Standex International Corporation — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2017 (Standex fiscal 2017 third quarter), not 2016 Q3 as indicated in the request metadata. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Business context and reporting period
Standex is a diversified manufacturer with five reportable segments: Food Service Equipment, Engraving, Engineering Technologies, Electronics, and Hydraulics. The quarter’s results include acquisitions of Horizon Scientific and Standex Electronics Japan, as well as the divestiture of U.S. Roll Plate and Machinery (RPM). Interim results are unaudited and are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales, 2017 | $184.7 million | $538.2 million |
| Net sales, 2016 | $177.5 million | $557.8 million |
| Gross profit margin, 2017 / 2016 | 33.2% / 33.0% | 33.4% / 33.2% |
| Operating income, 2017 / 2016 | $11.4 million / $17.2 million | $44.4 million / $56.3 million |
| Net income, 2017 / 2016 | $7.6 million / $11.5 million | $31.8 million / $39.9 million |
| Diluted EPS, 2017 / 2016 | $0.60 / $0.91 | $2.50 / $3.12 |
- Quarterly sales rose 4.1%; management attributed the change to acquisition contributions and 2.9% organic growth, partly offset by the RPM divestiture and currency effects. Year-to-date sales fell 3.5%, reflecting a 3.5% organic decline and RPM divestiture, partly offset by acquisitions.
- Operating income declined 33.4% for the quarter and 21.1% year to date. Acquisition-related costs were $5.4 million for the quarter and $6.9 million year to date; restructuring costs were $1.0 million and $3.1 million, respectively. Gross margin improved slightly, but operating expense and lower volume weighed on earnings.
- Cash from operating activities was $30.4 million for the nine months, versus $46.5 million in the prior-year period, including discontinued operations. The cash flow statement reports $30.9 million from continuing operations; MD&A cites $31.5 million, a difference to verify.
- Cash and equivalents were $88.0 million at March 31, 2017, versus $122.0 million at June 30, 2016. Current assets were $348.7 million and current liabilities $133.5 million (current ratio approximately 2.6).
- Long-term debt was $215.4 million, compared with $92.1 million at June 30, 2016. Net debt was $127.4 million, versus net cash of $29.9 million. The increase primarily funded acquisitions. The $400 million credit facility expires in December 2019; $176.2 million of additional borrowing capacity was reported. The company reported covenant ratios of 29.70x interest coverage and 1.93x leverage, against minimum and maximum limits of 3.0x and 3.5x, respectively.
- Capital expenditures were $17.8 million and acquisition spending, net of acquired cash, was $153.8 million in the nine-month cash flow statement. Dividends paid were $5.8 million; cash dividends per share were $0.46 year to date, up from $0.40.
Material changes and segment trends
- Food Service Equipment: Quarterly sales increased 5.4%, but operating income declined 12.3%. Refrigeration faced delays and production issues related to a new foam formulation; management said the issues were resolved. Year-to-date sales and operating income declined 3.0% and 17.4%.
- Engraving: Quarterly sales fell 10.7%, largely reflecting the RPM divestiture, while operating income rose 13.2%. Year-to-date sales and operating income decreased 16.9% and 12.1%.
- Engineering Technologies: Quarterly sales rose 22.3% and operating income 40.0%, supported by Space, Energy, and Aviation demand. A facility closure was announced, with expected annual savings of $2.5–$3.0 million beginning in fiscal 2018.
- Electronics: Quarterly sales increased 8.0% and operating income 23.5%. The Standex Electronics Japan acquisition expands Asian market access; integration was expected during the fourth quarter.
- Hydraulics: Quarterly sales and operating income declined 10.2% and 16.6%, respectively, due primarily to softness in North American dump truck and trailer markets.
Acquisitions, outlook, risks, and unusual items
- Standex acquired OKI Sensor Device Corporation (renamed Standex Electronics Japan) for $129.2 million net of acquired cash. The preliminary allocation included $76.0 million of goodwill and $53.8 million of identifiable intangibles; the purchase accounting remained subject to finalization.
- Horizon Scientific was acquired for $24.7 million net of acquired cash, with up to $8.4 million in contingent deferred consideration. Its purchase allocation was also preliminary. Year-to-date acquisition-related expense included seller compensation and professional fees.
- Management anticipated continued growth in Electronics and Engineering Technologies in the fourth quarter, improving seasonal demand in Food Service Equipment and Hydraulics, and continued Engraving improvement. These are segment comments, not consolidated financial guidance.
- Key risks discussed include end-market weakness, customer order delays, raw-material and component costs (including steel and refrigeration inputs), foreign exchange, acquisition integration and synergy execution, restructuring savings, pension funding, and possible supply constraints. The company said no customer represented more than 5% of consolidated sales or receivables.
- Cash held by foreign subsidiaries was $58.3 million. Repatriation could trigger U.S. tax or be subject to capital controls; management intended to reinvest foreign earnings overseas. Foreign-exchange contracts had an aggregate liability of about $2.1 million.
- Management stated existing legal matters were not expected to have a material effect. Corporate expense increased partly due to resolution of outstanding litigation. The company also recorded a prior-year $7.3 million non-cash write-down related to RPM before its sale.
- Management reported disclosure controls effective as of March 31, 2017. Its assessment excluded internal controls over financial reporting at Horizon Scientific and Standex Electronics Japan, both acquired within the preceding year.
Most important facts for investors to verify
- Reconcile the cash flow and investing figures in MD&A with the condensed cash flow statement, including continuing-operations operating cash flow, acquisition spending, and capital expenditures.
- Track whether the recent acquisitions deliver expected growth, margins, integration benefits, and synergies; confirm final purchase-price allocations and any Horizon contingent payments.
- Assess whether Food Service Equipment’s operational recovery and end-market conditions support management’s segment outlook, and whether the Eastlake closure achieves projected savings.
- Monitor debt, borrowing capacity, covenant headroom, interest costs, and the use and availability of foreign-held cash.
- Review the company’s annual report for fuller risk-factor and pension disclosures; the filing refers to the prior Form 10-K for risk factors and does not provide consolidated full-year earnings guidance.