Standex International Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2019. The request metadata says “2018 Q3,” but the filing is for fiscal 2019 Q3.
Business context and financial performance
Standex operates five continuing segments: Food Service Equipment, Engraving, Engineering Technologies, Electronics and Hydraulics. During the quarter, it completed the sale of its Cooking Solutions Group and classified that business as discontinued operations.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Continuing net sales | $193.8 million, up 0.8% from $192.1 million | $582.4 million, up 2.7% from $567.0 million |
| Gross margin | 31.9%, versus 34.4% | 34.0%, versus 34.4% |
| Income from operations | $15.0 million, versus $18.8 million | $57.9 million, versus $54.5 million |
| Continuing net income | $7.3 million, versus $11.8 million | $34.1 million, versus $20.1 million |
| Net income, including discontinued operations | $26.3 million, versus $12.8 million | $55.5 million, versus $24.0 million |
| Diluted EPS, continuing operations | $0.58, versus $0.92 | $2.69, versus $1.57 |
Quarterly sales growth included $7.7 million from acquisitions; organic sales declined $1.7 million and foreign exchange reduced sales by $4.3 million. For the nine-month period, acquisitions added $20.4 million, organic sales added $3.3 million and foreign exchange reduced sales by $8.3 million. Quarterly operating income fell 20%, principally because of lower gross profit, organic sales softness, material costs and wage inflation.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $25.6 million, including $25.0 million from continuing operations, compared with $28.7 million and $26.9 million, respectively, in the prior year.
- Investing cash outflow was $109.2 million, including $96.8 million for acquisitions and $17.8 million of capital expenditures. Financing provided $72.5 million, including $99.0 million of net revolving-credit borrowings; the company also paid $7.3 million in dividends and repurchased $19.2 million of shares.
- At March 31, cash was $96.0 million and funded debt was $293.0 million; net debt was $195.7 million. The $500 million credit facility had $175.9 million of borrowing capacity available, after letters of credit, based on the company’s then-current trailing EBITDA.
- Credit-agreement leverage and interest-coverage ratios were 2.02:1 and 8.22:1, respectively, versus maximum leverage of 3.5:1 and minimum interest coverage of 2.75:1.
- The company received $106.9 million of sale proceeds on April 1, after quarter-end, and said substantially all were used to repay facility borrowings. Cash included $78.5 million held by foreign subsidiaries.
Material changes and unusual items
- The Cooking Solutions Group sale to Middleby closed March 31 for a stated cash purchase price of $105 million, subject to adjustments and transaction fees. The sale generated a $20.5 million pretax gain, offset by $4.4 million of transaction fees; a tax benefit contributed to discontinued-operations income of $19.0 million for the quarter. Total quarterly net income therefore substantially reflects the divestiture rather than continuing operations.
- Standex acquired Agile Magnetics for approximately $39.2 million and Tenibac-Graphion for approximately $57.3 million in cash. Purchase-price allocations remained preliminary at quarter-end. The acquisitions contributed to higher goodwill and intangible assets.
- Reported results adopted ASC 606 from July 1, 2018 using the modified retrospective method. Compared with the prior revenue standard, ASC 606 reduced reported continuing sales by $3.3 million for the quarter and $9.2 million for the nine months; prior-year comparative figures were not restated.
- Interest expense rose to $3.2 million for the quarter and $8.6 million year to date, mainly due to acquisition-related borrowing and a higher effective borrowing rate.
Segment results and outlook
- Food Service Equipment: Quarterly sales declined 9.9% and operating income declined 35.8%, with weakness in Refrigeration and cost-structure issues. Management expected continued Refrigeration weakness, alongside a seasonal sequential revenue increase.
- Engraving: Quarterly sales rose 10.0%, supported by acquisitions and newer offerings, but operating income fell 37.7% amid unfavorable mix, weaker North American automotive demand, China-related trade concerns and integration costs. Management anticipated a challenging next quarter, with customer launches expected to support recovery from fiscal Q1 2020.
- Electronics: Quarterly sales fell 2.0% and operating income fell 16.1%, reflecting softer regional demand, product mix, materials costs and wage inflation. Management expected a challenging fourth-quarter comparison and sales around fiscal Q3 levels for the calendar year.
- Engineering Technologies: Quarterly sales increased 17.3% and operating income 142.4%, reflecting higher volumes and manufacturing efficiencies. Management expected further growth in aviation, space and defense in the fourth quarter.
- Hydraulics: Quarterly sales increased 17.3% and operating income 28.2%, supported by refuse-market demand and market-share gains; tariffs on Chinese-sourced components partly offset the benefit.
- Management expected approximately $0.8 million of restructuring costs for the remainder of fiscal 2019 and approximately $2.5 million in fiscal 2020; completed actions were expected to generate annual savings of $2.7 million. Fiscal 2019 capital spending was forecast at $35–$36 million. No consolidated revenue or EPS guidance was provided in the filing.
- On April 17, 2019, Standex announced an agreement to acquire GS Engineering for $30 million, subject to closing.
Risks, contingencies and other considerations
Management identified exposure to economic and end-market weakness, tariffs and rising materials and labor costs, foreign-exchange movements, acquisition integration and synergy execution, restructuring savings, customer delays or cancellations, and supply constraints. The company was under IRS audit for fiscal 2016 and 2017, with completion anticipated in fiscal Q1 2020. Management said existing legal matters were not expected to materially affect financial position, results or cash flow. Management also expected adoption of the lease standard on July 1, 2019 to materially affect the balance sheet, primarily through recognition of operating-lease assets and liabilities; the impact had not yet been quantified.
Important facts for investors to verify
- Confirm receipt and application of the $106.9 million Cooking Solutions sale proceeds, and the resulting post-quarter debt and liquidity levels.
- Assess continuing-operations earnings and margins separately from discontinued-operations income and the divestiture gain.
- Track gross-margin recovery, particularly in Food Service Equipment, Engraving and Electronics, and test management’s restructuring savings expectations.
- Review acquisition performance, final purchase-price allocations, integration costs and the funding and closing status of the announced GS Engineering transaction.
- Monitor the effects of ASC 606, tariffs, foreign exchange, materials inflation and the forthcoming lease-accounting adoption.