Standex International Corporation — Form 10-Q Summary
Reporting period: Three months ended September 30, 2015, the first quarter of fiscal 2016. Comparisons are with the three months ended September 30, 2014 unless noted. Amounts are in U.S. dollars.
Business context and key financial results
Standex operates five reportable groups: Food Service Equipment, Engraving, Engineering Technologies, Electronics Products, and Hydraulics Products. It describes its strategy as growing through organic initiatives and acquisitions, while improving operations and returning capital to shareholders.
| Metric | Q1 FY2016 | Prior period / change |
|---|---|---|
| Net sales | $198.4 million | $202.0 million; down 1.8% |
| Gross profit / margin | $68.6 million / 34.6% | $66.1 million / 32.7% |
| Income from operations | $23.1 million | $21.2 million; up 8.8% |
| Continuing-operations income | $16.1 million | $14.9 million |
| Net income | $16.0 million | $14.6 million |
| Diluted EPS | $1.25 total; $1.26 continuing operations | $1.13 total; $1.16 continuing operations |
| Cash dividends per share | $0.12 | $0.10 |
| Continuing-operations operating cash flow | $7.9 million | Used $11.0 million |
| Capital expenditures | $5.3 million | $7.2 million |
Sales declined by $3.6 million: unfavorable exchange rates reduced sales by $6.1 million, acquisitions added $4.1 million, and organic sales fell $1.6 million. Higher gross margin reflected favorable mix, lower operating costs, and improved efficiencies; operating income also benefited from Food Service Equipment and Engraving performance.
Segments and material changes
- Food Service Equipment: Sales fell 5.8% to $107.2 million, while operating income rose 20.1% to $14.0 million and margin improved to 13.1% from 10.3%. Refrigeration sales to national chains were weak; cost savings, pricing, and product rationalization supported profitability.
- Engraving: Sales rose 19.3% to $33.5 million and operating income rose 42.7% to $9.9 million. Organic growth was strong, partly offset by currency effects.
- Engineering Technologies: Sales fell 7.0% to $18.7 million and operating income fell 69.6% to $0.7 million. Lower oil-and-gas demand, relocation costs, and severance weighed on results; acquisition sales partly offset organic declines.
- Electronics Products: Sales declined 5.0% to $28.0 million, largely due to foreign exchange; operating income was nearly flat at $5.6 million.
- Hydraulics Products: Sales rose 4.3% to $11.0 million and operating income rose 14.8% to $2.0 million.
Backlog realizable within one year was $166.8 million, down 1.1% from $168.6 million a year earlier. Foreign-currency translation losses contributed to other comprehensive loss of $5.3 million for the quarter.
Cash, debt, liquidity, and capital
- Cash and cash equivalents were $95.3 million at September 30, 2015, versus $96.1 million at June 30. Of the current balance, $89.8 million was held by foreign subsidiaries; repatriation could have tax or capital-control consequences.
- Long-term debt, net of issuance costs, was $104.3 million, versus $101.8 million at June 30. Management reported net debt of $9.0 million, compared with $5.6 million at June 30.
- The $400 million revolving credit facility expires in December 2019. The company reported $247.6 million of borrowing capacity, after accounting for facility usage and letters of credit. It reported covenant ratios of 27.20:1 interest coverage against a 3.0:1 minimum, and 1.10:1 leverage against a 3.5:1 maximum.
- Working-capital changes were a significant cash-flow factor: net changes in operating assets and liabilities used $14.7 million, compared with $29.1 million used in the prior-year quarter. Total cash decreased $0.8 million during the quarter.
Outlook, commentary, risks, and unusual items
- Management expected no near-term recovery in oil and gas and was shifting Engineering Technologies’ focus toward aviation. It anticipated weak near-term refrigeration sales to national chains; Engraving expected second-quarter year-over-year sales growth, Electronics expected higher second-half volume from new products and restocking, and Hydraulics expected continued growth in certain North American markets. These are segment comments, not consolidated earnings guidance.
- Management estimated fiscal 2016 capital expenditures of $26–$28 million and restructuring expense of $2.9 million, of which $1.5 million had been incurred in the quarter. The quarter’s restructuring charge included $1.2 million of noncash facility impairment expense.
- The effective tax rate was 28.7%, versus 28.4%. Management attributed the increase primarily to the scheduled expiration of a beneficial China tax rate at December 31, 2015 and said it intended to apply for renewal when permitted.
- On October 1, 2015, after quarter-end, Standex acquired Northlake Engineering for approximately $13.9 million in cash. In October, it also received an advance payment of $2.8 million on the ADP buyer note, released related property mortgages, and recorded a $0.2 million discontinued-operations loss related to the transaction.
- Discontinued operations recorded a $0.2 million loss, compared with a $0.4 million loss in the prior-year quarter. Standex said existing legal matters were not expected to materially affect its financial position, results, or cash flows.
- Key disclosed risks include foreign-exchange movements, weak oil-and-gas and other end markets, raw-material and component costs, supply availability, customer acceptance of price increases, and the ability to realize restructuring and acquisition benefits. Management said a hypothetical 10% currency move would not materially affect operations, financial position, or cash flows, but translation movements can affect equity.
Important facts for investors to verify
- Whether improved gross margin and operating income can persist despite lower sales and ongoing foreign-exchange pressure.
- Engineering Technologies’ exposure to continued oil-and-gas weakness and the effectiveness of its aviation repositioning.
- Cash conversion and working-capital trends, including the concentration of cash held by foreign subsidiaries.
- Progress and actual costs of restructuring, including whether expected savings offset charges and operating disruption.
- Northlake’s post-quarter acquisition price, integration, and contribution to Electronics Products results.
- Renewal of the China tax benefit and the potential effect on the effective tax rate.