Standex International Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the three months ended September 30, 2016; comparisons are with the three months ended September 30, 2015 unless otherwise noted. The interim results are not necessarily indicative of full-year results. Standex operates five reporting segments: Food Service Equipment, Engraving, Engineering Technologies, Electronics, and Hydraulics.
Key financial results
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $179.6 million | $198.4 million |
| Gross profit | $61.8 million | $68.6 million |
| Gross margin | 34.4% | 34.6% |
| Operating income | $19.8 million | $23.1 million |
| Income from continuing operations | $14.0 million | $16.1 million |
| Net income | $13.9 million | $16.0 million |
| Diluted EPS | $1.09 | $1.25 |
| Cash from operating activities | $1.0 million | $7.3 million |
| Capital expenditures | $7.1 million | $5.3 million |
Sales declined 9.5%, including a $1.4 million adverse foreign-exchange effect, $4.3 million from the Roll Plate and Machinery divestiture, and $2.7 million of acquisition-related sales; organic sales fell $15.8 million. Operating income decreased 14.4%. Management attributed pressure primarily to lower sales volume and $1.3 million of additional U.S. health-insurance costs. SG&A declined to $41.6 million from $43.9 million, but rose as a share of sales to 23.2% from 22.1%. The effective tax rate was 28.5%, versus 28.7%.
Liquidity, debt, and capital
At September 30, cash and cash equivalents were $121.3 million, of which $114.4 million was held by foreign subsidiaries. Long-term debt, net of issuance costs, was $104.2 million, up from $92.1 million at June 30; the company reported net cash of $17.0 million. It had $221.9 million of additional borrowing capacity under its credit facility, which expires in December 2019. The facility’s interest-coverage ratio was 26.77:1 against a 3.0:1 minimum, and its leverage ratio was 1.18:1 against a 3.5:1 maximum. The effective borrowing rate was 1.81%; swaps fixed the rate on $50 million of debt at a weighted average 1.43%.
Operating cash flow from continuing operations was $1.1 million, compared with $7.9 million a year earlier. Management cited working-capital increases as a significant cash use. Financing activities included $12.0 million of net borrowings, $1.8 million in dividends, and treasury-stock purchases. The quarterly dividend was $0.14 per share, versus $0.12. The company expects fiscal 2017 capital expenditures of $26–28 million, depreciation of $15–16 million, and amortization of $3–4 million.
Material changes and segment performance
- Food Service Equipment: Sales fell 13.6% to $92.7 million and operating income fell 32.3% to $9.5 million. Refrigeration sales were affected by customer consolidation and lower quick-service restaurant spending; cooking sales were affected by prior-year grocery-store rollouts that did not recur.
- Engraving: Sales fell 20.3% to $26.7 million and operating income fell 25.3% to $7.4 million. The decline included the divested business, weaker North American mold-texturizing demand, and prior-year spillover sales.
- Engineering Technologies: Sales were essentially flat at $18.7 million; operating income increased to $1.5 million from $0.7 million, reflecting margin and mix improvement and cost reductions. A large engine customer’s platform delays pushed out demand.
- Electronics: Sales increased 9.5% to $30.7 million and operating income increased 16.6% to $6.5 million, primarily reflecting Northlake acquisition sales and operating improvements. Organic sales growth was modest.
- Hydraulics: Sales decreased 1.1% to $10.8 million, while operating income increased 7.7% to $2.1 million, supported by cost containment and aftermarket sales.
Backlog realizable within one year was $159.9 million, down 4.1% year over year. Total backlog was $191.7 million, versus $198.5 million.
Outlook, risks, and unusual items
- Management expected near-term weakness in refrigeration sales to national chains, citing seasonality, the strong U.S. dollar, and customer capital-spending reductions; it expected to lap year-over-year declines in the third quarter. Engraving management anticipated sales and operating-income growth in the remainder of fiscal 2017. Electronics management expected net organic sales increases for the rest of the fiscal year; Hydraulics management expected continued softness in dump-truck and trailer demand.
- Fiscal 2017 restructuring expense was expected to be $7.0 million; $0.4 million was recorded in the quarter. Initiatives include plant optimization and personnel reductions. Management said a fully insured U.S. health plan effective January 2017 was expected to reduce cost volatility.
- On October 17, 2016, after quarter-end, Standex acquired Horizon Scientific for approximately $31 million in cash. Horizon will join Food Service Equipment and supplies laboratory refrigeration, freezers, and cryogenic equipment.
- Standex sold its U.S. Roll Plate and Machinery business during the quarter; the sale generated $0.7 million of proceeds. A $7.3 million non-cash loss to write the business down to net realizable value had been recorded in the prior fiscal year.
- Risks identified include economic and end-market weakness, foreign-exchange movements and limits or tax costs on repatriating foreign cash, commodity and component-cost increases, supply shortages, competition, and failure to achieve restructuring or acquisition benefits. The company reported no expectation that existing legal matters would materially affect its financial position, results, or cash flows. No customer represented more than 5% of sales or receivables.
- Management stated that disclosure controls were effective as of September 30, 2016; its evaluation excluded Northlake’s internal control over financial reporting during the permitted first-year period.
Important facts for investors to verify
- Whether working-capital demands and operating cash generation improve after the sharp year-over-year decline in quarterly operating cash flow.
- How much of the reported $121.3 million cash balance is practically available for U.S. needs, given that $114.4 million was held abroad and repatriation could incur tax or other restrictions.
- Whether Food Service Equipment and Engraving stabilize as management’s near-term expectations and comparisons progress, and whether backlog converts to sales as expected.
- Actual restructuring costs and savings versus the $7.0 million fiscal 2017 estimate, and whether the new health-insurance plan reduces volatility.
- Horizon’s purchase price, funding, integration, and contribution to results; and the company’s ability to maintain credit-covenant headroom as debt and acquisition spending change.