Standex International Corporation — Form 10-Q
Reporting period: Quarter and six months ended December 31, 2017 (fiscal 2018 second quarter and first half). Comparative periods ended December 31, 2016. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context and performance
Standex is a diversified manufacturer and service provider reporting in five segments: Food Service Equipment, Engraving, Engineering Technologies, Electronics, and Hydraulics. The company continued its strategy of organic growth, acquisitions, and operational improvement. Results include the Piazza Rosa acquisition in Engraving and a full comparative-period contribution from Standex Electronics Japan, acquired in fiscal 2017.
Key financial metrics
| Metric | Three months ended Dec. 31, 2017 | Three months ended Dec. 31, 2016 | Six months ended Dec. 31, 2017 | Six months ended Dec. 31, 2016 |
|---|---|---|---|---|
| Net sales | $209.8 | $173.9 | $424.1 | $353.5 |
| Gross margin | 34.1% | 32.7% | 34.4% | 33.6% |
| Operating income | $18.2 | $13.2 | $38.3 | $33.0 |
| Income from continuing operations | $(2.8) | $10.4 | $11.2 | $24.8 |
| Net income (loss) | $(2.8) | $10.4 | $11.2 | $24.7 |
| Diluted EPS | $(0.22) | $0.82 | $0.88 | $1.94 |
Quarterly sales increased 20.6%; management attributed the $35.9 million increase to $15.3 million of organic growth, $17.3 million from acquisitions, and $3.3 million from currency. First-half sales increased 20.0%, including $25.7 million of organic growth, $40.2 million from acquisitions, and $4.8 million from currency. Gross-margin improvement was attributed mainly to sales mix.
For the six months, continuing operating cash flow was $25.7 million, versus $20.8 million. Investing activities used $22.8 million, including $15.7 million of capital expenditures and $10.4 million for acquisitions; financing activities provided $15.6 million. Cash increased to $109.4 million from $88.6 million at June 30, 2017. Long-term debt was $216.2 million net of issuance costs ($216.5 million funded debt), up from $192.0 million. Net debt was $106.8 million. The company reported $172.0 million of remaining borrowing capacity and compliance with its credit covenants.
Material changes and segment results
- Food Service Equipment: Quarterly sales rose 5.4% and operating income 8.8%. Refrigeration and Specialty Solutions grew; Cooking Solutions declined as the company exited lower-margin products. Higher rebates weighed on current-quarter profitability.
- Engraving: Quarterly sales rose 31.0%, aided by organic growth, Piazza Rosa, and currency; operating income increased 4.4%. Margin was lower, reflecting growth initiatives and acquisition integration costs.
- Engineering Technologies: Quarterly sales rose 18.2%, but operating income fell 18.6%. Management cited development-program costs, legacy aviation pricing pressure, and manufacturing inefficiencies.
- Electronics: Quarterly sales rose 61.5% and operating income 67.8%, driven by Standex Electronics Japan, organic growth, and operating improvements.
- Hydraulics: Quarterly sales rose 22.2% and operating income 52.8%, supported by refuse-market share gains, stronger North American dump demand, and factory efficiency gains.
Backlog under one year increased 11.1% to $182.3 million year over year; total backlog was $224.3 million. Acquisition-related and restructuring costs were $0.7 million and $2.0 million, respectively, for the quarter. First-half restructuring costs were $5.0 million.
Outlook, commentary, and risks
- Management expected positive demand in Hydraulics’ construction and infrastructure end markets, continued Electronics growth from new business opportunities, and further Engraving revenue opportunities from new technologies and Piazza Rosa’s finishing capabilities.
- Management expected Food Service Equipment profitability to improve as low-margin buying-group contracts ended and restructuring progressed. Engineering Technologies’ second-half focus was delivery on space development programs and long-term aviation agreements.
- Restructuring expense was expected to be $4.0–$5.0 million for the remainder of fiscal 2018. Fiscal 2018 capital spending was expected to be $31–$32 million.
- The Tax Cuts and Jobs Act produced provisional, discrete tax charges of approximately $15 million: $13.8 million for deemed repatriation of foreign earnings and $1.2 million for deferred-tax remeasurement. These charges drove the quarterly loss and the 116.7% effective tax rate; management said the tax accounting remained incomplete and estimates could change. The transition tax may be paid over eight years.
- At December 31, $94.5 million of the $109.4 million cash balance was held by foreign subsidiaries; repatriation from some subsidiaries could have tax consequences or be subject to capital controls.
- Risks identified include raw-material price changes and supply availability, foreign-exchange and variable-rate debt exposure, execution of acquisitions and restructuring, end-market weakness, and the ability to achieve expected cost savings and synergies. The company had $75 million of debt covered by interest-rate swaps at a weighted-average fixed rate of 1.74%.
- The company did not believe existing legal matters would materially affect its financial position, results, or cash flows. It reported disclosure controls effective and no material change in internal control over financial reporting; evaluation excluded acquired businesses during their first year.
Important facts for investors to verify
- Whether the provisional tax-reform estimates change in later filings, including the final transition-tax calculation and deferred-tax remeasurement.
- How much of sales and earnings growth is organic versus acquisition-related, and whether acquisition integration and deferred compensation affect margins.
- Whether Engineering Technologies’ margin pressures and Food Service Equipment’s expected profitability improvement develop as management anticipated.
- Cash availability and repatriation constraints, debt levels, interest costs, borrowing capacity, and compliance with credit-facility covenants.
- Progress against the stated restructuring and capital-spending expectations, and whether Topic 606 adoption and the expected material lease-accounting impact are quantified in subsequent reporting.