Business context and reporting period
Standex International Corporation’s Form 10-K covers the fiscal year ended June 30, 2017 (FY2017), not calendar-year 2016 or a standalone 2016 fourth quarter. Standex is a diversified manufacturer reporting five segments: Food Service Equipment, Engraving, Engineering Technologies, Electronics, and Hydraulics.
During FY2017, Standex acquired Japan-based OKI Sensor Device Corporation (renamed Standex Electronics Japan) and Horizon Scientific, and sold its U.S. Roll Plate and Machinery business. A further acquisition, Italy-based Piazza Rosa Group, closed in July 2017 and is disclosed as a subsequent event.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $755.3 million | $751.6 million |
| Gross profit / margin | $252.8 million / 33.5% | $252.3 million / 33.6% |
| Operating income / margin | $65.0 million / 8.6% | $70.3 million / 9.4% |
| Income from continuing operations | $46.6 million | $52.2 million |
| Net income | $46.5 million | $52.1 million |
| Diluted EPS | $3.65 | $4.08 |
| Operating cash flow from continuing operations | $64.0 million | $81.2 million |
| Cash and cash equivalents at year-end | $88.6 million | $122.0 million |
| Total debt / net debt | $192.0 million / $103.4 million | $92.1 million / net cash of $29.9 million |
FY2017 gross margin was nearly unchanged; the operating-income decline reflected acquisition-related expenses, higher restructuring costs, and organic sales weakness. Capital expenditures were reported as $25.8 million in MD&A; cash-flow statements show $26.4 million of capital-asset expenditures. Dividends declared rose to $0.62 per share from $0.54.
At year-end, $76.6 million of cash was held by foreign subsidiaries. Standex reported $193.4 million of additional borrowing availability under its credit facility, based on current EBITDA. Its interest coverage ratio was 22.37:1 against a 3.0:1 minimum, and leverage was 1.79:1 against a 3.5:1 maximum. The borrowing rate was 2.41%; $100 million of interest-rate swaps fixed the LIBOR component at a weighted average 1.60%.
Material changes versus the prior year
- Sales increased 0.5%, but included $38.5 million of acquisition contribution; organic sales declined $11.2 million, divestitures reduced sales by $17.4 million, and foreign exchange reduced sales by $6.2 million.
- Operating income fell 7.6% and diluted EPS fell from $4.08 to $3.65. FY2017 included $7.8 million of acquisition-related expense and $5.8 million of restructuring costs, versus no acquisition-related expense and $4.2 million of restructuring costs in FY2016.
- Operating cash flow declined $17.2 million, primarily due to higher accounts receivable and inventory and lower continuing-operations income. Investing cash outflow increased to $179.1 million, including $153.8 million for acquisitions.
- Debt increased substantially to fund acquisition activity; year-end shifted from net cash to net debt.
- Backlog realizable within one year increased 18.8% to $193.5 million. The filing notes that acquisition effects contributed to reported backlog gains in Food Service Equipment and Electronics.
Segment results were mixed: Electronics sales rose 15.5% and operating income rose 31.1%; Engineering Technologies sales rose 10.1% and operating income rose 17.0%. Food Service Equipment operating income declined 16.7%, Engraving operating income declined 13.5%, and Hydraulics sales declined 8.6%.
Outlook, commentary, risks and unusual items
- Management forecast FY2018 capital spending of $27–29 million and depreciation and amortization of $18–19 million and $8–9 million, respectively. It gave no consolidated revenue or earnings guidance in the provided filing text.
- Management expected continued Electronics momentum and synergies from Standex Electronics Japan; it also anticipated Mold-Tech growth, including recovery of delayed North American automotive launches, and continued strength in Engineering Technologies aviation demand. Food Service Equipment planned a focus on differentiated products and profitability, including possible plant realignment.
- Management anticipated further restructuring charges in FY2018, subject to market conditions and cost-reduction actions. Savings and timing were not quantified clearly in the filing text.
- Key disclosed risks include economic and cyclical-market weakness, competition and pricing pressure, raw-material cost increases or supply interruptions, foreign exchange and restrictions on cash repatriation, execution and integration of acquisitions, realizing restructuring savings, customer delays, pension funding requirements, litigation and environmental exposure, and cybersecurity disruption.
- Of $88.6 million in cash, $76.6 million was held abroad; repatriation could create adverse tax consequences or be subject to capital controls. The company intended to reinvest foreign earnings indefinitely.
- FY2017 included $5.8 million in restructuring costs, $7.8 million in acquisition-related costs, and a $0.7 million gain on sale of real estate. FY2016 included a $7.3 million non-cash loss to write down the Roll Plate and Machinery business before its sale.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The acquired Horizon Scientific and Standex Electronics Japan entities, representing 15.1% of assets and 4.7% of revenue, were excluded from the internal-control evaluation.
Important facts for investors to verify
- How much of future growth and backlog conversion is organic, versus attributable to acquisitions, and whether acquired businesses deliver expected synergies.
- Whether Food Service Equipment can recover margins after FY2017 declines and planned operational changes.
- Working-capital trends, especially receivables and inventory, given the decline in operating cash flow.
- Debt reduction capacity, covenant headroom, interest-rate exposure, and the availability and tax implications of foreign-held cash.
- The realized costs and savings from restructuring, acquisition integration, and planned FY2018 capital investment.
- Potential pension funding needs, contingent acquisition payments, and other material legal, environmental, or tax contingencies.