Standex International Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2018 (fiscal 2019). The interim financial statements are unaudited. Standex reports five continuing-operation segments: Food Service Equipment, Engraving, Engineering Technologies, Electronics, and Hydraulics.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Six months ended Dec. 31, 2018 | Prior-year comparison |
|---|---|---|---|
| Continuing-operations sales | $195.5 million | $388.6 million | Up 5.3% and 3.7%, respectively |
| Gross margin | 34.2% | 35.0% | 34.1% and 34.4%, respectively |
| Operating income | $20.2 million | $42.9 million | Up 18.6% and 20.0%, respectively |
| Continuing-operations net income | $12.5 million | $26.8 million | Prior year: loss of $4.3 million for the quarter; income of $8.2 million for six months |
| Total net income, including discontinued operations | $13.4 million | $29.3 million | Prior year: loss of $2.8 million for the quarter; income of $11.2 million for six months |
| Diluted EPS, continuing operations | $0.98 | $2.10 | Prior year: loss of $0.34 per share for the quarter; income of $0.64 for six months |
Quarterly sales growth included $9.5 million from acquisitions and $3.0 million of organic growth, partly offset by $2.6 million of unfavorable currency effects. Six-month growth included $12.7 million from acquisitions and $5.0 million of organic growth, offset by $4.0 million of unfavorable currency effects. The reported gross margin was nearly flat for the quarter and improved 0.6 percentage points for the half year, primarily due to business mix.
Continuing-operations operating cash flow was $13.9 million for the six months, versus $24.9 million a year earlier. Total operating cash flow, including discontinued operations, was $19.3 million versus $25.6 million. Investing activities used $106.3 million, including $16.2 million of capital expenditures and acquisition-related spending. Financing activities provided $97.9 million, including $122.0 million of net revolving-credit borrowings, while the company repurchased $19.1 million of stock and paid $4.8 million in dividends.
At December 31, cash was $118.2 million, including $107.1 million held by foreign subsidiaries. Long-term debt was $314.7 million net of issuance costs ($316.0 million funded debt); net debt was $196.5 million. The company had $176.6 million available to borrow under its new $500 million facility, after outstanding letters of credit. Current assets were $398.5 million and current liabilities were $144.3 million.
Material changes and business developments
- Standex acquired Tenibac-Graphion in August 2018 for $57.3 million and Agile Magnetics in September 2018 for $39.2 million. Purchase-price allocations remained preliminary. Acquisitions contributed to higher sales and increased goodwill and intangible assets.
- The company decided to divest its Cooking Solutions Group to focus on its remaining businesses and said it expected the sale to be completed before fiscal year-end. The group was classified as discontinued operations; its six-month sales were $48.4 million and net income was $2.5 million. Standex also sold its minority interest in a European oven manufacturer.
- Funded debt increased from $194.0 million at June 30, 2018, primarily reflecting acquisition financing. Standex entered a five-year amended credit agreement, increasing its borrowing limit from $400 million to $500 million, with a potential additional $250 million subject to conditions.
- Reported results reflect adoption of ASC 606 using the modified retrospective method; prior-year comparisons were not restated. The filing shows that ASC 606 reduced reported six-month sales by $5.9 million and net income by $0.2 million compared with amounts without adoption.
Outlook, commentary, and risks
- Management expects approximately $35–$36 million of fiscal 2019 capital spending and about $1.0 million of additional restructuring costs for the remainder of the year. The filing gives no consolidated revenue or earnings guidance.
- Management expects challenged Refrigeration conditions to continue, while new Scientific products may support growth. Engraving anticipated some third-quarter softness followed by improvement in the fourth quarter. Engineering Technologies expected sales volumes to increase in the third and fourth quarters; Hydraulics expected positive end-market demand.
- Backlog realizable within one year rose 16.7% to $203.9 million. Total backlog was $242.8 million. Management cautioned that backlog is not necessarily predictive of future sales and orders may be delayed or canceled.
- Interest expense rose to $3.1 million for the quarter from $1.8 million, reflecting higher borrowings and a higher effective borrowing rate. The rate was 3.7% at December 31. Interest coverage was 10.22:1 and the leverage ratio was 2.08:1, within the stated facility limits.
- Key risks include trade tariffs and U.S.–China trade tensions, raw-material and component cost inflation, foreign exchange, economic and end-market conditions, acquisition integration and synergies, customer delays, and execution of restructuring initiatives. The company said it was under IRS audit for fiscal 2016 and 2017 and did not expect existing legal matters to have a material impact.
- The prior-year quarter’s 129.0% effective tax rate included approximately $15 million of discrete U.S. tax-reform charges; the current-quarter rate was 23.6%. Standex recorded a $0.8 million tax benefit related to the transition tax and did not expect material adjustments when finalizing tax returns.
Most important facts for investors to verify
- Whether the Cooking Solutions Group sale closes on the expected timetable and at a value above its reported net assets.
- Whether acquired businesses deliver expected growth and returns, and how final purchase-price allocations affect goodwill, intangible assets, and future amortization.
- Whether operating cash generation improves as acquisitions, working capital, and debt service affect liquidity and leverage.
- Whether Refrigeration weakness, trade tensions, tariffs, and input-cost inflation affect segment sales and margins as management described.
- The final effects of ASC 606, the remaining tax-return adjustments, and the outcome of the IRS audit.