Standex International Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter 2020, the three months ended September 30, 2019; comparable period is the three months ended September 30, 2018. Amounts below are in U.S. dollars. The interim results are unaudited and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $196.4 million | $193.1 million |
| Gross profit / margin | $68.3 million / 34.8% | $69.3 million / 35.9% |
| Income from operations | $18.4 million | $22.6 million |
| Continuing operations income | $12.5 million | $14.4 million |
| Net income | $12.4 million | $15.9 million |
| Diluted EPS | $1.00 | $1.24 |
| Cash dividends per share | $0.20 | $0.18 |
Sales increased 1.7% year over year: acquisitions contributed $8.4 million, while organic sales declined $3.2 million and foreign exchange reduced sales by $1.9 million. Operating income fell 18.6%. Management attributed the decline principally to lower gross profit, organic sales weakness in Electronics, material-cost and wage inflation, and higher compensation and benefits.
Continuing-operations operating cash flow was $8.3 million, compared with cash used of $2.6 million in the prior-year quarter; including discontinued operations, operating cash flow was $8.4 million. Capital expenditures were $7.0 million. Investing cash flow was positive $2.3 million, including $9.0 million of insurance proceeds. Financing activities used $11.1 million, including $8.8 million of net revolving-credit repayments, $2.5 million of dividends, and $0.8 million of share repurchases. Cash ended the quarter at $90.2 million, down from $93.1 million at June 30, 2019.
At September 30, 2019, long-term debt was $188.9 million net of issuance costs, cash was $90.2 million, and reported net debt was $98.7 million. Stockholders’ equity was $472.9 million. The current ratio, based on reported current assets of $324.4 million and current liabilities of $134.7 million, was approximately 2.4. The $500 million credit facility had $190.0 million drawn; $257.5 million remained available based on trailing-twelve-month EBITDA, after $7.6 million of letters of credit. The interest coverage ratio was 7.53:1 and leverage ratio was 1.22:1, within the stated covenant limits of at least 2.75:1 and no more than 3.5:1, respectively.
Material changes and segment results
- Engraving: Sales rose 6.8% to $38.4 million, primarily from acquisitions; operating income declined 13.4% to $6.5 million. Organic sales fell amid automotive program timing, and acquired-intangible amortization increased.
- Electronics: Sales fell 9.4% to $46.6 million and operating income fell 36.7% to $8.1 million. Organic weakness was broad, most pronounced in Asia; material inflation, including platinum-group metals, and sales mix pressured results.
- Engineering Technologies: Sales increased 18.6% to $24.6 million and operating income increased 89.2% to $3.4 million, reflecting strength in Aviation, Space and Defense and productivity improvements.
- Hydraulics: Sales rose 9.7% to $13.7 million and operating income rose 59.6% to $2.5 million, supported by refuse-market demand, lower material costs, and cost management.
- Food Service Equipment: Sales increased 0.9% to $73.0 million; operating income rose 25.6% to $8.4 million. Scientific sales and merchandising mix helped results. Refrigeration operations continued recovering from a fire that damaged inventory at a leased facility.
Total backlog was $229.8 million, down from $250.4 million a year earlier; backlog realizable within one year declined 6.4% to $193.7 million. Management cited slower end markets and foreign-exchange effects as contributors.
Outlook, commentary, risks and unusual items
- Management expected Engraving to improve year over year as global automotive model roll-outs increased, GS Engineering contributed, and restructuring actions were completed. Engineering Technologies was expected to continue year-over-year growth in the second quarter; Hydraulics was expected to be relatively flat year over year in that quarter.
- Management expected lower year-over-year commercial refrigeration sales in the second quarter while inventory was rebuilt after the facility fire, and continued strength in Scientific markets. Electronics material costs were expected to remain elevated; the company had fixed some future purchase commitments and was pursuing manufacturing changes.
- Fiscal 2020 capital spending was projected at $31–$34 million. Management expected depreciation of $25.5–$26.5 million and amortization of $8.5–$9.5 million. Approximately $1.9 million of additional restructuring costs were expected for the remainder of fiscal 2020.
- The company recorded a $1.0 million operating gain from $9.0 million of insurance proceeds related to the fire-damaged property. A $1.3 million life-insurance benefit reduced the effective tax rate; the continuing-operations rate was 27.8%, versus 28.9% a year earlier. Discontinued operations contributed a loss of $11,000, versus income of $1.5 million in the prior-year quarter; the Cooking Solutions Group had been sold in March 2019.
- Recent acquisitions include GS Engineering, Agile Magnetics, and Tenibac. The GS Engineering purchase-price allocation remained preliminary. The company also adopted the new lease standard on July 1, 2019, recognizing $42.1 million of operating lease right-of-use assets and $41.9 million of lease liabilities.
- Principal disclosed risks include end-market weakness, raw-material and component inflation, tariffs, foreign-exchange movements, execution of restructuring and acquisition integration, customer delays or cancellations, supply availability, pension funding, and the ability to pass cost increases through to customers. Tariff relief for Hydraulics was scheduled to end in the third quarter of fiscal 2020, with extension uncertain. The company was negotiating a U.S. union contract due to expire in the second quarter.
- Management said existing legal matters were not expected to materially affect financial position, results, or cash flows. The company was under IRS audit for fiscal 2016 and 2017 and anticipated finalizing it in fiscal 2020’s third quarter. Management reported disclosure controls were effective; internal-control evaluation excluded GS Engineering and Agile Magnetics.
Important facts for investors to verify
- Whether Electronics’ organic sales weakness and cost inflation persist, and whether Engraving’s anticipated recovery materializes.
- Progress rebuilding refrigeration inventory and retaining customers after the fire, along with the ultimate insurance recovery and operating impact.
- Backlog conversion, especially the decline in under-one-year backlog, and the strength of Engineering Technologies’ long-term demand.
- Compliance with credit-facility covenants, remaining borrowing availability, and the company’s capacity to fund capital spending, dividends, and pension contributions.
- Final GS Engineering purchase accounting, contingent acquisition payments, restructuring execution and costs, and the outcome of the IRS audit.