions. Specialty Solutions revenue grew 30.4% year-on-year to $29.7 million, reflecting continued end market recovery, primarily in food service, specialty retail, and refuse end markets. Operating income increased 16.4% to $3.7 million due to volume growth and pricing actions, partially offset by material inflation and increased freight costs. Sequentially, backlog realizable under a year increased $10.1 million or approximately 29% in second quarter fiscal 2022, reinforcing the continued recovery in key end markets.
Pictured on slide 8 is a recently launched ProCon Nautilus helical gear pump for espresso and milk foaming applications. This unique product highlights our value-based approach to client solutions. The Nautilus gear pump is energy efficient with a low amp draw, reinforces the overall focus on sustainability of our development programs, and offers a compact size with smoother and quieter operation. In regard to our outlook, in fiscal third quarter 2022, we expect a slight to moderate increase in revenue and operating margin sequentially, reflecting positive trends in backlog and end markets. We continue to seek to recover material inflation through pricing actions. I will now turn the call over to Ademir to discuss our financial performance in greater detail.
Thank you, David, and good morning, everyone. First, I will provide a few key takeaways from our fiscal second quarter 2022 results. Revenue, operating margin, and free cash flow all increased both sequentially and year-on-year. Organic revenue growth of approximately 20% year-on-year reflected record sales in the Electronics and Scientific segments, with four of our five segments reporting increased sales. 20% year-on-year organic growth consists of approximately two-thirds in volume increase and one-third in price realization. In addition, adjusted consolidated operating margin of 13.6% in the quarter represented a 20 basis point sequential increase and 220 basis points increase year-on-year, led by strong operating performance in the Electronics and Scientific segments. We also further added to our significant balance sheet and liquidity strength with solid free cash flow generation.
In summary, supported by continued strong market demand, an active pipeline of new business opportunities and new product development, ongoing focus on price and productivity initiatives, and with a year-to-date book-to-bill well in excess of one, Standex is entering the second half of fiscal 2022 with momentum and expectations for continued improvement in financial performance, both sequentially and year-on-year. In addition, all these positive trends provide us with further financial flexibility to pursue a very active pipeline of M&A opportunities. Now let's turn to slide 9, second quarter fiscal 2022 income statement summary. On a consolidated basis, total revenue increased 18.8% year-on-year from $156.3 million in the second quarter of 2021 to $185.7 million this quarter. This revenue increase primarily reflected strong organic growth at the Electronics and Scientific segment.
The sales increase was partially offset by the prior divestiture of the Enginetics business, which contributed approximately $2.3 million in revenue in the fiscal second quarter of 2021, as well as a small impact from foreign exchange. On a year-on-year basis, our adjusted operating margin increased 220 basis points to 13.6%, reflecting operating leverage associated with revenue growth and readout of price and productivity actions, partially offset by materials inflation and increased freight costs, primarily impacting the Scientific and Specialty segments. As expected, our tax rate was in the 24% range, increasing to 24.7% compared to 20.9% in the second quarter of fiscal 2021.
We expect that our tax rates will be in the 24% range into our fiscal third quarter, followed by a tax rate in the low 20% range in our fiscal fourth quarter. We still expect our fiscal 2022 tax rate to be around 24%. Adjusted earnings per share were $1.45 in the second quarter of fiscal 2022, compared to $1.05 a year ago, an approximately 38% improvement year-on-year. Please turn to slide 10, second quarter 2022 free cash flow.
We reported free cash flow of $18.9 million in the second quarter of 2022, compared to free cash flow of approximately $17 million in the second quarter of 2021. This now represents the best first half free cash flow performance in Standex's history, reflecting continued focus on working capital improvements and a better mix of higher performing businesses. Working capital turns of 5.5 times represented an approximately 20% increase year-on-year. Now, please turn to slide 11 for a summary of Standex's capitalization structure and liquidity statistics, which remain very strong. Standex had net debt of $52.5 million at the end of the second quarter, compared to $68.9 million at the end of the first quarter, primarily reflecting free cash flow offset by dividends and changes in foreign exchange.
Our net debt for fiscal second quarter of 2022 consisted primarily of long-term debt of $199.7 million, and cash and cash equivalents totaling $147.2 million, with approximately $100 million held by foreign subs. We repatriated cash of approximately $16 million from foreign subs in the second quarter and expect to repatriate between $30 million-$35 million in cash in fiscal 2022. We ended the second quarter with approximately $281 million of available liquidity. In addition, our net debt to adjusted EBITDA leverage was approximately 0.42x, with a net debt to total capital ratio of 9.2%. From a capital allocation perspective, we declared our 230th consecutive quarterly cash dividend on January 27th of $0.26 per share, an approximately 8% increase over the year-ago period.
Finally, we expect capital expenditures of approximately $25 million-$30 million in fiscal 2022. I will now turn the call over to David for further details around our growth outlook and closing comments.
Thank you, Ademir. If everyone can please turn to slide 12 for a discussion of our improved growth outlook. We are entering the next phase of our strategy and growth trajectory, well-positioned to exceed our prior long-term organic revenue growth target of mid-single digits. We are focusing on end markets aligned with sustainable growth trends. We can provide innovative solutions addressing emerging global opportunities in areas such as renewable energy, electric vehicles, human health, commercialization of space, and products that emphasize sustainability in their features. Our presence in these high-growth end markets is already contributing $64 million in sales annually and increasing at a 25% compound annual growth rate. Our applications typically have multiyear customer purchase life cycles, providing a recurring revenue stream. We are leveraging our significant pool of internal talent with the recent announcement of a dedicated office of innovation.
We are increasing investment in R&D to execute on a very active pipeline of new product introductions and expand the range of high return opportunities company-wide. We are focused on driving profitable growth with investment in R&D, which has doubled since the end of fiscal 2019, while our consolidated adjusted margin improved. Recent releases include introducing new product categories at Scientific, including blood bank and plasma cabinets, and a ground-up redesign and merchandising of our new Vision Series, which we introduced in November and is already generating significant customer order flow. Our approach to executing on our projects is highly collaborative and multifaceted to maximize the value of our expertise. In the case of the solar project with Enel, which I discussed earlier in my comments, Electronics, Engraving, and our Innovation and Technology office are collaborating to apply custom surface engraving and electronic componentry.
In addition, Standex has a minority ownership stake in Gr3n SA, whose recycling process will be used for material inputs to module production. We expect a pilot plant to begin operation in early 2023. Please turn to slide 13 to discuss our update to the Standex financial framework. A year ago, we provided a comprehensive list of financial targets highlighted on slide 13 that we expected to achieve in the next 3-5 years. Our performance in the past year and the momentum in the business increase our confidence in meeting and exceeding these targets. We are well-positioned to continue to exceed mid-single-digit sales growth.
We now expect to reach an adjusted EBITDA margin above 20% and a return on invested capital above 12% in the next 18-36 months, reflecting the significant strengthening of our business portfolio and breadth of company growth and productivity initiatives and pipeline. Operator, I will now open the line for questions.
Thank you. We'll now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Chris McGinnis from Sidoti & Company. Please go ahead.
Yeah, good morning. Thanks for taking my questions, and congratulations on a very strong quarter.
Yeah, thank you. Good morning.
I guess just one thing right off the bat is just that you know a number of other companies are reporting kind of significant increases in raw materials, supply chain issues or labor. Can you just address you know maybe how much of a headwind that is right now and how are you largely offsetting that?
I'll say a couple words then turn it over to Ademir. You know, our biggest raw material issue in the last few years was rhodium in Electronics, and I think you've seen in the last year how we've effectively managed that by passing price through to recover the margin. We've also engineered an alternative product for customers using ruthenium in those switches. The other business that's really affected by material increases is Hydraulics. You know, you kind of see that in the specialty margins, but Hydraulics has always dealt with fluctuations in steel price and has a well-established process for passing price through, and we're confident they're positioned to start recapturing that margin in the coming quarters.
Yeah. Chris, if I can add, you know, for the most part, we are the regional supplier for regional customers. We don't have really a lot of long kind of a long-haul supply chain, if you will. So we estimate in a quarter, there was about $6 million worth of sales that got pushed from the quarter, pushed to the right. But these are sales that we did not lose. These are not cancellations, just something that we will, you know, have to ship in Q3 and Q4. But for the most part, it's been a pretty limited impact to us.
Great. Oh, sorry.
Nope.
Oh, just in relation to the, you know, the updated long-term targets, what's the driving factor to make that an 18-month to versus a, you know, 36-month? You know, what are you thinking that could, you know, lead it to be quicker versus the longer term, you know, execution?
Well, there's two things, Chris. One is just simply looking at the performance of the business in the last year. I mean, we're ahead now. We're ahead of where we thought we would be a year ago. Even our performance relative to external expectations, we've exceeded the expansion in margin rate in our sales. We're farther along than we thought we would be. Secondly, we just completed a very granular ground up recast of our five-year projections for all of our businesses. We came out of there with a lot of confidence that our top line growth will continue. We'll leverage margin expansion. You know, the page 12 gives a number of the items that go into our enhanced top line expectations.
It's a process of just kind of watching the performance in the last year and also really digging through our businesses to see what they've got in the pipeline to contribute to the next few years.
Great. Just one more from me, and I'll jump back in queue. Just in relation to the balance sheet and the opportunity for M&A, you know, I know last quarter you bought back some shares. That didn't happen in Q2. I'm just guessing, you know, is the opportunity for M&A becoming maybe more apparent at this point?
Yeah, I'll say a word about that. You know, every quarter we look at our cash. What are the best uses of cash? Continuing to buy back shares is always on the table, but it's in context with the other options in front of us. Obviously we have some great internal investment opportunities. The acquisition pipeline has become busier in recent quarters. Our intent is not to sit on cash for a long time. We're gonna put it to the most productive uses and, you know, I can only say we'll follow the same kind of quarter-by-quarter evaluation. Ademir, you want to add anything to that?
Yeah. The only thing to add, Chris, you know, share repurchases will continue to be an important part of our capital allocation strategies. No, I wouldn't read too much into the fact that we didn't repurchase any shares last quarter.
Okay. I appreciate that. I'm gonna jump back in queue. Good luck in Q3, if I don't talk to you.
Yeah, thank you.
Thank you.
The next question comes from Christopher Moore from CJS Securities. Please go ahead.
Good morning, guys. Thanks for taking a few questions.
Good morning.
Good morning. You talked about the reed switch production material substitution project should be finished by the end of 2022. Just curious, if it had been finished by the end of 2021, kind of roughly how additive would that have been in 2022? Is that more of a volume versus margin?
Yeah. That's a great question. When we first started talking about that, we thought to recapture the margin we were losing from rhodium inflation, we would need to have this ruthenium production in place. Starting about a year ago with the Q3 of 2021, our Electronics business put in place a more disciplined pricing process and began recovering the margins from the rhodium. By the time we got to the end of the year, the ruthenium project was no longer one about recapturing margin, but it was one of, A, expanding capacity and B, offering our customers an option between ruthenium and rhodium switches. I mean, your question is a hypothetical one.
Had we had that capacity online last, say, June, for example, it would have given us more capacity and probably some upside on the sales line.
Got it. Thank you. Engraving, you know, is the one segment that's lagging a little bit. Can you just maybe talk about visibility and expectations beyond Q3?
Yeah. The way to think of this business is 70% of the sales go into the auto industry, and it's driven by new platforms. The outlook for new platform rollouts in the coming years is stable to slightly growing. Think of that as like a GDP growing end market. There's a move in the market to more soft trim parts than hard trim. Our bread and butter for years and years was hard trim. We acquired a business a few years ago to accelerate our soft trim sales, and that backlog is really growing. We anticipate that the soft trim sales in the coming quarters will start to read through. We'll see that growth. You see our Engraving growth in this quarter really is solid.
In the auto end market, we think we're well positioned to participate in the trends to soft trim and our laneways are driving growth. On the non-auto business, which we've always used as kind of a way to fill capacity in our site, there it's about 30% of the business. We've had more competition in recent years, as some of our smaller regional competitors have invested in lasers. We've talked about our new laser technology, which we're beginning to roll out, and we'll start to roll through our regions, you know, this calendar year. Those things are all going on in the Engraving business. When we talk about getting this business back to a 20% operating income, there's basically three key things.
The one is James Hooven, who's now running the business, is driving the operating disciplines, you know, consistently across the regions because the labor management practices and pricing, in particular, are critical. Secondly, just ramping up the soft trim growth, especially in Asia, will help us grow top line. Thirdly, the roll out of this new laser technology across all the businesses will strengthen our position in the non-auto auto segment.
Got it. That laser rollout, that's more of a second half calendar 2022 when it really gets moving or is that a calendar 2023?
Yeah, we have two installs now. There'll be another couple in over the next couple quarters, and then a few more in the first half of the next fiscal year. Well, first half of the next fiscal year. It's kind of a calendar year story. You'll see it progressively roll through.
Got it. Specialty was a nice beat in revenue, certainly where we were looking for. $30 million, you're talking about, you know, kind of sustaining close to that in Q3. What would it take to increase that, you know, quarterly revenue closer to $35 million?
Well, the end markets are almost back to the pre-COVID levels in the food service equipment. I think our team believes that this quarter they'll get back to the pre-COVID levels. For the pump and display merchandising, we continue to see end market strength. The new products that we've released, we think are gonna take some shares, so that will accelerate growth there. The hydraulics business will be a beneficiary in the coming years of this North American infrastructure spend. That's not gonna be a pop to the earnings, but it provides them a nice runway over the next 5-10 years to continue to grow. I think it's favorable external market conditions, plus our new product releases will help us, you know, continue to grow that top line.
Got it. Last one for me, I just wanted to maybe Ademir could repeat, I didn't hear exactly. The breakdown on the organic growth in the quarter between price and volume, did you say one-third price, two-thirds volume? Did I hear that correctly?
Yes, you did, Chris.
Okay. All right. I'll jump back in line. Thanks, guys.
Thanks.
Thanks.
Again, if you have a question, please press Star, then One. Our next question comes from Chris Howe from Barrington Research. Please go ahead.
Good morning, David and Ademir.
Good morning.
Good morning. I guess first off, starting with slide 12, if we think about the new product pipeline, across the businesses, perhaps more specifically around solar energy, can you talk about, just the puts and takes and how you balance your level of R&D investment, and also, your level of investment in pursuing new opportunities, beyond what you already have?
Yeah. I was so excited to put this slide together. This is like the culmination of eight years of work in getting our businesses to focus on controlling their own destiny with their own organic growth program. If you look at Standex, years ago, we reported our R&D spending of, you know, less than 1% of our sales. To be honest, a lot of that was customer support, manufacturing support. There wasn't really a pipeline of new products that we were working on. Several years ago, with this GDP Plus process that's run by Paul Burns in the business development group, we started identifying new product development. We started allowing the businesses to ramp up their engineering spending.
You see, I think this year will be about 2%, Ademir, is that right?
Yeah.
About 2% of our sales in R&D. If you benchmark other companies, I think long term, provided we find, and we think we can, attractive new products to invest in, you'll see that number drift probably closer to 3% and over 3% of sales. This is all part of a disciplined Stage-Gate process. This kind of gets to your question, how do we decide where to invest? We first, we have these ideation sessions with all the businesses. From that ideation session, we have a list or a portfolio of opportunities. We choose the ones that appear the best, and we first construct a market test. A market test is a way for us to go out, talk to customers, maybe do some voice of customer research, maybe get a prototype in some customer's hands.
In just a few months, kind of determine, is there something worth exploring here? If so, then it enters our Stage-Gate process. We have a monthly review between the business and our business development team to track the evolution of this idea until we get to kind of a green light to start a new product development. So it's quite a disciplined process. We do this with all the businesses, and you're just starting to see the culmination of that. This work has been going on for years, but the new products are now coming out. They're starting to generate sales. You know, we're confident enough about it to put some highlights on this page about how that will help drive long-term growth.
Okay. Helpful. Just following up on a previous question related to the reed switch substitution and how if it were completed sooner, perhaps it would have helped on the revenue line. As we think about the differences in material, how should I think about it as it relates to demand for certain application?
Yeah. Well, just very roughly.
Yeah.
Just to take very roughly, the characteristics of rhodium are best suited to the most mission-critical applications out there. If you've got a switch that must work 1 billion times without any interruption, that's the characteristics of rhodium are more secure there. If you have a switch that needs to undergo very high voltage across an open switch, like in safety isolation testing for electric vehicles, that's better for rhodium. On the other end of the spectrum, applications like your security system in your home, where there's a reed switch in the window and a magnet in the window frame or the other way around, a ruthenium switch is perfectly adequate there, or for toys or sprinkler systems.
Kind of lower end and higher end applications that those two span the range of application conditions.
Okay. Is it fair to say then, based on the lower end applications of ruthenium that the cost of the switch is lower, but perhaps the demand for ruthenium far exceeds what it is now for rhodium?
Well, yeah, first of all, there's a lot more ruthenium in the world. The market for ruthenium-
Yeah
is more liquid. There's a higher supply. If you count up all the reed switches sold in the world, there are more ruthenium switches sold than rhodium switches. There are more lower end applications. I think that's what you're getting at.
Yeah.
Yeah.
Lastly, just on the sci-
If I could, Chris.
Yeah.
I apologize. Let me make one point. Our margins on the ruthenium switches are equivalent to our rhodium switches. Maybe a lower price point, but it's lower cost as well because of ruthenium. You know, we're agnostic about what switch a customer chooses.
Okay. Then lastly, on the Scientific segment, you know, there is ongoing replacement of cabinets, as we move further down the line, talking about that. Also, can you talk about the global opportunity for Scientific? I know domestically, you continue to be strong, perhaps COVID-related, perhaps not. How should we think about opportunities outside of our borders for Scientific?
Yeah. This is something we've actually spent some energy in the last year. Through that same growth process I mentioned, we've conducted some market tests to look at the opportunity. What we discovered is, in many parts of the world, they are still using the same kind of refrigerator you might have in your office to keep drinks in or something that you buy at Costco. So it's a very low price point, lower quality cabinet, and not very attractive for us at this moment. For those countries that do have higher quality standards for medication or vaccine storage, they have their own unique requirements and certification requirements. You know, we're looking at ways that we can play in those markets.
It's not as simple a matter as just exporting the products we make here in America to those countries. We'd have to find a way to either re-engineer and you know and get certified to those local protocols. We are actively exploring those things.
Okay. That's all I have. Thank you.
Thank you.
This concludes our question-and-answer session. I'd like to turn the conference back over to David Dunbar for any closing remarks.
Yeah. Thank you. We delivered strong top line growth and record margins in the quarter. We see substantial runways to further drive Standex growth and profitability. Given our strengthening positions in high growth markets and we are also aligned with sustainable global trends and investment in innovative solutions, which leverage our significant technical and application expertise to provide compelling customer solutions. I want to thank everyone today for their interest in Standex and our discussion of our fiscal second quarter and current outlook. Again, I want to thank our employees and shareholders for their continued support. We look forward to speaking with you again on our fiscal third quarter 2022 call.
Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.