Standex International Corporation — Form 10-Q Summary
Business context and reporting period
Reports the three and six months ended December 31, 2019, the second quarter and first half of fiscal 2020. Standex operates in five reportable segments: Engraving, Electronics, Engineering Technologies, Hydraulics, and Food Service Equipment. Results are unaudited; interim performance may not indicate full-year results. Amounts below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $190.6 | $195.5 | $387.0 | $388.6 |
| Gross profit margin | 34.9% | 34.2% | 34.8% | 35.0% |
| Operating income | $17.8 | $20.2 | $36.3 | $42.9 |
| Continuing operations net income | $12.4 | $12.5 | $24.9 | $26.8 |
| Net income, including discontinued operations | $12.2 | $13.4 | $24.7 | $29.3 |
| Diluted EPS, total | $0.99 | $1.05 | $1.99 | $2.30 |
- Second-quarter sales fell 2.5%; organic sales declined 3.0%, with acquisitions contributing 0.8% and foreign exchange reducing sales 0.4%. First-half sales were down 0.4%, reflecting a 2.3% organic decline, acquisition growth of 2.6%, and an adverse currency impact of 0.7%.
- Quarterly operating income declined 11.7%; first-half operating income declined 15.3%. SG&A rose to 24.7% of sales for the quarter from 23.4%, and to 24.8% for the half from 23.5%.
- Interest expense declined to $1.9 million for the quarter and $4.1 million for the half, versus $3.1 million and $5.4 million, respectively. The quarterly effective tax rate was 19.0%, versus 23.6%, including a $0.8 million discrete benefit for certain Chinese operations.
- Six-month operating cash flow was $21.7 million consolidated, including $21.8 million from continuing operations and a $0.2 million outflow from discontinued operations. Capital expenditures were $10.7 million; cash increased to $98.9 million from $93.1 million at June 30, 2019.
- At December 31, cash was $98.9 million and funded debt was $188.0 million ($187.0 million net of issuance costs); net debt was $88.1 million. The company had $252.3 million of borrowing capacity under its $500 million revolving facility. Interest coverage was 8.24:1 and leverage was 1.22:1, compared with covenant limits of 2.75:1 minimum and 3.5:1 maximum, respectively.
- Current assets were $342.6 million and current liabilities $145.3 million. The company declared dividends of $0.42 per share for the first half, versus $0.38 a year earlier.
Material changes and segment trends
- Electronics: Sales declined 13.0% in the quarter and 11.2% year to date; operating income fell 25.1% and 31.5%, respectively. Management cited weaker demand across markets, particularly Asia, and inflation in platinum-group-metal and other costs.
- Engineering Technologies: Sales increased 12.4% in the quarter and 15.3% year to date; operating income rose 66.0% and 76.8%, respectively, on higher volume and efficiency improvements.
- Food Service Equipment: Sales were essentially flat, while operating income rose 30.5% in the quarter and 27.7% year to date, supported by productivity, labor reductions, and favorable mix.
- Engraving: Quarterly sales were down 0.6%, with operating income up 1.0%. First-half sales rose 3.0%, including acquisitions, but operating income fell 6.6% amid lower organic volume, added amortization, and currency effects.
- Hydraulics: Quarterly sales and operating income declined 6.6% and 5.8%; first-half sales rose 1.7% and operating income 23.7%. Customer inventory buildup and weaker dump-truck demand affected the quarter.
- Backlog realizable within one year declined 3.8% to $196.1 million year over year. Total backlog was $224.5 million, down from $242.8 million.
Outlook, commentary, risks, and unusual items
- Management expected fiscal Q3 sales and operating income to increase year over year in Engraving and Food Service Equipment, with modest sequential improvement in Electronics but lower sales year over year. Hydraulics was expected to decline in Q3 due to customer destocking and the expiration of tariff relief.
- Management expected approximately $1.0 million of additional restructuring expense during the remainder of FY2020. Full-year capital spending was forecast at $30–32 million; depreciation was estimated at $25–26 million and amortization at $8.5–9.5 million.
- The company announced a definitive agreement to acquire Torotel, subject to approval by holders of two-thirds of its outstanding shares. A shareholder vote was scheduled for February 12, 2020; management expected closing shortly thereafter.
- A June 2019 fire at a leased Refrigeration warehouse resulted in insurance proceeds. During the first half, the company reported $10.0 million of insurance recovery in investing cash flow and a separate $1.0 million operating gain; management also described $9.0 million of proceeds for inventory and personal-property losses.
- Risks highlighted include economic and end-market weakness, the coronavirus impact on China supply chains and demand, tariffs and commodity inflation, foreign-exchange exposure, execution of restructuring and acquisitions, customer delays, and pension funding. The company was under IRS audit for fiscal 2016 and 2017. Management said existing legal and environmental matters were not expected to materially affect results or financial position.
- Most cash was held abroad: $86.9 million of the $98.9 million balance. Repatriation may have adverse tax consequences or be subject to capital controls; the company expected to repatriate $35.0 million during FY2020.
Important facts for investors to verify
- Whether Electronics demand and margins stabilize, given its substantial sales and operating-income declines and management’s outlook.
- Whether reported backlog converts to sales, particularly in Engineering Technologies, and whether the overall backlog decline continues.
- Completion and integration of the proposed Torotel acquisition, including shareholder approval and financing implications.
- Progress on restructuring, expected savings, and the remaining FY2020 restructuring costs; also confirm capital-spending plans and cash conversion.
- The effects of China-related supply-chain and demand risks, tariffs, raw-material inflation, and foreign-cash repatriation on results and liquidity.
- The insurance proceeds and fire-related accounting, the IRS audit, and the continuing status of pension obligations and other contingencies.