Standex International Corporation — Form 10-Q Summary
Period: Fiscal third quarter and nine months ended March 31, 2020; filed May 8, 2020. The request labels the period “2019 Q3,” but this filing covers fiscal 2020 Q3. Unless stated otherwise, financial amounts below are in millions of dollars. The interim statements are unaudited.
Business context
Standex reported five continuing reportable segments: Electronics, Engraving, Engineering Technologies, Hydraulics, and Food Service Equipment. In the quarter, the company classified its Refrigerated Solutions Group (Master-Bilt and NorLake) as discontinued operations and agreed to sell it. The $10.6 million cash sale, subject to adjustments and fees, closed April 16, 2020, after quarter-end. Prior periods were reclassified to reflect discontinued operations.
Financial performance and liquidity
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Continuing net sales, 2020 / 2019 | $155.5 / $160.5 | $465.2 / $471.2 |
| Gross margin, 2020 / 2019 | 33.8% / 34.3% | 36.2% / 37.0% |
| Operating income, 2020 / 2019 | $16.9 / $16.8 | $50.4 / $60.1 |
| Continuing net income, 2020 / 2019 | $12.1 / $8.7 | $34.9 / $35.7 |
| Total net income (loss), 2020 / 2019 | $(6.3) / $26.3 | $18.4 / $55.5 |
| Diluted EPS from continuing operations, 2020 / 2019 | $0.97 / $0.69 | $2.81 / $2.81 |
- Quarterly continuing sales fell 3.1%; management attributed about $7.4 million of the quarter’s sales reduction to COVID-19. For the nine months, sales declined 1.3%, reflecting organic declines and unfavorable currency effects, partly offset by acquisitions.
- Quarterly operating income was nearly flat as cost containment offset lower sales; nine-month operating income fell 16.1%, mainly due to lower organic volume, higher input costs, and increased restructuring charges.
- Quarterly continuing net income improved year over year, including a lower effective tax rate and lower interest expense. Nine-month continuing net income was slightly lower. Total net income was substantially affected by discontinued operations, including a $20.0 million asset impairment charge in Q3 2020; Q3 2019 included a gain on the Cooking Solutions Group sale.
- For the nine months, cash from operating activities was $25.9 million overall, including $29.5 million from continuing operations. Investing activities used $4.9 million overall; financing activities used $2.0 million. Cash increased $16.2 million to $109.3 million.
- At March 31, cash was $109.3 million and funded debt was $213.0 million (net debt: $102.8 million). The company reported $217.6 million of remaining borrowing capacity. Its credit-facility leverage ratio was 1.49:1 and interest coverage ratio was 9.53:1, versus maximum leverage of 3.5:1 and minimum interest coverage of 2.75:1.
- Nine-month capital expenditures were $15.8 million. Fiscal 2020 capital spending was expected to be $19–21 million. Dividends were $0.22 per share for Q3 and $0.64 per share for nine months.
Material changes and segment trends
- Electronics: nine-month sales declined 9.0% and operating income declined 26.7%, reflecting lower organic demand and inflationary costs.
- Engraving: nine-month sales rose 0.5%, including acquired sales, while operating income declined 5.1%; management cited project timing, pandemic-related delays, and restructuring.
- Engineering Technologies: nine-month sales rose 8.4% and operating income rose 48.9%, supported by volume, pricing, and manufacturing efficiencies. Management expected Q4 sales to decline sequentially, particularly in aviation, with defense volumes expected to be steadier.
- Hydraulics: nine-month sales fell 2.9%, while operating income rose 16.4%, helped by lower manufacturing costs. Management anticipated Q4 pressure from customer production declines, excess inventories, and tariffs.
- Food Service Equipment: nine-month continuing sales increased 2.5% and operating income increased 11.1%. Management expected Q4 declines in Display Merchandising and Pumps amid restaurant closures, and some near-term impact to Scientific sales as customers prioritized protective equipment over capital purchases.
Outlook, risks, and unusual items
- Management said the pandemic’s future effects were uncertain. Most sites remained operational, but the company had experienced customer-related revenue losses and shutdowns, including in China, Italy, and Mexico. China facilities had returned to normal operations by the filing date.
- The company implemented spending reductions, furloughs, position eliminations, and footprint actions; it expected approximately $1.5 million of additional restructuring costs for the rest of fiscal 2020. Engraving actions were expected to produce about $2.0 million in annual savings beginning in Q4.
- Management reported sufficient global liquidity and financing access. It entered into new interest-rate swaps and extended an existing swap, estimating an approximately 50-basis-point reduction in its effective interest rate, or about $1 million of annual savings going forward.
- The CARES Act allowed deferral of certain 2020 pension contributions until 2021. The filing describes a $1.3 million non-taxable life-insurance gain in fiscal 2020 and a $0.7 million discrete tax benefit in Q3. The IRS audit issues for fiscal 2016 and 2017 were settled, but formal closure was delayed by COVID-19.
- COVID-19, economic weakness in served markets, supply-chain disruption, raw-material and tariff costs, foreign exchange, pension funding, acquisition integration, and execution of restructuring and divestiture plans were identified risks. Management reported no material expected impact from existing legal matters and stated disclosure controls were effective.
- The filing provides segment-specific expectations but no consolidated earnings or revenue guidance.
Important facts for investors to verify
- Confirm the Q3 fiscal 2020 reporting period and review the effects of the retroactive discontinued-operations reclassification.
- Verify the final proceeds, adjustments, and any post-closing effects of the April 16 RSG sale, and reconcile the $20.0 million impairment with the related discontinued-operation results.
- Track pandemic-related demand, backlog, Q4 segment trends, and whether restructuring actions deliver the projected savings and costs.
- Monitor cash conversion, working capital, foreign cash availability, borrowing capacity, covenant headroom, and the impact of pension-contribution deferrals.
- Assess whether continuing-segment performance and margins can recover after the nine-month decline in operating income, particularly in Electronics.