Standex International Corporation — Form 10-Q
Reporting period: Three months ended September 30, 2018 (fiscal 2019 first quarter). Unaudited results; amounts below are in millions except per-share data. The company reports five continuing segments. Its Cooking Solutions Group was classified as discontinued operations after management decided to divest it.
Financial results
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Continuing-operations sales | $193.1 | $189.1 | +2.1% |
| Gross profit / margin | $69.3 / 35.9% | $65.7 / 34.7% | Margin +1.2 percentage points |
| Operating income | $22.6 | $18.7 | +21.4% |
| Continuing-operations income | $14.4 | $12.7 | +13.1% |
| Net income, including discontinued operations | $15.9 | $14.0 | +13.3% |
| Diluted EPS, total | $1.24 | $1.09 | Up $0.15 |
| Interest expense | $2.2 | $1.7 | Higher borrowings and effective rates |
- Sales growth reflected $2.1 million of organic growth and $3.3 million from acquisitions, partly offset by a $1.4 million foreign-exchange impact. Higher-margin mix supported gross margin; lower restructuring costs also contributed to operating-income growth.
- Continuing operating cash flow was a use of $2.6 million, versus a use of $3.3 million a year earlier. Working-capital increases used $20.0 million. Including discontinued operations, total operating cash flow was positive $1.0 million.
- Investing cash outflow was $102.2 million, primarily for capital expenditures of $7.5 million and the Agile Magnetics and Tenibac acquisitions. Financing cash inflow was $103.0 million, including $105.5 million of net revolving-credit borrowings and $2.3 million of dividends paid. Cash ended at $109.3 million, down $0.3 million from June 30.
- At September 30, total funded debt was $299.5 million (reported long-term debt, net of issuance costs, was $299.4 million); cash was $109.3 million and net debt was $190.2 million. The $400 million credit facility matures in December 2019. The company reported $93.1 million of remaining borrowing capacity, an interest coverage ratio of 11.75x against a 3.0x minimum, and leverage of 2.35x against a 3.5x maximum.
- Current assets were $396.8 million and current liabilities $144.8 million, both including discontinued operations. Cash held outside the U.S. was $98.4 million; the company expected to repatriate about $50 million during fiscal 2019, subject to operating and tax needs.
Material changes and business developments
- Agile Magnetics was acquired for approximately $39.2 million net of cash acquired and added to Electronics. Tenibac-Graphion was acquired for approximately $56.7 million net of cash acquired and added to Engraving. Purchase-price allocations were preliminary at quarter-end; recorded goodwill was $20.1 million and $32.9 million, respectively.
- Sales increased in Engraving, Engineering Technologies, Electronics, and Hydraulics, but declined in Food Service Equipment. Electronics sales rose 9.9% and operating income rose 24.4%; Food Service Equipment sales fell 7.1% and operating income fell 19.9%.
- Cooking Solutions Group sales were $24.4 million and net income was $1.5 million, compared with sales of $25.2 million and net income of about $1.3 million in the prior-year quarter. Management expected to complete the divestiture before fiscal year-end and stated that fair value of the group’s net assets exceeded carrying value.
- Backlog under one year increased 13.8% year over year to $207.0 million. Total backlog was $250.4 million.
- Foreign-currency translation drove a $5.2 million after-tax other-comprehensive loss; comprehensive income was $10.6 million versus $18.9 million a year earlier.
Outlook, risks, and unusual items
- No consolidated full-year sales or earnings guidance is stated. Management expected fiscal 2019 capital spending of $35–$36 million and restructuring expense of approximately $1.5 million for the remainder of the year. Expected depreciation was $21–$22 million and amortization $8.5–$9.5 million.
- Engineering Technologies sales were expected to be consistent in Q2, with a meaningful increase in Q3 and Q4; space-market sales were also expected to grow during fiscal 2019. Food Service Equipment management anticipated continued subdued spending by drug-retail, dollar-store, and quick-service-restaurant customers. Electronics management cited possible customer inventory corrections; Hydraulics management noted potential 2019 market pressure from tariffs, material inflation, higher interest rates, and labor shortages.
- Key risks include tariffs and raw-material costs, especially steel and refrigeration components; the ability to pass cost increases to customers; demand across served end markets; acquisition integration and realization of anticipated benefits; currency fluctuations; customer delays or cancellations; and restructuring execution. Hydraulics margins were pressured by China tariffs and temporary U.S. machine downtime.
- The continuing-operations effective tax rate was 28.9%, up from 25.1%. Management cited foreign withholding taxes, executive-compensation limits, and U.S. taxation of certain foreign income, partly offset by the federal rate reduction. Accounting for certain Tax Cuts and Jobs Act effects remained provisional.
- ASC 606 was adopted July 1, 2018 using the modified retrospective method. Adoption reduced opening retained earnings by $1.0 million. For the quarter, it reduced reported sales by $3.0 million and net income by $0.4 million versus the amounts shown on the filing’s reconciliation without ASC 606; the prior-year comparison remains under ASC 605.
- The company planned to begin lender discussions during Q2 for a replacement five-year credit facility. It also disclosed that adoption of the new lease standard was expected to have a material financial-statement impact, not yet quantified. Management said existing legal matters were not expected to have a material impact.
Important facts for investors to verify
- Progress, timing, and final proceeds of the planned Cooking Solutions Group divestiture, including any changes to the stated fair-value conclusion.
- Final purchase accounting and integration performance for Agile Magnetics and Tenibac-Graphion, and whether expected acquisition benefits materialize.
- Cash conversion and working-capital trends, given negative continuing operating cash flow despite higher reported earnings.
- Credit-facility refinancing progress, borrowing capacity, covenant compliance, and exposure to variable interest rates.
- Whether tariff and input-cost increases can be passed through without further margin pressure, and whether demand or customer inventory corrections affect segment outlooks.
- Final tax-reform accounting, future effects of ASC 606, and the quantified balance-sheet impact of the forthcoming lease standard.