Standex International Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, the three months ended September 30, 2017. Comparisons are with the three months ended September 30, 2016, unless otherwise noted. Financial statement amounts are in U.S. dollars; amounts below are in millions except per-share data.
Business context
Standex is a diversified manufacturer and services provider with five reportable segments: Food Service Equipment, Engraving, Engineering Technologies, Electronics and Hydraulics. The quarter included Piazza Rosa, acquired during the period, and contributions from prior acquisitions Standex Electronics Japan and Horizon Scientific. Results are unaudited and interim results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $214.4 | $179.6 |
| Gross profit / gross margin | $74.2 / 34.6% | $61.8 / 34.4% |
| Income from operations | $20.1 | $19.8 |
| Continuing-operations income | $14.0 | $14.3 |
| Net income | $14.0 | $14.3 |
| Diluted EPS | $1.10 | $1.12 |
| Operating cash flow | $(5.5) | $1.4 |
| Capital expenditures | $8.9 | $7.1 |
- Sales rose 19.4%: $10.3 million, or 5.8%, from organic growth; $22.9 million from acquisitions; and $1.6 million from foreign exchange. Management said all five segments contributed to organic growth.
- Gross margin improved slightly, but operating income grew only 1.9%. SG&A was $50.0 million, up from $41.6 million; the company attributed the increase mainly to higher volume and $5.2 million of incremental acquisition costs. Operating expenses also included $3.0 million of restructuring costs and $1.0 million of acquisition-related costs.
- Interest expense increased to $1.7 million from $0.7 million, reflecting acquisition-related borrowing and a higher effective interest rate. The effective tax rate was 26.4%, versus 26.5%.
- Operating cash use reflected a $25.0 million use of cash from working-capital increases, partly offset by $22.5 million generated from income-statement activities. Investing cash use was $17.1 million, including $8.9 million of capital spending and $10.1 million for Piazza Rosa, partly offset by $2.2 million of life-insurance proceeds. Financing provided $8.0 million, including $10.2 million of net borrowings.
- Cash was $75.3 million at September 30, down from $88.6 million at June 30; $64.9 million was held by foreign subsidiaries. Long-term debt was $205.9 million, versus $192.0 million at June 30. Net debt was $130.6 million, compared with $103.4 million. The company reported $176.9 million of available borrowing capacity under its $400 million revolving facility.
- Current assets were $344.8 million and current liabilities $143.9 million at September 30. The current deferred tax asset was reclassified to non-current under an accounting-standard adoption; the filing says this classification change did not affect results of operations.
Material changes and segment trends
- Food Service Equipment: Sales increased 11.3%; operating income increased 9.9%, with a 10.1% margin versus 10.2%. Refrigeration growth and Horizon Scientific helped, while Cooking Solutions shipments were delayed by a new ERP implementation.
- Engraving: Sales increased 22.8%, including Piazza Rosa and stronger mold texturizing. Operating income was nearly flat and margin declined to 22.6% from 27.7%, reflecting acquisition costs, business volume, technology investment and uneven automotive deliveries.
- Engineering Technologies: Sales increased 8.3%, but operating income fell 22.0% and margin declined to 5.8% from 8.0%. Management cited an aviation-market price concession and a favorable prior-year contract adjustment that did not recur.
- Electronics: Sales increased 52.8%, largely from Standex Electronics Japan, with organic growth across regions. Operating income increased 58.1%; margin improved to 21.9% from 21.1%.
- Hydraulics: Sales increased 5.1%, while operating income fell 13.1% and margin declined to 16.2% from 19.6%, primarily due to product mix and higher-than-expected raw-material costs.
- Backlog realizable within one year increased 20.7% to $191.3 million from $158.5 million a year earlier; management attributed the rise to broad organic demand and acquisitions.
- Comprehensive income was $18.9 million versus $14.4 million, including $4.9 million of other comprehensive income, mainly reflecting favorable foreign-currency translation.
Outlook, risks and unusual items
- Management expects restructuring expense of $5 million to $6 million for the remainder of fiscal 2018. Current initiatives include Food Service management realignment and plant changes, exiting an unprofitable Brazilian Engraving business, and completing an Engineering Technologies footprint consolidation.
- Fiscal 2018 capital spending is expected to be $31 million to $32 million, including $2.4 million for the Italy acquisition. Depreciation is expected at $19 million to $20 million and amortization at $8 million to $9 million.
- Management cited expected growth opportunities in Engraving, aviation and space markets, Electronics and Hydraulics, while noting potential North American sales effects from Hurricane Maria’s impact on two Electronics customers. Food Service management expected Cooking Solutions shipments to normalize in Q2 as ERP issues were resolved.
- Key risks identified include economic and end-market conditions, competition, product mix, higher raw-material and component costs, supply availability, foreign-exchange movements, ability to realize restructuring savings and acquisition synergies, and future pension funding requirements. The company stated that a hypothetical 10% currency move would not materially affect its operations, financial position or cash flows.
- The revolving credit facility requires minimum interest coverage of 3.0:1 and maximum leverage of 3.5:1; reported ratios were 17.13:1 and 1.92:1, respectively. The facility expires in December 2019. $100 million of debt was covered by interest-rate swaps at a weighted-average fixed base rate of 1.60%; the effective borrowing rate, including swaps, was 2.47%.
- Management did not expect existing legal matters to have a material impact. The filing notes the possibility of adverse tax consequences or capital controls if certain foreign cash were repatriated; management intended to reinvest foreign earnings overseas.
- The company is assessing new revenue-recognition and lease-accounting standards. It anticipates a material financial-statement impact from lease-standard adoption but had not quantified it; the revenue-standard impact was also not yet quantified.
Most important facts for investors to verify
- Whether working-capital investment reverses and operating cash flow recovers after the reported quarterly cash use.
- Whether acquisition-driven sales growth converts into sustainable operating profit and cash flow, particularly given higher interest expense and acquisition-related costs.
- Progress against restructuring plans and the expected additional $5 million to $6 million of fiscal 2018 restructuring expense.
- Execution of the Food Service ERP recovery and the trajectory of margins in Engraving, Engineering Technologies and Hydraulics.
- Final purchase-price allocations and integration outcomes for recent acquisitions, alongside debt levels, facility headroom and compliance with credit covenants.