Standex International Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended June 30, 2018. The request metadata says “2017 Q4,” but the filing is the FY2018 annual report; its fourth quarter ended June 30, 2018. Amounts below are U.S. dollars.
Business context
Standex is a diversified manufacturer with five reportable segments: Food Service Equipment, Engraving, Engineering Technologies, Electronics and Hydraulics. Its strategy emphasizes organic growth, acquisitions, operational improvements and shareholder returns. International operations generated 32% of sales, up from 31% in FY2017.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $868.4 million | $755.3 million |
| Gross profit / gross margin | $301.8 million / 34.8% | $252.8 million / 33.5% |
| Operating income / operating margin | $84.0 million / 9.7% | $65.0 million / 8.6% |
| Income from continuing operations | $36.6 million | $46.6 million |
| Net income | $36.6 million | $46.5 million |
| Diluted EPS | $2.86 | $3.65 |
| Cash from continuing operating activities | $65.0 million | $64.0 million |
| Cash and cash equivalents | $109.6 million | $88.6 million |
| Long-term debt, net | $193.8 million | $192.0 million |
| Net debt | $84.2 million | $103.4 million |
Sales rose 15.0%, comprising $59.9 million from acquisitions, $38.9 million of organic growth and $14.4 million from favorable foreign exchange. Gross margin improved 1.3 percentage points, while operating income increased 29.2%. Net income and diluted EPS declined, principally reflecting the substantially higher tax provision. The effective tax rate was 52.6%, versus 24.8% in FY2017, including $11.7 million for the deemed-repatriation tax, $7.8 million for expected repatriation-related withholding and state taxes, and $1.3 million from deferred-tax revaluation.
Operating cash flow was nearly flat year over year; working-capital increases used $19.6 million. Investing activities used $32.3 million, including $26.5 million of capital expenditures and $10.4 million for acquisitions, partly offset by proceeds and other investing inflows. Financing activities used $11.9 million, including $8.9 million of dividends and $2.7 million of share repurchases. The company declared $0.70 per share in dividends, up from $0.62.
At year-end, $101.8 million of cash was held outside the United States. Management expected to repatriate approximately $50 million during FY2019, subject to operating needs and tax payments. The $400 million revolving credit facility matures in December 2019; borrowings were approximately $194 million, with $198.1 million of additional borrowing capacity reported. Net debt to capitalization was 15.7%, down from 20.2%. The filing reports covenant compliance; leverage was approximately 1.7x against a 3.5x maximum. It gives interest coverage as both 11.32x and 11.40x in different sections.
Material changes by segment
- Electronics: Sales increased 43.6% to $196.3 million, including $37.1 million from the Standex Electronics Japan acquisition; organic growth was 12.1%. Operating income rose 63.8% to $45.3 million and margin expanded to 23.1%.
- Engraving: Sales increased 28.6% to $136.3 million, with 10.2% organic growth and $13.2 million from Piazza Rosa. Operating income rose 13.2%, but margin declined to 21.3% from 24.1%, reflecting investment and weaker performance in certain locations.
- Food Service Equipment: Sales rose 4.2% to $396.9 million; operating income increased 4.2% to $34.9 million and margin held at 8.8%. Cooking Solutions sales fell 8.8%, while refrigeration and specialty products grew. Commodity costs and plant realignment weighed on margins.
- Engineering Technologies: Sales were nearly flat at $90.8 million, while operating income fell 33.3% to $6.4 million and margin declined to 7.1%. Management cited program delays, lower development spending and pricing pressure on legacy aircraft parts.
- Hydraulics: Sales increased 17.1% to $48.2 million, but margin declined to 15.2% from 16.3%, with material costs cited as a factor.
Backlog realizable within one year increased 10.3% to $213.5 million, led by Engineering Technologies. Total backlog was $246.1 million. Backlog is not necessarily predictive of sales; customers may delay or cancel orders.
Outlook, risks and unusual items
- Management anticipated FY2019 capital expenditures of approximately $36 million, including $5 million for a new Electronics facility in Cincinnati. Long-term capital spending was expected to be about 3%–4% of sales.
- Management expected Food Service Equipment to benefit from operational improvements and differentiated-product growth; Engineering Technologies sales were expected to grow overall, though its first quarter was expected to decline; Electronics reported strong demand entering FY2019; and Hydraulics anticipated first-half sales growth. Aviation-program margin improvement was expected as programs ramp toward full volume in calendar 2020.
- Management anticipated further restructuring charges in FY2019. FY2018 restructuring expense was $7.6 million, primarily associated with Food Service realignment, exit of an unprofitable Brazilian Engraving business and Engineering Technologies footprint optimization. Acquisition-related expense was $3.7 million.
- Newly enacted and proposed tariffs, especially those affecting Chinese-sourced products, could increase costs and pressure sales and margins. Hydraulics expected tariff effects to weigh on FY2019 margins if fully implemented; the company planned price increases where possible.
- Other material risks include economic and end-market cyclicality, competition and pricing pressure, raw-material costs and supply availability, execution of restructuring and acquisitions, foreign-exchange and repatriation constraints, credit-facility covenants, pension funding, litigation and environmental matters, cybersecurity, and privacy regulation including GDPR. Management said current legal matters were not expected to materially affect financial position, results or cash flow, and believed the company was substantially compliant with environmental requirements.
- Standex acquired Tenibac-Graphion, a texturing-services provider reporting $25 million of 2017 revenue, in August 2018, after the reporting period. The company expected to include it in Engraving.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective; its control evaluation excluded Piazza Rosa, acquired during the year.
Important facts for investors to verify
- Reconcile the filing’s two stated FY2018 interest-coverage ratios (11.32x and 11.40x) and confirm covenant headroom and the December 2019 credit-facility maturity/refinancing plan.
- Assess the sustainability of operating growth and margin gains, particularly acquisition contribution versus organic growth and the weaker Engineering Technologies and Food Service areas.
- Confirm the final tax effects of the Tax Cuts and Jobs Act, the timing and costs of the expected $50 million repatriation, and the effect on future effective tax rates.
- Track tariff implementation, customer price recovery and resulting cost or margin effects, especially in Hydraulics and Chinese-sourced products.
- Review delivery of expected restructuring savings, FY2019 capital spending, acquisition integration and contingent acquisition payments; assess Tenibac-Graphion’s subsequent contribution.