Standex International Corporation — Form 10-Q
Business context and reporting period: This unaudited filing covers the quarter and six months ended December 31, 2016, the second quarter and first half of fiscal 2017. Standex reports five segments: Food Service Equipment, Engraving, Engineering Technologies, Electronics, and Hydraulics. The company describes its strategy as growing through organic initiatives and acquisitions, while improving operations and divesting businesses that do not meet its return expectations. Interim results are not necessarily indicative of full-year results.
Key financial metrics
Amounts are in millions except per-share data.
| Metric | Quarter ended Dec. 31, 2016 | Quarter ended Dec. 31, 2015 | Six months ended Dec. 31, 2016 | Six months ended Dec. 31, 2015 |
|---|---|---|---|---|
| Net sales | $173.9 | $181.9 | $353.5 | $380.3 |
| Gross profit margin | 32.7% | 32.0% | 33.6% | 33.3% |
| Income from operations | $13.2 | $16.1 | $33.0 | $39.2 |
| Net income | $10.3 | $12.4 | $24.2 | $28.4 |
| Diluted EPS | $0.80 | $0.96 | $1.90 | $2.22 |
| Operating cash flow, continuing operations | Not provided separately | Not provided separately | $20.3 | $30.9 |
- Quarterly sales fell 4.4%; operating income declined 17.6%. For the first half, sales fell 7.1% and operating income declined 15.7%. Gross margin improved in both comparisons.
- First-half total operating cash flow, including discontinued operations, was $20.0 million, versus $30.2 million a year earlier. Investing used $37.0 million, including $24.7 million for Horizon and $13.0 million for capital expenditures. Financing provided $22.5 million, including $32.0 million of net revolving-credit borrowings; dividends paid were $3.8 million.
- At December 31, cash was $121.3 million, including $112.4 million held by foreign subsidiaries. Long-term debt was $124.3 million net of issuance costs; net debt was $3.0 million, compared with net cash of $29.9 million at June 30, 2016. The company reported $213.1 million of additional borrowing ability under its facility and compliance with its covenants: a 26.80:1 interest coverage ratio against a 3.0:1 minimum and a 1.33:1 leverage ratio against a 3.5:1 maximum.
- The credit facility has a $400 million borrowing limit, expires in December 2019, and may be increased by up to $100 million subject to conditions. Interest-rate swaps fixed the base rate on $50 million of debt at a weighted average 1.43%.
Material changes and segment performance
- Management attributed the quarterly sales decline to organic sales decreases and the divestiture of U.S. Roll Plate and Machinery (RPM), partly offset by Horizon acquisition sales. For the first half, the company cited organic declines, RPM, and currency effects, partly offset by Horizon and Northlake acquisition contributions.
- Quarterly segment sales and operating income: Food Service Equipment $92.2 million and $7.2 million; Engraving $25.9 million and $6.5 million; Engineering Technologies $18.5 million and $1.9 million; Electronics $28.5 million and $6.1 million; Hydraulics $8.7 million and $1.0 million.
- Electronics was the strongest earnings contributor, with quarterly operating income up 34.6%, attributed to favorable mix, cost improvements, and manufacturing consolidation. Food Service Equipment operating income rose 7.5% despite organic sales weakness; Horizon added $7.4 million of quarterly sales, while purchase accounting expense was $1.1 million.
- Engraving sales and operating income fell 19.0% and 12.5%, respectively, with the RPM divestiture accounting for much of the sales decline. Engineering Technologies sales fell 10.4% in the quarter amid customer delays, while first-half operating income rose 21.8% on mix and efficiency gains. Hydraulics sales fell 12.7% in the quarter, reflecting weaker North American dump-truck and trailer demand.
- Backlog realizable within one year was $164.1 million, up 3.6% year over year; total backlog was $192.7 million, down from $197.6 million.
Outlook, risks, and unusual items
- Management anticipated improvement in national-chain Food Service sales in the second half, possible benefits from a new walk-in panel subject to testing and regulatory approval, and stronger Hydraulics demand as construction and infrastructure activity developed. Engraving management expected delayed automotive launches and newer technologies to support second-half sales; Engineering Technologies focused on delivery of space and aviation development programs. These are expectations, not assured outcomes.
- Fiscal 2017 restructuring expense was expected to total $6.7 million; $2.1 million had been incurred in the first half. Initiatives included workforce reductions, facility consolidation, and capacity realignment.
- Horizon Scientific was acquired in October for $24.7 million net of cash acquired. Purchase-price allocation remained preliminary; up to $8.4 million of additional consideration is contingent on the seller’s continued employment. The company recorded $1.5 million of acquisition-related costs in the quarter and first half.
- On February 2, 2017, Standex announced a definitive agreement to acquire Oki Sensor Device Corporation, subject to regulatory approvals, with closing anticipated around March 31, 2017. Oki reported approximately $56 million of revenue for its fiscal year ended March 31, 2016, including approximately $12.9 million of sales to Standex Electronics.
- Key risks identified include economic and end-market weakness, customer delays, foreign exchange movements, raw-material and component cost increases or shortages, execution of restructuring and acquisitions, product acceptance and regulatory requirements, and pension funding changes. Foreign-currency translation contributed to a first-half comprehensive loss of $8.7 million, despite net income of $24.2 million.
- Management said foreign cash is generally available for ordinary operations but repatriation could have adverse tax consequences or be subject to capital controls; it intends to reinvest foreign earnings overseas. A 10% currency movement was not expected to materially affect operations, financial position, or cash flows, though translation can affect equity.
- The company said existing legal matters were not expected to have a material financial impact. It reported effective disclosure controls as of December 31, 2016; the evaluation excluded Horizon’s internal control over financial reporting during the first year after acquisition.
Important facts for investors to verify
- Whether organic sales and operating performance stabilize in the segments facing lower demand, particularly Food Service Equipment, Engraving, and Hydraulics.
- Horizon’s final purchase-price allocation, integration performance, and any contingent payments; also the regulatory status, financing, and expected contribution of the proposed Oki acquisition.
- Whether the $6.7 million fiscal-year restructuring estimate is achieved and whether the actions deliver lasting savings.
- The availability and tax implications of foreign-held cash, alongside debt levels, facility capacity, and covenant headroom as acquisition spending continues.
- Actual working-capital cash generation, backlog conversion, and pension contributions compared with management’s stated expectations.