Standex International Corporation — Form 10-Q Summary
Period clarification: The filing covers the three and nine months ended March 31, 2016 (fiscal 2016 third quarter), not 2015 Q3 as stated in the request. Financial amounts below are in millions of dollars unless noted.
Business context and reporting period
Standex is a diversified manufacturer serving commercial and industrial markets through five segments: Food Service Equipment, Engraving, Engineering Technologies, Electronics Products, and Hydraulics Products. The unaudited filing compares fiscal Q3 and year-to-date results with the corresponding 2015 periods.
Financial performance and liquidity
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $177.5 in 2016; $181.0 in 2015 | $557.8 in 2016; $572.4 in 2015 |
| Gross profit margin | 33.0%; 31.6% in 2015 | 33.2%; 31.8% in 2015 |
| Operating income | $17.2; $17.8 in 2015 | $56.3; $54.9 in 2015 |
| Income from continuing operations | $11.6; $12.8 in 2015 | $40.2; $39.0 in 2015 |
| Net income | $11.5; $12.6 in 2015 | $39.9; $38.4 in 2015 |
| Diluted EPS | $0.91; $0.99 in 2015 | $3.12; $2.99 in 2015 |
Q3 sales fell 2.0% year over year: a 1.4% foreign-exchange headwind and 2.0% organic decline were partly offset by 1.4% contribution from acquisitions. Year-to-date sales declined 2.5%, reflecting a 2.5% currency impact and 1.5% organic decline, partly offset by 1.5% acquisition contribution. Q3 operating income decreased 3.8%; year-to-date operating income increased 2.6%. SG&A was $41.1 million in Q3 and $125.7 million year to date, rising as a share of sales to 23.2% and 22.5%, respectively.
Continuing-operations cash from operations was $47.3 million for the nine months, up from $23.1 million. The filing attributes the increase primarily to a $23.9 million improvement from working-capital changes and higher net income. Investing activities used $27.1 million, including $13.7 million for Northlake and $13.3 million of capital expenditures. Cash at March 31 was $113.4 million, including $105.6 million held by foreign subsidiaries. Long-term debt was $106.0 million net of issuance costs; cash exceeded debt by $7.4 million. The company had $246.8 million of borrowing availability under its $400 million facility, which expires in December 2019.
Current assets were $346.3 million and current liabilities $117.9 million at March 31, 2016, versus $335.4 million and $138.8 million, respectively, at June 30, 2015. Stockholders’ equity was $382.3 million. The facility’s leverage ratio was 1.11:1 against a maximum of 3.5:1; interest coverage was 28.80:1 against a minimum of 3.0:1. The effective borrowing rate was 1.70%, with swaps fixing the rate on $50 million of debt at a weighted average 1.43%.
Material changes and segment trends
- Food Service Equipment: Q3 sales declined 3.4%, while operating income rose 32.0% to $8.5 million; year-to-date sales fell 5.7%, but operating income increased 16.8%. Cost and operating efficiencies supported margins despite weaker sales, particularly in refrigeration.
- Engraving: Q3 sales increased 6.2%, but operating income decreased 7.9% to $5.3 million amid start-up costs. Year-to-date sales rose 15.2% and operating income 21.5%.
- Engineering Technologies: Q3 sales declined 21.3% and operating income 52.3%; year-to-date declines were 17.6% and 50.4%. Reduced oil-and-gas demand and timing of space contracts weighed on results; aviation improved.
- Electronics Products: Q3 sales rose 6.8%, including $2.5 million from Northlake, while operating income was nearly flat. Year-to-date sales increased 1.1%; operating income decreased 1.6%.
- Hydraulics Products: Q3 sales increased 12.0% and operating income 16.5%; year-to-date sales rose 6.4% and operating income 12.4%.
Backlog realizable within one year was $160.6 million, down 2.5% from $164.6 million a year earlier. Total backlog was $192.4 million, compared with $204.5 million.
Outlook, risks and unusual items
- Management expected continued soft demand in refrigeration and oil and gas for the remainder of fiscal 2016. It anticipated aviation growth and improved Engineering Technologies profitability exiting Q4, and expected Hydraulics sales momentum to continue into Q4.
- Management forecast fiscal 2016 capital expenditures of $23–25 million, depreciation of $14–15 million, amortization of $2.5–3.5 million, and restructuring expense of approximately $3.7 million. The company had incurred $3.4 million of restructuring costs through March 31, including $1.7 million of non-cash expense related to a vacant property.
- Northlake was acquired on October 1, 2015 for $13.7 million net of acquired cash. Its purchase-price allocation remained preliminary; the acquisition added $5.1 million of goodwill at March 31 following allocation adjustments.
- Q3 effective tax rate increased to 28.7% from 24.9%, attributed to a higher share of income taxed in the U.S. and an increased reserve for an uncertain tax position. The nine-month rate was 26.3%, versus 26.6%.
- Risks identified include prolonged weakness in served markets, especially oil and gas and refrigeration; foreign-exchange movements; raw-material cost increases or supply shortages; execution and savings from restructuring and acquisitions; pension funding requirements; and possible tax costs or restrictions associated with repatriating foreign cash. Management said existing legal matters were not expected to have a material impact.
- Discontinued operations included a $0.2 million loss related to settlement of the Air Distribution Products Group note. A remaining lease obligation was $0.8 million, with $0.6 million recorded as a liability; management did not expect further charges.
Investor verification points
- Check subsequent results against management’s expectations for oil-and-gas, refrigeration, and aviation demand, and the anticipated Q4 improvement in Engineering Technologies.
- Assess whether higher gross margins and Food Service cost savings persist as sales and product mix change, while monitoring higher SG&A as a percentage of revenue.
- Review Northlake’s final purchase-price allocation, integration progress, and contribution to Electronics Products results.
- Track restructuring costs against the $3.7 million fiscal-year estimate and verify whether the initiatives deliver recurring savings.
- Monitor foreign-held cash accessibility, the uncertain tax-position reserve, pension contributions, and compliance with credit-facility covenants.